<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 31, 1997
 
                                       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)
 
<TABLE>
<S>                                            <C>
                 CALIFORNIA                                     95-4107640
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
</TABLE>
 
                    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 (sec.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: $35,791,444 as of August 18, 1997.
 
     As of August 18, 1997, the registrant had 4,751,230 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 1997 Annual
Stockholder's Meeting are incorporated by reference in Part III.
 
================================================================================
<PAGE>   2
                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         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 Pumps") for
industrial, commercial, aerospace and military applications. Management believes
that 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 Pumps manufactured by the
Company. The Company also manufactures high-pressure valves, regulators, and
accessories to complement Haskel(R) Specialty Pumps. The Company distributes
third-party manufactured valves, cylinders and actuators, and other pneumatic
and hydraulic devices.

         Applying its engineering expertise and high-pressure pump, booster,
amplifier and relief valve technology, the Company is also engaged in the test
and control systems business. The Company's systems business consists of the
design and manufacture of many different kinds of apparatus that incorporate the
Company's products, engineering knowledge as well as experience in high pressure
technology, often incorporating electronics and computers to achieve a
functional piece of equipment. This integrated equipment (a "Haskel(R) System")
has a wide variety of applications in many industries.

         In its fiscal year ended May 31, 1997, approximately 57% of the
Company's business was manufacturing (including Haskel(R) Systems); the balance
was distribution of Haskel(R) and third-party fluid power products.

         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, and Haskel Asia Pte., located in Singapore. The ITD is the U.S.
manufacturer of Haskel(R) Specialty Pumps, Haskel(R) Systems, high-pressure
valves, regulators and accessories to complement these products. HESL represents
the Company's European industrial products operations with offices located in
Sunderland, Stockport and Manchester, England; Aberdeen, Scotland; Lille,
France; Wesel, Germany; Zoetermeer, the Netherlands; and the most recent
addition, after the completion of the fiscal year, in San Sebastian, Spain.
Haskel Asia, Pte. represents the Company's Asian operations with offices located
in Singapore and Hong Kong. Haskel Asia and HESL and its divisions and
subsidiaries primarily distribute Haskel(R) Specialty Pumps and design and
manufacturer Haskel(R) Systems for specific applications required by customers
in Asia, Australia, Europe, India, and the Middle East. HESL and its divisions
and subsidiaries also manufacture products needed for HESL's markets that are
not produced in the United States, such as the Jetflow Airmover(R), and
distribute complementary products of other manufacturers. Haskel-Hogan is a
value-added systems manufacturer.

         Certain financial information about the Company's business segments and
its domestic and foreign operations and export sales is presented in Note 15 of
the Notes to Consolidated Financial Statements appearing in this Report. No
single customer accounted for more than 10% of sales during fiscal 1995, 1996 or
1997.



                                       2
<PAGE>   3
INDUSTRIAL PRODUCTS MANUFACTURING

         Products and Markets

         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 Pumps manufactured by the
Company. Haskel(R) Specialty Pumps 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. Haskel(R) Specialty Pumps utilize
reciprocating plungers with fixed displacement bodies to generate these
pressures. Management believes that the high quality of the Company's products,
in terms of engineering design, reliability, durability and performance, enables
the Company to sell such products at a premium price. Haskel(R) Specialty Pumps
are designed for niche markets where high pressure with low flow of liquids or
gases is required. The pump's function is to generate pressure, taking in
low-pressure, low-flow liquids and gases and producing high-pressure, low-flow
liquids and gases. 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 fluids under pressure. Additional products
include metal seals for extreme temperature applications; the Company's patented
Hydroswage(R) products, which use high liquid pressure 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 valve products in the Company's name for marketing by the Company in
selected geographic areas.

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

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

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



                                       3
<PAGE>   4
         The Company has been awarded the ISO 9001 accreditation, a quality
certification from the International Standards Organization ("ISO"), for HESL's
United Kingdom operations and the Company is in the process of applying for such
certification for its U.S. operations. The ISO 9001 accreditation gives
recognition for maintaining an internationally recognized standard of quality in
both its products and engineering and management believes certification should
help the Company maintain a competitive advantage.

         The markets served by the manufacturing segment are substantial and
diversified, with no single customer accounting for more than 10% of its sales.
Total manufacturing sales were approximately 59%, 61% and 57% of the Company's
total sales in 1995, 1996 and 1997, respectively.

         The following table lists the broad range of industries utilizing
Haskel(R) Specialty Pumps 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 Extrusion 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>

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

         Facilities and Materials

         The Company manufactures Haskel(R) Specialty Pumps and related products
and Haskel(R) Systems at the Company's facilities in Burbank, California, and in
Sunderland, England. Manufacturing operations in Sunderland include 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; and
Singapore.

         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. Management has an
ongoing program to improve its manufacturing processes.



                                       4
<PAGE>   5
Backlog

         Backlog of unfilled firm orders for the Manufacturing segment was
approximately $5,473,000 at May 31, 1997, as compared to approximately
$5,114,000 at May 31, 1996. This increase in backlog was due primarily to
increased orders as a result of continued internal growth as the Company
continues to expand its international markets, especially throughout Europe and
the Pacific Rim. Substantially all of the Company's fiscal 1997 year-end backlog
is expected to be recognized as revenue in fiscal 1998.

         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 generally 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 Company's 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 and results of operations.


INDUSTRIAL PRODUCTS DISTRIBUTION

         Haskel(R) Specialty Pumps and Haskel(R) Systems

         The Company's manufactured 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, and the Netherlands; the former Soviet Republics; Pacific Rim
countries, 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 92 distributor locations in the United States and Canada; 40
distributors in Europe and Central and South America; and 17 distributors in the
Asia-Pacific region. The activities of these distributors are supported by the
Company's regional sales managers who have extensive technical backgrounds.

         Third-Party Pumps and Related Products

         The Company also distributes over 40 different lines of third-party
manufactured products worldwide. These products are used primarily in the pump
and pump-related fluid power business, and include cylinders, actuators,
pneumatic and hydraulic valves, hoses and fittings, high-pressure components,
pumps and motors, as well as a major line of seals and lubricants.

         Total distribution sales of Haskel(R) and third-party products were
approximately 41%, 39% and 43% of the Company's total sales in fiscal 1995, 1996
and 1997, respectively.

         Backlog of unfilled firm orders for the distribution segment was
approximately $3,563,000 at May 31, 1997, as compared to approximately
$3,276,000 at May 31, 1996. Substantially all of the Company's fiscal 1997
year-end backlog is expected to be recognized as revenue in fiscal 1998.



                                       5
<PAGE>   6
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
November 30, 1996 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 recorded in fiscal
year 1997. See Footnote 14 in the Notes to Financial Statements.


COMPETITION

         Manufacturing

         In general, the principal competitive factors in the markets in which
the Company's manufacturing segment participates are product quality and
performance, availability, reliability, technical support and price.

         In the high-pressure pump manufacturing industry, the Company's
manufacturing segment has three major 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 United States and United Kingdom 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, prompt product delivery, competitive pricing, and comprehensive
technical assistance.

         The Company's competitors in the low-horsepower (10 HP or less) systems
market include 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. The Company's competitors in the
higher-horsepower (more than 10 HP) systems market are primarily the same
distributors with which it competes in its distribution business.

         Distribution

         Unlike its manufacturing business, the Company's distribution business
competes with many other companies that provide substantially similar products.
Management believes that many of these competing companies are larger and have
greater financial strength than the Company.


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 and most significant 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 Company's Hydroswage(R), for example, uses
Haskel(R) Specialty Pumps to create high pressure for hydraulically expanding
metal tubes into tube sheets. 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.



                                       6
<PAGE>   7
         The Company's business requires ongoing EDR&D expenditures. For fiscal
years 1995, 1996 and 1997, the Company incurred approximately $1,151,000,
$905,000, and $1,079,000, respectively, on general engineering and research and
development (R&D) with a significant part of these expenditures directed towards
R&D. Due to increased engineering efforts, the Company began tracking time
related to direct production during fiscal year 1996 and that portion of
expenditures applicable to sustaining engineering is now being charged directly
to cost of sales. 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 competitive warranty service for each of its
product lines, as well as follow-up service, training, and support, for which
the Company typically charges separately. Management views customer support
services as a critical competitive factor, 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.


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.


FUNDS IN FOREIGN SUBSIDIARIES

         The Company has relied primarily on its income from domestic operations
to pay dividends and make major capital expenditures. In pursuit of a global
growth strategy, the Company generally avoids paying dividends from the earnings
of its foreign subsidiaries, allowing substantial cash balances to be retained
in those countries for internal growth and strategic acquisitions outside the
United States.


ACQUISITIONS

         The Company pursues opportunities to expand its market position and
high pressure technology business through numerous strategic actions, including
where appropriate, acquisitions of related businesses, product lines,
distribution or new technologies. During fiscal years 1995, 1996 and 1997, the
Company acquired the following businesses: Haskel Hochdrucksysteme, GmbH,
located in Wesel, Germany in November 1995; Hydraulic Mobile Equipment Limited
("HME"), located in Manchester, England, in June 1996; Haskel-Hogan Systems and
Service located in Houston, Texas in December 1996; and Nanojet Engineering
GmbH, located in Wesel, Germany, in May 1997. In addition to these acquisitions,
the Company opened offices in Zoetermeer, the Netherlands, in June 1996;
Singapore in May 1997; and Hong Kong in May 1997.



                                       7
<PAGE>   8
         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 31, 1997, the Company had 338 employees, including 54 in
general management, administration and finance; 76 in sales and marketing; 27 in
engineering; and 181 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.


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              58            President, Chief Executive Officer and Director
Lonnie D. Schnell               48            Chief Financial Officer and Secretary
Robert A. Smith                 56            Executive Vice President and President -
                                              Industrial Products
Henry Mason                     47            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 1990. 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.



                                       8
<PAGE>   9
         Robert A. Smith joined the Company as President - Industrial Products
in February 1995 and has also served as Executive Vice President of the Company
since November 1995. Mr. Smith was employed by Puroflow, Inc. and its
affiliates, where he served as a Director, and as President of Puroflow
Corporation and Engineered Filtration Company (both affiliates of Puroflow,
Inc.) from February 1991 through January 1994. Mr. Smith also served as a
Director of Industrial Tools, Inc. from 1978 until February 1995 and served as
its President and CEO from January 1994 until February 1995. Mr. Smith is
currently Vice Chairman of the Board of Puroflow, Inc.

         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        --
Denver, Colorado                   Leased        500              ITD                   July 1998
Houston, Texas                     Leased        16,200           ITD                   October 2001
American Fork, Utah                Leased        500              ITD                   Month-to-Month
Kent, Washington                   Leased        1,500            ITD                   January 1998
Pleasanton, California             Leased        500              ITD                   April 1998
Sunderland, England                Owned         41,000           HESL                  --
Manchester, England                Leased        7,000            HESL                  October 1999
Stockport, England                 Owned         5,500            HESL                  --
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                  December 1998
Hong Kong                          Leased        500              Haskel Asia, Pte.     April 1998
Singapore                          Leased        2,379            Haskel Asia, Pte.     February 1999
</TABLE>


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

         The Company's manufacturing business segment uses the facilities
located in Burbank, California; Sunderland, Stockport and Manchester, England;
Aberdeen, Scotland; Lille, France; Zoetermeer, the Netherlands; Wesel, Germany;
Houston, Texas; and Singapore. The Company's distribution business segment uses
the facilities located in Burbank, California; Denver, Colorado; American Fork,
Utah; Kent, Washington; Pleasanton, California; Sunderland, England; Aberdeen,
Scotland; Singapore; and Hong Kong.



                                       9
<PAGE>   10
         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 also
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.

         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



                                       10
<PAGE>   11
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 in addition to past and future direct and indirect Governmental EPA
oversight and administrative costs of approximately $13.0 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 that the confirmation judgment of the trial
court is 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 $7.6
million; the Company's portion of which has been approximately $160,000, or
about 2%

         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. Management and the Company's environmental counsel
also believe that the Company's reserve amount will be adequate, even if the
Group cannot agree upon a process by which to arrive at a Final Allocation, and
the process by which the shares would be allocated is resolved by way of
judicial proceeding. 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 significantly 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.

         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 letter of closure was obtained from the RWQCB in 1996.

         Lubrication Corporation of America

         The Company was named a PRP regarding contamination of a site operated
by Lubrication Corporation of America ("LCA"). The Company denied all liability
in connection with the LCA site, but nevertheless, the Company paid the sum of
$37,000 to be fully released from and to receive full contribution protection
relative to all liability in connection with the LCA site.

         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



                                       11
<PAGE>   12
the claims by the EPA for the Superfund Site, and to force its carriers to
provide a defense for these claims. 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 31,
1997, the environmental reserve was $898,000. The Company believes, based upon
the advice and opinion of its environmental counsel, that the Company's
liabilities will not exceed the amount currently reserved for these matters.

         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 any 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.

         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 1997.



                                       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 1995                  High                Low
                  -----------                  ----                ---
                  <S>                         <C>                 <C>
                  First Quarter                 --                  --
                  Second Quarter              $10-1/2             $ 9
                  Third Quarter               $12-1/2             $ 8-1/2
                  Fourth Quarter              $10-1/8             $ 5-1/4

                  Fiscal 1996

                  First Quarter               $ 8                 $ 5-1/8
                  Second Quarter              $ 7                 $ 5
                  Third Quarter               $ 7-3/8             $ 5-1/4
                  Fourth Quarter              $ 7-1/2             $ 5-3/4

                  Fiscal 1997

                  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

</TABLE>


         On August 18, 1997, the closing price of the Company's Class A Common
Stock on the Nasdaq Stock Market was $12 7/8.

         On August 18, 1997, there were approximately 430 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 18, 1997, 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 ended May 31, 1995, 1996 and 1997, on shares of its Class A and
Class B Common Stock. The Company currently expects that comparable cash
dividends will continue to be paid.



                                       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 31, 1997 and
is derived from the Consolidated Financial Statements of the Company. The
consolidated financial statements as of May 31, 1996 and 1997, and for each of
the years in the three-year period ended May 31, 1997, and the report thereon
(which report is based in part on the work of other auditors) of Deloitte &
Touche LLP, 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,
                                -------------------------------------------------------------------------------------
                                    1993              1994              1995               1996              1997
                                ------------      ------------       ------------      ------------      ------------
<S>                             <C>               <C>                <C>               <C>               <C>
OPERATING PERFORMANCE:

Revenues                        $ 40,054,000      $ 37,457,000       $ 38,883,000      $ 42,169,000      $ 51,400,000

Income (loss) from
  Continuing Operations
  Before Taxes                     3,110,000           (36,000)         2,700,000         4,566,000         7,775,000

Net Income from
  Continuing                       2,208,000              --            1,551,000         2,647,000         4,734,000
  Operations

Cash Flow from Continuing
  Operations                       2,390,000           367,000          3,178,000         1,055,000         4,725,000

FINANCIAL POSITION:

Cash & Cash Equivalents         $  9,736,000      $  7,120,000       $  8,806,000      $  8,239,000      $  8,490,000

Working Capital                   22,287,000        17,172,000         20,969,000        21,891,000        24,095,000

Total Assets                      34,506,000        44,411,000         44,295,000        45,360,000        41,232,000

Long-term Debt                       827,000        10,187,000          3,514,000         3,366,000         2,379,000

Shareholders' Equity              25,036,000        24,384,000         31,007,000        32,220,000        28,667,000

PER SHARE DATA:

Net Income from Continuing
  Operations                    $       0.57      $       --         $       0.35      $       0.56      $       0.98

Cash Dividends
                                        0.55              0.36               0.28              0.28              0.28

Book Value
                                        7.46              6.33               6.56              6.81              5.99

Average shares outstanding         3,876,345         3,929,349          4,500,783         4,738,266         4,839,739
</TABLE>



                                       14
<PAGE>   15
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS


         This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results and timing of certain events could
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, the integration of acquired operations, the sale of the electronic
products distribution business, management of growth and other factors.


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, and Haskel Asia, Pte., located in Singapore. The ITD is the U.S.
manufacturer of Haskel(R) Specialty Pumps, Haskel(R) Systems, high-pressure
valves, regulators and accessories to complement these products. HESL represents
the Company's European industrial products operations with offices located in
Sunderland, Stockport and Manchester, England; Aberdeen, Scotland; Lille,
France; Wesel, Germany; Zoetermeer, the Netherlands; and the most recent
addition, after the completion of the fiscal year, in San Sebastian, Spain.
Haskel Asia, Pte. represents the Company's Asian operations with offices located
in Singapore and Hong Kong. Haskel Asia and HESL and its divisions and
subsidiaries primarily distribute Haskel(R) Specialty Pumps and design and
manufacturer Haskel(R) Systems for specific applications required by customers
in Asia, Australia, Europe, India, and the Middle East. HESL and its divisions
and subsidiaries also manufacture products needed for HESL's markets that are
not produced in the United States, such as the Jetflow Airmover(R), and
distribute specialty products of other manufacturers. Haskel-Hogan is a
value-added systems manufacturer.


ENVIRONMENTAL  ISSUES

         At May 31, 1997, the Company had reserves of approximately $898,000
related to its environmental liabilities. Based on the advice and opinion of its
environmental counsel, Management believes that these reserves are adequate.

         The Company has four matters relative to environmental issues. They
are: 1) Superfund Site; 2) On-site remediation; 3) LCA litigation; and 4)
Insurance litigation.

         Superfund Site. The Company has been named a PRP at the Superfund Site.
(See Note 12 of Notes to Consolidated Financial Statements.) The EPA has divided
the Superfund Site into two regions, Glendale and Burbank, and negotiations are
being conducted between regions, and among PRP members, to reallocate the
respective shares of the regions and PRP members. The Company and other PRP's
may be jointly and severally liable for the remediation of this site. However,
based upon advice and opinion of environmental counsel, the Company, which is a
participant in the Glendale region, does not anticipate its proportionate share
of the remediation costs to exceed the amount reserved.

         On-Site Remediation. 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 the Company
assessed and remediated the soil. All on-site assessment and remediation work
has been completed and a letter of closure was obtained from the RWQCB in 1996.



                                       15
<PAGE>   16
         LCA Litigation. The Company was named a PRP regarding contamination of
a site operated by Lubrication Corporation of America ("LCA"). The Company
denied all liability in connection with the LCA site, but nevertheless, the
Company paid the sum of $37,000 to be fully released from and to receive full
contribution protection relative to all liability in connection with the LCA
site.

         Insurance Litigation. When the Company initially tendered all of its
environmental claims relative to the Superfund Site to its insurers, 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. 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 legal 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. Any payments received from the insurers are netted
against the legal expenses included within general and administrative expenses.

        RESULTS OF 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,
                                                                --------------------------------
                                                                 1995         1996         1997
                                                                ------       ------       ------
<S>                                                             <C>          <C>          <C>
Sales ..................................................        100.0%       100.0%       100.0%
Cost of sales ..........................................         57.6         54.4         54.4
                                                                -----        -----        -----
Gross profit ...........................................         42.4         45.6         45.6
Selling expenses .......................................         17.1         17.0         15.7
General and administrative expenses ....................         15.4         16.2         13.2
Engineering design, research and development expenses ..          3.0          2.1          2.1
                                                                -----        -----        -----
Total operating costs ..................................         35.5         35.3         31.0
                                                                -----        -----        -----
Operating Income .......................................          6.9         10.3         14.6
Other income ...........................................       --              0.6          0.5
                                                                -----        -----        -----
Income from continuing operations before income taxes ..          6.9         10.9         15.1
Provision for income taxes .............................          3.0          4.6          5.9
                                                                -----        -----        -----
Income from continuing operations ......................          3.9          6.3          9.2
Discontinued Operations:
     Loss from operations, net of taxes ................         (1.4)         (.2)        (1.0)
     Estimated loss on disposal of segment, net of taxes           --           --        (13.8)
                                                                -----        -----        -----
Net income (loss) ......................................          2.5%         6.1%        (5.6%)
                                                                =====        =====        =====
</TABLE>




                                       16
<PAGE>   17
DISCONTINUED OPERATIONS

         In January 1997, the Company announced its decision to sell or
discontinue its electronic products distribution business. The financial impact
of this was first reflected in the Company's November 30, 1996 financial
statements. Accordingly, the operations have been treated as a discontinued
segment, and the prior financial results have been restated to exclude the
affect 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 recorded in fiscal year 1997.

         The estimated loss on disposal of segment of $7,095,000 included in the
statement of operations for the year ended May 31, 1997 reflects the net amount
of the following components: the write-down of the net assets of the Electronic
Products Distribution Segment ("EPG") to the expected market value; disposal
costs; anticipated operating income of the EPG 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 recognized a loss from discontinued
operations of $532,000, $100,000 and $529,000 for the each of the three years
ended May 31, 1995, 1996 and 1997, respectively. The loss from discontinued
operations for fiscal year 1997 included $240,000 in restructuring costs
incurred in the first quarter. The decrease in income from discontinued
operations for the year ended May 31, 1997 as compared to the prior year is the
result of weakened market conditions and increased competition within the
electronics industry.


RESULTS OF CONTINUING OPERATIONS

         Haskel International, Inc. posted record net sales in 1997, for the
second consecutive year, of $51,400,000, rising by $9,231,000, or 21.9%, from
1996 to 1997, and by $3,286,000, or 8.45%, from 1995 to 1996. Higher sales
volumes due to expanding international markets, especially throughout Europe and
the Pacific Rim, were responsible for most of the growth in revenues from 1995
to 1997. Growth through newly opened and acquired operations accounted for
$935,000 of the increase in 1996 and $3,513,000 of the increase in 1997. In
1997, the Company recorded revenues of $1,200,000 from a single order to the
automotive safety products sector. Internal growth through new products and
systems as well as expanded marketing efforts accounted for the remaining
increased revenues.

         Cost of sales increased by 21.7% from 1996 to 1997 and by 2.5% from
1995 to 1996. The growth in cost of sales from 1995 to 1997 was driven by the
increased sales volumes. Gross margin as a percent of sales remained constant at
45.6% in 1996 to 1997 and was 42.4% in 1995. The increased gross margin
percentages in 1996 and 1997 are the result of improved manufacturing processes,
lower material costs, and shifts in the product mix. During 1995, the Company
had recorded an additional $400,000 in inventory reserves as a result of changes
in product demand and product lines, resulting in lower than usual gross margin
percentages.

         General and administrative expenses for 1997 include a credit of
approximate $676,000 representing a settlement received from the Company's
insurance carriers for the recovery of prior year's legal expenses relating to
environmental matters. Selling, general and administrative, and engineering,
("Operating") expenses, excluding the insurance reimbursements in 1997, grew by
$1,703,000, or 11.4%, from 1996 to 1997 and by $1,112,000, or 8.1%, from 1995 to
1996. Approximately $1,121,000 and $337,000 of the increase in operating
expenses for 1997 and 1996, respectively, represented activities of new
businesses acquired and started. The remaining increases in expenses from 1995
to 1997 represent growing selling and marketing costs associated with the
Company's efforts to expand market share worldwide and support the Company's
growth.

         The Company's effective tax rate decreased to 39% in 1997 compared to
42% and 42.6% in 1996 and 1995, respectively. The effective tax rate in 1995 and
1996 was higher due primarily to additional income taxes associated with
dividends from foreign subsidiaries.



                                       17
<PAGE>   18
         Refer to Note 1 "Summary of Significant Accounting Policies" included
in the Company's consolidated financial statements for a description of new
accounting pronouncements effecting the continuing operations of the Company.


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,
                                                            -----------------------------------------------
                                                                1995              1996             1997
                                                            -----------       -----------       -----------
<S>                                                         <C>               <C>               <C>
Cash and cash equivalents ............................      $ 8,806,000       $ 8,239,000       $ 8,490,000
                                                            ===========       ===========       ===========
Net cash provided by continuing operations ...........      $ 3,178,000       $ 1,055,000       $ 4,725,000
                                                            ===========       ===========       ===========
Net cash provided by (used in) discontinued operations      $  (545,000)      $ 1,495,000       $  (250,000)
                                                            ===========       ===========       ===========
Net cash used in investing activities ................      $ 1,252,000       $ 1,341,000       $ 2,489,000
                                                            ===========       ===========       ===========
Net cash provided by (used in) financing activities ..      $   188,000       $(1,726,000)      $(1,896,000)
                                                            ===========       ===========       ===========
</TABLE>


WORKING CAPITAL AND LIQUIDITY

         The Company had working capital at May 31, 1997 of $24,095,000 as
compared to $21,891,000 at May 31, 1996.

         Net cash provided by continuing operations was $3,178,000, $1,055,000,
and $4,725,000 in 1995, 1996 and 1997, respectively. The increase in cash
provided by continuing operations in 1997 as compared to 1996 was the direct
result of the significant increase in earnings. The decrease in net cash
provided by continuing operations in 1996 as compared to 1995 is primarily the
result of increased inventory and accounts receivable balances due to increased
sales levels and newly acquired operations. This decrease in cash flow was
offset by the significant increase in earnings. Depreciation and amortization
was $626,000, $925,000, and $1,282,000 in 1995, 1996 and 1997, respectively.

         Net cash used for investing activities was $1,252,000, $1,341,000, and
$2,489,000 in 1995, 1996 and 1997, respectively. Capital expenditures of
$1,330,000, $1,272,000, and $1,236,000 represent the primary cash used for
investing activities in 1995, 1996, 1997, respectively. Additionally, the
Company used $159,000 and $1,348,000 in 1996 and 1997, respectively, for new
business acquisitions.

         Net cash used in financing activities in 1996 and 1997 was $1,726,000
and $1,896,000, respectively, and represented principal payments of long-term
debt as well as the payment of dividends. In 1997, the Company raised $419,000
from the issuance of common stock as a result of exercised stock options. Net
cash provided by financing activities was $188,000 in 1995. Net cash of
approximately $6,297,000 ($6,670,000 in 1995, before accounting for deferred
costs of $373,000 in 1994) was raised in connection with the Company's initial
public offering. Following the offering, the Company paid a related party
promissory note using $2,000,000 in cash, and renegotiated its credit facility
with its bank, substantially resulting in the total long-term debt reduction of
$3,173,000 for the year. Cash dividends of $1,201,000 were also paid during
1995.

         The effect of the exchange rates on cash and cash equivalents resulted
in an increase in cash and cash equivalents of $117,000 in 1995, a decrease in
cash and cash equivalents of $50,000 in 1996, and an increase in cash and cash
equivalents of $161,000 in 1997.



                                       18
<PAGE>   19
         The Company maintains substantial cash balances in Europe consisting of
accumulated earnings from its foreign subsidiaries. The Company intends to use
these funds primarily for acquisitions outside the United States and expansion
of the Company's European operations.

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

         At May 31, 1997, the Company's principal source of liquidity was
$8,490,000 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

         In November 1993, the Company borrowed $6,000,000 in term debt from a
bank to finance the acquisition of the EPG. As of May 31, 1997, the balance of
the term debt was $1,957,000 and bears interest at the LIBOR rate plus 1 3/4%
(7.5% at May 31, 1997). Additionally, the Company has obtained, from the same
bank, a $5,000,000 revolving line of credit and a $4,000,000 acquisition line of
credit available for use in making acquisitions or capital expenditures.
Borrowings under the acquisition credit line will be converted annually into
five-year term loans with interest-only payments in the first year of
conversion. Borrowings under the lines of credit bear interest at the LIBOR rate
plus 1 1/2% (7.1875% at May 31, 1997) for the revolving line of credit, and 1
3/4% (7.4375% at May 31, 1997) for the acquisition line of credit. At May 31,
1997, there were no outstanding balances under the lines of credit.

         All amounts advanced under the loan agreement, as amended, with the
Company's bank (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 a specified minimum consolidated tangible net worth of
not less than $18,000,000; minimum working capital of not less than $15,000,000;
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; certain other ratios and insurance. In addition, the
Loan Agreement restricts the Company's ability to incur indebtedness, pay
dividends in the event of a default under the Loan Agreement, consummate mergers
or acquisitions without prior Bank approval in which the consideration paid by
the Company exceeds the acquisition line, or make annual aggregate capital
expenditures exceeding $2,000,000. The revolving credit portion of the Loan
Agreement provides that for at least 30 consecutive days during each
twelve-month period there shall be no loans outstanding under the revolving
credit line. As of May 31, 1997, the Company was in compliance with all of the
covenants of the Loan Agreement.




                                       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, 1996 and 1997............................................   F-3

Consolidated Statements of Operations
for the years ended May 31, 1995, 1996 and 1997.....................   F-5

Consolidated Statements of Shareholders' Equity
for the years ended May 31, 1995, 1996 and 1997.....................   F-6

Consolidated Statements of Cash Flows
for the years ended May 31, 1995, 1996 and 1997.....................   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 31, 1997,
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))

  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))
</TABLE>



                                       21
<PAGE>   22
<TABLE>
<CAPTION>
Exhibit
Number    Exhibit Description
-------   -------------------
  <S>     <C>
  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)

  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)
</TABLE>



                                       22
<PAGE>   23
<TABLE>
<CAPTION>
Exhibit
Number    Exhibit Description
-------   -------------------
  <S>     <C>
  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)

  11.1    Statement regarding computation of net income per share.

  21      Schedule of Subsidiaries.

  23.1    Consent of Deloitte & Touche.

  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.


                                       23
<PAGE>   24
                                   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 25, 1997                   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 25, 1997
-------------------------------------
Edward Malkowicz

                                                     Chief Executive Officer
/s/ R. Malcolm Greaves                               and Director                       August 25, 1997
-------------------------------------
R. Malcolm Greaves


Richard Detweiler                                    Director                           August 25, 1997
------------------------------------
Richard Detweiler


/s/ Marvin L. Goldberger                             Director                           August 25, 1997
------------------------------------
Marvin L. Goldberger


/s/ Stanley T. Myers                                 Director                           August 25, 1997
------------------------------------
Stanley T. Myers


/s/ Terrence A. Noonan                               Director                           August 25, 1997
------------------------------------
Terrence A. Noonan


/s/ John T. Vinke                                    Director                           August  25, 1997
---------------------------
John T. Vinke

</TABLE>



                                       24
<PAGE>   25

                           HASKEL INTERNATIONAL, INC.
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>

Independent Auditors' Reports...........................................  F-1

Consolidated Balance Sheets
at May 31, 1996 and 1997................................................  F-3

Consolidated Statements of Operations
for the years ended May 31, 1995, 1996 and 1997.........................  F-5

Consolidated Statements of Shareholders' Equity
for the years ended May 31, 1995, 1996 and 1997.........................  F-6

Consolidated Statements of Cash Flows
for the years ended May 31, 1995, 1996 and 1997.........................  F-7

Notes to Consolidated Financial Statements..............................  F-9

</TABLE>



                                       25
<PAGE>   26

                          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, 1996 and
1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended May 31,
1997. 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% of consolidated total assets at
May 31, 1996 and 1997 and total sales constituting 38%, 42% and 45% for fiscal
years 1995, 1996 and 1997, respectively, 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,
1996 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended May 31, 1997 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  21, 1997



                                      F-1
<PAGE>   27

                 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, 1996 and 1997, 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 31, 1997 (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, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
May 31, 1997 in conformity with generally accepted accounting principles.



PRICE WATERHOUSE
Chartered Accountants
and Registered Auditors

Newcastle
United Kingdom
July 21, 1997



                                      F-2
<PAGE>   28

                           HASKEL INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                            May 31,                   May 31,
                                                                                             1996                      1997

                                                                                    ---------------------     ---------------------
<S>                                                                                        <C>                       <C>          

                                                              ASSETS

CURRENT ASSETS:
     Cash and cash equivalents                                                             $   8,239,000             $   8,490,000
     Accounts receivable, net                                                                  9,581,000                11,751,000
     Inventories                                                                              10,532,000                10,335,000
     Prepaid expenses and other current assets                                                   356,000                   942,000
     Deferred income taxes                                                                     1,260,000                 1,419,000
                                                                                    ---------------------     ---------------------
          TOTAL CURRENT ASSETS                                                                29,968,000                32,937,000

PROPERTY, PLANT & EQUIPMENT, Net                                                               5,526,000                 5,376,000

PURCHASED TECHNOLOGY, Net                                                                      6,569,000

GOODWILL, Net                                                                                  3,248,000                   698,000

DEFERRED INCOME TAXES                                                                                                    2,156,000

OTHER ASSETS                                                                                      49,000                    65,000
                                                                                    ---------------------     ---------------------

                                 TOTAL                                                      $ 45,360,000              $ 41,232,000
                                                                                    =====================     =====================

</TABLE>


See notes to consolidated financial statements.



                                      F-3
<PAGE>   29

                           HASKEL INTERNATIONAL, INC.
                     CONSOLIDATED BALANCE SHEETS (Continued)


<TABLE>
<CAPTION>
                                                                                      May 31,                  May 31,
                                                                                        1996                     1997

                                                                                ---------------------    ---------------------
<S>                                                                                   <C>                      <C>           

                                      LIABILITIES & SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
     Current portion of long-term debt                                                $      985,000           $      978,000
     Accounts payable                                                                      3,510,000                4,070,000
     Dividends payable                                                                       331,000                  335,000
     Accrued liabilities                                                                   3,089,000                3,249,000
     Income taxes payable                                                                    162,000                  210,000
                                                                                ---------------------    ---------------------
                            TOTAL CURRENT LIABILITIES                                      8,077,000                8,842,000

LONG-TERM DEBT                                                                             2,381,000                1,401,000

DEFERRED INCOME TAXES                                                                        334,000

OTHER ACCRUED LIABILITIES                                                                  2,348,000                2,322,000

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; 4,688,230 and
        4,748,230 issued and outstanding at May 31, 1996 and May 31, 1997,
        respectively                                                                      13,436,000               13,855,000
     Class B, without par value; 40,000 shares
        authorized, issued and outstanding at
        May 31, 1996 and May 31, 1997                                                         19,000                   19,000
     Retained Earnings                                                                    18,951,000               14,733,000
     Cumulative foreign currency translation adjustment                                     (186,000)                  60,000
                                                                                ---------------------    ---------------------
             TOTAL SHAREHOLDERS' EQUITY                                                   32,220,000               28,667,000
                                                                                ---------------------    ---------------------
                                          TOTAL                                         $ 45,360,000             $ 41,232,000
                                                                                =====================    =====================

</TABLE>




See notes to consolidated financial statements.

                                      F-4
<PAGE>   30

                           HASKEL INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                        Year Ended May 31,
                                                                1995           1996            1997
                                                            ------------    ------------    ------------

<S>                                                         <C>             <C>             <C>         
SALES                                                       $ 38,883,000    $ 42,169,000    $ 51,400,000

COST OF SALES                                                 22,398,000      22,956,000      27,938,000
                                                            ------------    ------------    ------------

GROSS PROFIT                                                  16,485,000      19,213,000      23,462,000

EXPENSES:
      Selling                                                  6,642,000       7,162,000       8,081,000

      General and administrative                               6,007,000       6,845,000       6,779,000

      Engineering design, research and development             1,151,000         905,000       1,079,000

                                                            ------------    ------------    ------------
                  Total                                       13,800,000      14,912,000      15,939,000
                                                            ------------    ------------    ------------

OPERATING INCOME                                               2,685,000       4,301,000       7,523,000

OTHER INCOME (EXPENSE):
      Interest Expense                                          (238,000)       (104,000)       (118,000)
      Interest Income                                            435,000         356,000         358,000
      Other                                                     (182,000)         13,000          12,000
                                                            ------------    ------------    ------------
                                                                  15,000         265,000         252,000
                                                            ------------    ------------    ------------

INCOME FROM CONTINUING OPERATIONS
      BEFORE PROVISION FOR INCOME TAXES                        2,700,000       4,566,000       7,775,000

PROVISION FOR INCOME TAXES                                     1,149,000       1,919,000       3,041,000
                                                            ------------    ------------    ------------

INCOME FROM CONTINUING OPERATIONS                              1,551,000       2,647,000       4,734,000

DISCONTINUED OPERATIONS:
      Loss from operations, net of taxes                        (532,000)       (100,000)       (529,000)

      Estimated loss on disposal of segment, net of taxes                                     (7,095,000)
                                                            ------------    ------------    ------------

NET INCOME (LOSS)                                           $  1,019,000    $  2,547,000    $ (2,890,000)
                                                            ============    ============    ============

INCOME (LOSS) PER SHARE:
      Continuing operations                                 $       0.35    $       0.56    $       0.98
      Discontinued operations:
              Loss from operations                                 (0.12)          (0.02)          (0.11)
              Estimated loss on disposal                                                           (1.47)
                                                            ------------    ------------    ------------
      Total                                                 $       0.23    $       0.54    ($      0.60)
                                                            ============    ============    ============
DIVIDEND PER SHARE                                          $       0.28    $       0.28    $       0.28
                                                            ============    ============    ============

WEIGHTED AVERAGE NUMBER OF
  COMMON AND COMMON EQUIVALENT
  SHARES OUTSTANDING                                           4,500,783       4,738,266       4,839,739
                                                            ============    ============    ============

</TABLE>

See notes to consolidated financial statements.



                                      F-5
<PAGE>   31

                           HASKEL INTERNATIONAL, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                   Year Ended May 31,
                                       --------------------------------------------
                                           1995            1996            1997
                                       -------------   ------------    ------------
<S>                                       <C>             <C>             <C>      
Shares outstanding

Common stock, Class A shares
Balance, beginning of year                3,406,470       4,688,230       4,688,230
Issuance of common stock                    874,500                          60,000
Conversion of common stock                  407,260
                                       ------------    ------------    ------------
    Balance, end of year                  4,688,230       4,688,230       4,748,230
                                       ============    ============    ============

Common stock, Class B shares
Balance, beginning of year                  447,260          40,000          40,000
Conversion of common stock                 (407,260)
                                       ------------    ------------    ------------
    Balance, end of year                     40,000          40,000          40,000
                                       ============    ============    ============


Common stock, Class A
Balance, beginning of year             $  6,859,000    $ 13,436,000    $ 13,436,000
Issuance of common stock                  6,381,000                         419,000
Conversion of common stock                  196,000
                                       ------------    ------------    ------------
    Balance, end of year               $ 13,436,000    $ 13,436,000    $ 13,855,000
                                       ============    ============    ============

Common stock, Class B
Balance, beginning of year             $    215,000    $     19,000    $     19,000
Conversion of common stock                 (196,000)
                                       ------------    ------------    ------------
    Balance, end of year               $     19,000    $     19,000    $     19,000
                                       ============    ============    ============

Retained earnings
Balance, beginning of year             $ 17,971,000    $ 17,729,000    $ 18,951,000
Net income (loss)                         1,019,000       2,547,000      (2,890,000)
Cash dividends, Class A and B shares     (1,261,000)     (1,325,000)     (1,328,000)
                                       ------------    ------------    ------------
    Balance, end of year               $ 17,729,000    $ 18,951,000    $ 14,733,000
                                       ============    ============    ============

Cumulative translation adjustment
    Balance, end of year                   (177,000)       (186,000)         60,000
                                       ------------    ------------    ------------

Total shareholders' equity             $ 31,007,000    $ 32,220,000    $ 28,667,000
                                       ============    ============    ============

</TABLE>


See notes to consolidated financial statements.



                                      F-6
<PAGE>   32

                           HASKEL INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    Year Ended May 31,
                                                                        -----------------------------------------
                                                                           1995           1996            1997
                                                                        -----------    -----------   ------------
<S>                                                                     <C>            <C>            <C>        

CASH FLOWS FROM OPERATING ACTIVITIES:
    Income from continuing operations                                   $ 1,551,000    $ 2,647,000    $ 4,734,000
    Adjustments to reconcile net income to net cash
       provided by operating activities:
       Depreciation and amortization                                        626,000        925,000      1,282,000
       (Gain) Loss on sale of property                                      (15,000)       (33,000)        62,000
       Deferred income taxes                                                (19,000)       (35,000)        13,000
       Effect of exchange rate changes                                      368,000         41,000         84,000
       Changes in operating assets and liabilities
          (net of acquisitions):
            Accounts Receivable, net                                      1,721,000     (1,441,000)    (2,690,000)
            Inventories                                                    (579,000)    (1,450,000)       703,000
            Prepaid expenses and other current assets                       351,000        (74,000)      (596,000)
            Accounts Payable and accrued liabilities                       (661,000)       686,000      1,010,000
            Income taxes                                                   (165,000)      (211,000)       123,000
                                                                        -----------    -----------    -----------
               Net cash provided by continuing operations                 3,178,000      1,055,000      4,725,000
                                                                        -----------    -----------    -----------
               Net cash (used in) provided by discontinued operations      (545,000)     1,495,000       (250,000)
                                                                        -----------    -----------    -----------
               Net cash provided by operating activities                  2,633,000      2,550,000      4,475,000
                                                                        -----------    -----------    -----------
CASH FLOWS FROM INVESTING
    ACTIVITIES:
       Capital expenditures                                              (1,330,000)    (1,272,000)    (1,236,000)
       Proceeds from sale of property                                        78,000         90,000         95,000
       Purchase of subsidiary (net of cash and
          cash equivalents acquired)                                                      (159,000)    (1,348,000)
                                                                        -----------    -----------    -----------
               Net cash used in investing activities                     (1,252,000)    (1,341,000)    (2,489,000)
                                                                        -----------    -----------    -----------
CASH FLOWS FROM FINANCING
    ACTIVITIES:
       Principal payments on long-term debt - related party              (2,000,000)
       Principal payments on long-term debt                              (3,173,000)      (401,000)      (987,000)
       Proceeds from issuance of common stock                             6,754,000                       419,000
       Dividends declared                                                (1,261,000)    (1,325,000)    (1,328,000)
       Repayment of notes payable                                          (192,000)
       Increase in dividends payable                                         60,000
                                                                        -----------    -----------    -----------
               Net cash provided by (used in) financing activities          188,000     (1,726,000)    (1,896,000)
                                                                        -----------    -----------    -----------
EFFECT OF EXCHANGE RATE ON
    CASH AND CASH EQUIVALENTS                                               117,000        (50,000)       161,000
                                                                        -----------    -----------    -----------
NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                                                           1,686,000       (567,000)       251,000
CASH AND CASH EQUIVALENTS AT
    BEGINNING OF PERIOD                                                   7,120,000      8,806,000      8,239,000
                                                                        -----------    -----------    -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                              $ 8,806,000    $ 8,239,000    $ 8,490,000
                                                                        ===========    ===========    ===========

</TABLE>

See notes to consolidated financial statements.



                                      F-7
<PAGE>   33

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

<TABLE>
<CAPTION>
                                            Year Ended May 31,
                                   ------------------------------------
                                     1995        1996           1997
                                   ---------   ----------    ----------
<S>                                <C>          <C>          <C>       
SUPPLEMENTAL DISCLOSURES OF
  CASH FLOW INFORMATION
Cash paid during the year for :
Interest
      Continuing operations       $  266,000   $   75,000   $  121,000
                                  ==========   ==========   ==========
      Discontinued operations     $  314,000   $  181,000   $  111,000
                                  ==========   ==========   ==========
Income taxes                      $1,245,000   $2,128,000   $2,557,000
                                  ==========   ==========   ==========
</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

      On October 14, 1993, the Company paid $1,000,000 in cash and issued a
      promissory note in the amount of $3,500,000 in connection with the
      purchase of land and buildings. Because the property was purchased from a
      group of controlling shareholders, the Company has recorded the property
      at the historical net book value ($365,000) to such shareholders and has
      reflected the excess of the purchase price as a deemed dividend of
      $2,511,000 ($635,000 of which is cash) net of deferred income taxes of
      $1,624,000. In November 1994, the Company paid the promissory note with
      $2,000,000 cash and offsetting a $1,500,000 note receivable from such
      shareholders.

      In fiscal year 1995, $6,670,000 was raised (net of offering costs) in
      connection with the Company's initial public offering of Class A Common
      Stock. These proceeds, net of deferred public offering costs of $373,000,
      resulted in net proceeds from the offering of $6,297,000.

      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.)

      On June 3, 1996, HESL acquired all of the outstanding stock of Hydraulic
      Mobile Equipment Limited ("HME") for $851,000 ($814,000 in cash and
      $37,000 in acquisition costs) plus liabilities.

<TABLE>
               <S>                               <C>            
               Fair value of assets acquired     $     1,067,000
               Cash paid                                (851,000)
                                                 ----------------
               Liabilities assumed               $       216,000
                                                 ================
</TABLE>

      On May 1, 1997, HESL acquired all of the outstanding stock of Nanojet
      Engineering GmbH for $29,000 plus liabilities.

<TABLE>

               <S>                                <C>            
               Fair value of assets acquired      $       176,000
               Cash paid                                  (29,000)
                                                  ----------------
               Liabilities assumed                $       147,000
                                                  ================

</TABLE>


See notes to consolidated financial statements.



                                      F-8
<PAGE>   34

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


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 subsidiary, Haskel Energy Systems, Ltd.
("HESL"), and its operating subsidiaries. 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
domestic inventories is determined by the last-in, first-out (LIFO) method and
represents approximately 64% and 55% of consolidated inventories at May 31, 1996
and 1997, respectively. All other inventories are valued using the first-in,
first-out (FIFO) method. If all domestic inventories had been valued on the FIFO
method, they would have been higher by $1,843,000 and $1,944,000 at May 31, 1996
and 1997, respectively.

Property, Plant and Equipment

        Property, plant and equipment are 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, using principally the straight-line method.
Provision for amortization of leasehold improvements is made 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 asset and liability computations 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 due to
the fact that the majority of the notes are based on variable interest rates.



                                      F-9
<PAGE>   35

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition

        Revenue is recognized upon shipment of product. Accounts receivable are
uncollateralized and contain no significant concentrations of credit risk.

Research and Development

        Research and development costs are expensed as incurred.

Earnings Per Share

        Earnings per share are computed based upon the weighted average number
of common shares and dilutive common share equivalents (consisting of incentive
stock options and nonqualified stock options) outstanding during the periods.

        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 (EPS) excludes common
stock equivalents from the EPS calculation, while diluted EPS is calculated
consistent with the Company's primary earnings per share calculation. The
Company will adopt the provisions of SFAS No. 128 within the first quarter of
fiscal year 1998. Basic and diluted EPS, as computed under SFAS No. 128, would
have no impact on the earnings per share calculations for the three years ended
May 31, 1997 due to the insignificant number of common stock equivalents
outstanding in each of these three years.

Foreign Currency Translation

        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. Income statement information 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 income. Gains and losses resulting from translation of foreign
financial statements are included as a separate component of shareholders'
equity.

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.

Reclassifications

        Certain reclassifications have been made in the 1995 and 1996 financial
statements to conform with the 1997 financial statement presentation.




                                      F-10
<PAGE>   36

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Stock Options

        In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. The new 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 new 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 continue 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 (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.

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.
The Company has not yet determined the impact of adopting this statement.

        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 business enterprises report information about operating
segments and requires enterprises to report selected information about operating
segments in interim financial reports. The Company has not yet determined the
impact of adopting this statement.



                                      F-11
<PAGE>   37


                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


2.         MERGERS AND ACQUISITIONS

        On November 19, 1993, the Company paid $6,000,000 in cash, $268,000 in
acquisition costs and issued 450,000 shares of its Class A Common Stock in
exchange for all of the outstanding common stock of M.G. Electronics ("MGE").
The transaction has been accounted for as a purchase. The valuation of the
Company's stock used in recording the purchase price was $7.18 per share, which
was the value as of the fiscal year ended May 31, 1993 as determined by an
independent appraisal. In connection with the acquisition, the Company recorded
purchased technology of $7,900,000 and goodwill of $3,428,000. During fiscal
year 1997, the Company made the decision to dispose of this business (see Note
14).

        During fiscal years ending May 31, 1995, 1996 and 1997, the Company
completed the following acquisitions recorded using the purchase accounting
method. The pro-forma effects of the acquisitions are not significant to the
financial statements.

        On November 30, 1995, HESL acquired certain assets of Armaturenbau GmbH
in exchange for $159,000 in cash and a note payable of $253,000. In connection
with the acquisition, the Company recorded goodwill of approximately $108,000,
which is being amortized over 15 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 May 1, 1997, HESL acquired all of the outstanding stock of Nanojet
Engineering GmbH for $29,000 in cash. In connection with the acquisition, the
Company recorded goodwill of approximately $147,000, which is being amortized
over 5 years.


3.   COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS

<TABLE>
<CAPTION>

                                             May 31,         May 31,
                                             1996            1997
                                          ------------    ------------
<S>                                       <C>             <C>         

Cash and cash equivalents:
  Cash in banks                           $  2,901,000    $  3,077,000
  Time deposits                              5,338,000       5,413,000
                                          ------------    ------------
                                          $  8,239,000    $  8,490,000
                                          ============    ============
Accounts receivable:
  Accounts receivable                     $ 10,542,000    $ 12,294,000
  Less: Allowance for doubtful accounts       (961,000)       (543,000)
                                          ------------    ------------
                                          $  9,581,000    $ 11,751,000
                                          ============    ============


</TABLE>



                                      F-12
<PAGE>   38

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


3.      COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS (CONTINUED)


<TABLE>
<CAPTION>
                                                      May 31,          May 31,
                                                        1996            1997
                                                    ------------    ------------
<S>                                                 <C>             <C>         
Inventories:
  Raw materials .................................   $  3,335,000    $  3,029,000
  Work-in-process ...............................      2,032,000       1,697,000
  Finished goods ................................      5,165,000       5,609,000
                                                    ------------    ------------
                                                    $ 10,532,000    $ 10,335,000
                                                    ============    ============

Property, plant and equipment:
  Land and building .............................   $  2,636,000    $  2,870,000
  Computer equipment ............................      2,530,000       2,022,000
  Machinery and equipment .......................      3,378,000       4,321,000
  Furniture and fixtures ........................      2,466,000         529,000
  Leasehold improvements ........................      1,436,000         962,000
                                                    ------------    ------------
                                                      12,446,000      10,704,000
  Less: Accumulated depreciation and amortization     (6,920,000)     (5,328,000)
                                                    ------------    ------------
                                                    $  5,526,000    $  5,376,000
                                                    ============    ============

Purchased technology:
  Purchased technology ..........................   $  7,900,000
  Less: Accumulated amortization ................     (1,331,000)
                                                    ------------
                                                    $  6,569,000
                                                    ============

Goodwill:
  Goodwill ......................................   $  3,859,000    $    804,000
  Less: Accumulated amortization ................       (611,000)       (106,000)
                                                    ------------    ------------
                                                    $  3,248,000    $    698,000
                                                    ============    ============

Accrued Liabilities:
  Accrued payroll and related expenses ..........   $    452,000    $    309,000
  Accrued bonuses ...............................        725,000         913,000
  Accrued environmental expenses ................         93,000
  Accrued retirement benefits ...................        209,000         197,000
  Accrued vacation ..............................        521,000         518,000
  Accrued commissions ...........................        284,000         342,000
  Other .........................................        805,000         970,000
                                                    ------------    ------------


                                                    $  3,089,000    $  3,249,000
                                                    ============    ============

</TABLE>



                                      F-13
<PAGE>   39

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


4.      LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>

                                                                                      May 31,        May 31, 
                                                                                      1996            1997
                                                                                   ------------   -----------
<S>                                                                                <C>            <C>        

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 31, 1997 was 5.92% ....................................................   $   386,000    $   271,000
Non-interest bearing note payable issued in connection with
  acquisition.  Payable in three annual installments of $95,000 
Interest imputed based on an assumed interest
  rate of 8% ...................................................................       241,000        151,000
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 3/4% 
  Interest rate at May 31, 1997 was 7.5%.  Collateralized
  by 50% of the Company's stock in
  HESL .........................................................................     2,739,000      1,957,000
                                                                                   -----------    -----------
                                                                                     3,366,000      2,379,000
Less:  Current portion of long-term debt .......................................      (985,000)      (978,000)
                                                                                   -----------    -----------
Long-term debt .................................................................   $ 2,381,000    $ 1,401,000
                                                                                   ===========    ===========

</TABLE>



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

<TABLE>
<CAPTION>
                                                                     May 31,
                                                                   -------------
<S>                                                                    <C>     
1998........................................................           $978,000
1999........................................................            940,000
2000........................................................            461,000
                                                                   -------------
     Total                                                           $2,379,000
                                                                   =============

</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 1/2% (7.1875% at May 31,
1997). There were no outstanding balances under the line of credit as of May 31,
1996 or 1997.

        The Company has a $4 million acquisition line of credit available with
the same bank at an interest rate equal to the LIBOR rate plus 1 3/4% (7.4375%
at May 31, 1997). The Company may make minimum draws of $250,000 against this
line. Balances outstanding against this line at the end of February 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.

        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



                                      F-14
<PAGE>   40

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


4.      LONG-TERM DEBT (CONTINUED)

less than $18,000,000; 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 $2,000,000. As of May 31, 1997, 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 February 2000.

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

<TABLE>
<CAPTION>

Fiscal year ending May 31,

  <S>                                                            <C>     
  1998...................................................        $401,000
  1999...................................................         350,000
  2000...................................................         253,000
  2001...................................................         196,000
  2002...................................................         127,000
  Thereafter.............................................         477,000
                                                            --------------
Total minimum lease payments.............................      $1,804,000
                                                            ==============

</TABLE>


         Rent expense for all operating leases was $212,000, $246,000, and
$222,000 for fiscal years 1995, 1996 and 1997, respectively.



                                      F-15
<PAGE>   41

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997

6.      INCOME TAXES

        The provision for income taxes is summarized as follows:

<TABLE>
<CAPTION>
                                            Fiscal Year Ended May 31,
                               -------------------------------------------------
                                   1995               1996               1997
                               -----------        -----------        -----------
<S>                            <C>                <C>                <C>        
Current:
  Federal ..............       $   470,000        $ 1,059,000        $ 1,163,000
  State ................           296,000            313,000            500,000
  Foreign ..............           625,000            901,000          1,171,000
                               -----------        -----------        -----------
                                 1,391,000          2,273,000          2,834,000
Deferred:
  Federal ..............          (180,000)          (305,000)           140,000
  State ................           (62,000)           (49,000)            12,000
   Foreign .............                                                  55,000
                               -----------        -----------        -----------
                               $ 1,149,000        $ 1,919,000        $ 3,041,000
                               ===========        ===========        ===========
</TABLE>

            HESL had undistributed earnings of approximately $12,100,000 at May
31, 1995. In July 1995, $3,500,000 of these earnings were distributed to the
Company. The Company included income taxes on this distribution in its fiscal
year 1995 tax provision. Management retained permanently the remaining
$8,600,000 of the undistributed earnings of HESL as of May 31, 1995 primarily
for internal growth and strategic acquisitions outside of the United States.
Unrecognized income taxes on such earnings would be approximately 2 1/2 percent,
or $215,000, after taking into effect foreign tax credits which would be
available as a reduction of the majority of the U.S. income tax in the event of
the future distribution of these earnings. In fiscal years 1996 and 1997, the
Company provided taxes (net of expected foreign tax credits) on the
undistributed earnings of HESL in excess of the $8,600,000 permanently retained.

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

<TABLE>
<CAPTION>
                                                          May 31,       May 31,
                                                          1996           1997
                                                     -------------   -----------
<S>                                                   <C>            <C>        
     Deferred tax assets:
  Uniform capitalization rules ....................   $   334,000    $   303,000
  Allowance for doubtful accounts .................       344,000        150,000
  Reserve for obsolescence ........................       360,000        489,000
  Environmental accrual ...........................       407,000        363,000
  Retirement accrual ..............................       538,000        524,000
  Vacation and sick accrual .......................       163,000        130,000
  Severance accrual ...............................                      179,000
  Purchased land/building - related party (Note 11)     1,549,000      1,624,000
  Other ...........................................       170,000        250,000
                                                      -----------    -----------
Total deferred tax assets .........................     3,865,000      4,012,000
                                                      -----------    -----------
Deferred tax liabilities:
  Depreciation ....................................      (191,000)      (122,000)
  Purchased technology ............................    (2,662,000)
  Other ...........................................       (86,000)      (315,000)
                                                      -----------    -----------
Total deferred tax liabilities ....................    (2,939,000)      (437,000)
                                                      ===========    ===========
Net deferred tax asset ............................   $   926,000    $ 3,575,000
                                                      ===========    ===========

</TABLE>



                                      F-16
<PAGE>   42

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


6.      INCOME TAXES (CONTINUED)

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

        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. The reasons for these differences are
as follows:

<TABLE>
<CAPTION>
                                                      FISCAL YEAR ENDED MAY 31,
                                                 ------------------------------------
                                                    1995         1996         1997
                                                 ----------   -----------  ----------
<S>                                              <C>          <C>          <C>       
Income tax expense at statutory rate .........   $  918,000   $1,552,000   $2,644,000
State income taxes, net of federal tax benefit      154,000      174,000      338,000
Taxes associated with dividends  from HESL ...       34,000       53,000
Foreign income subject to tax other than at
    federal statutory rate ...................                   110,000
Other ........................................       43,000       30,000       59,000
                                                 ----------   ----------   ----------
                                                 $1,149,000   $1,919,000   $3,041,000
                                                 ==========   ==========   ==========

</TABLE>

7.      PROFIT SHARING PLAN

        The Company has a profit sharing plan which covers substantially all
U.S. employees. Contributions are at the discretion of the Board of Directors.
The Company did not make any profit sharing contributions for fiscal years 1995,
1996 or 1997.

        Effective June 1, 1997, the Company adopted the Haskel International,
Inc. 401(k) Plan. The Company established the Plan 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 gross wages (or a maximum of $9,500 annually). The Company will
match 25% of the employee's deferral up to the first 6 percent of each
participating employee's deferral. Employees vest immediately in the Company's
matching contribution.


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.



                                      F-17
<PAGE>   43

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


8.      RETIREMENT PLANS (CONTINUED)

        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,
                                                             --------------------------
                                                                1996             1997
                                                             -----------    -----------
<S>                                                          <C>            <C>        
Actuarial present value of benefit obligations:
  Vested benefits ........................................   $ 1,897,000    $ 2,159,000
  Non-vested benefits ....................................       174,000        197,000
                                                             -----------    -----------
Accumulated benefit obligation ...........................     2,071,000      2,356,000
Effect of projected salary increases .....................       229,000        294,000
                                                             -----------    -----------
Projected benefit obligation .............................     2,300,000      2,650,000
Net assets available for benefits (market value) .........     1,876,000      2,369,000
                                                             -----------    -----------
Projected benefit obligation in excess of plan assets ....       424,000        281,000
Unrecognized net obligation being recognized over 15 years       469,000        351,000
                                                             ===========    ===========
Prepaid pension cost .....................................   $   (45,000)   $   (70,000)
                                                             ===========    ===========
</TABLE>

        Net periodic pension cost included the following components:

<TABLE>
<CAPTION>
                                                         Fiscal Year Ended May 31,
                                                   -----------------------------------
                                                      1995         1996         1997
                                                   ---------    ---------    ---------
<S>                                                <C>          <C>          <C>      
Service cost - benefits earned during the period   $ 131,000    $ 158,000    $ 164,000
Interest cost on projected benefit obligation ..     214,000      184,000      191,000
Expected return on plan assets .................    (158,000)    (150,000)    (276,000)
Amortization of unrecognized net obligation ....      42,000       16,000      136,000
                                                   =========    =========    =========
Net periodic pension cost ......................   $ 229,000    $ 208,000    $ 215,000
                                                   =========    =========    =========
</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 9 percent and 8 percent, respectively, for
fiscal year 1995 and 8 percent and 6 percent, respectively, for fiscal years
1996 and 1997. The expected long-term rate of return on assets was 9 percent for
fiscal year 1995 and 8 percent for fiscal years 1996 and 1997. The discount rate
approximates the rate on AA-rated bonds in the United Kingdom. 


9. STOCK OPTIONS AND WARRANTS

         The Company has four stock option plans: the 1989 Incentive Stock
Option Plan and the Nonqualified Stock Option Plan which were replaced by the
1995 Incentive Stock Option Plan and the 1995 Formula Stock Option Plan,
respectively. Under the Company's various stock option plans, the Company may
issue 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 1989 Incentive Stock Option Plan and the Nonqualified Stock
Option Plan become exercisable at such times and in such installments as were
determined by the Board of Directors at the time of the



                                      F-18
<PAGE>   44

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


9.   STOCK OPTIONS AND WARRANTS (CONTINUED)

grant. The options granted under the 1995 Incentive Stock Option Plan, which
replaced both the 1989 Incentive Stock Option Plan and Nonqualified 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 1995 Formula Stock Option Plan become exercisable in equal
installments over five years. The options under all of the above plans expire no
later than ten years after the date of grant. There are 1,380,000 shares of
Class A Common Stock reserved for issuance under the option plans as of May 31,
1997. As of May 31, 1997, options for 505,365 of these shares, in the aggregate,
were exercisable. The following table summarizes the stock option activity:

<TABLE>
<CAPTION>
                                          Range of Option
                                Shares    Prices Per Share
                               --------   ----------------

<S>                            <C>        <C>     <C>  
Outstanding at June 1, 1994    524,285    $7.00 - $9.46
Options exercised .........    (12,000)   $7.00 - $7.18
Options granted ...........    269,000    $8.03 - $10.00
Options canceled ..........     (2,400)   $8.03 - $9.46
                               -------


Outstanding at May 31, 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
                              ========

</TABLE>

                               Options Outstanding
                                 at May 31, 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                Weighted
                                   Weighted     Average                       Weighted
                                   Average     Remaining       Options        Average
    Range of         Options       Exercise    Contractual  Exercisable at    Exercise
 Exercise Price    Outstanding      Price        Life       May 31, 1997       Price
 --------------    -----------      -----        ----       ------------       -----
<S>                    <C>          <C>           <C>          <C>             <C>  
$5.375 - $7.50         497,000      $6.77         6.16         314,200         $6.88
$7.625 - $10.00        396,565      $9.07         7.26         191,165         $9.31

</TABLE>

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

        In connection with the initial public offering of its common stock, the
Company sold Representative's Warrants which 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.



                                      F-19
<PAGE>   45

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


9.   STOCK OPTIONS AND WARRANTS (CONTINUED)

        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 and
1997 would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                        Fiscal Year Ended May 31,
                                     --------------------------------
                                         1996              1997
                                     --------------    --------------
       <S>                           <C>               <C>          

        Net income (loss)
            As reported              $   2,547,000     $ (2,890,000)
            Pro forma                    2,491,000       (2,990,000)

        Net earnings (loss) per share
             As reported                  $   .54         $   (.60)
             Pro forma                        .53             (.62)

</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 and 1997 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 and 1997, (ii)
expected volatility of approximately 45% in 1996 and 1997, (iii) risk-free
interest rate of approximately 5.8% in 1996 and 6.0% in 1997, and (iv) expected
lives of approximately 5 years in 1996 and 1997. The Company's calculations are
based on a single-option valuation approach and forfeitures are recognized as
they occur.


10.     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 pension agreements were $139,000 for fiscal years 1995 and
1996 and $140,000 for fiscal year 1997. Additionally, the Company has accrued
costs of $1,348,000 and $1,328,000 associated with the actuarial present value
of the accumulated obligation as of May 31, 1996 and 1997, 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 $139,000 and $141,000 as of May 31, 1996 and 1997,
respectively, and is included in accrued liabilities. Other accrued liabilities
include $1,209,000 and $1,187,000 as of May 31, 1996 and 1997, respectively.



                                      F-20
<PAGE>   46

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


11.     RELATED PARTY TRANSACTIONS

        The Company previously leased its principal office space, plant, and
warehouse facilities in Burbank, California from a controlling shareholder of
the Company. On October 14, 1993, the Company purchased the land and certain
buildings previously leased at its Burbank facility from a group of controlling
shareholders of the Company. The Company paid $1,000,000 in cash and issued a
$3,500,000 promissory note to the sellers. The purchase price was based upon an
independent appraisal. The promissory note was repaid in 1995 by a cash payment
of $2,000,000 and offsetting a $1,500,000 balance of a note receivable from the
same shareholders (see below). Interest paid on the note totaled $167,000 in
fiscal year 1995. Because the property was purchased from a group of controlling
shareholders, the Company recorded the property at the historical net book value
to such shareholders and reflected the excess of the purchase price of
$4,500,000 and the net book value of $365,000, as a deemed dividend of
$2,511,000 net of deferred income taxes of $1,624,000.

        During fiscal year 1993, the Company received a note in the amount of
$1,500,000 from a group of controlling shareholders of the Company. The note
receivable was settled during fiscal year 1995 in a non-cash exchange with a
portion of a $3,500,000 promissory note (see above) from the Company. During
1995, $62,000 in interest was received on the note.

        The Company incurred attorneys' fees in the amount of $353,000, $358,000
and $292,000 in 1995, 1996 and 1997, respectively, in connection with services
provided by a law firm. A principal with that law firm, who served as the
Company's general counsel and as a director of the Company until November 1996.
The Company had accrued $62,000 as of May 31, 1996 associated with the above. In
addition, that firm represents the Hayman Family Trusts and the Haskel, Inc.
Profit Sharing Plan, which are principal shareholders of the Company.


12.     CONTINGENCY

         The Company is currently under investigation by the Environmental
Protection Agency (the "EPA") regarding potential contamination at the Burbank
California facility. 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 also
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



                                      F-21
<PAGE>   47

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


12.     CONTINGENCY (CONTINUED)

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.

        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 in addition to past and future direct and indirect Governmental EPA
oversight and administrative costs of approximately $13.0 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 that the confirmation judgment of the trial
court is 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 $7.6
million; the Company's portion of which has been approximately $160,000, or
about 2%.



                                      F-22
<PAGE>   48

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


12.     CONTINGENCY (CONTINUED)

        The Company established an environmental reserve for contingent
liabilities that may arise in connection with the Superfund Site. At May 31,
1996 and 1997, the environmental reserve was $913,000 and $898,000,
respectively. The Company believes, based upon the advice and opinion of its
environmental counsel, that the Company's liabilities will not exceed the amount
currently reserved for these matters. 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. Management and the
Company's environmental counsel also believe that the Company's reserve amount
will be adequate, even if the Group cannot agree upon a process by which to
arrive at a Final Allocation, and the process by which the shares would be
allocated is resolved by way of judicial proceeding. 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
significantly 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.

        Additionally, the Company was issued a mandate by the Regional Water
District to perform testing and clean-up 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 letter of closure 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.

        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.
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.
These reimbursements were netted against legal expenses within general and
administrative expenses. Litigation is pending as to whether the Company's
insurers must indemnify the Company for the Superfund Site liability.

        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 any 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.



                                      F-23
<PAGE>   49
                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997

13.     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, 1996 and 1997, 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.

        During the second quarter of fiscal 1995, the Company effected an
Initial Public Offering of 862,500 shares of its Class A Common Stock. The
proceeds to the Company for the offering were approximately $7,765,000 (after
underwriting commissions and expenses). Other costs associated with the offering
were approximately $1,468,000, resulting in net funds available to the Company
of approximately $6,297,000.


14.     DISCONTINUED OPERATIONS


        In January 1997, the Company announced its decision to sell or
discontinue its electronic products distribution business. The financial impact
of this was first reflected in the Company's November 30, 1996 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 recorded in fiscal year 1997. As the market
value of the net assets of the business are equal to the expected costs to
dispose of the business, there are no net assets held for sale of the business
shown in the consolidated balance sheet.

        The loss from discontinued operations reflected in the accompanying
consolidated statements of operations are net of an income tax benefit of
$192,000 for fiscal year 1995, 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 $12,818,000, $14,622,000 and $1,904,000 for fiscal
years 1995, 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 reflects the net amount of the
following components: the write-down of the net assets of the EPG to the
expected market value; disposal costs; anticipated operating income of the EPG
through the expected date of disposal; and an income tax benefit of $2,515,000
from the reversal of related deferred tax liabilities.



                                      F-24
<PAGE>   50

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


15.      BUSINESS SEGMENTS

        The Company operates in two business segments: manufacturing and
distribution. The manufacturing segment 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, regulators, and accessories to complement these products.
The manufacturing segment also designs and manufactures systems. The
distribution segment distributes product lines used primarily in the fluid power
business, the largest line of which is the Company's products. Corporate
expenses consist mainly of salaries and related expenses, legal and accounting
costs, and directors' fees.

<TABLE>
<CAPTION>
                                                                              Fiscal Year Ended May 31,
                                                                   --------------------------------------------
                                                                        1995          1996             1997
                                                                   -------------   ------------    ------------
<S>                                                                <C>             <C>             <C>         
  Sales:
  Manufacturing ................................................   $ 25,603,000    $ 29,184,000    $ 35,573,000
  Distribution .................................................     18,019,000      18,718,000      26,525,000
  Less intersegment sales ......................................     (4,739,000)     (5,733,000)    (10,698,000)
                                                                   ------------    ------------    ------------
         Total sales ...........................................   $ 38,883,000    $ 42,169,000    $ 51,400,000
                                                                   ============    ============    ============

Operating profit:
  Manufacturing ................................................   $  3,024,000    $  4,925,000    $  6,654,000
  Distribution .................................................      1,310,000       1,707,000       2,684,000
                                                                   ------------    ------------    ------------
         Total operating profit ................................      4,334,000       6,632,000       9,338,000
Interest expense ...............................................       (238,000)       (104,000)       (118,000)
Interest income ................................................        435,000         356,000         358,000
Other ..........................................................       (182,000)         13,000          12,000
Corporate expenses .............................................     (1,649,000)     (2,331,000)     (1,815,000)
                                                                   ------------    ------------    ------------
          Income from continuing operations
             before income taxes......................             $  2,700,000    $  4,566,000    $  7,775,000
                                                                   ============    ============    ============
Depreciation and amortization:
 Manufacturing .................................................   $    427,000    $    670,000    $    922,000
  Distribution .................................................        199,000         255,000         360,000
                                                                   ------------    ------------    ------------
          Total depreciation and amortization ..................   $    626,000    $    925,000    $  1,282,000
                                                                   ============    ============    ============

Capital expenditures (excluding
  subsidiaries acquired):
  Manufacturing ................................................   $    903,000    $    687,000    $    937,000
  Distribution .................................................        283,000         335,000         299,000
  Discontinued electronic products segment .....................        144,000         250,000
                                                                   ------------    ------------    ------------
          Total capital expenditures ...........................   $  1,330,000    $  1,272,000    $  1,236,000
                                                                   ============    ============    ============

Identifiable assets:
  Manufacturing ................................................   $ 17,033,000    $ 18,102,000    $ 18,190,000
  Distribution .................................................     11,130,000      10,482,000      13,859,000
  Discontinued electronic products segment .....................     12,141,000      10,802,000
  Corporate ....................................................      3,991,000       5,974,000       9,183,000
                                                                   ------------    ------------    ------------
            Total assets .......................................   $ 44,295,000    $ 45,360,000    $ 41,232,000
                                                                   ============    ============    ============

</TABLE>


                                      F-25
<PAGE>   51

                           HASKEL INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1995, 1996 AND 1997


15.    BUSINESS SEGMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                     Fiscal Year Ended May 31,
                                           --------------------------------------------
                                               1995            1996            1997
                                           -------------   -------------   ------------
<S>                                        <C>             <C>             <C>         
Sales:
  United States ........................   $ 27,900,000    $ 28,952,000    $ 33,118,000
  Europe ...............................     14,613,000      17,866,000      23,065,000
  Less sales between geographic areas ..     (3,630,000)     (4,649,000)     (4,783,000)
                                           ------------    ------------    ------------
                                           $ 38,883,000    $ 42,169,000    $ 51,400,000
                                           ============    ============    ============

Operating profit:
  United States ........................   $  2,720,000    $  3,984,000    $  5,884,000
  Europe ...............................      1,614,000       2,648,000       3,454,000
                                           ------------    ------------    ------------
                                              4,334,000       6,632,000       9,338,000
Interest expense .......................       (238,000)       (104,000)       (118,000)
Interest income ........................        435,000         356,000         358,000
Other ..................................       (182,000)         13,000          12,000
Corporate expenses .....................     (1,649,000)     (2,331,000)     (1,815,000)
                                           ------------    ------------    ------------

Income from continuing operations before
  income taxes .........................   $  2,700,000    $  4,566,000    $  7,775,000
                                           ============    ============    ============

Identifiable assets:
  United States ........................   $ 28,794,000    $ 31,685,000    $ 23,526,000
  Europe ...............................     15,501,000      13,675,000      17,706,000
                                           ------------    ------------    ------------
                                           $ 44,295,000    $ 45,360,000    $ 41,232,000
                                           ============    ============    ============

</TABLE>

         Export sales were $4,521,000, $3,776,000 and $5,024,000 during fiscal
years 1995, 1996 and 1997, respectively.

         No single customer accounted for more than 10% of total sales during
fiscal year 1995, 1996 or 1997.



                                      F-26
<PAGE>   52

                                                                     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, 1995              $211,000           $791,000            $87,000               $915,000

     May 31, 1996              $915,000           $389,000           $343,000               $961,000

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

</TABLE>




                                      F-27
<PAGE>   53
                                 EXHIBIT INDEX

Exhibit
 Number         Exhibit Description
-------         -------------------

 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. 
<PAGE>   54
EXHIBIT
NUMBER          EXHIBIT DESCRIPTION
-------         -------------------

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.

<PAGE>   55
EXHIBIT
NUMBER          EXHIBIT DESCRIPTION
-------         -------------------

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.

11.1(1)         Statement regarding computation of net income per share.

21(1)           Schedule of Subsidiaries.

23.1(1)         Consent of Deloitte & Touche.

23.2(1)         Consent of Price Waterhouse.

27(1)           Financial Data Schedule.

        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.

(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.