<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X]   Annual Report Under section 13 or 15(d) of The Securities Exchange Act of
      1934 for the Fiscal Year Ended May 30, 1998

                                       or

[ ]   Transition Report Pursuant to section 13 or 15(d) of The Securities
      Exchange Act of 1934 for the transition period 
      from ______________ to ______________


                           COMMISSION FILE NO. 0-25068

                           HASKEL INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)


          CALIFORNIA                                             95-4107640
 (State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                             Identification No.)

                    100 EAST GRAHAM PLACE, BURBANK, CA 91502
                     (Address of principal executive office)

       Registrant's telephone number, including area code: (818) 843-4000

         Securities registered under Section 12(b) of the Exchange Act:
                              Class A Common Stock

       Name of each exchange on which registered: The Nasdaq Stock Market

       Securities registered under Section 12(g) of the Exchange Act: None

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]

         Aggregate market value of the voting stock held by non-affiliates of
the registrant: $26,199,198 as of August 14, 1998.

         As of August 14, 1998, the registrant had 4,759,205 shares of Class A
Common Stock and 40,000 shares of Class B Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the proxy statement for the registrant's 1998 Annual
Stockholder's Meeting are incorporated by reference in Part III.

<PAGE>   2

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

OVERVIEW

         Established in 1946, the Company manufactures pneumatically (compressed
air or gas) and hydraulically (oil) driven, high-pressure low-flow, fixed
displacement, reciprocating plunger, liquid pumps, gas boosters, chemical
injection pumps and air pressure amplifiers ("Haskel(R) Specialty Products") for
industrial, commercial, aerospace and military applications. The Company is one
of the world's leading manufacturers of pneumatically-driven, high-pressure
liquid pumps and gas boosters, which represent the vast majority of Haskel(R)
Specialty Products manufactured by the Company. The Company also manufactures
high-pressure valves, metering valves, metal seals, regulators, and accessories
to complement these products. The Company distributes third-party manufactured
valves, actuators, and other pneumatic and hydraulic devices throughout Europe
and the Asia-Pacific regions.

         The Company also utilizes its engineering expertise and high-pressure
technology in the manufacture of test and control ("value added") systems. The
Company's systems business consists of the design and manufacture of equipment
that incorporates the Company's products, engineering knowledge and high
pressure technology, often using electronic controls to achieve a functional
piece of equipment to provide customers with high-pressure solutions. This
integrated equipment (a "Haskel(R) System") has a wide variety of applications
in many industries.

         The Company's corporate offices are located in Burbank, California. The
Company consists of the Industrial Technologies Division ("ITD"), also located
in Burbank, California, and the Company's wholly owned subsidiaries, Haskel
Energy Systems, Ltd. ("HESL"), located in Sunderland, England and its divisions
and subsidiaries, Haskel-Hogan Systems and Service ("Haskel-Hogan"), located in
Houston, Texas, Haskel Asia Pte. Ltd., located in Singapore, and Haskel
Australasia Pty. Ltd., located in Brisbane, Australia. The ITD is the U.S.
manufacturer of Haskel(R) Specialty Products, Haskel(R) Systems, high-pressure
valves, metal seals, regulators and accessories to complement these products.
HESL is the Company's European manufacturing and distribution center with
offices located in Sunderland and Manchester, England; Aberdeen, Scotland;
Lille, France; Wesel, Germany; Zoetermeer, the Netherlands; and San Sebastian,
Spain. Haskel Asia, Pte. Ltd. is the Company's Asian manufacturing and
distribution operations with offices located in Singapore and Hong Kong. Haskel
Australasia, Pty. Ltd. is the Company's Australian manufacturing and
distribution operations with offices located in Brisbane, Australia. HESL and
its divisions and subsidiaries, Haskel Asia and Haskel Australasia primarily
distribute the Company's products, design and manufacturer Haskel(R) Systems for
specific applications, and distribute complementary products of other
third-party manufacturers in Asia, Australia, Europe, India, and the Middle
East. HESL Sunderland also manufactures metering valves and products needed for
HESL's markets that are not produced in the United States, such as the Jetflow
Airmover(R).

         Certain financial information about the Company's business segments and
export sales is presented in Note 16 of the Notes to Consolidated Financial
Statements appearing in this Report. No single customer accounted for more than
10% of sales during fiscal 1996, 1997 or 1998.


PRODUCTS

         The Company is one of the world's leading manufacturers of
pneumatically-driven, high-pressure liquid pumps and gas boosters. These
products produce high pressures (typically 4,000 to 20,000 psi with a capability
of up to 150,000 psi) at low volumes of flow, with rated fluid power of up to
ten horsepower. In order to generate these pressures, reciprocating plungers
within fixed displacement bodies are principally utilized. Haskel(R) Specialty
Products are designed for niche markets where high pressure with low flow of
liquids or gases is required. The pump's function is to generate



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<PAGE>   3

high-pressure, low-flow liquids and gases using low-pressure, low-flow liquids
and gases as a drive source. The energy produced by a pump is used to move a
linear or rotary actuator, generate pressure for testing or metal forming,
charge pressure containers, and transfer and mix liquids and gases under
pressure. Additional products include metal seals for extreme temperature and
pressure applications; high-pressure valves and fittings; IRCDs(R), a valve for
precise injection of liquids such as chemicals in metering applications;
Nanojet(R) homogenizers, which use a super high-pressure process to mix liquids;
Hydroswage(R) products, which use high pressure liquid for metal expansion,
creating a high integrity joint between the metal tube and the tube sheet as
found in boilers and heat exchangers; and the Jetflow Airmover(R), which
ventilates stagnant environments, such as that found in mines, by diluting and
removing hazardous gases. The Company has also entered into private branding
agreements with other companies in the pressure industry to have manufactured
certain products in the Company's name for use or sale by the Company in
selected markets.

         Haskel(R) Systems' business consists of the design and manufacture of
equipment that incorporates the Company's products, engineering knowledge and
experience in high pressure technology, together with third party products.
Haskel(R) Systems often incorporate electronic controls to achieve a functional
piece of equipment. Haskel(R) Systems have a wide variety of applications in
many industries. Some of the applications of Haskel(R) Systems include:

         -     pressure testing hoses, valves, pipes and cylinders
         -     mixing and transferring liquids and gases under pressure
         -     injecting gases into plastics in order to improve the molding
               process
         -     metering valves for precise injection of liquids such as
               chemicals
         -     boosting oxygen for life support and emergency service use
         -     homogenization for mixing liquids
         -     food preservation
         -     boosting nitrogen for charging cryostats in missile guidance
               applications, commercial aircraft tires, struts and escape chutes
         -     pressurizing argon for infrared cooling in missiles
         -     boosting helium for testing automotive brake and air conditioning
               hoses and charging satellite rocket motors
         -     pressure charging and testing of automotive air bag canisters
         -     recovering and charging chloroflurocarbons ("CFC's") used in air
               conditioning and refrigeration applications
         -     recovering and charging SF6 (Sulfer Hexafluoride), an arc
               suppressant gas, used in high voltage switch gear
         -     pressurizing carbon dioxide for filling fire extinguishers and
               manufacturing foam
         -     compressing natural gas (CNG) for use as a vehicle fuel
         -     hydrostatic forming of metal using the Company's Hydroswage(R)
               process
         -     work holding and press overload applications
         -     chemical injection and well head control applications for oil and
               gas production platforms
         -     boosting shop compressed air

         In addition, other manufacturers incorporate Haskel(R) Specialty
Products in their equipment for these and similar purposes.

         The Company has been awarded the ISO 9001 accreditation, a quality
certification from the International Standards Organization ("ISO"), for its
manufacturing facilities in the United States and United Kingdom. The ISO 9001
accreditation gives recognition for maintaining an internationally recognized
standard of quality in both its products and engineering.



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<PAGE>   4

MARKETS

         The markets served by Haskel International, Inc. are substantial and
diversified. The following table lists the broad range of industries utilizing
Haskel(R) Specialty Products and Haskel(R) Systems. The industries that, taken
in the aggregate, account for a majority of the Company's sales are marked with
an asterisk (*).

                       INDUSTRIES USING HASKEL(R) PRODUCTS

<TABLE>
<S>                                                  <C>
Abrasive Pressure Water Cleaning                     Marine Engineering
Aerospace and Aircraft                               Mining
Automotive *                                         Medical Equipment and Emergency Support Scvs.
Boiler and Heat Exchanger Manufacture                Oil and Gas Exploration and Production *
Brewing and Distilling                               Oil and Petrochemical Refining and Production *
Chemicals                                            Pressure Testing *
CNG Charging Stations                                Paper Industry
Defense *                                            Plastic Machinery *
Diving Charging Equipment                            Railways
Electronic/Electrical Machinery                      Refrigeration and Air Conditioning
Fire Fighting and Related Services                   Research and Development Establishments,
General Engineering *                                   including Universities and Colleges
I.C. Engines and Compressors                         Textile Engineering
Industrial Machinery                                 Utilities, Power Generation, Electricity Distribution *
Valve Testing and Packing Removal
</TABLE>

         The useful lives of the Company's products are generally quite long,
however specific applications have various lives. Product parts are usually
replaceable from current stock; older products can be modified to include the
latest technology providing a source of recurring revenue.


SALES AND DISTRIBUTION

         The Company's products are sold through a direct sales force,
independent distributors, and authorized manufacturers' representatives
throughout the world. The largest distribution of the Company's products are
through its own subsidiaries and divisions. Products are sold throughout the
United States; Canada; the United Kingdom; other European countries, including
France, Germany, the Netherlands, and Spain; the former Soviet Republics;
Asia-Pacific, including China and Japan; Australia; Africa; South America;
India; and the Middle East.

         Distribution of the Company's products is accomplished through a
network of 123 distributor locations within the United States, Canada, and
Central and South America; 24 distributor locations within Europe and the Middle
East; and 24 distributor locations within the Asia-Pacific region. The
activities of these distributors are supported by the Company's worldwide
offices and regional and product sales managers who have extensive technical
backgrounds.

         The Company also distributes approximately 15 different lines of
third-party manufactured products throughout Europe and the Asia-Pacific
regions. These products are used primarily in the pump and pump-related fluid
power business, and include pneumatic actuators, pneumatic and hydraulic valves,
hoses and fittings, high-pressure components, pumps and motors. In the beginning
of fiscal year 1998, the Company eliminated the distribution of third-party
products in the Western United States to strategically focus its sales efforts
in this region on the Company's primary product lines.



                                       4
<PAGE>   5

MANUFACTURING

         The Company manufactures Haskel(R) Specialty Products and related
products and Haskel(R) Systems at the Company's facilities in Burbank,
California, and in Sunderland, England. Manufacturing operations in Sunderland
include metering valves and products that are not produced in the United States,
which are needed for European markets, such as the Jetflow Airmover(R).
Haskel(R) Systems are also designed and manufactured at facilities in
Manchester, England; Aberdeen, Scotland; Lille, France; Wesel, Germany;
Zoetermeer, the Netherlands; Houston, Texas; Singapore; and Brisbane, Australia.

         Historically, the Company has been able to pass a significant portion
of increased component part prices through to their customers by price
increases, although there is no assurance that they will be able to continue to
do so in the future. Currently, all materials used by the Company in the
manufacturing process are readily available at reasonable prices, and Management
does not anticipate any adverse change in this situation. The Company has an
ongoing program to improve its manufacturing processes.


BACKLOG

         Backlog of unfilled firm orders was approximately $8,899,000 at May 30,
1998, as compared to approximately $9,036,000 at May 31, 1997. Of the backlog at
May 31, 1997, approximately $1,064,000 represented the outstanding orders
pertaining to the third-party distribution business in the Western United States
which was eliminated in the beginning of fiscal year 1998. Excluding these
orders, the backlog increased $927,000 or 12%. This increase in backlog was due
primarily to increased orders as a result of continued growth as the Company
expands its international markets, especially throughout Europe. Substantially
all of the Company's fiscal 1998 year-end backlog is expected to be recognized
as revenue in fiscal 1999.

         Pursuant to the customary terms of the Company's agreements with
government contractors and other customers and in accordance with industry
custom, a customer may cancel or reschedule an order without penalty if the
Company has not made financial commitments with respect to the order. Lead times
for the release of purchase orders depend upon the scheduling and forecasting
practices of the individual customers, which also can affect the timing of the
conversion of the Company's backlog into revenues. For these reasons, among
others, the Company's backlog at a particular date may not be indicative of its
future revenue, and there is no assurance that the backlog will be completed and
recorded as revenue. Cancellation of pending contracts or termination or
reductions of contracts in progress may have a materially adverse effect on the
Company's business.


DISCONTINUED OPERATIONS

         During fiscal years 1994, 1995, 1996 and the first half of fiscal year
1997, the Company operated an electronic products distribution business. In
January 1997, the Company announced its decision to sell or discontinue these
operations. The financial impact of this was first reflected in the Company's
third quarter 1997 financial statements. Accordingly, the operations have been
treated as a discontinued segment, and the prior financial results have been
restated to segregate the effect of these operations. The loss from these
operations have been reflected separately in the Company's financial results,
and a loss on disposal of these operations was recorded in fiscal year 1997. In
fiscal year 1998, the Company sold the electronics products business and
recognized a gain on sale. See Footnote 15 in the Notes to Financial Statements.

         Prior to the disposal of this business, the Company had been organized
under two business groups: the electronic products group (the "EPG") and the
industrial products group (the "IPG"). As a consequence of the sale of the
electronics business segment, in January 1998, the Company eliminated the
"group" structure, including the IPG and the executive position of IPG
President.



                                       5
<PAGE>   6

COMPETITION

         The principal competitive factors in the Company's markets are product
quality and performance, availability, reliability, technical support and price.

         In the air driven, high-pressure, pump markets, the Company has three
major U.S. and European based competitors: Teledyne Fluid Systems, a division of
Teledyne Inc.; Schmidt Kranz & Company GmbH; and SC Hydraulic Engineering
Corporation. Certain of the Company's competitors are larger overall and have
greater financial resources than the Company. The Company has a significantly
larger worldwide market share in this line of business than do any of its
competitors, but there can be no assurance that the Company will maintain its
market share. In order to remain competitive, the Company supports the
reliability and reputation of its products with customer service, good product
delivery, competitive pricing, and comprehensive technical assistance.

         The Company's competitors in the systems market include some of the
same companies that compete with the Company in the high-pressure pump market
and a number of small manufacturers of systems, as well as unrelated
distributors of systems.


ENGINEERING, DESIGN, RESEARCH AND DEVELOPMENT

         Substantially all of the Company's engineering, design, research and
development ("EDR&D") is performed in connection with its manufacturing business
and falls into three categories. The first category is the modification or
improvement of existing products. Modifications are usually the result of
application engineering, where the Company tailors a product to fit a specific
application, often at the request of a particular customer. The Company also
endeavors to engineer improvements that apply to all of its pumps. The second
type of EDR&D involves utilizing Haskel(R) high-pressure technology and know how
to develop new products. The third type of EDR&D is the development of products
unrelated to pumps where the Company can utilize its expertise in valve and seal
technology.

         The Company's business requires ongoing EDR&D expenditures. For fiscal
years 1996, 1997 and 1998, the Company incurred approximately $905,000,
$1,079,000, and $1,294,000, respectively, on general engineering and research
and development (R&D) with a significant part of these expenditures directed
towards R&D. The Company relies on market opportunities to determine the
allocation of it's research and development expenditures. The Company expects to
continue to pursue product development programs and to increase expenditures in
all of its principal product lines and services.


CUSTOMER SUPPORT AND SERVICES

         The Company provides warranty service for each of its product lines, as
well as follow-up service, training, and support, for which the Company
typically charges separately. During 1998, the Company extended its warranty
period from 12 months to 18 months, which exceeds that offered by the
competition. Management views customer support services as a critical
competitive advantage, as well as a revenue source. The Company maintains its
own service groups and trains its customers and distributors in the performance
of user-level maintenance.



                                       6
<PAGE>   7

GOVERNMENT REGULATION

         The Company's manufacturing operations are subject to various foreign,
federal, state and local laws, including those restricting the discharge of
materials into the environment. The Company is subject to environmental
regulation governing the generation, transportation and disposal of hazardous
waste, the appropriate labeling of products and materials, storage and use of
hazardous materials, and employee safety training. Applicable federal
environmental regulations include, but are not limited to, the Federal
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA");
the Resource Conservation and Recovery Act; the Clean Air Act; and the Clean
Water Act. Individual Company sites may also be subject to similar state and
local environmental regulation. The Company is not involved in any pending or
threatened proceedings that would require curtailment of its operations because
of such regulations. The Company continually expends funds to assure that its
facilities are in compliance with applicable environmental regulations. See
additional discussion regarding environmental matters under Item 3. Legal
Proceedings.


ACQUISITIONS

         The Company pursues opportunities to expand its market position in high
pressure technology business through various methods, including acquisitions of
related businesses, product lines, distribution and/or new technologies.

         During fiscal years 1996, 1997 and 1998, the Company acquired the
following businesses: certain assets of Armaturenbau GmbH (now Haskel
Hochdrucksysteme, GmbH), located in Wesel, Germany in November 1995; Hydraulic
Mobile Equipment Limited ("HME"), located in Manchester, England in June 1996;
Hogan Fluid Power (now Haskel-Hogan Systems and Service) located in Houston,
Texas in December 1996; Nanojet Engineering GmbH, located in Wesel, Germany in
May 1997; Palpro Ltd., located in Brixworth, England in November 1997; and MDC,
Ltd. and Hydraulic & Air, Ltd. (now Haskel Australasia), located in Brisbane,
Australia in March 1998. In addition to these acquisitions, the Company opened
offices in Zoetermeer, the Netherlands, in June 1996; Singapore in May 1997;
Hong Kong in May 1997; and San Sebastian, Spain in August 1997.

         While Management is continually evaluating possible acquisitions and,
from time to time, is engaged in discussions with respect thereto, the Company
currently has no commitments for any material acquisition.


PATENTS AND TRADEMARKS

         The Company currently owns a number of United States and foreign
patents and trademarks, which expire at various dates through 2010. Although
Management believes that the patents and trademarks associated with the
Company's various products are of value, Management does not consider any of
them to be essential to the Company's business.


HUMAN RESOURCES

         As of May 30, 1998, the Company had 335 employees, including 64 in
general management, administration and finance; 85 in sales and marketing; 25 in
engineering and research and development; and 161 in operations, manufacturing,
and customer service. Management believes that the Company's success depends in
part upon its ability to attract, retain, train and motivate highly skilled and
dedicated employees. None of the Company's employees is represented by a labor
union, and the Company has never experienced a work stoppage. Management
believes the Company's relations with its employees are good.



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<PAGE>   8

EXECUTIVE OFFICERS OF THE REGISTRANT

         The Executive Officers of the Company are as follows:

<TABLE>
<CAPTION>
Name                                 Age            Position with Company
----                                 ---            ---------------------
<S>                                   <C>           <C>
R. Malcolm Greaves                    59            President, Chief Executive Officer and Director
Lonnie D. Schnell                     49            Chief Financial Officer and Secretary
Henry Mason                           48            Managing Director of HESL
</TABLE>

        R. Malcolm Greaves was appointed President and Chief Executive Officer
of the Company in February 1996. He joined HESL as General Manager in January
1989 and was appointed Managing Director of HESL in June 1989. Mr. Greaves has
served as a director of the Company since September 1990. Between January 1994
and February 1995, he served as Executive Vice President in charge of worldwide
pump operations, after serving as Vice President, Chief Operating Officer for
Europe, the Middle East, India and Africa from April 1993.

         Lonnie D. Schnell joined the Company as Chief Financial Officer and
Secretary in November 1994. From August 1990 through October 1994, Mr. Schnell
was Vice President and Controller of Teleflex Control Systems, Inc., an
electromechanical actuator and cargo handling business.

         Henry Mason was appointed Managing Director of HESL in January 1997. He
has been employed by HESL since its formation in the United Kingdom in 1978
where he held the position of Business Manager for its Mining Products Division.
In 1987, he was appointed Sales Manager for HESL and was appointed Sales and
Marketing Director in April 1993.


ITEM 2.  DESCRIPTION OF PROPERTIES

         The Company's principal facilities are as follows:

<TABLE>
<CAPTION>
                                                                                          Lease Expiration
                                    Owned/         Square Feet                            Dates, Including
 Location                           Leased         Under Roof      Occupied By            Option Periods
 --------                           ------         ----------      -----------            --------------
<S>                                 <C>            <C>             <C>                    <C>
 Burbank, California                Owned              103,500     Corporate, ITD               --

 Houston, Texas                     Leased              16,200     ITD                    October 2001

 Chino, California                  Leased               1,440     ITD                    December 1998

 Sunderland, England                Owned               41,000     HESL                         --

 Manchester, England                Leased               7,000     HESL                   October 1999

 Manchester, England                Leased              15,000     HESL                   May 2007

 Zoetermeer, the Netherlands        Leased               3,500     HESL                   January 2000

 Lille, France                      Owned                7,000     HESL                         --

 Aberdeen, Scotland                 Leased               1,000     HESL                   October 2000

 Wesel, Germany                     Leased               5,500     HESL                   June 1999

 San Sebastian, Spain               Leased               7,900     HESL                   June 2000
</TABLE>



                                       8
<PAGE>   9

<TABLE>
<CAPTION>
                                                                                          Lease Expiration
                                    Owned/         Square Feet                            Dates, Including
 Location                           Leased         Under Roof      Occupied By            Option Periods
 --------                           ------         ----------      -----------            --------------
<S>                                 <C>            <C>             <C>                    <C>
 Singapore                          Leased               2,379     Haskel Asia, Pte.      February 1999
 Brisbane, Australia                Leased               5,114     Haskel                 February 2003
                                                                   Australasia,
                                                                   Pty.
 Hong Kong                          Leased                 779     Haskel Asia, Pte.      March 2000
</TABLE>

         The Company's corporate headquarters and principal executive offices
are located at the Burbank, California premises.

         The locations in Burbank, California, and Sunderland, England represent
the two main manufacturing facilities for the Company's products and have both
manufacturing and office areas. The locations in Houston, Texas; Manchester,
England; Zoetermeer, the Netherlands; Lille, France; Aberdeen, Scotland; Wesel,
Germany; San Sebastian, Spain; Singapore; and Brisbane, Australia have both
office and manufacturing area; however, the manufacturing areas are currently
used for assembly purposes only. The facilities located in Chino, California and
Hong Kong represent office space used for engineering and sales, respectively.

         Management believes that the facilities used by the Company are
suitable and adequate for the Company's business as presently conducted.


ITEM 3.  LEGAL PROCEEDINGS

         Other than as set forth below, the Company is not a party to any legal
proceedings other than routine litigation incidental to its business.

         San Fernando Valley Area 2 Superfund Site

         The Environmental Protection Agency (the "EPA") named the Company as
one of approximately 35 Potentially Responsible Parties ("PRPs"), as that term
is defined in applicable law, for an area known as the San Fernando Valley Area
2 Superfund Site (the "Superfund Site"), in which the groundwater has been
contaminated by solvents. Most of the parties named by the EPA as PRPs for the
Superfund Site, including the Company, chose to cooperate with the EPA in
complying with EPA directives, and formed the Glendale PRP Group (the "Group")
as a vehicle through which to accomplish that goal.

         Under applicable law, most notably the federal Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA"), the Company
might be jointly and severally liable with other PRPs for the full cost of
cleaning up the Superfund Site, including the cost of the remedial design phase
and EPA oversight costs discussed below (the "Remediation Cost"). There is legal
authority, however, which holds that when the approximate extent of
contamination caused by each PRP can be determined, liability must be allocated
among the PRPs in proportion to their relative contribution. Based on this
authority, Management and the Company's environmental counsel believe there will
be a rational, pro rata allocation of responsibility for the cleanup of the
Superfund Site among the participating PRPs. Management and the Company's
environmental counsel believe, based upon extensive research conducted on the
Company's site, that the Company was, at most, a small contributor to
groundwater contamination at the Superfund Site.



                                       9
<PAGE>   10

         On December 21, 1993, an independent mediation team engaged by the
Group presented a confidential proposed interim allocation schedule (the
"Interim Allocation"), which allocated 1.76% responsibility to the Company for
the remedial design phase. In May 1994, 23 of the 27 parties (including the
Company) signed an Administrative Order on Consent ("AOC"), by which the parties
committed to accomplish the Remedial Investigation and Remedial Design phases of
the project, as set forth in the AOC. As a result of certain parties having
dropped out of the Group, and other parties joining the Group, the Company's
Interim Allocation has fluctuated between 1.76% and 2.36%. The Group completed
the remedial design phase and fully complied with the AOC, at a cost to the
Group of approximately $6 million.

         In 1995, the Group agreed upon a process by which a retroactive
reallocation of the Interim Allocation could be accomplished. The process agreed
upon by the Group entailed a two-phase procedure: Phase I consisted of an
arbitration whereby a panel of scientific arbitrators ascertained what
percentage of the contamination in the Superfund Site was caused by sources from
Burbank versus sources from Glendale (the Burbank-Glendale split). The
arbitrators determined that responsibility for the share found to have emanated
from Burbank-based sources would be borne by one PRP who was to bear 58.8% of
all past and future costs incidental to the Superfund Site; all other Group
members (the Intra-Glendale parties) were to bear 41.2% of such costs. The
Burbank-based member of the PRP appealed the Phase I result to the agreed-upon
judicial neutral, who eventually affirmed the arbitrator's 58.8% / 41.2% split
between Burbank and Glendale, respectively. Subsequently, a civil court upheld
the arbitration award. The court's ruling is now under appeal by the
Burbank-based party.

         Allocation amongst the Intra-Glendale parties of the percentage share
allocated to Glendale was to constitute Phase II of this retroactive
reallocation process. Once this two-phase process was complete, the results
would constitute the Final Allocation which was to apply retroactively as well
as prospectively to all Group members. In addition, discussions have been held
among the Intra-Glendale parties regarding a possible settlement, whereby
certain PRP members would accept dollar sums from the other PRPs, thereby
effectuating a cash-out settlement for the majority of PRPs. The settlement
discussions have been based upon a total cost (including the initial AOC work
which has already been accomplished) of approximately $48.0 million plus past
and future direct and indirect Governmental EPA oversight and administrative
costs of approximately $14.0 million. Each of these estimates constitute the
total for both the Burbank and Intra-Glendale parties combined, such that the
Intra-Glendale parties would only be responsible for 41.2% of the total amount
pending the confirmation judgment of the trial court being affirmed.

         In addition to the Remedial Investigation and Remedial Design phase of
the project as set forth in the AOC, the EPA issued a Unilateral Administrative
Order (UAO), thereby ordering all PRPs to perform the second phase of the AOC,
namely the construction phase. Almost all of the work required by the UAO has
now been completed. The total amount of money which the Group has spent on
implementing the AOC and performing all tasks required under the UAO is $7.7
million; the Company's portion of which has been approximately $113,000, or
about 1.4%.

         If the settlement negotiations within the Group fail, and assuming the
Final Allocation agreed upon is similar to the Interim Allocation, an assumption
the Management and the Company's environmental counsel believe is reasonable,
the Company's share of the Remediation Cost should not exceed the Company's
reserve amount of $898,000. If the Group cannot agree upon a process by which to
arrive at a Final Allocation, the process of allocating shares would likely be
by judicial determination. Whether the allocation proceeds by way of group
negotiation or judicial determination, Management and the Company's
environmental counsel believe that the Company's reserve amount will be
adequate.



                                       10
<PAGE>   11

         To the extent that a member of the Group does not accept the Final
Allocation or does not pay its share of the liability for remediation, the
remaining members may each, on a pro rata basis, become responsible for that
member's allocation. Further data, negotiation or disagreements among the PRPs,
insolvencies of or refusals to pay by PRPs or increases in actual costs of
remediation could cause the Company's ultimate liability for remediation for the
Superfund Site to increase from the amount calculated based upon the Interim
Allocation percentage. Consequently, there can be no assurance that remediation
of the Superfund Site will not have a materially adverse effect on the results
of operations or financial condition of the Company.

         Insurance and Reserves

         When the Company initially tendered all of the environmental claims
relative to the Superfund Site, the Company's insurers refused to pay or to
properly defend the Company. The Company brought litigation against its insurers
in which the Company sought indemnity relative to the claims by the EPA for the
Superfund Site, and to force its carriers to provide a defense for these claims.
In March 1995, the Company successfully moved for summary adjudication of the
carriers' duties to defend. As a result of this ruling, during fiscal year 1997,
the carriers paid the Company approximately $676,000 for fees incurred prior to
May 31, 1996 and has paid the Company's fees incurred after that date at a
reasonable rate. Litigation is pending as to whether the Company's insurers must
indemnify the Company for the Superfund Site liability.

         The Company established an environmental reserve for contingent
liabilities that may arise in connection with the Superfund Site. At May 30,
1998, the environmental reserve was $898,000. The Company has not included any
specific amount in the environmental reserve for litigation defense costs, which
cannot be estimated but could be substantial if these matters precipitate more
litigation than is anticipated.

         Due to the nature of environmental matters, there can be no assurance
that the environmental reserve will be adequate to cover contingent liabilities
arising from the above-referenced environmental matters or that any liability in
excess of the environmental reserve will not have a material adverse effect on
the Company's results of operations or financial condition.

         On-Site Contamination

         The soil at the property occupied by the Company at 100 East Graham
Place, Burbank, California had been contaminated by solvents. Pursuant to a
directive of the Regional Water Quality Control Board ("RWQCB") the Company
assessed and remediated the soil. All on-site assessment and remediation work
has been completed and a no further action letter was obtained from the RWQCB in
1996.

         Toxic Tort Litigation

         In December 1997, the Company was named a defendant in eight separate
tort complaints filed by approximately 2700 individuals against over 100
defendants wherein the plaintiffs are claiming personal injuries and property
damages allegedly resulting from exposure to the release of toxic and
carcinogenic chemicals by Defendants into the soil, water and air in the
Burbank/Glendale area of Los Angeles County. This litigation stems from a toxic
tort action previously filed in the United States District Court containing the
same allegations. In October 1997, the eight separate tort actions were
consolidated with the pending United States District Court case. Subsequent to
the consolidation of these lawsuits, the Company joined a Joint Defense Group
comprised of approximately 40 of the newly named defendants.

         A Pretrial Order and Agreement Re Cooperation, Joint Defense and Terms
of Stay and Severance was negotiated among the parties and in April 1998, 28 of
the newly named defendants petitioned and in May 1998, the court granted, an
order to (1) stay any proceedings against the newly named defendants until such
time as a determination has been made by the court in the consolidated



                                       11
<PAGE>   12

action, and (2) sever the newly named defendants from the pending litigation.
However, ten of the remaining defendants will continue to vigorously defend
against the plaintiffs' claims in the consolidated case. If these Defendants are
successful in defeating the plaintiff's claims, Management and the Company's
environmental counsel believe the plaintiffs would not pursue the Company and
the other defendants. In the event the Defendants settle and/or lose at trial,
then it is likely the plaintiffs would seek similar settlements or prosecute
their case against the Company and the other defendants. A trial date has not
been set.

         The Company is currently preparing a technical presentation
representing that the Company never used hexavalent chromium, an air-bourne
particle named in the complaint, and demonstrating that the groundwater under
the Company's property never impacted the Burbank drinking water wells as the
Company's property is downstream from the named Burbank locations. The defense
costs in this matter are being shared among four insurance carriers under a
reservation of rights.

         Compliance with Existing Regulations

         Although Management anticipates increases in the Company's cost of
ongoing compliance with existing environmental regulations due to inflation,
Management believes that the cost of compliance will not have a material adverse
effect on the Company's financial condition.


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

         No matters were submitted to a vote of security holders of the Company
during the fourth quarter of fiscal 1998.



                                       12
<PAGE>   13

                                     PART II


ITEM 5.  MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER  MATTERS

         The Company's Class A Common Stock is quoted on the Nasdaq Stock Market
under the symbol "HSKL". Prior to November 1, 1994, there was no public trading
market for the Company's Common Stock. The following table sets forth the high
and low sales prices for the Company's Class A Common Stock as reported by the
Nasdaq Stock Market:

<TABLE>
<CAPTION>
                  Fiscal 1997                             High                          Low
                  -------------                          -------                      -------
<S>                                                      <C>                          <C>
                  First Quarter                          $ 8 7/8                      $ 6 3/4
                  Second Quarter                         $ 8 5/8                      $ 7 1/2
                  Third Quarter                          $ 9 3/4                      $ 7 1/2
                  Fourth Quarter                         $ 10 1/2                     $ 8 7/8

                  Fiscal 1998   
                  --------------
                  First Quarter                          $ 14 1/4                     $ 9 1/2
                  Second Quarter                         $ 16 1/2                     $ 11 3/8
                  Third Quarter                          $ 12 1/4                     $ 9 13/16
                  Fourth Quarter                         $ 12 1/4                     $ 9 3/4
</TABLE>


         On August 14, 1998, the closing price of the Company's Class A Common
Stock on the Nasdaq Stock Market was $ 8.75.

         On August 14, 1998, there were approximately 334 holders of record of
the Company's Class A Common Stock.

         There is no established trading market for shares of the Company's
Class B Common Stock. As of August 14, 1998, all of the Company's Class B Common
Stock was held by eight irrevocable trusts. Altogether, there are three
beneficiaries of these trusts and each trust has only one beneficiary. All eight
trusts have the same co-trustees.

         The Company paid cash dividends in the amount of $.28 per share in
fiscal years 1996, 1997 and 1998, on shares of its Class A and Class B Common
Stock. The Company currently expects that comparable cash dividends will
continue to be paid in fiscal year 1999.



                                       13
<PAGE>   14

ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

         The following table sets forth selected consolidated financial data of
the Company as of and for each of the five fiscal years ended May 30, 1998 and
is derived from the Consolidated Financial Statements of the Company. The
consolidated financial statements as of May 31, 1997 and May 30, 1998, and for
each of the years in the three-year period ended May 30, 1998, and the auditor's
report thereon, are included elsewhere herein. The following data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Report.

<TABLE>
<CAPTION>
                                                                             Year Ended
                                   ---------------------------------------------------------------------------------------------
                                   May 31, 1994         May 31, 1995        May 31, 1996        May 31, 1997        May 30, 1998
                                   ------------         ------------        ------------        ------------        ------------
<S>                                <C>                  <C>                 <C>                 <C>                 <C>         
 OPERATING PERFORMANCE:

 Revenues                          $ 37,457,000         $ 38,883,000        $ 42,169,000        $ 51,400,000        $ 53,710,000

 Income (loss) from
   Continuing Operations
   Before Taxes (1), (2)                (36,000)           2,700,000           4,566,000           7,775,000           7,477,000

 Net Income from Continuing
   Operations (1), (2)                       --            1,551,000           2,647,000           4,734,000           4,682,000

 Cash Flow from Continuing
   Operations                           367,000            3,178,000           1,055,000           4,725,000           5,776,000

 FINANCIAL POSITION:

 Cash & Cash Equivalents           $  7,120,000         $  8,806,000        $  8,239,000        $  8,490,000        $  9,710,000

 Working Capital                     17,172,000           20,969,000          21,891,000          24,095,000          25,460,000

 Total Assets                        44,411,000           44,295,000          45,360,000          41,232,000          46,292,000

 Long-term Debt                      10,187,000            3,514,000           3,366,000           2,379,000           1,426,000

 Shareholders' Equity                24,384,000           31,007,000          32,220,000          28,667,000          31,881,000

 PER SHARE DATA (DILUTED):

 Net Income from Continuing
   Operations (1), (2)             $         --         $       0.35        $       0.56        $       0.98        $       0.93

 Cash Dividends
                                           0.36                 0.28                0.28                0.28                0.28

 Book Value
                                           6.33                 6.56                6.81                5.99                6.64

 Average shares outstanding           3,929,349            4,500,783           4,738,266           4,839,739           5,050,717
</TABLE>


(1)   Financial results in 1994 include restructuring expenses of $620,000 and
      environmental reserve expenses of $1,039,000 resulting in a reduction in
      net earnings of $995,000, or $.25 per share after tax.
(2)   Financial results in 1998 include a $676,000 legal settlement with the
      Company's insurance carriers regarding past environmental matters which
      resulted in an increase in net income of $400,000, or $.08 per share after
      tax.



                                       14
<PAGE>   15

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


         The following discussion and analysis is provided to increase
understanding of, and should be read in conjunction with, the consolidated
financial statements and accompanying notes.


OVERVIEW

         The consolidated financial statements include the results of the
Company and all of its operating divisions and subsidiaries. See discussion of
discontinued operations below.

         The Company's corporate offices are located in Burbank, California. The
Company consists of the Industrial Technologies Division ("ITD"), also located
in Burbank, California, and the Company's wholly owned subsidiaries, Haskel
Energy Systems, Ltd. ("HESL"), located in Sunderland, England and its divisions
and subsidiaries, Haskel-Hogan Systems and Service ("Haskel-Hogan"), located in
Houston, Texas, Haskel Asia Pte. Ltd., located in Singapore, and Haskel
Australasia Pty. Ltd., located in Brisbane, Australia. The ITD is the U.S.
manufacturer of Haskel(R) Specialty Products, Haskel(R) Systems, high-pressure
valves, metal seals, regulators and accessories to complement these products.
HESL is the Company's European manufacturing and distribution center with
offices located in Sunderland and Manchester, England; Aberdeen, Scotland;
Lille, France; Wesel, Germany; Zoetermeer, the Netherlands; and San Sebastian,
Spain. Haskel Asia, Pte. Ltd. is the Company's Asian manufacturing and
distribution operations with offices located in Singapore and Hong Kong. Haskel
Australasia, Pty. Ltd. is the Company's Australian manufacturing and
distribution operations with offices located in Brisbane, Australia. HESL and
its divisions and subsidiaries, Haskel Asia and Haskel Australasia primarily
distribute the Company's products, design and manufacturer Haskel(R) Systems for
specific applications, and distribute complementary products of other
third-party manufacturers in Asia, Australia, Europe, India, and the Middle
East. HESL Sunderland also manufactures metering valves and products needed for
HESL's markets that are not produced in the United States, such as the Jetflow
Airmover(R).

DISCONTINUED OPERATIONS


         In January 1997, the Company announced its decision to sell its
electronic products distribution business. The financial impact of this was
first reflected in the Company's third quarter 1997 financial statements.
Accordingly, the electronic products business has been treated as a discontinued
segment, and the Company's prior financial results have been restated to exclude
the affect of these operations. A loss on disposal of these operations was
recorded in fiscal year 1997 and is reflected separately in the Company's
financial results. In fiscal year 1998, the Company sold the electronics
products business.


         Upon the sale of the electronic products business in September 1997,
the Company recognized a gain on sale of $346,000 which is the difference
between the expected fair market value of the business, determined in fiscal
year 1997, and the final selling price. In fiscal year 1997, the estimated loss
on disposal of segment of $7,095,000 included the net amount of the following
components: the write-down of the net assets of the Electronic Products
Distribution Segment to the expected market value; disposal costs; anticipated
operating income of the segment through the expected date of disposal; and an
income tax benefit of $2,515,000 from the reversal of related deferred tax
liabilities. The Company also recognized a loss from the operations of this
discontinued segment of $529,000 and $100,000 for the each of the years ended
May 31, 1997 and 1996, respectively.



                                       15
<PAGE>   16

        RESULTS OF CONTINUING OPERATIONS

         The following table sets forth, for the periods presented, the
percentage of net sales represented by certain items included in the
Consolidated Statements of Income:

<TABLE>
<CAPTION>
                                                                               Year Ended
                                                              ---------------------------------------------
                                                              May 31, 1996     May 31, 1997    May 30, 1998
                                                              ------------     ------------    ------------
<S>                                                           <C>              <C>             <C>   
  Sales ................................................           100.0%           100.0%           100.0%
  Cost of sales ........................................            54.4             54.4             54.4
                                                                --------         --------         --------
  Gross profit .........................................            45.6             45.6             45.6
  Selling expenses .....................................            17.0             15.7             15.1
  General and administrative expenses ..................            16.2             13.2             14.7
  Engineering, design, research and development expenses             2.1              2.1              2.4
                                                                --------         --------         --------
  Total operating costs ................................            35.3             31.0             32.2
                                                                --------         --------         --------
  Operating Income .....................................            10.3             14.6             13.4
  Other income .........................................             0.6              0.5              0.5
                                                                --------         --------         --------
  Income from continuing operations before income taxes             10.9             15.1             13.9
  Provision for income taxes ...........................             4.6              5.9              5.2
                                                                --------         --------         --------
  Income from continuing operations ....................             6.3%             9.2%             8.7%
                                                                ========         ========         ========
</TABLE>


COMPARISON OF FISCAL YEARS 1996, 1997 AND 1998

         Sales increased by $2,310,000, or 4.5%, between 1997 and 1998 and
increased by $9,231,000, or 21.9%, from 1996 to 1997. In the beginning of 1998,
the Company eliminated the distribution of third-party products in the Western
United States, which represented sales of $678,000, $4,326,000, and $4,649,000
in 1998, 1997, and 1996, respectively. Distribution of these lower margin,
non-proprietary products was eliminated in order to better concentrate sales and
marketing efforts in this region on the Company's core business products and
systems. In November 1997, the Company completed a strategic acquisition of a
company in the business of systems integration, which contributed $4,767,000 in
net sales in 1998. In 1997, the Company recorded revenues of $1,200,000 from a
single order to the automotive safety products sector which was not repeated in
1998. Excluding the third-party products, the results from the acquisition, and
the automotive order, the Company's core business increased $2,391,000, or 5.2%,
from 1997 to 1998, and $8,354,000, or 22.3%, from 1996 to 1997. The slower rate
of growth in 1998 as compared to 1997 was in part the result of the weakened
foreign currencies throughout most of Europe and a slowdown in the Asian
economies. The slowdown experienced within the overseas markets was partially
mitigated by increased core product sales domestically, principally as a result
of the Company's focus within the western region. The slowdown in the Asian
economies continues to affect the Company's order levels, and this trend is
anticipated to continue over the next few quarters. The Company estimates that
approximately 15% of its products are sold, either directly or indirectly, into
Asian countries. In 1997, approximately $3,513,000 of the sales increase over
1996 was due to newly opened and acquired operations with the remaining increase
resulting from expanded sales and marketing efforts and strong economic
conditions worldwide during 1997.



                                       16
<PAGE>   17

         Cost of sales increased $1,264,000, or 4.5%, from 1997 to 1998 and
$4,982,000, or 21.7%, from 1996 to 1997. The change in cost of sales from 1996
to 1998 was principally associated with increased sales volumes. Gross margin as
a percent of sales remained constant at 45.6% for all three years. With the
elimination of lower-margin third party products sales in the beginning of 1998,
the Company experienced higher overall gross margins; however, this was offset
by a lower-margin, long-term contract acquired as part of the purchase of the
Palpro business. The gross margin on the Company's core products remained
relatively consistent from year to year.

         General and administrative expenses in 1997 include a credit of
approximately $676,000 from a settlement paid by the Company's insurance
carriers for the recovery of prior year's environmental legal expenses. Selling,
general and administrative, and engineering, ("Operating") expenses, before this
insurance reimbursement in 1997, grew by $713,000, or 4.3%, from 1997 to 1998,
and by $1,703,000, or 11.4%, from 1996 to 1997. Approximately $1,110,000 and
$1,121,000 of the operating expenses for 1998 and 1997, respectively,
represented activities of new businesses acquired and started. The offsetting
decrease in operating expenses in 1998 compared to 1997 principally represents
costs which were eliminated with the discontinuance of the third-party
distribution business in the United States. The remaining increase in expenses
from 1996 to 1997 represents initial costs associated with the Company's efforts
to expand market share worldwide and support the Company's growth.

         The Company's effective tax rate was 37% in 1998 and 39% in 1997 as
compared to 42% in 1996. The higher effective tax rate in 1996 was due primarily
to additional income taxes associated with dividends from foreign subsidiaries.


LIQUIDITY AND CAPITAL RESOURCES

         Historically, the Company has financed its operations and met its
capital requirements primarily through cash generated from operations.

<TABLE>
<CAPTION>
                                                                                Year Ended
                                                          ------------------------------------------------------
                                                          May 31, 1996         May 31, 1997         May 30, 1998
                                                          ------------         ------------         ------------
<S>                                                       <C>                  <C>                  <C>         
Cash and cash equivalents ........................        $  8,239,000         $  8,490,000         $  9,710,000
                                                          ============         ============         ============
Net cash provided by continuing operations .......        $  1,055,000         $  4,725,000         $  5,776,000
                                                          ============         ============         ============
Net cash provided by (used in) discontinued
  operations .....................................        $  1,495,000         $   (250,000)        $   (348,000)
                                                          ============         ============         ============
Net cash used in investing activities ............        $ (1,341,000)        $ (2,489,000)        $ (1,959,000)
                                                          ============         ============         ============
Net cash used in financing activities ............        $ (1,726,000)        $ (1,896,000)        $ (2,003,000)
                                                          ============         ============         ============
</TABLE>

WORKING CAPITAL AND LIQUIDITY

         The Company had working capital at May 30, 1998 of $25,460,000 as
compared to $24,095,000 at May 31, 1997.

         Net cash provided by continuing operations was $1,055,000, $4,725,000,
and $5,776,000 in 1996, 1997 and 1998, respectively. The increase in cash
provided by continuing operations in 1998 from 1997 was principally the result
of lower working capital requirements in relation to the level of operations.
The increase in cash provided by continuing operations in 1997 versus 1996 was
principally the result of an increase of $2,087,000 in income and a significant
reduction in the level of 



                                       17
<PAGE>   18

inventory. Depreciation and amortization was $925,000, $1,282,000, and
$1,290,000 in 1996, 1997 and 1998, respectively.

         Net cash used for investing activities was $1,341,000, $2,489,000, and
$1,959,000 in fiscal years 1996, 1997 and 1998, respectively. Capital
expenditures of $1,272,000, $1,236,000, and $1,430,000 represent the primary use
of cash for investing activities in fiscal year 1996, 1997, and 1998,
respectively. Additionally, the Company used $159,000, $1,348,000, and $834,000
in fiscal year 1996, 1997, and 1998, respectively, for new business
acquisitions.

         Net cash used in financing activities in 1996, 1997, and 1998 was
$1,726,000, $1,896,000, and $2,003,000, respectively, and consisted mainly of
principal payments on long-term debt as well as the payment of dividends. In
1997 and 1998, the Company raised $419,000 and $318,000, respectively, from the
issuance of common stock as a result of exercised stock options.

         The effect of the exchange rates on cash and cash equivalents resulted
in a decrease in cash and cash equivalents of $50,000 in 1996, an increase of
$161,000 in 1997 and a decrease of $246,000 in 1998.

         The Company maintains substantial cash balances in Europe consisting of
accumulated earnings from its foreign subsidiaries. The Company retains
approximately one-half of these funds in U.S. dollars to hedge against exchange
risks, and intends to use these funds primarily for acquisitions and expansion
of operations.

         See "Consolidated Statements of Cash Flows" for supplemental
disclosures of cash flow information related to the Company's acquisitions.

         At May 30, 1998, the Company's principal source of liquidity was
$9,710,000 in cash and cash equivalents. The Company believes that these funds
plus funds generated by operations, and the available borrowing capacity under
its bank credit line, will be sufficient to finance its working capital and
capital expenditure requirements for at least the next 12 months.


CREDIT FACILITIES

         The Company maintains a term-loan with its bank, which as of May 30,
1998, had a balance outstanding of $1,174,000 and bears interest at the LIBOR
rate plus 1.5% (7.43% at May 30, 1998). Additionally, the Company has obtained,
from the same bank, a $5 million revolving line of credit available at an
interest rate equal to the LIBOR rate plus 1.25% (7.18% at May 30, 1998). There
were no outstanding balances under the line of credit as of May 31, 1997 or May
30, 1998.

         The Company also has secured a $10 million line of credit available
with the same bank at an interest rate equal to the LIBOR rate plus 1.5% (7.43%
at May 30, 1998) for the purpose of acquiring new businesses or major capital
and expansion programs. The Company may make minimum draws of $250,000 against
this line, and any balances outstanding at the end of December each year are
converted into a five-year term loan, payable in 48 equal installments beginning
one year from the date of conversion to a term loan. The resulting term loans
bear interest at the same rate as the acquisition line. There were no borrowings
against this acquisition line and no term loans associated with this line
outstanding as of May 31, 1997 or May 30, 1998.

         All amounts advanced under the loan agreement, as amended, (the "Loan
Agreement") are secured by 50 percent of the outstanding shares of HESL. The
Loan Agreement requires, among other things, that the Company maintain working
capital of not less than $15,000,000; tangible net worth of not less than
$25,000,000; debt no greater than 1.25 times tangible net worth; and earnings
before income taxes, depreciation and amortization and non-cash expenses equal
to or greater than 1.25 times required debt service, dividends and capital
expenditures. In addition, the covenants restrict the Company's ability to incur
indebtedness, pay dividends in the event of 



                                       18
<PAGE>   19

default, consummate certain mergers and make capital expenditures in excess of
$5,000,000. As of May 30, 1998, the Company was in compliance with all of the
covenants of the loan agreement.


YEAR 2000 COMPLIANCE

         The Year 2000 compliance issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, which could potentially
result in a system failure or miscalculations.

         The Company is in the process of conducting a comprehensive review of
its principal computer and other operating systems and those of its principal
suppliers to identify the systems that could be materially affected by the Year
2000 issue. The Company will be making appropriate modifications and conducting
compliance tests. These reviews and tests are expected to be completed by the
end of March 1999. The Company estimates that costs associated with the
principal resolution of this issue will be approximately $500,000. The Company
believes that with modifications to, or replacement of, existing systems, the
Year 2000 issue will not pose significant operating problems for the Company's
operating systems as modified and corrected.


RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which becomes effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
In February 1998, the FASB issued SFAS No. 132, Employer's Disclosures about
Pensions and Other Postretirement Benefits, which becomes effective for fiscal
years beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefits. The Company has not
yet determined the impact of adopting these statements.

         In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which becomes effective for all fiscal
quarters beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company does not engage in hedging or other derivative activities and does not
believe the adoption of this pronouncement will have an impact on the financial
statements.


SAFE HARBOR STATEMENT

         The provisions of the Private Securities Litigation Reform Act of 1995
("Act"), became effective in December 1995. The Act provides a "safe harbor" for
companies which make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for companies
with respect to litigation filed on the basis of such forward-looking
statements.

         The statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risk and uncertainties which are
described below that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described in such
forward-looking statements. These statements are identified by the use of
forward-looking terminology such as "beliefs", "expects", "may", "will",
"should", "plans", or "anticipates" or variations thereon are comparable
terminology or by a discussion of strategy. Therefore, forward-looking
statements should not be relied upon as a prediction of actual future results or
occurrences.



                                       19
<PAGE>   20

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See the Index to Consolidated Financial Statements of Haskel
International, Inc. and Subsidiaries included herein and listed on the Index to
Consolidated Financial Statements set forth below.

                   Index to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                                      Page
                                                                                                      ----
<S>                                                                                                   <C>
Independent Auditors' Reports..................................................................       F-1

Consolidated Balance Sheets
at May 31, 1997 and May 30, 1998  .............................................................       F-3

Consolidated Statements of Operations
for the years ended May 31, 1996 and 1997, and May 30, 1998....................................       F-5

Consolidated Statements of Shareholders' Equity
for the years ended May 31, 1996 and 1997, and May 30, 1998....................................       F-6

Consolidated Statements of Cash Flows
for the years ended May 31, 1996 and 1997, and May 30, 1998....................................       F-7

Notes to Consolidated Financial Statements.....................................................       F-9
</TABLE>


ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURES

         NONE



                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


ITEM 11. EXECUTIVE COMPENSATION


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information regarding executive officers of the Company is included in
Part I. For the other information called for by Items 10, 11, 12 and 13,
reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after May 30, 1998,
and which is incorporated herein by reference.



                                       20
<PAGE>   21

                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 (a)     Exhibits (numbered in accordance with Item 601 of Regulation S-K):

<TABLE>
<CAPTION>
 Exhibit
 Number           Exhibit Description
 ------           -------------------
<S>               <C>
  3.1             Restated Articles of Incorporation of the Company, as amended.
                  (Incorporated by reference to Exhibit 3.1 of the Company's
                  Annual Report on Form 10-K for the fiscal year ended May 31,
                  1995)

  3.2             Restated Bylaws of the Company, as amended. (Incorporated by
                  reference to Exhibit 3.2 of the Company's Annual Report on
                  Form 10-K for fiscal year ended May 31, 1996)

  4.1             Specimen Class A Common Stock and Class B Stock Certificates.
                  (Incorporated by reference to Exhibit 4.1 of the Company's
                  Registration Statement on Form S-1 (File No. 33-74362))

  4.2             Form of Underwriter's Warrants. (Incorporated by reference to
                  Exhibit 4.2 of the Company's Registration Statement on Form
                  S-1 (File No. 33-74362))

 10.1             1989 Incentive Stock Option Plan and form of Stock Option
                  Agreement. (Incorporated by reference to Exhibit 10.1 of the
                  Company's Registration Statement on Form S-1 (File No.
                  33-74362))

 10.2             Non-Qualified Stock Option Plan and form of Stock Option
                  Agreement. (Incorporated by reference to Exhibit 10.2 of the
                  Company's Registration Statement on Form S-1 (File No.
                  33-74362))

 10.3             1995 Incentive Stock Option Plan and form of Stock Option
                  Agreement. (Incorporated by reference to Exhibit 10.3 of the
                  Company's Annual Report on Form 10-K for fiscal year ended May
                  31, 1996)

 10.4             1995 Formula Stock Option Plan and form of Stock Option
                  Agreement. (Incorporated by reference to Exhibit 10.4 of the
                  Company's Annual Report on Form 10-K for fiscal year ended May
                  31, 1996)

 10.5             Haskel Inc. Profit Sharing Plan. (Incorporated by reference to
                  Exhibit 10.3 of the Company's Registration Statement on Form
                  S-1 (File No. 33-74362))

 10.6             Haskel Energy Systems, Ltd. Pension Plan. (Incorporated by
                  reference to Exhibit 10.4 of the Company's Registration
                  Statement on Form S-1 (File No. 33-74362))

 10.7             Agreement and Plan of Reorganization of M.G. Electronics, Inc.
                  into Haskel Network Group, Inc. dated November 17, 1993 and
                  related Indemnification Agreement and Agreement of Merger.
                  (Incorporated by reference to Exhibit 10.7 of the Company's
                  Registration Statement on Form S-1 (File No. 33-74362))
</TABLE>



                                       21
<PAGE>   22

<TABLE>
<CAPTION>
 Exhibit
 Number           Exhibit Description
 ------           -------------------
<S>               <C>
 10.8             Employment Agreement dated November 17, 1993 between Maury S.
                  Friedman and the Company. (Incorporated by reference to
                  Exhibit 10.8 of the Company's Registration Statement on Form
                  S-1 (File No. 33-74362))

 10.9             Non-Competition Agreement dated November 17, 1993 between
                  Maury S. Friedman, the Friedman Family Trust and M.G.
                  Electronics, Inc. (Incorporated by reference to Exhibit 10.9
                  of the Company's Registration Statement on Form S-1 (File No.
                  33-74362))

 10.10            Consulting Agreement dated March 21, 1996 between the Company
                  and Maury S. Friedman. (Incorporated by reference to Exhibit
                  10.17 of the Company's Quarterly Report on Form 10-Q for the
                  period ended February 29, 1996)

 10.11            Leases dated June 1, 1993 and September 24, 1993 between West
                  Lake Village Industrial Park and M.G. Electronics, Inc.
                  (Incorporated by reference to Exhibit 10.10 of the Company's
                  Registration Statement on Form S-1 (File No. 33-74362))

 10.12            Consultant and Widow's Pension Agreement dated May 16, 1983
                  between the Company and Frederick J. Broderick and related
                  Memorandum dated April 22, 1993. (Incorporated by reference to
                  Exhibit 10.13 of the Company's Registration Statement on Form
                  S-1 (File No. 33-74362))

 10.13            Glendale Superfund Site PRP Organization Agreement dated
                  October 28, 1993 by and among the Company and the other PRPs
                  in the Group. (Incorporated by reference to Exhibit 10.14 of
                  the Company's Registration Statement on Form S-1 (File No.
                  33-74362))

 10.14            Amendment to the Glendale Superfund Site PRP Organization
                  Agreement dated as of January 11, 1996 by and among the
                  Company and the other PRPs in the Group. (Incorporated by
                  reference to Exhibit 10.14 of the Company's Annual Report on
                  Form 10-K for fiscal year ended May 31, 1996)

 10.15            Memorandum of Agreement Regarding Cost-Sharing for the
                  Glendale Operable Unit Superfund Sites dated June 7, 1995 by
                  and among the Company and the other PRPs in the Group.
                  (Incorporated by reference to Exhibit 10.15 of the Company's
                  Annual Report on Form 10-K for fiscal year ended May 31, 1996)

 10.16            Underwriter's Warrant Agreement. (Incorporated by reference to
                  Exhibit 10.18 of the Company's Registration Statement on Form
                  S-1 (File No. 33-74362))

 10.17            Loan Agreement dated February 21, 1995 by and between the
                  Company and Union Bank and related Commercial Promissory Note,
                  Arbitration Agreement, Continuing Guaranty and Security
                  Agreement-Pledge. (Incorporated by reference to the Company's
                  Quarterly Report on Form 10-Q for the period ended February
                  28, 1995)

 10.18            First Amendment dated as of August 30, 1995 to Loan Agreement
                  between the Company and Union Bank. (Incorporated by reference
                  to Exhibit 10.18 of the Company's Annual Report on Form 10-K
                  for fiscal year ended May 31, 1996)
</TABLE>



                                       22
<PAGE>   23

<TABLE>
<CAPTION>
 Exhibit
 Number           Exhibit Description
 ------           -------------------
<S>               <C>
 10.19            Second Amendment dated as of February 13, 1996 to Loan
                  Agreement between the Company and Union Bank. (Incorporated by
                  reference to Exhibit 10.19 of the Company's Annual Report on
                  Form 10-K for fiscal year ended May 31, 1996)

 10.20            Third Amendment dated as of April 16, 1996 to Loan Agreement
                  between the Company and Union Bank. (Incorporated by reference
                  to Exhibit 10.20 of the Company's Annual Report on Form 10-K
                  for fiscal year ended May 31, 1996)

 10.21            Employment Agreement dated December 22, 1995 regarding James
                  C. Minyard. (Incorporated by reference to Exhibit 10.21 of the
                  Company's Annual Report on Form 10-K for fiscal year ended May
                  31, 1996)

 10.22            Haskel International, Inc. Executive Separation Pay Plan.
                  (Incorporated by reference to Exhibit 10.22 of the Company's
                  Annual Report on Form 10-K for fiscal year ended May 31, 1996)

 10.23            Employment Agreement dated July 8, 1996 regarding Doranda
                  Frison. (Incorporated by reference to Exhibit 10.1 of the
                  Company's Quarterly Report on Form 10-Q for the period ended
                  August 31, 1996)

 10.24            Fourth Amendment dated as of November 15, 1996 to Loan
                  Agreement between the Company and Union Bank. (Incorporated by
                  reference to Exhibit 10.23 of the Company's Quarterly Report
                  on Form 10-Q for the period ended February 28, 1997)

 10.25            Fifth Amendment dated as of February 4, 1997 to Loan Agreement
                  between the Company and Union Bank. (Incorporated by reference
                  to Exhibit 10.24 of the Company's Quarterly Report on Form
                  10-Q for the period ended February 28, 1997)

 10.26            Sixth Amendment dated as of September 15, 1997 to Loan
                  Agreement between the Company and Union Bank. (Incorporated by
                  reference to Exhibit of the Company's Quarterly Report on Form
                  10-Q for the period ended August 29, 1997)

 10.27            Change in Control Agreement dated September 27, 1997 between
                  R. Malcolm Greaves and the Company. (Incorporated by reference
                  to Exhibit 10.27 of the Company's Quarterly Report on Form
                  10-Q for the period ended November 28, 1997)

 10.28            Change in Control Agreement dated September 27, 1997 between
                  Lonnie D. Schnell and the Company. (Incorporated by reference
                  to Exhibit 10.28 of the Company's Quarterly Report on Form
                  10-Q for the period ended November 28, 1997)

 10.29            Change in Control Agreement dated September 27, 1997 between
                  Henry Mason and the Company. (Incorporated by reference to
                  Exhibit 10.29 of the Company's Quarterly Report on Form 10-Q
                  for the period ended November 28, 1997)

 10.30            Amended and Restated Loan Agreement dated February 13, 1998
                  between the Company and Union Bank of California, N.A..
                  (Incorporated by reference to Exhibit 10.30 of the Company's
                  Quarterly Report on Form 10-Q for the period ended February
                  28, 1998)
</TABLE>



                                       23
<PAGE>   24

<TABLE>
<CAPTION>
 Exhibit
 Number           Exhibit Description
 ------           -------------------
<S>               <C>
 21               Schedule of Subsidiaries.

 23.1             Consent of Deloitte & Touche LLP.

 23.2             Consent of Price Waterhouse.

 27               Financial Data Schedule.
</TABLE>

         The following schedules supporting the financial statements:

         Schedule II       Valuation and Qualifying Accounts


(b)      Reports on Form 8-K:

         None.



                                       24
<PAGE>   25

                                   SIGNATURES

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


        Date:  August 21, 1998                    HASKEL INTERNATIONAL, INC.



                                                  By /s/ Lonnie D. Schnell
                                                     ---------------------------
                                                     Lonnie D. Schnell
                                                     Chief Financial Officer

                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, each person whose signature appears
below constitutes and appoints R. Malcolm Greaves and Lonnie D. Schnell, or any
one of them, his attorney-in-fact and agent, with full power of substitution,
for him in any and all capacities, to sign any amendments to this Annual Report,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitutes, may do or
cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
Signature                                                     Title                              Date
---------                                                     -----                              ----
<S>                                                  <C>                                <C>
                                                     Chairman of the Board
/s/ Edward Malkowicz                                 and Director                       August 21, 1998
------------------------------------
Edward Malkowicz

                                                     Chief Executive Officer
/s/ R. Malcolm Greaves                               and Director                       August 21, 1998
------------------------------------
R. Malcolm Greaves


/s/ Stanley T. Myers                                 Director                           August 21, 1998
------------------------------------
Stanley T. Myers


/s/ Terrence A. Noonan                               Director                           August 21, 1998
------------------------------------
Terrence A. Noonan


/s/ John T. Vinke                                    Director                           August  21, 1998
------------------------------------
John T. Vinke


H. Carr Wells                                        Director                           August 21, 1998
------------------------------------
H. Carr Wells


/s/ W. Bradley Zehner II, Ph.D.                      Director                           August 21, 1998
------------------------------------
W. Bradley Zehner II, Ph.D.
</TABLE>



                                       25
<PAGE>   26

                           HASKEL INTERNATIONAL, INC.
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                          Page
                                                                                                          ----
<S>                                                                                                       <C>
Independent Auditors' Reports................................................................              F-1

Consolidated Balance Sheets
   at May 31, 1997 and May 30, 1998..........................................................              F-3

Consolidated Statements of Operations
   for the years ended May 31, 1996 and 1997, and May 30, 1998...............................              F-5

Consolidated Statements of Shareholders' Equity
   for the years ended May 31, 1996 and 1997, and May 30, 1998...............................              F-6

Consolidated Statements of Cash Flows
   for the years ended May 31, 1996 and 1997, and May 30, 1998...............................              F-7

Notes to Consolidated Financial Statements...................................................              F-9
</TABLE>



                                       26
<PAGE>   27

                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders of
   Haskel International, Inc.:

We have audited the accompanying consolidated balance sheets of Haskel
International, Inc. ("the Company") and its subsidiaries as of May 31, 1997 and
May 30, 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended May 30, 1998. Our audits also included the financial statement schedule
listed in the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based upon our audits. We did not audit the
financial statements of Haskel Energy Systems, Ltd. ("HESL") (a consolidated
subsidiary), which statements reflect total assets constituting 43% and 40% of
consolidated total assets at May 31, 1997 and May 30, 1998 and total sales
constituting 42% for fiscal year 1996 and 45% for fiscal years 1997 and 1998 of
consolidated total sales. Those financial statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for HESL, is based solely upon the report of
such other auditors.

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

In our opinion, based upon our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Haskel International, Inc. and its subsidiaries at May 31,
1997 and May 30, 1998, and the results of their operations and their cash flows
for each of the three years in the period ended May 30, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, based on our
audits and the report of other auditors, the financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.



DELOITTE & TOUCHE LLP
Costa Mesa, California
July  17, 1998



                                      F-1

<PAGE>   28

                 INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF
                          HASKEL ENERGY SYSTEMS LIMITED



We have audited the consolidated balance sheets of Haskel Energy Systems Limited
and its subsidiaries as of May 31, 1997 and May 30, 1998, and the related
consolidated statements of income, of shareholders' equity, and of cash flows
for each of the three years in the period ended May 30, 1998 (not included
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based upon our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Haskel Energy Systems Limited
and its subsidiaries as of May 31, 1997 and May 30, 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
May 30, 1998 in conformity with generally accepted accounting principles.




PRICE WATERHOUSE
Chartered Accountants
and Registered Auditors

Newcastle
United Kingdom
July 17, 1998



                                      F-2
<PAGE>   29

                           HASKEL INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                        May 31,            May 30,
                                                         1997               1998
                                                      -----------        -----------
<S>                                                   <C>                <C>        
                                     ASSETS

CURRENT ASSETS:
     Cash and cash equivalents                        $ 8,490,000        $ 9,710,000
     Accounts receivable, net                          11,751,000         15,333,000
     Inventories                                       10,335,000         10,450,000
     Prepaid expenses and other current assets            942,000            630,000
     Deferred income taxes                              1,419,000          1,004,000
                                                      -----------        -----------

          TOTAL CURRENT ASSETS                         32,937,000         37,127,000

PROPERTY, PLANT & EQUIPMENT, Net                        5,376,000          5,315,000

GOODWILL, Net                                             698,000          1,474,000

DEFERRED INCOME TAXES                                   2,156,000          2,167,000

OTHER ASSETS                                               65,000            209,000
                                                      -----------        -----------

                   TOTAL                              $41,232,000        $46,292,000
                                                      ===========        ===========
</TABLE>



See notes to consolidated financial statements.



                                      F-3
<PAGE>   30

                           HASKEL INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS
                                   (Continued)

<TABLE>
<CAPTION>
                                                                  May 31,             May 30,
                                                                   1997                1998
                                                               ------------        ------------
<S>                                                            <C>                 <C>         
                              LIABILITIES & SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
     Current portion of long-term debt                         $    978,000        $    960,000
     Accounts payable                                             4,070,000           7,007,000
     Dividends payable                                              335,000             331,000
     Accrued liabilities                                          3,249,000           2,785,000
     Income taxes payable                                           210,000             584,000
                                                               ------------        ------------

              TOTAL CURRENT LIABILITIES                           8,842,000          11,667,000

LONG-TERM DEBT                                                    1,401,000             466,000

OTHER ACCRUED LIABILITIES                                         2,322,000           2,278,000

COMMITMENTS & CONTINGENCIES

SHAREHOLDERS' EQUITY:
     Preferred Stock: 2,000,000 shares authorized;
        none issued and outstanding
     Common Stock:
     Class A, without par value; 20,000,000 shares
        authorized; 4,748,230 and 4,759,205 issued
        and outstanding at May 31, 1997 and
        May 30, 1998, respectively                               13,855,000          13,922,000
     Class B, without par value; 40,000 shares
        authorized, issued and outstanding at
        May 31, 1997 and May 30, 1998                                19,000              19,000
     Retained Earnings                                           14,733,000          18,144,000
     Cumulative foreign currency translation adjustment              60,000            (204,000)
                                                               ------------        ------------

             TOTAL SHAREHOLDERS' EQUITY                          28,667,000          31,881,000
                                                               ------------        ------------

                        TOTAL                                  $ 41,232,000        $ 46,292,000
                                                               ============        ============
</TABLE>



See notes to consolidated financial statements.



                                      F-4
<PAGE>   31

                             HASKEL INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                             Fiscal Year Ended
                                                           ------------------------------------------------------
                                                              May 31,              May 31,              May 30,
                                                               1996                 1997                 1998
                                                           ------------         ------------         ------------
<S>                                                        <C>                  <C>                  <C>         
SALES                                                      $ 42,169,000         $ 51,400,000         $ 53,710,000

COST OF SALES                                                22,956,000           27,938,000           29,202,000
                                                           ------------         ------------         ------------
GROSS PROFIT                                                 19,213,000           23,462,000           24,508,000
                                                           ------------         ------------         ------------

EXPENSES:
   Selling                                                    7,162,000            8,081,000            8,134,000

   General and administrative                                 6,845,000            6,779,000            7,900,000

   Engineering, design, research and development                905,000            1,079,000            1,294,000
                                                           ------------         ------------         ------------
           Total                                             14,912,000           15,939,000           17,328,000
                                                           ------------         ------------         ------------

OPERATING INCOME                                              4,301,000            7,523,000            7,180,000

OTHER INCOME (EXPENSE):
   Interest Income                                              356,000              358,000              385,000
   Interest Expense                                            (104,000)            (118,000)            (143,000)
   Other                                                         13,000               12,000               55,000
                                                           ------------         ------------         ------------
                                                                265,000              252,000              297,000
                                                           ------------         ------------         ------------

INCOME FROM CONTINUING OPERATIONS
   BEFORE PROVISION FOR INCOME TAXES                          4,566,000            7,775,000            7,477,000

PROVISION FOR INCOME TAXES                                    1,919,000            3,041,000            2,795,000
                                                           ------------         ------------         ------------
INCOME FROM CONTINUING OPERATIONS                             2,647,000            4,734,000            4,682,000
                                                           ------------         ------------         ------------

DISCONTINUED OPERATIONS:
   Loss from operations, net of taxes                          (100,000)            (529,000)
   Gain/(loss) on disposal of segment, net of taxes                               (7,095,000)             346,000
                                                           ------------         ------------         ------------
NET INCOME (LOSS)                                          $  2,547,000         $ (2,890,000)        $  5,028,000
                                                           ============         ============         ============
</TABLE>



See notes to consolidated financial statements.



                                      F-5
<PAGE>   32

                           HASKEL INTERNATIONAL, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended
                                                 ------------------------------------------------------
                                                    May 31,              May 31,             May 30,
                                                     1996                 1997                 1998
                                                 ------------         ------------         ------------
<S>                                              <C>                  <C>                  <C>         
Shares outstanding

Common stock, Class A shares
Balance, beginning of year                          4,688,230            4,688,230            4,748,230
Issuance of common stock                                                    60,000               45,975
Repurchase and retirement of common stock                                                       (35,000)
                                                 ------------         ------------         ------------
    Balance, end of year                            4,688,230            4,748,230            4,759,205
                                                 ============         ============         ============

Common stock, Class B shares
    Balance, end of year                               40,000               40,000               40,000
                                                 ============         ============         ============

Common stock, Class A
Balance, beginning of year                       $ 13,436,000         $ 13,436,000         $ 13,855,000
Issuance of common stock                                                   419,000              318,000
Repurchase and retirement of common stock                                                      (251,000)
                                                 ------------         ------------         ------------
    Balance, end of year                         $ 13,436,000         $ 13,855,000         $ 13,922,000
                                                 ============         ============         ============

Common stock, Class B
    Balance, end of year                         $     19,000         $     19,000         $     19,000
                                                 ============         ============         ============

Retained earnings

Balance, beginning of year                       $ 17,729,000         $ 18,951,000         $ 14,733,000
Net income (loss)                                   2,547,000           (2,890,000)           5,028,000
Repurchase and retirement of common stock                                                      (283,000)
Cash dividends, Class A and B shares               (1,325,000)          (1,328,000)          (1,334,000)
                                                 ------------         ------------         ------------
    Balance, end of year                         $ 18,951,000         $ 14,733,000         $ 18,144,000
                                                 ============         ============         ============

Cumulative translation adjustment
    Balance, end of year                         $   (186,000)        $     60,000         $   (204,000)
                                                 ------------         ------------         ------------

Total shareholders' equity                       $ 32,220,000         $ 28,667,000         $ 31,881,000
                                                 ============         ============         ============
</TABLE>



See notes to consolidated financial statements.



                                      F-6
<PAGE>   33


                           HASKEL INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                        Fiscal Year Ended
                                                                      ---------------------------------------------------
                                                                        May 31,             May 31,             May 30,
                                                                         1996                1997                1998
                                                                      -----------         -----------         -----------
<S>                                                                   <C>                 <C>                 <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
  Income from continuing operations                                   $ 2,647,000         $ 4,734,000         $ 4,682,000
  Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation and amortization                                          925,000           1,282,000           1,290,000
   (Gain) Loss on sale of property                                        (33,000)             62,000               9,000
   Deferred income taxes                                                  (35,000)             13,000             404,000
   Effect of exchange rate changes                                         41,000              84,000             (18,000)
   Changes in operating assets and liabilities
     (net of acquisitions):
       Accounts receivable, net                                        (1,441,000)         (2,690,000)         (2,996,000)
       Inventories                                                     (1,450,000)            703,000             436,000
       Prepaid expenses and other current assets                          (74,000)           (596,000)            424,000
       Accounts payable and accrued liabilities                           686,000           1,010,000           1,171,000
       Income taxes payable                                              (211,000)            123,000             374,000
                                                                      -----------         -----------         -----------
        Net cash provided by continuing operations                      1,055,000           4,725,000           5,776,000
                                                                      -----------         -----------         -----------
        Net cash provided by (used in) discontinued operations          1,495,000            (250,000)           (348,000)
                                                                      -----------         -----------         -----------
        Net cash provided by operating activities                       2,550,000           4,475,000           5,428,000
                                                                      -----------         -----------         -----------

CASH FLOWS USED IN INVESTING ACTIVITIES:
   Capital expenditures                                                (1,272,000)         (1,236,000)         (1,430,000)
   Proceeds from sale of property                                          90,000              95,000             305,000
   Purchase of subsidiary (net of cash acquired)                         (159,000)         (1,348,000)           (834,000)
                                                                      -----------         -----------         -----------
        Net cash used in investing activities                          (1,341,000)         (2,489,000)         (1,959,000)
                                                                      -----------         -----------         -----------

CASH FLOWS USED IN FINANCING ACTIVITIES:
   Principal payments on long-term debt                                  (401,000)           (987,000)           (987,000)
   Proceeds from issuance of common stock                                                     419,000             318,000
   Dividends declared                                                  (1,325,000)         (1,328,000)         (1,334,000)
                                                                      -----------         -----------         -----------
        Net cash used in financing activities                          (1,726,000)         (1,896,000)         (2,003,000)
                                                                      -----------         -----------         -----------

EFFECT OF EXCHANGE RATE ON
  CASH AND CASH EQUIVALENTS                                               (50,000)            161,000            (246,000)
                                                                      -----------         -----------         -----------

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                            (567,000)            251,000           1,220,000

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF PERIOD                                                   8,806,000           8,239,000           8,490,000
                                                                      -----------         -----------         -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                            $ 8,239,000         $ 8,490,000         $ 9,710,000
                                                                      ===========         ===========         ===========
</TABLE>



See notes to consolidated financial statements.



                                      F-7
<PAGE>   34

                           HASKEL INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Continued)

<TABLE>
<CAPTION>
                                                                        Fiscal Year Ended
                                                         ----------------------------------------------
                                                           May 31,           May 31,           May 30,
                                                            1996              1997              1998
                                                         ----------        ----------        ----------
<S>                                                      <C>               <C>               <C>       
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
       Cash paid during the year for:
       Interest
             Continuing operations                       $   75,000        $  121,000        $  139,000
                                                         ==========        ==========        ==========
             Discontinued operations                     $  181,000        $  111,000
                                                         ==========        ==========        ==========

       Income taxes                                      $2,128,000        $2,557,000        $1,990,000
                                                         ==========        ==========        ==========
</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

       On November 30, 1995, HESL acquired certain assets of Armaturenbau GmbH
         for $412,000 ($159,000 in cash and a note payable of $253,000).

       Liabilities assumed in conjunction with acquisitions of businesses:

<TABLE>
<CAPTION>
                                                        May 31,             May 30,
                                                         1997                1998
<S>                                                   <C>                 <C>        
         Acquisitions (Note 2):
                 Fair value of assets acquired        $ 1,243,000         $ 2,377,000
                 Cash paid                               (880,000)           (834,000)
                                                      -----------         -----------
                 Liabilities assumed                  $   363,000         $ 1,543,000
                                                      ===========         ===========
</TABLE>

On September 11, 1997, the Company sold its electronic products business in
exchange for 35,000 shares of the Company's Class A common stock (valued at
$534,000) and a note receivable in the amount of $159,000.



See notes to consolidated financial statements.



                                      F-8
<PAGE>   35

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

         The consolidated financial statements include the accounts of Haskel
International, Inc. (the "Company"), its wholly owned operating domestic
subsidiaries and its operating foreign subsidiaries: Haskel Energy Systems, Ltd.
("HESL") and its operating subsidiaries; Haskel Asia Pte. Ltd.; and Haskel
Australasia Pty. Ltd. All significant intercompany accounts and transactions
have been eliminated.

Cash Equivalents

         The Company considers all short-term investments with original
maturities of 90 days or less to be cash equivalents.

Inventories

         Inventories are stated at the lower of cost or market. The cost of the
Company's principal domestic inventories is determined by the last-in, first-out
(LIFO) method and represents approximately 55% and 48% of consolidated
inventories at May 31, 1997 and May 30, 1998, respectively. All other
inventories are valued using the first-in, first-out (FIFO) method. If domestic
inventories had been valued on the FIFO method, they would have been greater by
$1,944,000 and $1,799,000 at May 31, 1997 and May 30, 1998, respectively.

Property, Plant and Equipment

         Property, plant and equipment is stated at cost. Provision for
depreciation has been made based upon the estimated useful lives of the assets,
which range from 3 to 30 years, principally using the straight-line method.
Provision for amortization of leasehold improvements is based upon the estimated
lives of the assets or terms of the leases, whichever is shorter.

Income Taxes

         Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets and
liabilities. Such deferred income tax assets and liabilities are based on
enacted tax laws and rates applicable to periods in which the differences are
expected to reverse. A valuation allowance is established, when necessary, to
reduce deferred income tax assets to the amount expected to be realized. Income
tax expense is the tax payable or refundable for the period plus or minus the
change during the period in deferred income tax assets and liabilities.

Fair Value of Financial Instruments

         The carrying values of cash equivalents, accounts receivable, and
accounts payable approximate fair value due to the short maturities of such
instruments. The carrying values of notes payable approximate fair value since
the majority of the notes carry variable interest rates that approximate market
rates.



                                      F-9
<PAGE>   36

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition

         Revenue is recognized upon shipment of product or completion of
identified contract milestones. Revenue on certain long-term contracts is
recognized under the percentage of completion method. Accounts receivable are
not pledge as collateral and contain no significant concentrations of credit
risk.

         At May 30, 1998, the Company had approximately $3,700,000 of unbilled
receivables, principally secured by an irrevocable letter of credit, included
within trade receivables.

Research and Development

         Research and development costs are expensed as incurred.

Earnings Per Share

         During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. SFAS No. 128 requires the Company to disclose a basic and diluted
earnings per share calculation. Basic earnings per share amounts are based upon
the weighted average number of common shares outstanding. Diluted earnings per
share amounts are based upon the weighted average number of common and common
equivalent shares for each period presented. Common equivalent shares include
stock options, assuming conversion under the treasury stock method, using the
average market price during the period. The Company has adopted the provisions
of SFAS No. 128 during fiscal year 1998. All previously reported earnings per
share amounts have been restated based upon the provisions of the new standard
(see Note 12).

Foreign Currency

         Foreign assets and liabilities are translated to their United States
dollar equivalents based on rates of exchange prevailing at the end of each
respective period. The statement of operations is translated using the average
rate for the year. Gains and losses resulting from foreign currency transactions
(which have not been significant) are included in the consolidated statements of
operations. Gains and losses resulting from translation of foreign financial
statements are included as a separate component of shareholders' equity.



                                      F-10
<PAGE>   37

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Intangible Assets

         The Company accounts for the impairment and disposition of long-lived
assets in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In accordance
with SFAS No. 121, long-lived assets to be held are reviewed for events or
changes in circumstances which indicate that their carrying value may not be
recoverable. The Company annually evaluates the carrying value of the intangible
assets versus the cash benefit expected to be realized and adjusts for any
impairment in value.

         The Company also reviews the carrying value of all goodwill on a
quarterly basis, and if future undiscounted cash flows are believed insufficient
to recover the remaining carrying value of the goodwill, the carrying value is
written down to fair market value in the period the impairment is identified.

Stock Options

         In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. The standard defines a fair value method of accounting
for stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period.

         Pursuant to the accounting standard, companies are encouraged, but are
not required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to account for such
transactions under Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, but are required to disclose in a note to the
financial statements pro forma net income and earnings per share as if the
Company had applied the new method of accounting. The Company has determined
that it will not change to the fair value method and will continue to use APB
Opinion No. 25 for measurement and recognition of employee stock-based
transactions (see Note 9).

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 assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.



                                      F-11
<PAGE>   38

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accounting Periods

         Effective June 1, 1997, the Company changed its accounting period for
financial statement purposes from a calendar month-end fiscal year to a
52/53-week fiscal year. Beginning with fiscal year 1998, the Company's fiscal
year ends on the Saturday closest to May 31. Interim fiscal quarters end on the
Saturday closest to the calendar end of August, November and February of each
year. This change does not have a significant impact on the consolidated
financial results or financial position of the Company.

Segment Reporting

         In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which becomes effective for fiscal
years beginning after December 15, 1997. SFAS No. 131 establishes standards for
the way that public businesses report information about operating segments and
requires businesses to report selected information about operating segments in
interim financial reports. The Company has elected early adoption of this
standard and has restated its segment reporting in prior years to reflect the
Company's existing business segments as of May 30, 1998 (see Note 16.)


2.          MERGERS AND ACQUISITIONS

         During fiscal years 1996, 1997 and 1998, the Company completed several
acquisitions recorded using the purchase accounting method. The acquisitions
were principally purchased for cash plus the assumption of liabilities, and the
issuance of notes payable. The proforma effects of the acquisitions are not
significant to the financial statements. The following represent the more
significant acquisitions during these three years.

         On June 3, 1996, HESL acquired all of the outstanding stock of
Hydraulic Mobile Equipment Limited ("HME") in exchange for $814,000 in cash and
$37,000 in acquisition costs. In connection with the acquisition, the Company
recorded goodwill of approximately $161,000, which is being amortized over 15
years.

         On December 4, 1996, the Company acquired certain assets of Hogan Fluid
Power, Inc. for approximately $380,000 in cash and $50,000 in acquisition costs.
In connection with the acquisition, the Company recorded goodwill of
approximately $40,000, which is being amortized over 5 years.

         On November 27, 1997, HESL acquired all of the outstanding stock of
Palpro Limited for $13,000, plus liabilities. In connection with the
acquisition, the Company recorded goodwill of approximately $280,000, which is
being amortized over 15 years.

         On March 24, 1998, the Company acquired certain assets of two
Australian companies, M.D.C., Pty. Ltd. and Hydraulics and Air, Pty. Ltd, for
approximately $821,000 in cash and $70,000 in acquisition costs. In connection
with the acquisition, the Company recorded goodwill of approximately $642,000,
which is being amortized over 15 years.



                                      F-12
<PAGE>   39

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



3.       COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS

<TABLE>
<CAPTION>
                                                                   May 31,             May 30,
                                                                    1997                 1998
                                                                ------------         ------------
<S>                                                             <C>                  <C>         
Cash and cash equivalents:
  Cash in banks ........................................        $  3,077,000         $  3,596,000
  Time deposits ........................................           5,413,000            6,114,000
                                                                ------------         ------------
                                                                $  8,490,000         $  9,710,000
                                                                ============         ============

Accounts receivable:
  Accounts receivable ..................................        $ 12,294,000         $ 15,731,000
  Less: Allowance for doubtful accounts ................            (543,000)            (398,000)
                                                                ------------         ------------
                                                                $ 11,751,000         $ 15,333,000
                                                                ============         ============

Inventories:
  Raw materials ........................................        $  3,029,000         $  3,154,000
  Work-in-process ......................................           1,697,000            1,128,000
  Finished goods .......................................           5,609,000            6,168,000
                                                                ------------         ------------
                                                                $ 10,335,000         $ 10,450,000
                                                                ============         ============

Property, plant and equipment:
  Land and building ....................................        $  2,870,000         $  2,600,000
  Computer equipment ...................................           2,022,000            2,657,000
  Machinery and equipment ..............................           4,321,000            4,641,000
  Furniture and fixtures ...............................             529,000              682,000
  Leasehold improvements ...............................             962,000            1,033,000
                                                                ------------         ------------
                                                                  10,704,000           11,613,000
  Less: Accumulated depreciation and amortization ......          (5,328,000)          (6,298,000)
                                                                ------------         ------------
                                                                $  5,376,000         $  5,315,000
                                                                ============         ============

Goodwill:
  Goodwill .............................................        $    804,000         $  1,655,000
  Less: Accumulated amortization .......................            (106,000)            (181,000)
                                                                ------------         ------------
                                                                $    698,000         $  1,474,000
                                                                ============         ============

Accrued Liabilities:
  Accrued bonuses ......................................        $    913,000         $    488,000
  Accrued vacation .....................................             518,000              418,000
  Other ................................................           1,818,000            1,879,000
                                                                ------------         ------------
                                                                $  3,249,000         $  2,785,000
                                                                ============         ============
</TABLE>



                                      F-13
<PAGE>   40

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


4.       LONG-TERM DEBT

         Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                              May 31, 1997        May 30, 1998
                                                                                              ------------        ------------
<S>                                                                                           <C>                 <C>        
Note payable to bank, principal payable in 46 equal monthly installments of
  $65,200 through November 1999. The unpaid principal balance accrues interest,
  to be paid monthly, based upon the LIBOR rate plus 1.5%. Interest rate at May
  30, 1998 was 7.43%. Collateralized by 50% of the Company's stock in HESL ...........        $ 1,957,000         $ 1,174,000


Various installment notes issued in connection with stock repurchases. Principal
  payable in equal quarterly installments through February 2000. Interest
  payable at a rate equal to one-year Treasury Notes adjusted quarterly.
  Interest rate at May 30, 1998 was 5.41% ............................................            271,000             162,000


Non-interest bearing note payable issued in connection with acquisition. Payable
  in three annual installments of $95,000 beginning November 1996. Interest
  imputed based on an assumed
  interest rate of 8% ................................................................            151,000              90,000
                                                                                              -----------         -----------

                                                                                                2,379,000           1,426,000
Less:  Current portion of long-term debt .............................................           (978,000)           (960,000)
                                                                                              -----------         -----------

Long-term debt .......................................................................        $ 1,401,000         $   466,000
                                                                                              ===========         ===========
</TABLE>


         Amounts of scheduled debt repayments by fiscal year are summarized as
follows:

<TABLE>
<CAPTION>
Fiscal year ending
<S>                                                                   <C>       
   May 29, 1999 ...................................                   $  960,000
   May 27, 2000 ...................................                      466,000
                                                                      ----------
Total .............................................                   $1,426,000
                                                                      ==========
</TABLE>

         The Company has a $5 million revolving line of credit available with a
bank at an interest rate equal to the LIBOR rate plus 1.25% (7.18% at May 30,
1998). The Company may make minimum draws of $100,000 against this line. There
were no outstanding balances under the line of credit as of May 31, 1997 or May
30, 1998.

         The Company has a $10 million acquisition line of credit available with
the same bank at an interest rate equal to the LIBOR rate plus 1.5% (7.43% at
May 30, 1998). The Company may make minimum draws of $250,000 against this line.
Balances outstanding against this line at the end of December each year are
converted into a five-year term loan, payable in 48 equal installments beginning
one year from the conversion to a term loan. The term loan with the bank bears
interest at the same rate as the acquisition line. There were no borrowings
against this acquisition line and no term loans associated with this line
outstanding as of May 31, 1997 or May 30, 1998.



                                      F-14
<PAGE>   41

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


4.       LONG-TERM DEBT (CONTINUED)

         All amounts advanced under the loan agreement with the Company's bank
(the "Loan Agreement") are collateralized by 50 percent of the outstanding
shares of HESL. The above loan agreement with the bank contains certain
covenants, including a requirement to maintain working capital of not less than
$15,000,000; tangible net worth of not less than $25,000,000; debt no greater
than 1.25 times tangible net worth; and earnings before income taxes,
depreciation and amortization and non-cash expenses equal to or greater than
1.25 times required debt service, dividends and capital expenditures. In
addition, the covenants restrict the Company's ability to incur indebtedness,
pay dividends in the event of default, consummate certain mergers and make
capital expenditures in excess of $5,000,000. As of May 30, 1998, the Company
was in compliance with all of the covenants of the loan agreement.


5.       LEASE COMMITMENTS

         The Company leases office space, plant and warehouse facilities under
operating lease agreements expiring at various dates through May 2007. Some of
the operating leases contain renewal options and provisions requiring the
Company to pay property tax increases in addition to the minimum rental.
Additionally, the Company leases automobiles under operating lease agreements
expiring at various dates through March 2002.

         Future minimum rental payments under operating leases with an initial
term of one year or more are as follows:

<TABLE>
<CAPTION>
Fiscal year ending
<S>                                                                   <C>       
  May 29, 1999 .......................................                $  575,000
  May 27, 2000 .......................................                   450,000
  May 26, 2001 .......................................                   312,000
  May 25, 2002 .......................................                   175,000
  May 31, 2003 .......................................                   114,000
                                                                      ----------  
Total minimum lease payments .........................                $2,014,000
                                                                      ==========
</TABLE>

         Rent expense for all operating leases was $246,000, $222,000 and
$360,000 for fiscal years 1996, 1997 and 1998, respectively.



                                      F-15
<PAGE>   42

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


6.       INCOME TAXES

         The provision for income taxes is summarized as follows:

<TABLE>
<CAPTION>
                                                   Fiscal Year Ended
                                  --------------------------------------------------
                                    May 31,             May 31,            May 30,
                                     1996                1997               1998
                                  -----------         -----------        -----------
<S>                               <C>                 <C>                <C>        
Current:
  Federal ................        $ 1,059,000         $ 1,163,000        $   872,000
  State ..................            313,000             500,000            252,000
  Foreign ................            901,000           1,171,000          1,267,000
                                  -----------         -----------        -----------
                                    2,273,000           2,834,000          2,391,000
Deferred:
  Federal ................           (305,000)            140,000            202,000
  State ..................            (49,000)             12,000            194,000
  Foreign ................             55,000               8,000
                                  -----------         -----------        -----------

                                  $ 1,919,000         $ 3,041,000        $ 2,795,000
                                  ===========         ===========        ===========
</TABLE>

         At May 30, 1998, applicable United States federal income taxes and
foreign withholding taxes have not been provided on approximately $8,600,000 of
accumulated earnings of foreign subsidiaries that are expected to be permanently
reinvested abroad. Management does not believe it is practical to determine the
amount of the unrecognized deferred tax liability for the temporary difference
related to investments in foreign subsidiaries that is essentially permanent in
duration. Management believes that, if determined, such amount would be
immaterial.

         The components of deferred tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
                                                              May 31,            May 30,
                                                               1997                1998
                                                           -----------         -----------
<S>                                                        <C>                 <C>        
Deferred tax assets:
  Uniform capitalization rules ....................        $   303,000         $   273,000
  Reserve for obsolescence ........................            489,000             322,000
  Environmental accrual ...........................            363,000             352,000
  Retirement accrual ..............................            524,000             497,000
  Purchased land/building - related party .........          1,624,000           1,558,000
  Other ...........................................            709,000             474,000
                                                           -----------         -----------

Total deferred tax assets .........................          4,012,000           3,476,000
                                                           -----------         -----------

Deferred tax liabilities:
  Other ...........................................           (437,000)           (305,000)
                                                           -----------         -----------

Total deferred tax liabilities ....................           (437,000)           (305,000)
                                                           -----------         -----------

Net deferred tax asset ............................        $ 3,575,000         $ 3,171,000
                                                           ===========         ===========
</TABLE>

         Management believes that it is more likely than not that future
operations will generate sufficient taxable income to realize the deferred tax
assets.



                                      F-16
<PAGE>   43

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


6.       INCOME TAXES (CONTINUED)

         The provisions for income taxes differ from the provisions that would
have resulted by applying the federal statutory rates to the income from
continuing operations before income taxes as follows:

<TABLE>
<CAPTION>
                                                                           Fiscal Year Ended
                                                            -------------------------------------------------
                                                               May 31,            May 31,            May 30,
                                                                1996               1997               1998
                                                            -----------        -----------        -----------
<S>                                                         <C>                <C>                <C>        
Income tax expense at statutory rate ...............        $ 1,552,000        $ 2,644,000        $ 2,542,000
State income taxes, net of federal
     tax benefit ...................................            174,000            338,000            294,000
Taxes associated with dividends  from
     HESL ..........................................             53,000
Foreign income subject to tax other
     than at federal statutory rate ................            110,000
Other ..............................................             30,000             59,000            (41,000)
                                                            -----------        -----------        -----------
                                                            $ 1,919,000        $ 3,041,000        $ 2,795,000
                                                            ===========        ===========        ===========
</TABLE>


7.       PROFIT SHARING PLAN

         The Company has a profit sharing plan that covers substantially all
U.S. employees. Contributions to the plan are at the discretion of the Board of
Directors. The Company did not make any profit sharing contributions for fiscal
years 1996 and 1997.

         Effective June 1, 1997, the Company's Plan adopted a format to meet the
requirements of a qualified retirement plan pursuant to the provisions of
Section 401(k) of the Internal Revenue Code. The Plan provides eligible
employees the opportunity to make tax deferred contributions to a retirement
trust account in amounts up to 15% of their qualified wages (or a maximum of
$9,500 annually). The Company will match 25% of the employee's deferred
contribution for contributions representing up to 6 percent of each
participating employee's qualified earnings. Employees vest in the Company's
matching contribution at 20% per year of qualified service. In fiscal year 1998,
the Company's matching contribution was $139,000.



                                      F-17
<PAGE>   44

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


8.       RETIREMENT PLANS  

         HESL maintains two pension plans for the benefit of employees:

         (a)  The Haskel Retirement Benefits Plan provides future benefits for
              all employees of HESL who have completed one year of qualifying
              service.

         (b)  A Discretionary Benefits Plan provides additional future benefits
              for United Kingdom directors.

         Pension costs are determined under the provisions of SFAS No. 87,
Employers' Accounting for Pensions. Plan assets are held separately from those
of HESL and are invested with insurance companies. Certain selected information
for the plans is as follows:

<TABLE>
<CAPTION>
                                                                               May 31,             May 30,
                                                                                1997                1998
                                                                            -----------         -----------
<S>                                                                         <C>                 <C>        
Actuarial present value of benefit obligations:
  Vested benefits ..................................................        $ 2,159,000         $ 2,591,000
  Non-vested benefits ..............................................            197,000             377,000
                                                                            -----------         -----------
Accumulated benefit obligation .....................................          2,356,000           2,968,000
Effect of projected salary increases ...............................            294,000             369,000
                                                                            -----------         -----------
Projected benefit obligation .......................................          2,650,000           3,337,000
Net assets available for benefits (market value) ...................          2,369,000           3,021,000
                                                                            -----------         -----------
Projected benefit obligation in excess of plan assets ..............            281,000             316,000
Unrecognized net obligation being recognized over 15 years .........            351,000             186,000
                                                                            -----------         -----------
Accrued (Prepaid) pension cost .....................................        $   (70,000)        $   130,000
                                                                            ===========         ===========
</TABLE>

         Net periodic pension cost included the following components:

<TABLE>
<CAPTION>
                                                                                Fiscal Year Ended
                                                                  ---------------------------------------------
                                                                    May 31,           May 31,           May 30,
                                                                     1996              1997              1998
                                                                  ---------         ---------         ---------
<S>                                                               <C>               <C>               <C>      
Service cost - benefits earned during the period .........        $ 158,000         $ 164,000         $ 198,000
Interest cost on projected benefit obligation ............          184,000           191,000           212,000
Expected return on plan assets ...........................         (150,000)         (276,000)         (507,000)
Amortization of unrecognized net obligation ..............           16,000           136,000           309,000
                                                                  ---------         ---------         ---------
Net periodic pension cost ................................        $ 208,000         $ 215,000         $ 212,000
                                                                  =========         =========         =========
</TABLE>


         The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8 percent and 6 percent, respectively, for
fiscal years 1996 and 1997, and 6.5 percent and 4 percent, respectively, for
fiscal year 1998. The expected long-term rate of return on assets was 8 percent
for all fiscal years presented. The discount rate approximates the rate on
AA-rated bonds in the United Kingdom.



                                      F-18
<PAGE>   45

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


9.       STOCK OPTIONS AND WARRANTS

         Under the Company's stock option plans, the Company may issue up to
1,380,000 nonqualified and incentive stock options to officers, directors and
other employees to purchase the Company's Class A common stock at a price that
is not less than 100 percent of the fair market value at the date of grant. The
options granted under the Incentive Stock Option Plan become exercisable at such
times and in such installments as are determined by the Stock Option Committee
at the time of grant. The options granted under the Nonqualified Option Plans
become exercisable in equal installments over five years. The options under both
of the above plans expire no later than ten years after the date of grant. The
following table summarizes the stock option activity:

<TABLE>
<CAPTION>
                                                                       Range of Option
                                                    Shares             Prices Per Share
                                                --------------         ----------------
<S>                                             <C>                    <C>
Outstanding at June 1, 1995 ............               778,885         $7.00 - $10.00
  Options granted ......................               238,000          $5.38 - $7.25
  Options canceled .....................              (182,320)         $5.38 - $9.50
                                                --------------


Outstanding at May 31, 1996 ............               834,565         $5.38 - $10.00
  Options exercised ....................               (60,000)         $5.38 - $7.18
  Options granted ......................               244,000         $7.50 - $10.00
  Options canceled .....................              (125,000)         $7.00 - $8.03
                                                --------------


Outstanding at May 31, 1997 ............               893,565         $5.38 - $10.00
  Options exercised ....................               (45,975)        $5.38 - $10.00
  Options granted ......................                30,000         $8.03 - $14.00
  Options canceled .....................              (124,450)        $5.38 - $10.00
                                                --------------
Outstanding at May 30, 1998 ............               753,140         $5.38 - $14.00
                                                ==============
</TABLE>


         As of May 30, 1998, options for 538,940 shares were exercisable.


<TABLE>
<CAPTION>
                         Options Outstanding at May 30, 1998
-----------------------------------------------------------------------------------------------
                                                      Weighted
                                       Weighted        Average                        Weighted
                                       Average        Remaining       Options          Average
Range of                Options        Exercise       Contractual   Exercisable at     Exercise
Exercise Price        Outstanding        Price           Life       May 30, 1998        Price
---------------       -----------      --------       -----------   --------------    ---------
<S>                   <C>              <C>            <C>           <C>               <C>    
 $5.38 - $7.18          361,000        $   6.79            4.13         313,800        $   6.91
 $7.25 - $9.46          275,540        $   8.74            5.36         200,140        $   9.09
$10.00 - $14.00         116,600        $  10.63            8.64          25,000        $  10.00
</TABLE>

         The weighted average fair value of options granted during fiscal years
1996, 1997 and 1998 were $2.70, $3.91 and $5.23, respectively.



                                      F-19
<PAGE>   46

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


9.    STOCK OPTIONS AND WARRANTS (CONTINUED)

         In connection with the initial public offering of its common stock, the
Company sold Representative's Warrants that entitle the holder to purchase up to
75,000 shares of Class A common stock at a price per share of $15.00. The
Warrants are exercisable for a period of four years beginning November 1, 1995.
The Warrants contain certain restrictions regarding transferability and
registration rights. On November 22, 1994, an option to purchase 25,000 shares
of Class A common stock was granted to an unaffiliated person at an option price
of $10.00 per share. This option is 100% vested and expires November 22, 1999.

         The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Stock Option Plans and no compensation cost has been
recognized. Had compensation cost for the Company's Stock Option Plan been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income
(loss) and net earnings (loss) per share for the years ended May 31, 1996, 1997
and May 30, 1998 would have been reduced to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
                                                                          Fiscal Year Ended
                                                        --------------------------------------------------------
                                                           May 31,              May 31,               May 30,
                                                            1996                 1997                  1998
                                                        -------------        -------------         -------------
<S>                                                     <C>                  <C>                   <C>          
Net income (loss)
    As reported ................................        $   2,547,000        $  (2,890,000)        $   5,028,000
    Pro forma ..................................            2,491,000           (2,990,000)            4,908,000
Net income (loss) per share Basic:
     As reported ...............................        $         .54        $        (.61)        $        1.05
     Pro forma .................................                  .53                 (.63)                 1.03
Net income (loss) per share Diluted:
     As reported ...............................        $         .54        $        (.60)        $        1.00
     Pro forma .................................                  .53                 (.62)                  .97
</TABLE>

         Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to June 1, 1996, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.

         The fair value of options granted under the Company's Stock Option
Plans during fiscal years 1996, 1997 and 1998 were estimated on the date of
grant using the Black-Scholes option-pricing model, with the following
weighted-average assumptions used: (i) dividend rate of $.28 per share in 1996,
1997 and 1998, (ii) expected volatility of approximately 45% in 1996, 1997 and
1998, (iii) risk-free interest rate of approximately 5.8% in 1996, 6.0% in 1997
and 5.5% in 1998, and (iv) expected lives of approximately five years in 1996,
1997 and 1998. The Company's calculations are based on a single-option valuation
approach and forfeitures are recognized as they occur.



                                      F-20
<PAGE>   47

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


10.      STOCK

         The Company is authorized to issue 2,000,000 shares of preferred stock,
no par value. Shares of preferred stock may be issued from time to time in one
or more series, and the Board of Directors, without further stockholder
approval, is authorized to fix the rights and terms, including dividends and
liquidation preferences and any other rights to each such series of preferred
stock. At May 31, 1997 and May 30, 1998, no shares of preferred stock were
issued or outstanding.

         Shareholders of Class B common stock elect the majority, and
shareholders of Class A common stock elect the minority, of the Board of
Directors. The holders of Class A common stock and Class B common stock have
equal rights on a per share basis (including the right to dividends) and vote as
a single class on all matters except the election of directors.


11.      RETIREMENT BENEFITS

         The Company is committed under unfunded consultant and non-compete
agreements to make post-retirement payments to employees in return for
consulting services from date of retirement to date of death or disability and
subsequent retirement payments to each employee's widow. Total payments
associated with these retirement agreements were $139,000, $140,000 and $142,000
for fiscal years 1996, 1997 and 1998, respectively. Additionally, the Company
has accrued costs of $1,328,000 and $1,303,000 associated with the actuarial
present value of the accumulated obligation as of May 31, 1997 and May 30, 1998,
respectively. The actuarial assumptions used to determine the obligation include
an assumed interest rate of 7%. Such accrual was made because the Company
determined that significant consulting service would not be required in the
future. The current portion of the liability was $141,000 and $139,000 as of May
31, 1997 and May 30, 1998, respectively, and is included in accrued liabilities.
Other accrued liabilities include $1,187,000 and $1,164,000 as of May 31, 1997
and May 30, 1998, respectively.



                                      F-21
<PAGE>   48

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


12.      EARNINGS PER SHARE

         The following table sets forth the computation of basic and diluted
earnings per share.


<TABLE>
<CAPTION>
                                                                             Fiscal Year Ended
                                                         ---------------------------------------------------------
                                                            May 31,               May 31,              May 30,
                                                             1996                  1997                  1998
                                                         -------------         -------------         -------------
<S>                                                      <C>                   <C>                   <C>          
BASIC AND DILUTED EARNINGS
   Income from continuing operations                     $   2,647,000         $   4,734,000         $   4,682,000
   Loss from discontinued operations                          (100,000)             (529,000)
   Gain (loss) from disposal of segment                                           (7,095,000)              346,000
                                                         -------------         -------------         -------------
   Net income (loss)                                     $   2,547,000         $  (2,890,000)        $   5,028,000
                                                         =============         =============         =============

COMPUTATION OF BASIC AND DILUTED SHARES
Basic Shares
  Weighted average shares                                    4,728,230             4,732,060             4,781,907

Effect of Dilutive Options                                      10,036               107,679               268,810
                                                         -------------         -------------         -------------

Diluted Shares
  Weighted average shares plus assumed conversion
     of dilutive securities                                  4,738,266             4,839,739             5,050,717
                                                         =============         =============         =============

EARNINGS PER SHARE
Basic EPS
  Income from continuing operations                      $        0.56         $        1.00         $        0.98
  Loss from discontinued operations                              (0.02)                (0.11)
  Gain (loss) from disposal of segment                                                 (1.50)                 0.07
                                                         -------------         -------------         -------------
  Net income (loss)                                      $        0.54         $       (0.61)        $        1.05
                                                         =============         =============         =============

Diluted EPS
  Income from continuing operations                      $        0.56         $        0.98         $        0.93
  Loss from discontinued operations                              (0.02)                (0.11)
  Gain (loss) from disposal of segment                                                 (1.47)                 0.07
                                                         -------------         -------------         -------------
  Net income (loss)                                      $        0.54         $       (0.60)        $        1.00
                                                         =============         =============         =============
</TABLE>




13.      RELATED PARTY TRANSACTIONS

         The Company incurred attorneys' fees in the amount of $358,000 and
$292,000 in 1996 and 1997, respectively, in connection with services provided by
a law firm. A principal with that law firm, served as the Company's general
counsel and as a director of the Company until November 1996. In addition,
during that time, the firm represented a major shareholder and the Haskel, Inc.
Profit Sharing Plan, which is also a principal shareholder of the Company.



                                      F-22
<PAGE>   49

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


14.      CONTINGENCY

         The Environmental Protection Agency (the "EPA") named the Company as
one of approximately 35 Potentially Responsible Parties ("PRPs"), as that term
is defined in applicable law, for an area known as the San Fernando Valley Area
2 Superfund Site (the "Superfund Site"), in which the groundwater has been
contaminated by solvents. Most of the parties named by the EPA as PRPs for the
Superfund Site, including the Company, chose to cooperate with the EPA in
complying with EPA directives, and formed the Glendale PRP Group (the "Group")
as a vehicle through which to accomplish that goal.

         Under applicable law, the Company might be jointly and severally liable
with other PRPs for the full cost of cleaning up the Superfund Site, including
the cost of the remedial design phase and EPA oversight costs discussed below
(the "Remediation Cost"). There is legal authority, however, which holds that
when the approximate extent of contamination caused by each PRP can be
determined, liability must be allocated among the PRPs in proportion to their
relative contribution. Based on this authority, Management and the Company's
environmental counsel believe there will be a rational, pro rata allocation of
responsibility for the cleanup of the Superfund Site among the participating
PRPs. Management and the Company's environmental counsel believe, based upon
extensive research conducted on the Company's site, that the Company was, at
most, a small contributor to groundwater contamination at the Superfund Site.

         In fiscal year 1994, an independent mediation team engaged by the Group
presented a confidential proposed interim allocation schedule (the "Interim
Allocation"), which allocated 1.76% responsibility to the Company for the
remedial design phase. In May 1994, 23 of the 27 parties (including the Company)
signed an Administrative Order on Consent ("AOC"), by which the parties
committed to accomplish the Remedial Investigation and Remedial Design phases of
the project, as set forth in the AOC. As a result of certain parties having
dropped out of the Group, and other parties joining the Group, the Company's
Interim Allocation has fluctuated between 1.76% and 2.36%. The Group completed
the remedial design phase and fully complied with the AOC, at a cost to the
Group of approximately $6 million.

         In 1995, the Group agreed upon a process by which a retroactive
reallocation of the Interim Allocation could be accomplished. The process agreed
upon by the Group entailed a two-phase procedure: Phase I consisted of an
arbitration whereby a panel of scientific arbitrators ascertained what
percentage of the contamination in the Superfund Site was caused by sources from
Burbank versus sources from Glendale (the Burbank-Glendale split). The
arbitrators determined that responsibility for the share found to have emanated
from Burbank-based sources would be borne by one PRP who was to bear 58.8% of
all past and future costs incidental to the Superfund Site; all other Group
members (the Intra-Glendale parties) were to bear 41.2% of such costs. The
Burbank-based member of the PRP appealed the Phase I result to the agreed-upon
judicial neutral, who eventually affirmed the arbitrator's 58.8% / 41.2% split
between Burbank and Glendale, respectively. Subsequently, a civil court upheld
the arbitration award. The court's ruling is now under appeal by the
Burbank-based party.



                                      F-23
<PAGE>   50

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


14.      CONTINGENCY (CONTINUED)

         Allocation amongst the Intra-Glendale parties of the percentage share
allocated to Glendale was to constitute Phase II of this retroactive
reallocation process. Once this two-phase process was complete, the results
would constitute the Final Allocation which was to apply retroactively as well
as prospectively to all Group members. In addition, discussions have been held
among the Intra-Glendale parties regarding a possible settlement, whereby
certain PRP members would accept dollar sums from the other PRPs, thereby
effectuating a cash-out settlement for the majority of PRPs. The settlement
discussions have been based upon a total cost (including the initial AOC work
which has already been accomplished) of approximately $48.0 million plus past
and future direct and indirect Governmental EPA oversight and administrative
costs of approximately $14.0 million. Each of these estimates constitute the
total for both the Burbank and Intra-Glendale parties combined, such that the
Intra-Glendale parties would only be responsible for 41.2% of the total amount
pending the confirmation judgment of the trial court being affirmed.

         In addition to the Remedial Investigation and Remedial Design phase of
the project as set forth in the AOC, the EPA issued a Unilateral Administrative
Order (UAO), thereby ordering all PRPs to perform the second phase of the AOC,
namely the construction phase. Almost all of the work required by the UAO has
now been completed. The total amount of money which the Group has spent on
implementing the AOC and performing all tasks required under the UAO is $7.7
million; the Company's portion of which has been approximately $113,000, or
about 1.4%.

         If the settlement negotiations within the Group fail, and assuming the
Final Allocation agreed upon is similar to the Interim Allocation, an assumption
the Management and the Company's environmental counsel believe is reasonable,
the Company's share of the Remediation Cost should not exceed the Company's
reserve amount of $898,000. If the Group cannot agree upon a process by which to
arrive at a Final Allocation, the process of allocating shares would likely be
by judicial determination. Whether the allocation proceeds by way of group
negotiation or judicial determination, Management and the Company's
environmental counsel believe that the Company's reserve amount will be
adequate.

         To the extent that a member of the Group does not accept the Final
Allocation or does not pay its share of the liability for remediation, the
remaining members may each, on a pro rata basis, become responsible for that
member's allocation. Further data, negotiation or disagreements among the PRPs,
insolvencies of or refusals to pay by PRPs or increases in actual costs of
remediation could cause the Company's ultimate liability for remediation for the
Superfund Site to increase from the amount calculated based upon the Interim
Allocation percentage. Consequently, there can be no assurance that remediation
of the Superfund Site will not have a materially adverse effect on the results
of operations or financial condition of the Company.

         When the Company initially tendered all of the environmental claims
relative to the Superfund Site, the Company's insurers refused to pay or to
properly defend the Company. The Company brought litigation against its insurers
in which the Company sought indemnity relative to the claims by the EPA for the
Superfund Site, and to force its carriers to provide a defense for these claims.
In March 1995, the Company successfully moved for summary adjudication of the
carriers' duties to defend. As a result of this ruling, during fiscal year



                                      F-24
<PAGE>   51

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


14.      CONTINGENCY (CONTINUED)

1997, the carriers paid the Company approximately $676,000 for fees incurred
prior to May 31, 1996 and has paid the Company's fees incurred after that date
at a reasonable rate. Litigation is pending as to whether the Company's insurers
must indemnify the Company for the Superfund Site liability.

         The Company established an environmental reserve for contingent
liabilities that may arise in connection with the Superfund Site. At May 30,
1998, the environmental reserve was $898,000. The Company has not included any
specific amount in the environmental reserve for litigation defense costs, which
cannot be estimated but could be substantial if these matters precipitate more
litigation than is anticipated.

         Due to the nature of environmental matters, there can be no assurance
that the environmental reserve will be adequate to cover contingent liabilities
arising from the above-referenced environmental matters or that any liability in
excess of the environmental reserve will not have a materially adverse effect on
the Company's results of operations or financial condition.

         Additionally, the Company was issued a mandate by the Regional Water
District to perform testing and cleanup of a site at the same facility. Pursuant
to a directive of the Regional Water Quality Control Board ("RWQCB"), the
Company assessed and remediated the soil. All on-site assessment and remediation
work has been completed and a no further action letter was obtained from the
RWQCB in 1996. The Company had an accrued liability of $56,000 as of May 31,
1996 relative to this matter. Based on the above, no reserve was deemed
necessary as of May 31, 1997 or May 30, 1998.

         In December 1997, the Company was named a defendant in eight separate
tort complaints filed by approximately 2,700 individuals against over 100
defendants wherein the plaintiffs are claiming personal injuries and property
damages allegedly resulting from exposure to the release of toxic and
carcinogenic chemicals by Defendants into the soil, water and air in the
Burbank/Glendale area of Los Angeles County. This litigation stems from a toxic
tort action previously filed in the United States District Court containing the
same allegations. In October 1997, the eight separate tort actions were
consolidated with the pending United States District Court case. Subsequent to
the consolidation of these lawsuits, the Company joined a Joint Defense Group
comprised of approximately 40 of the newly named defendants.

         A Pretrial Order and Agreement Re Cooperation, Joint Defense and Terms
of Stay and Severance was negotiated among the parties and in April 1998, 28 of
the newly named defendants petitioned and in May 1998, the court granted, an
order to (1) stay any proceedings against the newly named defendants until such
time as a determination has been made by the court in the consolidated action,
and (2) sever the newly named defendants from the pending litigation. However,
ten of the remaining defendants will continue to vigorously defend against the
plaintiffs' claims in the consolidated case. If these Defendants are successful
in defeating the plaintiff's claims, Management and the Company's environmental
counsel believe the plaintiffs would not pursue the Company and the other
defendants. In the event the Defendants settle and/or lose at trial, then it is
likely the plaintiffs would seek similar settlements or prosecute their case
against the Company and the other defendants. A trial date has not been set.



                                      F-25
<PAGE>   52

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


14.      CONTINGENCY (CONTINUED)

         The Company is currently preparing a technical presentation
representing that the Company never used hexavalent chromium, an air-bourne
particle named in the complaint, and demonstrating that the groundwater under
the Company's property never impacted the Burbank drinking water wells, as the
Company's property is downstream from the named Burbank locations. The defense
costs in this matter are being shared among four insurance carriers under a
reservation of rights.


15.      DISCONTINUED OPERATIONS


         In January 1997, the Company announced its decision to sell its
electronic products distribution business. The financial impact of this was
first reflected in the Company's third quarter 1997 financial statements.
Accordingly, the operations have been treated as a discontinued segment, and the
prior financial results have been restated to segregate the effect of these
operations. The income or loss from these operations have been reflected
separately in the Company's financial results, and a loss on discontinuance of
these operations was recorded in fiscal year 1997. As the market value of the
net assets of the business were equal to the expected costs to dispose of the
business, there were no net assets held for sale of the business shown in the
consolidated balance sheet as of May 31, 1997.

         The loss from discontinued operations reflected in the accompanying
consolidated statements of operations are net of an income tax provision of
$78,000 for fiscal year 1996 and an income tax benefit of $221,000 for fiscal
year 1997. Sales from these operations were $14,622,000 and $1,904,000 for
fiscal years 1996 and 1997, respectively.

         The estimated loss on disposal of segment of $7,095,000 included in the
statement of operations for fiscal year 1997 reflected the net amount of the
following components: the write-down of the net assets of the electronic
products distribution segment to the expected market value at that date;
disposal costs; anticipated operating income of the segment through the expected
date of disposal; and an income tax benefit of $2,515,000 from the reversal of
related deferred tax liabilities. On September 11, 1997, the Company sold its
electronics products business in exchange for 35,000 shares of the Company's
stock (valued at $534,000) and a note receivable in the amount of $159,000. The
Company recognized a gain on the sale of $346,000.


16.       BUSINESS SEGMENTS

         Haskel International, Inc. operates predominantly in one industry
segment. The Company designs and manufactures pneumatically and hydraulically
driven, high-pressure low-flow, fixed displacement, reciprocating, liquid pumps,
gas boosters, chemical injection pumps, air pressure amplifiers, high-pressure
valves, metering valves, regulators, and accessories to complement these
products, as well as integrated systems that include the various components. The
Company sells its products through a network of industrial distributors and
directly to customers through its own sales employees and manufacturer's
representatives. The principal markets for the Company's products are North and
South America, Europe, and Asia-Pacific.



                                      F-26
<PAGE>   53

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               YEARS ENDED MAY 31, 1996 AND 1997, AND MAY 30, 1998


16.       BUSINESS SEGMENTS (CONTINUED)

         Geographic information for the three years ended May 30, 1998 is
presented in the following tables. Transfers between geographic areas are
accounted for at cost plus a profit margin. Income and expenses not allocated to
geographic areas include investment income, interest expense, and corporate
administrative costs.

         Identifiable assets are those assets used exclusively in the operations
in each geographic area. Corporate assets are principally cash, cash equivalents
and deferred tax assets. In fiscal year 1996, corporate assets include
$10,802,000 associated with discontinued operations.


<TABLE>
<CAPTION>
                                                          Transfers
                                                           between            Sales to
                                                          geographic         unaffiliated         Operating         Identifiable
                                        Sales               areas             customers            income              assets
                                     ------------        ------------        ------------        ------------       ------------
<S>                                  <C>                 <C>                 <C>                 <C>                <C>         
Fiscal Year Ended May 30, 1998
--------------------------------------------------------------------------------------------------------------------------------
North and South America              $ 30,472,000        $  9,424,000        $ 21,048,000        $  4,394,000       $ 26,587,000
Europe                                 27,568,000             407,000          27,161,000           3,905,000         23,172,000
Asia-Pacific                            5,501,000                               5,501,000             960,000             854,000
Corporate                                                                                          (2,079,000)          9,412,000
Eliminations                           (9,831,000)         (9,831,000)                                                (13,733,000)
                                     ------------        ------------        ------------        ------------       ------------
                                     $ 53,710,000        $         --        $ 53,710,000        $  7,180,000       $ 46,292,000
                                     ============        ============        ============        ============       ============
Fiscal Year Ended May 31, 1997
--------------------------------------------------------------------------------------------------------------------------------
North and South America              $ 33,315,000        $  9,022,000        $ 24,293,000        $  5,056,000       $ 22,340,000
Europe                                 23,065,000             164,000          22,901,000           3,454,000         16,729,000
Asia-Pacific                            4,206,000                               4,206,000             828,000
Corporate                                                                                          (1,815,000)         13,235,000
Eliminations                           (9,186,000)         (9,186,000)                                                (11,072,000)
                                     ------------        ------------        ------------        ------------       ------------
                                     $ 51,400,000        $         --        $ 51,400,000        $  7,523,000       $ 41,232,000
                                     ============        ============        ============        ============       ============
Fiscal Year Ended May 31, 1996
--------------------------------------------------------------------------------------------------------------------------------
North and South America              $ 28,952,000        $  8,174,000        $ 20,778,000        $  3,349,000       $ 15,199,000
Europe                                 17,865,000             154,000          17,711,000           2,675,000         13,160,000
Asia-Pacific                            3,680,000                               3,680,000             608,000
Corporate                                                                                          (2,331,000)         26,658,000
Eliminations                           (8,328,000)         (8,328,000)                                                 (9,657,000)
                                     ------------        ------------        ------------        ------------       ------------
                                     $ 42,169,000        $         --        $ 42,169,000        $  4,301,000       $ 45,360,000
                                     ============        ============        ============        ============       ============
</TABLE>



                                      F-27
<PAGE>   54

                                                                     SCHEDULE II

                           HASKEL INTERNATIONAL, INC.
                        VALUATION AND QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts

<TABLE>
<CAPTION>
                          Balance at                                           Balance at
                         Beginning of                                            End of
                           Period          Additions         Write-offs          Period
                         ----------        ----------        ----------        ----------
<S>                      <C>               <C>               <C>               <C>       
     May 31, 1996        $  915,000        $  389,000        $  343,000        $  961,000

     May 31, 1997        $  961,000        $   27,000        $  445,000        $  543,000

     May 30, 1998        $  543,000        $   77,000        $  222,000        $  398,000
</TABLE>



                                      F-28
<PAGE>   55
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
  Exhibit
  Number       Exhibit Description
  ------       -------------------
<S>            <C>
  3.1(4)       Restated Articles of Incorporation of the Company, as amended.

  3.2(6)       Restated Bylaws of the Company, as amended.

  4.1(2)       Specimen Class A Common Stock and Class B Stock Certificates.

  4.2(2)       Form of Underwriter's Warrants.

 10.1(2)       1989 Incentive Stock Option Plan and form of Stock Option
               Agreement.

 10.2(2)       Non-Qualified Stock Option Plan and form of Stock Option
               Agreement.

 10.3(6)       1995 Incentive Stock Option Plan and form of Stock Option
               Agreement.

 10.4(6)       1995 Formula Stock Option Plan and form of Stock Option
               Agreement.

 10.5(2)       Haskel Inc. Profit Sharing Plan.

 10.6(2)       Haskel Energy Systems, Ltd. Pension Plan.

 10.7(2)       Agreement and Plan of Reorganization of M.G. Electronics, Inc.
               into Haskel Network Group, Inc. dated November 17, 1993 and
               related Indemnification Agreement and Agreement of Merger.

 10.8(2)       Employment Agreement dated November 17, 1993 between Maury S.
               Friedman and the Company.

 10.9(2)       Non-Competition Agreement dated November 17, 1993 between Maury
               S. Friedman, the Friedman Family Trust and M.G. Electronics, Inc.
</TABLE>


<PAGE>   56

<TABLE>
<CAPTION>
   Exhibit
   Number      Exhibit Description
   ------      -------------------
<S>            <C>
 10.10(5)      Consulting Agreement dated March 21, 1996 between the Company and
               Maury S. Friedman.

 10.11(2)      Leases dated June 1, 1993 and September 24, 1993 between West
               Lake Village Industrial Park and M.G. Electronics, Inc.

 10.12(2)      Consultant and Widow's Pension Agreement dated May 16, 1983
               between the Company and Frederick J. Broderick and related
               Memorandum dated April 22, 1993.

 10.13(2)      Glendale Superfund Site PRP Organization Agreement dated October
               28, 1993 by and among the Company and the other PRPs in the Group

 10.14(6)      Amendment to the Glendale Superfund Site PRP Organization
               Agreement dated as of January 11, 1996 by and among the Company
               and the other PRPs in the Group.

 10.15(6)      Memorandum of Agreement Regarding Cost-Sharing for the Glendale
               Operable Unit Superfund Sites dated June 7, 1995 by and among the
               Company and the other PRPs in the Group.

 10.16(2)      Underwriter's Warrant Agreement.

 10.17(3)      Loan Agreement dated February 21, 1995 by and between the Company
               and Union Bank and related Commercial Promissory Note,
               Arbitration Agreement, Continuing Guaranty and Security
               Agreement-Pledge.

 10.18(6)      First Amendment dated as of August 30, 1995 to Loan Agreement
               between the Company and Union Bank.

 10.19(6)      Second Amendment dated as of February 13, 1996 to Loan Agreement
               between the Company and Union Bank.

 10.20(6)      Third Amendment dated as of April 16, 1996 to Loan Agreement
               between the Company and Union Bank.

 10.21(6)      Employment Agreement dated December 22, 1995 regarding James C.
               Minyard.
</TABLE>


<PAGE>   57

<TABLE>
<CAPTION>
   Exhibit
   Number      Exhibit Description
   ------      -------------------
<S>            <C>
 10.22(6)      Haskel International, Inc. Executive Separation Pay Plan.

 10.23(7)      Employment Agreement dated July 8, 1996 regarding Doranda Frison.

 10.24(8)      Fourth Amendment dated as of November 15, 1996 to Loan Agreement
               between the Company and Union Bank.

 10.25(8)      Fifth Amendment dated as of February 4, 1997 to Loan Agreement
               between the Company and Union Bank.

 10.26(9)      Sixth Amendment dated as of September 15, 1997 to Loan Agreement
               between the Company and Union Bank.

 10.27(10)     Change in Control Agreement dated September 27, 1997 between R.
               Malcolm Greaves and the Company.

 10.28(10)     Change in Control Agreement dated September 27, 1997 between
               Lonnie D. Schnell and the Company.

 10.29(10)     Change in Control Agreement dated September 27, 1997 between
               Henry Mason and the Company.

 10.30(11)     Amended and Restated Loan Agreement dated February 13, 1998
               between the Company and Union Bank of California, N.A..

 21(1)         Schedule of Subsidiaries.

 23.1(1)       Consent of Deloitte & Touche LLP.

 23.2(1)       Consent of Price Waterhouse.

 27(1)         Financial Data Schedule.
</TABLE>

         The following schedules supporting the financial statements:

         Schedule II       Valuation and Qualifying Accounts


(1)      Filed herewith.

(2)      Filed as an exhibit to the Registrant's Registration Statement on Form
         S-1 (SEC File no. 33-74362), and incorporated by this reference.

(3)      Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
         for the period ended February 28, 1995, and incorporated herein by this
         reference.

(4)      Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
         the year ended May 31, 1995, and incorporated herein by this reference.

(5)      Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
         for the period ended February 29, 1996, and incorporated herein by this
         reference.



<PAGE>   58

(6)      Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
         the year ended May 31, 1996, and incorporated herein by this reference.

(7)      Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
         for the period ended August 31, 1996, and incorporated herein by this
         reference.

(8)      Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
         for the period ended February 28, 1997, and incorporated herein by this
         reference.

(9)      Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
         for the period ended August 29, 1997, and incorporated herein by this
         reference.

(10)     Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
         for the period ended November 28, 1997, and incorporated herein by this
         reference.

(11)     Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
         for the period ended February 28, 1998, and incorporated herein by this
         reference.