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

                                   FORM 10-KSB

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

 FOR THE FISCAL YEAR ENDED MAY 31,1997       COMMISSION FILE NUMBER:  001-12810

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

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

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

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

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

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

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. YES (X) NO ( )

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. (X )

State issuer's revenues for its most recent fiscal year: $17,325,000

The aggregate value of the Registrants  Common Stock held by  non-affiliates  of
the Registrant was approximately 10,669,230 as of August 4, 1997, based upon the
closing  sale price on the  American  Stock  Exchange  on that date at which the
stock was last sold.

There  were  6,635,791  shares  of  the  Registrants  Common  Stock  issued  and
outstanding as of July 31, 1997.

Part III,  other than Items 12 and 13, is  incorporated  by  reference  from the
Registrant's  Proxy  Statement for its 1997 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of May 31, 1997.
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                        HI-SHEAR TECHNOLOGY CORPORATION
                                  FORM 10-KSB

                               TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
PART I.     FINANCIAL INFORMATION

   ITEM 1      BUSINESS........................................................1

   ITEM 2      PROPERTIES......................................................9

   ITEM 3      LEGAL PROCEEDINGS..............................................10

   ITEM 4      SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS.............. 10


PART II.

   ITEM 5      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......11

   ITEM 6      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
               AND RESULTS OF OPERATIONS......................................12

   ITEM 7      FINANCIAL STATEMENTS & INDEX TO FINANCIAL STATEMENTS...........16

   ITEM 8      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
                FINANCIAL DISCLOSURE..........................................16
PART III.

   ITEM 9      DIRECTORS, EXECUTIVE OFFICES AND KEY EMPLOYEES.................17

   ITEM 10     EXECUTIVE COMPENSATION.........................................17

   ITEM 11     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.17

   ITEM 12     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................17

PART IV.

   ITEM 13     EXHIBITS AND REPORTS ON FORM 8-K...............................18

SIGNATURES....................................................................19

EXHIBIT INDEX.................................................................20

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ITEM 1.  BUSINESS

GENERAL OVERVIEW

     Hi-Shear  Technology  Corporation (the "Company")  designs and manufactures
highly reliable electronic and pyrotechnic-separation products for the aerospace
industry,  and  has  adapted  its  technology  to a  select  group  of  emerging
commercial  products.  Its aerospace  products are primarily  used in commercial
space satellites and launch vehicles,  exploration missions, strategic missiles,
advanced fighter aircraft and military systems. The Company's aerospace products
are used by customers ranging from commercial  satellite  manufacturers,  launch
vehicle  assemblers,  NASA,  the U.S.  Government,  foreign  space  agencies and
commercial launch ventures, and others in the aerospace business.

     The Company was founded as a division of Hi-Shear Industries ("HSI") in the
1950's  and was  incorporated  in  Delaware  in  1984.  The  Company  became  an
independent  corporation  in  June  1993  when  it was  acquired  by its  senior
management.  Over the  last  three  years  the  Company  has  designed,  tested,
developed and marketed a select group of commercial products and technology that
utilize both its highly  reliable  aerospace  product  experience and expertise.
Since beginning its commercial product developments,  the Company has introduced
two  commercial  product lines,  the LIFESHEAR  rescue cutters and high security
locks.  The Company has also  developed a low-cost  environmentally  safe liquid
airbag inflator system for use in automobile airbag safety systems.

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

AEROSPACE PRODUCTS

     The Company's  aerospace  products were introduced  originally for the U.S.
space program,  and included power cartridges and separation devices designed to
meet the need for high performance fail-safe devices with the strength to fasten
and hold together two  structures  under  rigorous  conditions  and then provide
quick  release  upon  command.  As the  Company's  separation  devices and power
cartridges  evolved,  the  Company  designed  supporting  electronic  systems to
sequentially fire the separation devices according to pre-programmed parameters.
These  electronic  devices  became a  separate  product  line for use in fighter
aircraft  ejection  seat systems and other  applications.  The  Company's  early
success  with NASA led to  expanded  application  of the  Company's  products to
satellites,  commercial space systems, advanced fighter aircraft and other space
launch vehicles.

MARS PATHFINDER

     Hi-Shear is proud to have provided the successful Mars  Pathfinder  Mission
with its  highly  reliable  hardware.  Sixty  separate  ordnance  events  on the
Pathfinder  spacecraft  utilized the  Company's  aerospace  devices.  Hi-Shear's
separation  system was used to jettison  the Mars Lander from the Cruise  Module
for its landing on the surface of Mars. An  assortment  of the Company's  highly
engineered  cable  cutters  and  separation  nuts  allowed  the back shell to be
released from the Lander. The Company's  initiator products were used to trigger
the  release of the heat  shield  from the Lander  after  entry into the Martian
atmosphere and to initiate the spacecraft's airbags, which cushioned its landing
on Mars. After the landing,  several more events were  successfully  carried out
using our high  technology  aerospace  products.  The  spacecraft's  petals were
opened using a specialized  segmented release product and the Rover was released
on command using the Company's products.  In addition to these functions crucial
to the success of the mission, Hi-Shear products were also used in several other
key applications during the flight landing and exploration.


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     The  Company's  Aerospace  Products  are  separated  into  two  categories:
Ordnance Products and Electronic Products.

     ORDNANCE PRODUCTS

     Historically, Ordnance Products have accounted for a significant portion of
the  Company's  revenues.  Management  believes  that  future  expansion  in its
Ordnance Products will come from growing  requirements for existing products and
also new products  utilizing its  capabilities  in  electronic  fuzing and laser
ignition systems as well as from growth in domestic commercial and foreign space
programs.

     TIMING DEPENDENT SEPARATION DEVICES. Satellites,  missiles, and other space
vehicles require substantial stand-by power to perform certain  timing-dependent
functions  such as separation,  cutting and  deployment.  Hi-Shear's  separation
devices  are   gas-activated   mechanical   devices  and  systems  utilized  for
satellites,  missiles and other space vehicles. These mechanical devices include
separation  nuts,  separation  bolts,  thrusters,  power  cartridges,   wing/fin
actuators,  cutters and pin pullers.  They are designed for USE AS standard high
strength  fastening  hardware  with  the  ability  to  separate  and/or  release
components  or  structures  on  command.  These  devices  provide  the low shock
mechanical  force  required for rapid  separation of structures or components in
multistage launch vehicles,  nose cones and capsules,  launching pads and sleds,
ejection  seats,  booster  rockets,  tanks and  other  jettison  equipment.  For
example,  the Company  supplies NASA with the separation  bolts that are used to
fasten and then release the solid rocket  boosters from the Space Shuttle during
its  launch.  Also,  the  Company's  products  are used in many  satellites  for
deployment  of solar  arrays  and  antenna  booms  and other  devices  (see Mars
Pathfinder, page 1). The Company maintains an active development program for new
designs, including subdued shock deployment systems for the increasingly lighter
commercial satellites used in communications and other commercial applications.

     POWER      CARTRIDGES/INITIATORS.      Hi-Shear      manufactures     power
cartridges/initiators,  including  supplying NASA's standard  initiator for many
years. A power  cartridge/initiator  creates high energy output by igniting fuel
in  a  controlled   chamber.   The  power  cartridges  are  hermetically  sealed
electro-explosive  devices  characterized  by their  compactness,  light weight,
environment  and  corrosive  resistance  and ultra high  reliability.  The power
cartridge's high pressure  combustion energy is used to open satellite doors and
deploy solar panels and to operate the thrusters,  wing/fin  actuators,  cutters
and pin  pullers  found in  commercial  satellites,  launch  vehicles,  and also
missiles  where  motion and force are required for  operating  rotating  missile
fins, and defense system deployments.

     LASER ORDNANCE AND INITIATION SYSTEMS

The Company is a leader in the research and  development  of laser  ordnance and
initiation systems. The Company began its laser research and development in 1988
and has continued to evolve and enhance laser firing units ever since.  The U.S.
Army  has  been   conducting   field   tests   and   program   improvements   on
Company-developed laser firing units since 1993. As the result of this work, the
Army is requesting definitive proposals from Hi-Shear for a breech mounted laser
system for use on howitzer  cannons  throughout  the world.  The  procurement of
ruggedized  laser firing  units for army  howitzer  applications  will result in
military operations  becoming less costly, less manpower intensive,  and produce
less negative  impact on the  environment.  Furthermore,  the  adaptation of the
Company's laser firing units, both domestic and abroad, provides a potential for
considerable sales growth for the many years to come.


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     In addition,  the  considerable  strides made during  fiscal year 1997 have
generated  much interest in applying  laser systems to the space market as well.
Several  proposals  have been made to customers  detailing the  Company's  laser
initiated solutions to satellite,  upgraded shuttle vehicle and unmanned vehicle
launch  systems and payloads.  The laser firing units  provide a consistent  and
precise means for the separation and sequencing of events.  They also save costs
in areas of  logistics  support and clean-up  since a single  firing unit can be
used several times without  replacement.  The Company is partnered  with certain
commercial and military  organizations  to develop laser based  applications for
commercial  uses.  These  opportunities  put the Company at the leading  edge of
laser technology for ruggedized  applications,  utilizes our core competence and
support growth objectives.

     SBIR AWARD

     During the fiscal  year the  Company  received a Phase II,  $730,000  Small
Business  Innovative  Research  (SBIR) award from the Army  Research  Laboratory
(ARL)  to fund its  laser  firing  research  for both  military  and  commercial
purposes.  This  is  a  cost  plus  contract  and  demonstrates  the  customer's
commitment to furthering  Hi-Shear developed  solutions for use in both military
and commercial  applications.  This is a two year effort, and will seek to solve
problems associated with reproducible and reliable ignition of large-caliber gun
propulsion  systems.  The goals of the program are twofold.  The short-term goal
involves the  elimination  of costly heavy metal  primers and their  replacement
with lasers to ignite bags of the propelling charge. The long-term goal involves
the elimination of all conventional primer and igniter materials from the system
and  replaces  them with the use of lasers  focused  through  optical  fibers to
ignite a charge.  Since lasers and associated  technologies have reached a stage
of  maturity  where  they will  replace  conventional  ignition  sources in both
military and  commercial  applications,  the Company is uniquely  positioned  to
benefit  from  this  transition  through  increased  sales.   Furthermore,   the
successful  completion  of the Phase II effort  puts  Hi-Shear  in good shape to
receive a Phase III award that potentially  guarantees sole-source production of
the system for a five-year period.

     ELECTRONIC PRODUCTS

     SEQUENCERS

     The Company remains the main SUPPLIER OF SEQUENCERS FOR THE DOUGLAS ACES II
crew ejection seat now placed in many of the U.S. Air Force's fighter  aircraft,
including the A-10,  B-2, F-15 and F-16.  The Company  originally  developed the
Analog Recovery  Sequencer  ("Analog")  which  electronically  triggers  various
ordnance  events  that deploy  parachutes  and  rockets in  connection  with the
pilot's ejection from fighter  aircraft.  These safety units have a service life
of seven years after which they must be replaced or refurbished. The Company has
received requirement contracts from the U.S. Air Force to refurbish units in the
past and it also constructs new units  according to the Air Force  requirements.
The Company received a U.S. Air Force analog sequencer  requirements contract in
February  1997 with an  estimated  value of up to $20  million  over a five-year
period.  The  Company  also has  received  $.8  million  of  contracts  from the
Government of Israel for its air force analog sequencer needs.

     ELECTRONIC, SAFE, ARM FUZE

     The Company has earned a reputation as a leader in the fuzing  industry for
tactical  and  conventional  military  programs.  The upgraded  Patriot  (PAC-3)
missile system is nearing  completion of the engineering  development phase, and
is entering the low rate initial  production  (LRIP) and  full-scale  production
phases.  The Company  employs a proprietary  initiator that when removed permits
full testing of the system without damaging the integrity of the missile system.
This allows for economical system


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safety  checks,  and also a shelf life estimated at 30 years making it among the
longest in the industry. The Company has combined experience gained on the PAC-3
program with  research and  development  studies and  additional  tests to build
working models for other  applications  to be utilized in further  marketing the
Company's  system.  These  efforts  act to increase  revenues in the  electronic
product line and augment other engineering development efforts to reduce product
functional cost.

     CUSTOMERS AND CONTRACTS

     Most of the  Company's  products  are  generally  used in major  commercial
satellite  ventures,  launch vehicles,  the Space Shuttle or military satellites
and missiles,  and therefore its customers tend to be large  aerospace  prime or
subcontractors.  Over  43% of  the  Company's  revenues  were  accounted  for by
Lockheed Martin (34%) and McDonnell Douglas (9%).  Lockheed Martin now comprises
what was  formerly  over twelve  customers  through  its merger and  acquisition
activities. Lockheed Martin consists of units formerly known as General Dynamics
Space Systems, Sanders, GE Aerospace,  Goodyear Aerospace, Ford Aerospace, Xerox
Aerospace and Defense,  LTV Missile  Systems,  Unisys  Defense,  and Loral.  The
Company's Government customers include the U.S. Air Force, U.S. Navy, U.S. Army,
NASA and other agencies of the government. Sales to the United States Government
as direct sales  represented  23% of revenue in fiscal year 1997. In fiscal year
1998, contract awards and contract  competition phases will continue to vary and
therefore sales  distribution  among customers during any one fiscal year should
not be considered indicative of future sales to those customers.

     In fiscal year 1997 most of the Company's  contracts  were on a fixed price
contract  basis.  In  addition,  the Company has  received a cost plus fixed fee
contract for innovative  research activities from the U.S. Army. Under its fixed
price  contracts,  the Company agrees to perform certain work for a fixed price.
These  fixed  price  contracts  carry  certain  inherent  risks,  including  the
underestimation  of costs,  problems with new  technologies or the occurrence of
adverse changes over the contract period.  Due to economies that can derive over
the  period  of the  contract,  these  fixed  price  contracts  can  also  offer
significant profit potential. Also, Company contracts which evolve from the U.S.
Government or from  subcontractors are subject to termination for convenience by
the U.S. Government.  However, if this termination for convenience is exercised,
the Company  would be  entitled  to payment of costs  incurred up to the date of
termination  and  a  reasonable   termination  fee.  U.S.  Government  contracts
extending beyond one year are also conditioned upon the continuing  availability
of  Congressional  appropriations  because  Congress  usually  appropriates on a
fiscal year basis even though contract  performance may take several years. When
the Company participates as a subcontractor,  and although the prime contractors
are  typically  large  aerospace  companies,  it is  subject  to the  failure or
inability of the prime contractor to perform its prime contract.

     The  Company  obtains  new  business by  marketing  proposals  or ideas for
existing or new products to its customers,  the U.S.  Government,  its agencies,
the armed forces or other prime  contractors,  and by  responding  to applicable
requests for  proposals  ("RFPs")  from  customers  for new products  within the
Company's  area of  expertise.  The  Company's  business is dependent to a large
extent upon its continuing  advanced expertise in niche technical areas, such as
space  separation  devices,  electronic  sequencers,  advanced  fuzing  systems,
pyrotechnics and laser ignition. It continually maintains a fail-safe design and
manufacturing capability for which it has become known in the industry.

     BACKLOG

     The Company's book-to-ship cycle is typical of the long lead times required
for highly engineered,  custom manufactured,  aerospace products. Typically, the
final  negotiation  of the  detailed  contract  requirements  together  with the
procurement of long lead-time  materials,  manufacturing

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processes and testing, takes between 6 and 12 months or more to accomplish. This
results in a fundamental  delay between the addition of a newly awarded contract
to backlog and the  resulting  recognition  of  revenues.  Due to this delay,  a
reduction in contracts  booked  during a  particular  fiscal year will  normally
result in lower revenues for most periods the following fiscal year. Conversely,
an increase in contracts booked will generally result in an increase in revenues
in the  following  periods.  Due to the  shorter  lead-times  of its  commercial
products,  the Company  believes that it will experience a shorter  book-to-ship
cycle on its commercial products than on its aerospace contracts.

     Contracts  undertaken  by the  Company  may  extend  beyond  one year,  and
accordingly,  portions are carried  forward from one year to the next as part of
backlog.  Some of the Company's  contracts  with the U.S.  Government are supply
contracts whose  requirements are primarily based on the  Government's  usage of
products on a periodic  basis.  Because many factors  affect the  scheduling  of
projects,  no  assurances  can be given as to when  revenue  will be realized on
projects  included in the Company's  backlog.  Although backlog  represents only
business  which  is  considered  to be  firm,  there  can be no  assurance  that
cancellations,  funding  changes,  or  scope  adjustments  will not  occur.  The
majority of backlog  represents  contracts under the terms of which cancellation
by the  customer  would  entitle  the  Company  to all or a portion of its costs
incurred and potential fees. See Item 6 MANAGEMENT'S  DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     COMPETITION

     To compete in the aerospace  contracts market,  companies must typically be
involved in the development  stage of the product.  The research and development
for "qualifying" the product pursuant to customer plans and  specifications is a
costly and time consuming process.  Each of the Company's aerospace products are
thoroughly  tested  individually,  as well as tested in conjunction with the end
product into which it is incorporated. After commencement of a given program, it
is very  costly for  competitors  to design new  competitive  components  or for
customers to change suppliers of the components since the customer would then be
required to re-qualify the products.  Therefore,  due to the Company's extensive
financial investment and years of involvement in the development of its products
and the practical barriers to entry into the market by competitors,  competition
is not a critical factor for subsequent  orders. In addition,  local,  state and
federal permits and licenses which are required to manufacture  such pyrotechnic
devices as the Company  produces are difficult to obtain and  therefore  provide
further barriers to entry into the market by competitors.

     As an independent  corporation,  the Company currently qualifies as a small
business  entity  (having  less than $50 million in  revenues  and less than 500
employees)  for the  purposes  of  dealing  with U.S.  Government  contracts  or
programs. Federal regulations encourage small business subcontracting and impose
small business  subcontracting goals on many government programs. The Government
also promotes direct contracting with small businesses.  In many instances, this
requirement is fulfilled by a "small business set aside" provision  whereby only
small businesses may compete for a contract.  An additional benefit derived from
qualifying  as a  small  business  is the  Small  Business  Innovative  Research
("SBIR")  program,  under which a small  business is eligible  for  research and
development awards up to $750,000. (See SBIR Award, page 3.)

COMMERCIAL PRODUCTS

     The LIFESHEAR  cutter was among the first  recipients of development  funds
received from the United States  Government's  Technology  Reinvestment  Program
(TRP). The Company's LIFESHEAR cutters provides for fast, safe, and reliable use
for a wide range of emergency  situations for fire and rescue,  law enforcement,
and military rescue teams. The LIFESHEAR cutter's light weight,  mobility,  ease


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of use, and inexpensive  design will quickly cut though metal car posts,  roofs,
and a variety of  construction  material  in order that a victim can  readily be
extracted from a life threatening  situation.  The LIFESHEAR cutter utilizes the
Company's  proprietary  power cartridges which eliminate the need for cumbersome
hydraulic and electrical  connections,  and compliments the Company's  aerospace
power   cartridges.   The  Company  markets  the  LIFESHEAR   cutter  through  a
well-established  worldwide  distribution  network,  and  maintains  a  customer
service desk in the home office to readily assist customer needs.

     The Company's  European  licensee is currently  delinquent in its mandatory
payments  to  the  Company  pursuant  to its  product  license  agreement.  This
delinquency in payments could have a negative impact on the continuation of that
licensee and in the near term the fees receivable from that licensee. Due to the
interest that has been expressed by other potential  licensees,  the Company may
pursue others to replace the European licensee if they fail to perform.

     During fiscal year 1997 the Company upgraded its  professional  sales force
and its domestic  regional  distributors.  The Company continues to monitor each
distributors'  performance  to assure  the best  distribution  of the  LIFESHEAR
products.

     The  LINESHEAR  cutter  was  designed  to  supply  utility,   construction,
refinery,  and service firms with an industrialized tool for high volume cutting
of large cables, wires, hoses, and reinforcement material. The unique design and
high  tensile  strength  cutting  blade  permits an object to be  severed  while
retaining  its original  shape after the cut.  This is of great benefit to field
crews working to splice or connect cables.  The LINESHEAR market is estimated to
grow  considerably  and open doors to the development of other variations of the
tool to include  crimping,  ramming,  and  spreading.  The  Company is  actively
pursuing this market and has established a sales force and distribution  network
dedicated  to the  success  of  this  industrial  product  line.  The  near-term
concentration  of marketing  efforts will be utility  companies and  refineries,
located in the  Western  region of the United  States.  The Company has plans to
expand the  marketing  of these tools  through  the  remainder  of the U.S.  and
overseas during the next years.  Implementation of the Company's marketing plans
in both  the  rescue  cutters  and  industrial  tools  will  fully  exploit  the
significant markets for these unique proprietary products.

     The  Company  has a  history  of  producing  security  locks  for the  U.S.
Government and the U.S. Navy. The U.S.  Appropriations Act of 1993 increased the
specifications  for high security locks.  High Security locks have a requirement
for precise dialing of combinations,  and to date, the Company has the only lock
that can meet the government specification for this precision dialing.  Hi-Shear
has received a request for quotation for  substantial  quantities of locks to be
purchased  by the U.S.  Government  over the next five years.  The Company  will
concentrate its efforts to capture this future  government  requirement.  During
the next year the Company will organize a  distribution  channel for sale of its
locks  to  potential  commercial  customers  who  require  the  benefit  of  the
government approved lock design.

     AUTOMOTIVE AIRBAG INFLATORS

     The Company has identified the  automotive  airbag market as a major,  fast
growing  market in which  management  believes  its  technology,  if  developed,
marketed  and   manufactured   in  conjunction   with  an   experienced   airbag
manufacturer, can gain market share. In the U.S. market, all trucks and cars are
required to have both driver and passenger side airbags for the 1999 model year.
Forecasters  suggest that the worldwide airbag market by early 2000's automotive
model years could exceed 70 million airbag units, up from 48.7 million for model
year 1996.  When the side-impact and back seat markets are included for airbags,
airbag  production by the early model year 2000 could exceed 100 million  units.
Europe and Asia, where presently only 50% of the cars produced have airbags, are
major markets for airbags as well.  Concurrent with this rise in unit volume has
been a  significant  decrease  in unit  price  for  


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airbag components (sensor, inflator, initiator and bag) and hence, a decrease in
the overall  airbag  price.  This  reduction in unit price can enable a low cost
inflator unit to capture  additional  volume through  increased  market share as
compared to inflator designs that cannot be manufactured for less cost.

     The Company's liquid airbag technology was first announced in November 1994
after the  Company  made the first of its  patent  filings.  The  patent  claims
generally  relate to its liquid  propellant  technology  applied  to  automotive
airbag use,  which the Company  developed in its work in the U.S. space program.
When the technology is applied to an automotive inflator application, the liquid
fuels produce a gas that inflates the airbag on a measurable,  rapid time basis.
The  liquid  fuel and the gas  produced  is benign and  environmentally  safe in
contrast to the toxic gases and materials used in existing  airbag  systems.  In
addition to its original liquid  propellant  airbag patent  application filed in
late 1994, the Company filed another  application  during fiscal year 1996 for a
U.S.  Patent to protect  additional  distinct  designs of the  Company's  liquid
powered airbag inflator systems.

     In late fiscal  1997,  notices  had been  received  from the United  States
Patent  and  Trademark  office  that  patent  claims  have been  allowed  on the
Company's  first  two  patent   applications  for  its  liquid  airbag  inflator
technology.  This notice of allowability  received by the Company  substantially
supports our expanding proprietary rights in the field of liquid airbag inflator
technology.

     The Company has been  continuing to develop its technology to result in the
lowest  cost  inflator  while   maintaining   both  its  high   performance  and
cleanliness.  Also,  the Company has been  designing the inflator for economical
use in the smartest airbag deployment systems.  Although this has acted to delay
the timeline of the Company's  inflator  program,  the  resulting  designs fully
address the cost demands  which have been evident in the inflator  industry over
the last two years.  The Company  believes  its inflator  designs now  addresses
automobile company demands for inflator  performance,  cleanliness,  and a lower
cost airbag inflation system.

     The next  phase of the  liquid  airbag  inflator  program  was to  select a
strategic partner to facilitate the final high volume  manufacturing  design and
to market this low cost airbag  inflator  for use in airbag  safety  systems.  A
strategic partner will be selected based in part on their facilities,  expertise
and  marketing  capabilities  which will be used to  strategically  exploit  the
benefits of this technology in the marketplace.

     The liquid  inflator  technology  to be used in the alliance is  absolutely
clean and particle  free and does not require a  pyrotechnic  igniter  typically
used on traditional solid propellant systems.  This low cost inflator technology
can be marketed for economical use in the smartest  deployment  systems designed
to improve  safety by  adjusting  bag  deployment  based on the  severity of the
accident  and the size and  position of the  occupants.  This liquid  technology
particularly  suits these smart systems in that it can produce a range of faster
and slower,  harder and softer bag deployments on command.  The liquid inflators
will bring about dramatic  reductions in cost and  significant  improvements  in
performance  compared with current  inflator  technology.  These attributes will
enable the Company and its strategic  partners to exploit this unique technology
in the form of superior airbag inflator products at a competitive price.

     The Company  believes that the attributes of its liquid  technology  airbag
inflator  designs and the interest it has received  from  potential  candidates,
will enable the Company to form a strategic partnership for final development of
the airbag product.

                                       7
<PAGE>



RESEARCH AND DEVELOPMENT

     The Company maintains a staff of engineers,  other scientific professionals
and support  personnel  engaged in development of new applications of technology
and  improvement  of  existing  products.   In  addition  to  the  research  and
development performed for specific aerospace and defense contracts and programs,
the Company  invested $.5 million in fiscal year 1997 and $1.4 million in fiscal
year 1996 on Company sponsored research and development.

     During  these two fiscal  years,  prototype  products  were  developed  and
patents  generated  or  applied  for in  several  areas,  including  its  liquid
propellant  automobile  airbag  inflator.  The  Company  has  filed  two  patent
applications  with  the  U.S.  Patent  and  Trademarks  office  for  its  liquid
propellant  automobile  safety  airbag  inflator  technology.  The  Company  has
received  notices from the United States Patent and Trademark Office that patent
claims have been allowed on these first two patent  applications  for its liquid
airbag inflator technology.

     The Company is using its laser  technology to  aggressively  develop unique
commercial products which would be produced by the company in high volumes.

MANUFACTURING AND PRODUCTION

     Production of the Company's products consists of fabricating and assembling
the hardware  components and separately  preparing the pyrotechnic charge in the
power  cartridge.  Production  of the  electromechanical  devices  involves  the
purchase of machined  components,  electrical  switches,  connectors,  seals and
other  materials,  the mechanical  assembly of the components and the testing of
the completed  units.  Throughout the entire process,  strict quality  assurance
controls are  maintained  including  customer and,  where  required,  government
inspection.  After assembly,  the products are  functionally  tested on a sample
basis. The handling and processing of pyrotechnic  materials  requires extensive
experience  and  expertise  as  well as the  proper  equipment,  facilities  and
permits.  The Company has been safely  handling and  processing  these fuels and
oxidizers for over thirty years.

INTELLECTUAL PROPERTY

     The policy of the  Company is to apply for  patents  and other  appropriate
statutory  protection when it develops new or improved  technology.  The Company
has  been  awarded  over 40 U.S.  patents  as well as  numerous  trademarks  and
copyrights.  The Company also relies on the laws of unfair competition and trade
secrets to protect its  unpatented  proprietary  rights.  The  Company  also has
several existing patents related to certain  technologies  developed as a result
of contracts with or for the U.S. Government.  These patents, issued as a result
of contracts with or for the U.S. Government,- share the rights to these patents
with the U.S. Government.

     The  Company  has filed two patent  applications  with the U.S.  Patent and
Trademarks  office for its liquid  propellant  automobile safety airbag inflator
technology.  The Company has received  notices from the United States Patent and
Trademark  Office that patent claims have been allowed on these first two patent
applications for its liquid airbag inflator technology.

     The Company  requires  all  employees  to execute an  Assignment  of Rights
agreement which assigns to the Company any  intellectual  property  developed by
the employee  during the course and scope of the employment.  In addition,  each
key employee has entered into an agreement with the Company agreeing,  to regard
and  preserve  as  confidential  all  information  pertaining  to the  Company's
business obtained by the employee as a result of employment with the Company.


                                       8
<PAGE>

     REGULATION, LICENSES AND PERMITS

     The ability of the Company to pursue its business  activities  is regulated
by various  agencies  and  departments  of the U.S.  Government.  The  Company's
Government contracts are subject to regular audit and periodic review and may be
modified,  increased  or  reduced  in  the  event  of  changes  in  governmental
requirements or policies,  Congressional appropriations and program progress and
scheduling. The Company is also required to obtain the necessary export licenses
from  the  U.S.   Department  of  Commerce  to  export  products  and  technical
information. In its commercial businesses,  various U.S. and foreign regulations
may  apply,  including  necessary  permits  to import  power  cartridges  into a
country.

     EMPLOYEES

     As of July  31,  1997  the  Company  had 135  employees  of  which  118 are
full-time  employees,  the majority of whom are engineers and  technicians.  The
Company's  success depends on its ability to attract and retain highly qualified
personnel.  None of the  employees  are  represented  by a labor  union  and the
Company has no knowledge  of any labor  organizing  activities.  The Company has
never suffered a work stoppage and considers its relations with its employees to
be excellent.

ITEM 2. PROPERTIES

     The Company's executive offices are located in Torrance,  California,  in a
75,000  square  foot  building   organized  for   electronic   and   pyrotechnic
manufacturing  and assembly  operations.  Approximately  25,000  square feet are
devoted  to  administrative   offices,   engineering  design  activities  and  a
prototyping  facility.  The  remaining  50,000  square  feet  are  dedicated  to
manufacturing  and quality  assurance  operations.  The  manufacturing  area has
approximately  20,000  square  feet  available  for  expansion  for new or added
product  lines.  The Company has  negotiated  a seven year lease of the Torrance
facility  which  provides  for pre-set  lease rates and expires on November  30,
1999. The lease  provides the Company with renewal  options and a right of first
refusal on the sale of the facility.

     The Company also leases a 16 acre facility in Saugus, California,  which is
used to store large amounts of base mixes.  The main building on the facility is
an 8,000  square foot  manufacturing  and assembly  area which  includes a 2,500
square foot blending and loading area.  The Company  leases the Saugus  property
from HSI Properties, Inc. pursuant to a lease which expires on May 31, 1999. The
rent is fixed for a period of three  years and then  increases  each June 1st by
four percent of the rent last in effect.  The Company has a three year option to
purchase the property for $1.0 million.  After June 1, 1996,  the purchase price
increases  each June 1st by four  percent  of the  purchase  price  then last in
effect.

     The Company  believes  that its current  facilities  in Torrance and Saugus
will adequately  support its operations for the foreseeable  future.  Management
believes that each of the properties is adequately covered by insurance.



                                       9
<PAGE>



ITEM 3. LEGAL PROCEEDINGS

     The Company is  currently a party to several  disputes  which may result in
litigation.  After consulting with counsel, it is the opinion of management that
ultimate liability, if any, with respect to these disputes, will not be material
to the Company.

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

     None




                                       10

<PAGE>



                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

<TABLE>
<CAPTION>

                                            HIGH                          LOW
                                            ----                          ---
<S>                                       <C>                           <C>
  Fiscal Year 1998 Ending May 31, 1998

    1st Quarter  (1)                       6-1/2                         4-7/8

  Fiscal Year 1997 ended May 31, 1997

     4th  Quarter                          7                             5
     3rd Quarter                           7-1/2                         5-1/4
     2nd Quarter                           6-3/4                         5
     1st Quarter                           7-1/2                         4-3/8

  Fiscal Year 1996 ended May 31, 1996

    4th Quarter                           10                             6-1/4
    3rd Quarter                            9-7/8                         5-1/4
    2nd Quarter                           15                             8-1/16
    1st Quarter                           13-1/4                         9-5/8
</TABLE>

     (1) TRADING ACTIVITY THROUGH JULY 31, 1997.

     The  Company  has never paid a cash  dividend  and the  payment of any cash
dividends  in the  future  are  subject  to the  terms of the  Company's  credit
facility (see note 6, Financial  Statements) and will be determined by the Board
of Directors in light of the conditions  then existing,  including the Company's
earnings,  financial requirements and conditions,  opportunities for reinvesting
earnings, business conditions and other factors.

     The  number  of  holders  of  record  of the  Company's  Common  Stock  was
approximately  275 and the estimated number of beneficial  shareholders was 1500
as of July 31, 1997.


                                       11

<PAGE>



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

GENERAL OVERVIEW

     Hi-Shear  Technology  Corporation (the "Company")  designs and manufactures
highly reliable electronic and pyrotechnic-separation products for the aerospace
industry,  and  has  adapted  its  technology  to a  select  group  of  emerging
commercial  products.  The  Company's  aerospace  products are used by customers
ranging from major aerospace companies,  NASA and the U.S. Government to foreign
space  agencies and  governments.  Its aerospace  products are primarily used in
commercial space satellites and launch vehicles,  exploration missions, advanced
fighter  aircraft,  missiles and  military  systems.  The Company has  designed,
tested and  developed a select  group of  commercial  products  that utilize its
highly reliable  aerospace  technology.  Since beginning its commercial  product
developments,  the Company has completed and introduced  two commercial  product
lines,  the LIFESHEAR  rescue cutters and high security  locks.  The Company has
also developed a low-cost environmentally safe liquid airbag inflator for use in
automobile airbag safety systems.

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

AEROSPACE PRODUCTS

     The Company's aerospace products were introduced  originally for use in the
U.S.  space  program,  and included  power  cartridges  and  separation  devices
designed  to meet the need  for  fail-safe  high  performance  devices  with the
strength to fasten and hold together two structures  under  rigorous  conditions
and then provide quick release upon command. As the Company's separation devices
and power  cartridges  evolved,  necessary  supporting  electronic  systems were
designed by the Company.  Electronic  sequencing  units designed to sequentially
fire separation devices according to pre-programmed parameters, became a product
line for, among other applications,  fighter aircraft ejection seat systems. New
products  from  research  and  development  work  conducted  by the  Company  in
pyrotechnic  laser  ignition  have been  developed  and include  laser  ignition
systems  for use on U.S.  Army  Howitzers  and an  Electronic,  Safe Arm  Fuzing
systems that is now being used on Loral's PAC-3 Upgraded  Missile  program.  The
Company's  aerospace  products  are  separated  into  two  categories:  Ordnance
Products and Electronic Products.

     Demand for the  Company's  aerospace  products is driven  primarily  by the
number of satellite launches,  space exploration missions,  and the requirements
of the U.S.  Government,  which are realized through a prime contractor or other
subcontractor.  The  aerospace  contracts  it receives  generally  provide for a
specific  number of deliveries  over a period of time. The Company  accounts for
these contracts on the percentage of completion basis. The percentage  completed
is determined  for most  contracts as units are shipped rather than as costs are
incurred.  Accordingly,  the results for any particular  accounting  period,  or
period to period  comparisons,  may be  significantly  affected by the timing of
production deliveries and may not be indicative of future operating results.



                                       12
<PAGE>



COMMERCIAL PRODUCTS

     The Company is committed  to the  development  of products  for  commercial
applications.  It has incurred  substantial expenses throughout its organization
related to the  development  of new  commercial  products  that  complement  and
utilize both its aerospace and its defense technology.  The Company has marketed
both its high  security  locks and its rescue  cutter and has  developed a third
commercial  product,  an advanced  low cost liquid  airbag  inflator  for use in
automobile airbag safety systems.


RESULTS OF OPERATIONS

FISCAL YEAR ENDED MAY 31, 1997 COMPARED WITH FISCAL YEAR ENDED MAY 31, 1996

     Revenues  were $17.3  million in 1997 as compared to $10.5 million in 1996.
The 65% increase in revenues  was the result of an increased  new order rate for
commercial  aerospace  products.  These orders were received early enough during
the fiscal year to result in increased  volumes of products being shipped in the
fiscal year.  Orders of $9.6 were received during the first six months of fiscal
1997,  an  increase  of 53% over the first six months of 1996.  The  increase in
revenues for the year also included revenues of $.4 million from the rescue tool
licensing fees and the sale of LIFESHEAR products.

         Orders  received  during the fiscal year  increased 52% over the orders
received  in the prior year.  In fiscal year 1997 the Company was awarded  $20.1
million in new aerospace  contracts  plus the long term portion of the five year
$20 million analog  sequencer  contract,  as compared to $13.2 million in fiscal
year 1996. This dramatic  increase in contracts  awarded during fiscal year 1997
resulted in an ending backlog of $16.1 million  compared to $15.8 million at the
end of fiscal 1996 despite the substantial  increased shipping volume during the
year. The increase in contract  awards granted to the Company during fiscal year
1997 was primarily attributable to the increased demand for commercial aerospace
products. The surge in planned commercial satellite launches and launch vehicles
together  with  government  exploration  and  military  activities,  drove  this
increased demand for the Company's aerospace products.

     Gross  profits  increased  threefold  to $4.2  million  averaging  24.3% of
revenues as  compared to $1.4  million or 13.5% of revenues in fiscal year 1996.
This  rise in gross  profitability  resulted  from a higher  volume  of  product
shipments and the related revenues to which the Company's overhead base could be
allocated as well as improved  effectiveness  in the use of labor and materials.
In addition the Company took a one time charge in the prior year in  recognition
of the exit from a business activity.

     Selling,  General  and  Administrative  expenses,  excluding  research  and
development,  totaled  $2.6  million in fiscal year 1997,  the same as in fiscal
year 1996. These general and administrative expenses remained constant despite a
65%  increase in revenues  due to  continued  efforts of  management  to improve
corporate efficiencies and reduce administrative  expenses. The Company believes
it will continue to improve on these  efficiencies  by using its new  accounting
and management information system to improve its material control and production
reporting in both its aerospace and commercial  product lines. This software has
been  installed  and is  currently  being fully  integrated  into the  Company's
business system.

     Research and Development  expenses were $.5 million for fiscal year 1997 as
compared to $1.4  million in fiscal year 1996.  The amount  spent in fiscal year
1997 is less  than that  spent in  fiscal  year  1996  because  the  prior  year
expenditures included large development expenses for the accelerated development
of its liquid airbag  inflator  system and the  LINESHEAR and LIFESHEAR  product
lines.  These


                                       13
<PAGE>

important new product efforts  continued into fiscal year 1997,  however because
of early successes,  they did not generate as large an expense as in fiscal year
1996.   Management  believes  the  enhancements  to  performance  and  technical
advantages  made through these  research and  development  efforts in both years
should result in enhanced airbag inflator  designs at lower  manufacturing  cost
and in higher  performing  commercial  cutters for new industrial  applications.
These  specialized  cutters are being marketed to the electric utility and other
industries that have unique cutting  requirements.  LINESHEAR can  substantially
reduce the time and expense compared to current cutting methods.

     Amortization  of the excess of net assets  acquired over purchase price was
$138,000  for fiscal year 1997  compared  to $302,000 in fiscal year 1996.  This
decrease in  amortization  was the result of the write-off of $1,150,000 in 1996
related  to the  Company's  exit from a business  activity.  (See Note 11 to the
financial statements.)

     The  Company  had an  operating  profit of $1.3  million as  compared to an
operating loss of $1.1 million for fiscal year 1996.  This operating  profit was
the result of a  substantial  increase  in volume and  revenue  from  commercial
aerospace  orders coupled with lower  general,  administrative  and  development
expenses.

     Net  interest  expense  for the  fiscal  year  1997 was  $274,000  which is
comparable  to the  $249,000  incurred in fiscal  year 1996.  During  1997,  the
increased revenue generated a higher level of average accounts receivables to be
financed during the period.

     The Company had a net income,  after  interest  and income  taxes,  of $1.0
million for fiscal  year 1997 as compared to a net loss of $1.3  million for the
prior fiscal year 1996.

FOURTH QUARTER RESULTS

         The  Company  had  revenues  of $6.5  million  and a net  income of $.4
million for the fourth  quarter of fiscal year 1997 compared to revenues of $3.0
million for the fourth  quarter of fiscal year 1996 which resulted in a net loss
for that period. The fiscal year 1997 fourth quarter increase in revenue and net
income  is  primarily  the  result of  increased  commercial  aerospace  orders,
resulting in higher shipments,  and lower administrative expenses as compared to
the fourth quarter of fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash of $.9 million was provided by operations  during fiscal year 1997
compared to the $1.8  million  used in  operations  for fiscal  year 1996.  This
improvement  resulted from an increase in  profitability  and a reduction of net
inventory.  The  Accounts  Receivables  balance was higher at year end than last
year due to the growth of shipments made in the fourth quarter. Also included in
the positive  cash flow for the year were  insurance  proceeds of $173,000 for a
business  interruption  claim. During the year, the Company invested in $570,000
of capital expenditures primarily for additions and improvements to its computer
system, automated test equipment and capital tooling.

     At May 31,  1997 the Company  had  reduced  its total  inventories  to $2.6
million  from  $3.8  million  at May 31,  1996  while  significantly  increasing
manufacturing  activity during the year. At year-end the Company had $692,000 in
commercial  inventory,  $298,000 in  unamortized  deferred costs and $220,000 of
tooling   dedicated  to  the  LIFESHEAR   product  line.   Management  plans  to
aggressively  increase the  distribution of its commercial  products to increase
sales and accelerate the inventory turn-over rate. The full realization of these
plans is dependent upon the Company's  ability to carry out the strengthening of
its  commercial  distribution  to fully  exploit both the rescue and  industrial
market for these products.


                                       14
<PAGE>

     In the normal  course of  business,  the  Company  submits  claims for cost
reimbursement  related to contract  requirements,  changes not yet  incorporated
into its  contract or other  contract  costs in  negotiation.  These  claims for
reimbursement result from changes to specifications, additional work required to
be performed by the Company to satisfy customer  requests beyond contract scope,
failure of customer designed  components and adjustments to contract pricing due
to  the  customer  reducing  unit  quantities.   May  31,  1997,  the  Company's
outstanding  claims totaled  $905,000 and are recorded as unbilled  receivables.
Although  there is no  guarantee  that  all  claims  will be  fully  reimbursed,
management  believes that the history of  reimbursement  for claims supports the
Company's claim submittal procedures.

     The Company's  primary  source of capital  during the year was its positive
operating  cash flow. The Company also continues to maintain a $3.5 million line
of credit with a  commercial  bank and pays market  interest on the  outstanding
balance.  As of May 31, 1997, there is $2.5 million  outstanding on this line of
credit.

     The Company  believes that its net working  capital of $3.7 million and its
lines of  credit  will be  sufficient  for its  operations  for the  foreseeable
future. Management believes it will be able to renew its annual credit agreement
under  terms  and  conditions  that  will  meet  the  Company's  needs  for  the
foreseeable  future.  The Company  expects that  successful  development  of its
liquid airbag inflator system for commercial high volume  production may require
additional capital. Although there are no assurances,  the Company believes that
any capital required for such production could be met through either  additional
debt or equity financing.

     ACCOUNTING PRONOUNCEMENTS TO BE IMPLEMENTED

     The Financial  Accounting  Standard  Board (FASB) has issued  Statement No.
128,  "EARNINGS PER SHARE",  which  supersedes APB Opinion No. 15. Statement No.
128 requires the  presentation  of earnings per share by all entities  that have
common  stock  or  potential  common  stock,  such  as  options,   warrants  and
convertible securities outstanding that trade in a public market. Those entities
that have only common stock  outstanding  are required to present basic earnings
per share amounts. Diluted per share amounts assume the conversion,  exercise or
issuance  of all  potential  common  stock  instruments  unless the effect is to
reduce  a  loss  or  increase  the  income  per  common  share  from  continuing
operations.  All entities  required to present per share amounts must  initially
apply Statement No. 128 for annual and interim periods ending after December 31,
1997.  Earlier  application is not permitted.  The adoption of Statement No. 128
would have no effect on reported earnings (loss) per share.

     The FASB has also issued Statement No. 131  "DISCLOSURES  ABOUT SEGMENTS OF
AN  ENTERPRISE  AND  RELATED  INFORMATION."   Statement  No.  131  modifies  the
disclosure  requirements  for  reportable  segments  and is  effective  for  the
Company's year ending May 31, 1999. The Company has not determined the effect of
the adoption of this Statement would have on the Company's reported segments.

                                       15


<PAGE>



ITEM 7.  FINANCIAL STATEMENTS

                          INDEX TO FINANCIAL STATEMENTS

                                                                      PAGE
                                                                      ----
Independent Auditor's' Report       .................................. F-1

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

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

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

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

Notes to Financial Statements......................................... F-6-19


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

     On June 7, 1996,  the  Company  filed a form 8-K which  disclosed  that the
Board of Directors  approved the  engagement  of McGladrey & Pullen,  LLP as the
Company's  independent  accountants.  (McGladrey & Pullen, LLP has conducted the
audit of the Company's  financial statement for the years ended May 31, 1996 and
1997.)  McGladrey  and Pullen,  LLP replaced the  accounting  firm of Deloitte &
Touche LLP, who had been engaged to audit the Company's financial statements for
the  fiscal  years  ended  May 31,  1993  through  May 31,  1995.  A  change  in
accountants  had been  recommended by the Company's Audit  Committee.  The audit
reports  provided  by  Deloitte & Touche LLP for the fiscal  years ended May 31,
1993 through May 31, 1995 did not contain any adverse opinion or a disclaimer or
opinion nor was any report  qualified  in any  respect,  and  management  of the
Company knows of no past disagreements between the Company and Deloitte & Touche
LLP on any matter of accounting  principles or  practices,  financial  statement
disclosure or auditing, scope or procedure.




                                       16

<PAGE>





                          INDEPENDENT AUDITOR'S REPORT




To the Board of  Directors
Hi-Shear Technology Corporation
Torrance, California


We  have  audited  the  accompanying   balance  sheet  of  Hi-Shear   Technology
Corporation  (The  "Company") as of May 31, 1997, and the related  statements of
operations, stockholders' equity and cash flows for the years ended May 31, 1997
and 1996.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.


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


In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of the Company as of May 31, 1997,
and the results of its operations and its cash flows for the years ended May 31,
1997 and 1996 in conformity with generally accepted accounting principles.





                                             McGladrey & Pullen, LLP



Anaheim, California
July 21, 1997

                                      F-1
<PAGE>



HI-SHEAR TECHNOLOGY CORPORATION

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


BALANCE SHEET
MAY 31, 1997
ASSETS (NOTE 6)
--------------------------------------------------------------------------------

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

Current Assets
   Cash                                                       $         19,000
   Accounts receivable (Note 3)                                      6,307,000
   Inventories (Note 4)                                              2,633,000
   Prepaid expenses and other current assets                            50,000
                                                                   -----------
         TOTAL CURRENT ASSETS                                        9,009,000

Equipment, net (Note 5)                                              1,491,000

Other Assets, net
   Deferred costs                                                      298,000
   Other intangible assets                                             115,000
                                                                   -----------

                                                              $     10,913,000
                                                          ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------

Current Liabilities
   Note payable to bank (Note 6)                              $      2,511,000
   Current portion of long-term debt (Note 6)                          128,000
   Accounts payable                                                  1,763,000
   Accrued payroll and related costs                                   423,000
   Other accrued liabilities (Note 8)                                  456,000
                                                                    ----------
         TOTAL CURRENT LIABILITIES                                   5,281,000

Long-Term Debt (Note 6)                                                 16,000
                                                                   -----------

         TOTAL LIABILITIES                                           5,297,000
                                                                     ---------

Excess of Net Assets Acquired Over Purchase Price (Note 11)            829,000
                                                                   -----------

Commitments and Contingencies (Notes 3,4, 8 and 9)

Stockholders' Equity (Notes 6 and 10)
   Preferred stock, $1.00 par value; 500,000 shares authorized:
         no shares issued
   Common stock, $.001 per value; 25,000,000 shares authorized;
         6,636,000 shares issued and outstanding                         7,000
   Additional paid-in capital                                        7,001,000
   Accumulated deficit                                             (2,221,000)
                                                                    ----------
         Total stockholders' equity                                  4,787,000
                                                                    ----------
                                                              $     10,913,000
                                                             =================
</TABLE>

See Notes to Financial Statements 

                                      F-3
<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1997 AND 1996

                                                           1997                       1996
---------------------------------------------------------------------------------------------------

<S>                                                     <C>                         <C>          
Revenues (Notes 2, 3, 4 and 12)                      $  17,325,000               $  10,489,000

Cost of Revenues (Note 4)                               13,122,000                   9,072,000
                                                     -----------------------------------------

         GROSS PROFIT (NOTE 11)                          4,203,000                   1,417,000

Selling, General and Administrative Expenses             2,560,000                   2,566.000

Research and Development Expenses                          478,000                   1,385,000

Amortization of Excess of Net Assets Acquired
    Over Purchase Price                                   (138,000)                  (302,000)

Write-Off of Excess of Net Assets Acquired Over
    Purchase Price Attributed to Exited Line of Business
    (Note 11)                                                 -                    (1,150,000)
                                                     -----------------------------------------

         OPERATING INCOME (LOSS)                         1,303,000                 (1,082,000)

Interest Income                                              1,000                      18,000

Interest (Expense)                                        (272,000)                   (269,000)
                                                     -----------------------------------------

         INCOME (LOSS) BEFORE PROVISION FOR
            INCOME TAXES                                 1,032,000                  (1,333,000)

Provision for Income Taxes (Note 7)                         11,000                          -
                                                     -----------------------------------------

         NET INCOME (LOSS)                           $   1,021,000              $   (1,333,000)
                                                     ==========================================

Net Income (Loss) Per Common and Common
   Equivalent Share                                  $        0.15              $        (0.20)
                                                     ==========================================


Weighted Average Number of Common and Common
   Equivalent Shares Outstanding During the Year         6,631,000                   6,594,000
                                                     ==========================================
</TABLE>


See Notes to Financial Statements.
                                      F-4
<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                 Additional                               Total
                                       Common Stock               Paid-In          Accumulated        Stockholders'
                               ------------------------------
                                    Shares         Amount         Capital            Deficit             Equity
-----------------------------------------------------------------------------------------------------------------------
<S>          <C> <C>                  <C>           <C>          <C>              <C>                    <C>          
Balance, May 31, 1995                 6,527,000     $  7,000     $   6,261,000    $   (1,909,000)        $   4,359,000

   Exercise of stock
      options                            24,000       -                123,000  -                              123,000

   Exercise of stock
       warrants                          77,000       -                593,000  -                              593,000

   Net (loss)                         -               -              -                (1,333,000)           (1,333,000)
                               ----------------------------------------------------------------------------------------

Balance, May 31, 1996                 6,628,000        7,000         6,977,000        (3,242,000)            3,742,000

   Exercise of stock
       options                            8,000       -                 24,000  -                               24,000

   Net income                         -               -              -                  1,021,000            1,021,000
                               ----------------------------------------------------------------------------------------

Balance, May 31, 1997                 6,636,000     $  7,000      $  7,001,000     $  (2,221,000)         $  4,787,000
                               ========================================================================================
</TABLE>

See Notes to Financial Statements.

                                      F-5

<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>

                                                                                     1997                 1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                <C>              
Cash Flows from Operating Activities
    Net Income (loss)                                                      $       1,021,000  $     (1,333,000)
    Adjustments to reconcile net income (loss) to net cash
       provided by (used in) operating activities:
       Depreciation and amortization                                                 541,000            473,000
       Amortization and write-off of excess of net assets
          acquired over purchase price                                             (138,000)        (1,452,000)
       Changes in operating assets and liabilities
          Accounts receivable                                                    (1,985,000)            476,000
          Inventories                                                              1,172,000          (134,000)
          Prepaid expenses and other assets                                         (42,000)            130,000
          Accounts payable                                                           338,000             17,000
          Accrued payroll and related costs                                         (57,000)           (29,000)
          Other accrued liabilities                                                    7,000             70,000
                                                                            ------------------------------------

          NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                        857,000        (1,782,000)
                                                                            ------------------------------------

Cash Flows from Investing Activities, purchase
    of equipment                                                                   (571,000)          (519,000)
                                                                            ------------------------------------
Cash Flows from Financing Activities
    Proceeds from note payable to a bank                                           4,375,000          2,636,000
    (Payments) on note payable to a bank                                         (4,500,000)        (2,000,000)
    Proceeds from stock options and warrants exercised                                24,000            716,000
    Principal payments on long-term debt                                           (242,000)          (223,000)
                                                                            -----------------------------------

          NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                      (343,000)          1,129,000
                                                                            -----------------------------------

          NET (DECREASE) IN CASH                                                    (57,000)        (1,172,000)

Cash, beginning of period                                                             76,000          1,248,000
                                                                            -----------------------------------

Cash, end of period                                                        $          19,000  $          76,000
                                                                           ====================================

Supplemental Disclosure of Cash Flow information
    Cash paid during the year for interest                                 $         274,000  $         249,000
                                                                           =====================================

    Cash paid during the year for income taxes                             $           8,000  $              -
                                                                           =====================================
</TABLE>
See Notes to Financial Statements.

                                      F-6
<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

NOTE 1.    NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS:

The Hi-Shear Technology Corporation ("HSR" or the "Company") began as a division
of Hi-Shear Industries, Inc. ("HSI") in the 1950's. On June 1, 1993, the Company
was effectively acquired by two members of HSR's senior management and conducted
an initial public offering of its shares in March 1994. The Company is listed on
the American Stock Exchange (symbol "HSR").

The  Company  is engaged in the  design  and  manufacture  of power  cartridges,
separation devices,  electronic  sequencers and other special components used by
the  aerospace  industry,  the military and NASA.  HSR's  aerospace  and defense
products are procured under both long and short-term  contracts with agencies of
the  United  States   Government  and  numerous   aerospace  and  defense  prime
contractors and subcontractors.  The Company is dependent on the continuation of
government  sponsored  military and aerospace  programs in order to maintain its
revenues.

To compete in the government  aerospace and defense contracts market,  companies
must typically be involved in the development stage of the product. The research
and development for  "qualifying"  the product  pursuant to government plans and
specifications  is a costly and time  consuming  process.  Each of the Company's
aerospace  and defense  products are tested  individually,  as well as tested in
conjunction  with  the  end  product  into  which  it  is  incorporated.   After
commencement of a given program, it is very costly for competitors to design new
competitive  components or for customers to change  suppliers of the  components
since the  customer  would  then be  required  to  requalify  the  products.  In
addition,  local,  state and federal  permits and licenses which are required to
manufacture  such  pyrotechnic  devices as the Company produces are difficult to
obtain.  For new government  contracts,  the Company's success will be dependent
upon its ability to compete  with other  companies,  some of which have  greater
financial and other resources than the Company.

The  Company   purchases   the   components   for  its  products   from  various
subcontractors.  While  some  of the  components,  such  as  flexible  circuits,
mechanical parts,  connectors,  seals and certain chemicals,  are purchased from
single suppliers,  they are generally available from several other sources. Most
components are manufactured specifically for the Company to its specifications.


The Company continues to diversify into commercial products, while continuing to
pursue its aerospace and defense business segment.  In this regard,  the Company
has completed the product development and has begun commercial production of the
LIFESHEAR  emergency  rescue cutting tool and LINESHEAR  cutter  (Cutters) and a
high security lock. The sales volumes of these new commercial  products have not
been significant;  however,  significant investments in inventory,  tooling, and
pre-production  costs for the Cutter have been made.  The  realization  of these
investments  is dependent  upon the Company's  ability to establish a market for
these  products.  In  addition,  the  Company has  developed a third  commercial
product,  an airbag inflator system. An initial patent  application for a liquid
inflator  was  filed by the  Company  in  November  1994,  with a second  patent
application  covering  expanded claims and improvements  filed in July 1996. All
costs related to the development of the airbag inflator has been expensed.


                                       F7
<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

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

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

NEW ACCOUNTING PRONOUNCEMENTS:

The Financial  Accounting  Standard  Board (FASB) has issued  Statement No. 128,
"EARNINGS PER SHARE",  which  supersedes  APB Opinion No. 15.  Statement No. 128
requires the presentation of earnings per share by all entities that have common
stock or potential  common  stock,  such as options,  warrants  and  convertible
securities  outstanding that trade in a public market.  Those entities that have
only common stock  outstanding  are required to present basic earnings per share
amounts.  Diluted per share amounts assume the conversion,  exercise or issuance
of all potential common stock instruments  unless the effect is to reduce a loss
or increase the income per common share from continuing operations. All entities
required to present per share amounts must initially apply Statement No. 128 for
annual and interim periods ending after December 31, 1997.  Earlier  application
is not  permitted.  The  adoption  of  Statement  No. 128 would have no material
effect on reported earnings (loss) per share.

The FASB has also issued  Statement No. 131  "DISCLOSURES  ABOUT  SEGMENTS OF AN
ENTERPRISE AND RELATED  Information."  Statement No. 131 modifies the disclosure
requirements  for  reportable  segments and is effective for the Company's  year
ending May 31, 1999.  The Company has not  determined the effect of the adoption
of this Statement would have on the Company's reported segments.

USE OF ESTIMATES:

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of 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.

REVENUE RECOGNITION:

Sales of commercial  products are  recognized as deliveries  are made.  Contract
revenues are derived principally from fixed-price  contracts and are recorded as
deliveries  are  made  and  milestones  achieved   (units-of-delivery   type  of
percentage-of-completion   method  of   accounting).   Revenues   from   certain
fixed-price development contracts are recorded as costs are incurred and include
estimated  earned profits  calculated on the basis of the  relationship  between
costs   incurred   and   total   estimated   costs    (cost-to-cost    type   of
percentage-of-completion   method  of   accounting).   Fixed-price   development
contracts  generally provide for the delivery of a small number of units after a
lengthy  period  of time over  which a  significant  amount  of costs  have been
incurred.

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

                                      F-8

<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

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

REVENUE RECOGNITION: (CONTINUED)

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

Included in 1997 revenues is approximately $173,000 related to payments received
on a business interruption insurance policy in excess of direct costs incurred.

ACCOUNTS RECEIVABLE:

Included are amounts billed and currently due from customers  under all types of
contracts, amounts earned but unbilled (primarily related to contracts accounted
for  under  the  cost-to-cost   type  of   percentage-of-completion   method  of
accounting) and amounts retained pending contract completion.

INVENTORIES:

Inventory  costs for the defense  and  aerospace  segment  relate  primarily  to
production  cost of contracts in process under  fixed-price  type  contracts and
represent accumulated contract costs less the portion of such costs allocated to
revenue  recognized  on  units  delivered  or  progress  completed.  Accumulated
contract costs include direct labor,  material  costs,  factory and  engineering
overhead,  and production  tooling costs. In accordance with industry  practice,
such  inventoried  costs are  classified as a current asset and include  amounts
related to contracts  having  production  cycles longer than one year.  Selling,
general and administrative costs are charged to expense as incurred.


Commercial  inventory is stated at the lower of cost  (first-in,  first-out)  or
market and  represents  direct labor,  materials and overhead  costs incurred in
production.

                                      F-9

<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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


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

EQUIPMENT:

Equipment is stated at cost. The Company also  capitalizes  certain material and
labor incurred in connection with the  construction of assets.  Depreciation and
amortization are charged against income using the straight-line  method over the
estimated  useful service lives of the related assets.  The principal lives used
in determining depreciation and amortization rates are as follows:

--------------------------------------------------------------------------------
       Machinery and equipment          5 to 10 years
       Tooling                          5 years
       Furniture and fixtures           10 years
       Leasehold improvements           Shorter  of lease term or useful
                                        life


OTHER ASSETS:

Deferred costs consist of capitalized  pre-production  costs, net of accumulated
amortization  of $238,000  related to the production of the Company's  LIFESHEAR
emergency rescue and LINESHEAR  cutting tools.  These costs are amortized over a
five-year  period.  Other  intangible  assets  consist of the cost for  acquired
patents and are amortized  over the lesser of the expected  economic life or the
17 year life of the patents.

EXCESS OF NET ASSETS ACQUIRED OVER PURCHASE PRICE:

In June 1993, the total purchase price of Hi-Shear  Technology  Corporation  was
allocated to the Company's assets and liabilities based upon their relative fair
values at the date of the  acquisition  using the purchase method of accounting.
However, since the purchase price was less than the fair value of the net assets
acquired,  the difference  was applied to reduce all noncurrent  assets to zero,
principally  equipment  and  leasehold  improvements,  with  the  balance  being
accounted  for as  excess of net  assets  acquired  over  purchase  price  (also
referred to as negative goodwill) which is generally being amortized into income
over a ten-year period. The normal amortization of negative goodwill amounted to
$138,000 and $302,000 in 1997 and 1996, respectively (Note 11).

INCOME TAXES:

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

                                      F-10

<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

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

RESEARCH AND DEVELOPMENT:

Company-sponsored  research  and  development  costs are  charged to expenses as
incurred.

NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:

Primary income (loss) per share is computed on the basis of the weighted average
number of shares of common stock plus common stock  equivalents  (stock options)
outstanding  during the year.  Common  stock  equivalents  are excluded if their
effect is  antidilutive.  Fully  diluted  income  (loss) per common share is not
presented since such dilution is not material.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

The  method  and  assumptions  used to  estimate  the fair  value  of  financial
instruments were:  long-term debt: the estimated fair value,  which approximates
the carrying value,  is based on interest rates that are currently  available to
the Company for issuance of debt with similar  terms and  remaining  maturities;
note payable to bank:  the  carrying  amount  approximates  fair value since the
interest rate changes with the market interest rate.

CASH AND CASH EQUIVALENTS:

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

The Company  periodically  has cash on deposit  with its bank which  exceeds the
insurance limits of the FDIC.


NOTE 2.   MAJOR CUSTOMERS

The Company  derives a major portion of its revenues  directly from  departments
and agencies of the United  States  Government  and certain  large United States
aerospace and defense contractors.  Sales to these major customers, which are in
excess of 10% of total sales, consist of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                       1997                   1996

<S>                                     <C>                   <C>
United States Government                23%                   21%
Lockheed Martin                         34%                   33%
McDonnell Douglas                        *                    11%

</TABLE>

*For the year ended May 31, 1997,  McDonnell Douglas represented revenue of less
than 10% of total Company revenue.


                                      F-11
<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

NOTE 3.   ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>

Accounts receivable at May 31, 1997 consist of the following:
--------------------------------------------------------------------------------------------------------------------
Due from United States  Government,  prime and  subcontractors  under  long-term
contracts:
<S>                                                                                                  <C>            
         Billed                                                                                      $    13,965,000
         Unbilled                                                                                          2,273,000
         Progress payments received                                                                     (10,543,000)
                                                                                                    ----------------
                                                                                                           5,695,000
Billed and currently due from foreign sales, long-term contracts                                             296,000

         Total due, long-term contracts                                                                    5,991,000

Commercial receivables                                                                                        87,000
Other receivables                                                                                            229,000
                                                                                                    ----------------

         Total                                                                                        $    6,307,000
                                                                                                    ================
</TABLE>


Unbilled amounts  represent  revenues  recognized from fixed price contracts for
which billings have not been  presented to customers at year-end.  As of May 31,
1997,  the Company has  recorded  retentions  of  $1,373,000  which are awaiting
completion  of  contracts in process  before  payment will be made and claims of
approximately  $900,000 net of a reserve of  approximately  $274,000,  which are
recorded at amounts which management  believes will ultimately be realized.  The
ultimate  realization of the claims may be different  than the amount  estimated
and the difference  could be significant.  During the fiscal year 1997 and 1996,
the  Company  generated  revenue  of  approximately   $1,162,000  and  $700,000,
respectively, from sources outside of the United States.

The Company has recorded  $300,000 in revenues related to a license agreement to
manufacture  and sell the  LifeShear and LINESHEAR  cutting  tools.  The license
agreement  is an  exclusive  agreement  to sell the  product  outside the United
States,  Canada  and  Japan  and it is for an  indefinite  period  of time.  The
agreement  provides for certain mandatory up-front license fees as well as fixed
fees based on minimum  sales  volumes and royalty  fees for each unit sold under
the  agreement.  Included  in other  receivables  is a  $150,000  mandatory  fee
receivable from the licensee which is delinquent.  Management  believes that the
Company will  ultimately  collect this amount and no reserve has been  recorded.
The licensee  claims that the Company  breached the agreement and requests to be
reimbursed extra costs in the total amount of $784,000, most of which consist of
future  anticipated  costs. No such provisions  exist in the license  agreement.
Management  believes these claims have been made in an attempt to avoid payment,
that the claims are  without  merit and will  ultimately  result in no  material
adverse effect on the Company's financial  statements.  Accordingly,  no amounts
for this claim have been accrued in the financial statements.


                                      F-12
<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

NOTE 4.   INVENTORIES

<TABLE>
<CAPTION>

Inventoried costs at May 31, 1997 consist of the following:
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>            
Production cost of contracts in process                                                              $       540,000
Raw materials and components                                                                               1,401,000
Commercial inventory:
         Raw materials                                                                                       385,000
         Work-in-process                                                                                     301,000
         Finished goods                                                                                        6,000
                                                                                                      --------------
                  TOTAL                                                                               $    2,633,000
                                                                                                      ==============
</TABLE>

Raw materials and components  represent  purchases and production costs of units
manufactured in excess of contractually required quantities.

The  Company's  government  contracts  are subject to regular audit and periodic
review by a  governmental  agency.  These  audits  may  result in changes in the
amount of allowable billings on current and/or prior completed contracts.

Production  costs of contracts in process are costs incurred to date less billed
and unbilled amounts. The status of the production costs of contracts at May 31,
1997, is as follows:

<TABLE>
<CAPTION>

                                                             HEFU/PSA         Other Contracts           Total
                                                            (Note 11)
---------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                <C>                  <C>            
Total contracts in process                                   $    4,594,000     $    32,389,000      $    36,983,000
                                                       ==============================================================

Costs incurred to date                                       $    5,886,000     $    14,406,000      $    20,292,000
Estimated profit (loss) recorded                                (1,492,000)           1,932,000              440,000
Less billed and unbilled amounts                                (4,372,000)        (15,820,000)         (20,192,000)
                                                       --------------------------------------------------------------

Total production costs of contracts in process             $         22,000   $         518,000    $         540,000
                                                       ==============================================================
</TABLE>

Because  of the  large  amount of  contracts  in  process  at any point in time,
changes in  estimates  to  complete  can have a drastic  impact on the  ultimate
profitability  of the Company.  Management  estimates that each 1% change in the
estimates to complete at May 31, 1997,  would change contract  profits or losses
by approximately $75,000.  During 1997 and 1996, management revised the estimate
to  complete  related to the  HEFU/PSA  line of  business  which the Company has
exited (Note 11). These revisions resulted in an increase to cost of revenues of
approximately $515,000 and $800,000, respectively.

                                      F-13

<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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


NOTE 4.   INVENTORIES (CONTINUED)

The Company's backlog consists of aggregate  revenues  remaining to be earned by
the Company at a given date under  contracts,  delivery orders or similar orders
in which the Company's obligations are specified and the time and performance by
the Company is fixed. Typically,  the final negotiation of the detailed contract
requirements   together  with  the  procurement  of  long  lead-time  materials,
manufacturing  processes  and testing,  takes between 6 and 12 months or more to
accomplish.  This results in a significant delay between the addition of a newly
awarded  contract to backlog and the  recognition of the related  revenue in the
financial statements.

Contracts undertaken by the Company may extend beyond one year and, accordingly,
portions are carried forward from one year to the next as part of backlog.  Some
of the  Company's  contracts  with  the  United  States  Government  are  supply
contracts whose  requirements  are primarily  based on the Governments  usage of
products on a periodic  basis.  Because many factors  affect the  scheduling  of
projects,  no assurances  can be given as to when or if revenue will be realized
on projects included in the Company's backlog.  Although backlog represents only
business which is considered firm, there can be no assurance that  cancellations
or  scope  adjustments  will not  occur.  The  majority  of  backlog  represents
contracts  under the terms of which  cancellation  by the customer would entitle
the Company to all or a portion of its costs incurred and potential fees. At May
31,  1997,   the  Company's   backlog,   including   contracts  in  process  was
approximately $16.1 million.


NOTE 5.   EQUIPMENT
<TABLE>
<CAPTION>

The Company's equipment at May 31, 1997 consist of the following:
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                                    <C>          
Machinery and equipment                                                                                $     919,000
Tooling costs                                                                                                468,000
Furniture and fixtures                                                                                       138,000
Leasehold improvements                                                                                        40,000
Projects in progress                                                                                         746,000
                                                                                                    -----------------
                                                                                                           2,311,000
Less accumulated depreciation and amortization                                                               820,000
                                                                                                    -----------------

                                                                                                       $   1,491,000
                                                                                                    =================
</TABLE>

Included  above  is  equipment   acquired  under  capital  leases  of  $604,000.
Accumulated  amortization  related  to  these  capital  leases  total  $520,000.
Amortization  expense  related to capital  leases is included with  depreciation
expense.

Projects  in  process   includes   certain   internal   costs   related  to  the
implementation  of the Company's  computer  system  totaling  $247,000.  It also
includes deposits made on certain tooling being manufactured.

                                      F-14

<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

NOTE 6.   DEBT

The  Company  has a line of  credit  agreement  with a bank for the  purpose  of
obtaining short-term loans up to a maximum of $3,500,000.  Borrowings under this
line of credit are  collateralized by substantially all of the Company's assets.
Outstanding  amounts bear interest at the Wall Street Journal's prime rate (8.5%
at May 31, 1997) plus .75%. The credit  agreement  expires  November 1, 1997. At
May 31, 1997,  $2,511,000 was outstanding  under the line of credit.  The credit
agreement  prohibits  payments of dividends  without prior approval and contains
various financial covenants including minimum working capital, maximum net worth
to total  liabilities,  minimum  cash flow  coverage and minimum  income  before
income taxes. Availability under the line at May 31, 1997, is $989,000.

<TABLE>
<CAPTION>

Long-term debt at May 31, 1997, consists of the following:

-------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                
Capital lease obligation, payable in monthly installments of
    $19,000 through 1997, including interest imputed at 7.5%                             $            92,000

Promissory note, guaranteed by HSI, payable in monthly installments
    of $3,000, including interest at 11% through 1998                                                 52,000
                                                                                         --------------------
                                                                                                     144,000
Less current portion                                                                                 128,000
                                                                                         --------------------

Long term debt                                                                           $            16,000
                                                                                         ====================
</TABLE>

Maturities of long-term debt are 1998 $128,000 and 1999 $16,000.

NOTE 7.   PROVISION FOR INCOME TAXES

<TABLE>
<CAPTION>
The 1997 provision for income taxes consists of state taxes  currently  payable.
Deferred income tax assets provided for in the accompanying balance sheet at May
31, 1997, consist of the following:
--------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>              
Depreciation                                                                             $         242,000
Net operating loss carryforwards                                                                 2,220,000
                                                                                        ----------------------

         TOTAL DEFERRED INCOME TAX ASSETS                                                        2,462,000

Valuation allowance                                                                             (2,462,000)
                                                                                         ---------------------

         NET DEFERRED INCOME TAXES                                                       $            -
                                                                                         =====================
</TABLE>

Management  determined  that deferred tax assets should be fully reserved due to
uncertainties as to their ultimate realization.  The realization of these assets
is dependent upon the Company  generating  sufficient  taxable income within the
carryforward period.

                                      F-15
<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

NOTE 7.   PROVISION FOR INCOME TAXES (CONTINUED)

A reconciliation  of expected tax expense to the amount computed by applying the
federal  statutory income tax rates to income (losses) before income taxes is as
follows:
<TABLE>
<CAPTION>

                                                                                   1997                 1996
------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                         <C>      
     Federal income tax (credits) computed at the statutory rate           $        357,000            (466,000)

     State taxes, less federal benefit                                               62,000                 -

     Purchase adjustments related to acquisition                                        -              (479,000)

     Change in valuation allowance                                                 (408,000)            945,000
                                                                          -----------------------------------------

                                                                           $         11,000               $ -
                                                                          =========================================
</TABLE>

As of May 31, 1997, the Company had federal net operating loss  carryforwards of
approximately  $6,000,000,  which expire  $2,830,000  in 2009 and  $3,170,000 in
2011.  The  Company  also  has  state  net  operating  loss   carryforwards   of
approximately $2,940,000 which expire $1,350,000 in 2009 and $1,590,000 in 2011.


NOTE 8.   EMPLOYMENT BENEFIT PLANS

The Company has a  contributory  profit sharing plan under Section 401(k) of the
Internal Revenue Code that covers all full-time employees. There were no Company
contributions made to the Plan during the years ended May 31, 1997 and 1996.

In conjunction  with the stock  acquisition by Hi-Shear  Technology  Acquisition
Corp. in June 1993, substantially all of the pension assets and liabilities were
retained by Hi-Shear  Industries,  Inc.  with the Company  assuming  the pension
liability for three active employees. The pension expense under this arrangement
amounted to $18,000 for years 1997 and 1996. The  accompanying  balance sheet at
May 31,  1997,  includes  a  $147,000  accrued  pension  liability  which is the
projected benefit obligation for the covered employees.


                                      F-16
<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

NOTE 9.   COMMITMENTS AND CONTINGENCIES

The Company leases its facilities and certain  equipment  under  operating lease
agreements that expire at various dates through 2000. The primary facility lease
is guaranteed by HSI. Rental expense under operating  leases for the years ended
May 31, 1997 and 1996, approximated $606,000 and $631,000, respectively.

<TABLE>
<CAPTION>

Minimum annual rentals under all noncancelable operating leases are as follows:

-------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>              
     1998                                                                                        $         625,000

     1999                                                                                                  667,000

     2000                                                                                                  282,000
                                                                                                --------------------

                                                                                                 $       1,574,000
                                                                                                ====================
</TABLE>

The Company's two principal officers and stockholders have employment agreements
covering a period of five years  expiring  on June 1,  1998.  Aggregate  minimum
annual  payments  under these  agreements was $455,000 for fiscal years 1997 and
1996.

The  Company is  currently  a party to  disputes  which  involve or may  involve
litigation.  It is  the  opinion  of  Company's  management  that  the  ultimate
liability,  if any,  with respect to these  disputes will not be material to the
Company's financial statements.


NOTE 10.   STOCKHOLDERS' EQUITY

Upon  completion of the initial  public  offering of common stock in March 1994,
the  Company  sold  warrants  to  purchase  150,000  additional  shares  to  its
underwriters for $100. These warrants have an exercise price of $8.25 per share,
subject to  adjustment in  accordance  with the terms of the warrant  agreement.
During 1997,  no warrants  were  exercised.  During 1996,  76,500  warrants were
exercised.  The remaining warrants,  covering 73,500 shares, expire on March 31,
1999.

STOCK OPTION PLAN:

The  Company  has an option  plan under  which it may grant  options to purchase
common stock, with a maximum term of 10 years.  Options for up to 500,000 shares
may be granted to employees under the Plan. Under the Plan,  options are granted
and vested as determined by management.

                                      F-17

<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

NOTE 10.   STOCKHOLDERS' EQUITY (CONTINUED)

A summary of the status of the two fixed plans and changes during the year ended
on those dates is as follows:

<TABLE>
<CAPTION>

                                                         1996                                 1997
                                           ---------------------------------    ---------------------------------
                                                                 Weighted-                           Weighted-
                                                                  Average                             Average
                                                                 Exercise                            Exercise
               Fixed Options                   Shares              Price          Shares               Price
-----------------------------------------------------------------------------------------------------------------
<S>                                              <C>        <C>                     <C>        <C>              
Outstanding at beginning of year                 171,000    $           6.85        249,000    $            6.85
     Granted                                     122,000                6.16         54,000                 5.44
     Exercised                                   (24,000)               4.89         (8,000)                3.24
     Forfeited                                   (20,000)               5.00        (53,000)               10.08
                                            ---------------------------------------------------------------------

Outstanding at end of year                       249,000    $           6.85        242,000    $            5.95
                                            =====================================================================

Exercisable at end of year                       108,000    $           8.27        127,000    $            6.03

Weighted-average fair value per
     option granted during the year                $3.87                              $4.54
</TABLE>


A further  summary  about  fixed  options  outstanding  at May 31,  1997,  is as
follows:
<TABLE>
<CAPTION>

                                        Options Outstanding                            Options Exercisable
                          -------------------------------------------------    ------------------------------------
                                            Weighted-
                                             Average           Weighted-                              Weighted-
                                            Remaining           Average                                Average
        Range of              Number       Contractual          Exercise           Number              Exercise
     Exercise Price        Outstanding         Life              Price           Exercisable            Price
------------------------------------------------------------------------------------------------------------------
<C>                        <C>              <C>          <C>                          <C>        <C>            
$5.00 to $6.50                   213,000     8 years      $           5.76             116,000    $          5.66
$8.50 to $10.50                   11,000     8 years                  9.95              11,000               9.95
                          ---------------                                      ----------------

                                 242,000                  $           5.95             127,000    $          6.03
                          ===============                                      ================

</TABLE>



                                      F-18

<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

NOTE 10.   STOCKHOLDERS' EQUITY (CONTINUED)

Grants under the  Company's  stock option plans are  accounted for following APB
Opinion No. 25 and related  interpretations.  Accordingly,  no compensation cost
has been  recognized  for grants under the plan. Had  compensation  cost for the
stock-based  compensation  plans  been  determined  based on the grant date fair
values of awards (the method described in FASB Statement No. 123),  reported net
income  (loss) and  earnings  (loss) per common share would have been reduced to
the proforma amounts shown below:

<TABLE>
<CAPTION>

                                                                                      1996                  1997
---------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                             <C>
     Net income (loss)
         As reported                                                        $      (1,333,000)            1,021,000
         Pro forma                                                                 (1,375,000)              886,000

     Net income (loss) per common and
         common equivalent share
         As reported                                                                    (0.20)                 0.15
         Pro forma                                                                      (0.21)                 0.13
</TABLE>

The  fair  value  of each  grant  is  estimated  at the  grant  date  using  the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions for grants in 1996 and 1997, respectively:  no dividend rate for all
years; price volatility of 69% in 1996 and 70% in 1997, risk-free interest rates
of approximately 5.9% in 1996 and 6.8% in 1997; and expected lives of ten years.


NOTE 11.   EXIT OF A BUSINESS ACTIVITY

During May 1996,  management approved a plan to exit the HEFU/PSA business.  The
HEFU/PSA line of business is part of the defense and aerospace business segment.
The product produced in this line of business  initiate  ordnance  functions and
switches on the initial stage of the Titan launch vehicle. Management decided to
exist this business line because the technology  associated with the product was
outdated,  was not  cost  competitive  and  the  future  standardization  in the
industry was not  anticipated  to include this business  line. In addition,  the
Company had incurred  substantial losses in the development and delivery of this
business  line.  The  plan's  major  components  are to  complete  the  existing
contracts  and not  accept  any future  new  contracts  or  add-ons to  existing
contracts in this specific line of business, unless required under Department of
Defense  (DOD)  regulations.  Management  determined  that  existing  assets and
personnel  assigned to this business  activity can be utilized in other areas of
the Company.  All estimated costs to complete the contracts  (including incurred
and  accrued  costs at May 31,  1996,  totaling  approximately  $1,060,000  were
recorded  in 1996  operations,  however,  as  discussed  in Note 4, the  Company
changed the estimated cost to complete the project in 1997.


                                      F-19
<PAGE>


HI-SHEAR TECHNOLOGY CORPORATION

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

NOTE 11.   EXIT OF A BUSINESS ACTIVITY (CONTINUED)

The  HEFU/PSA  line of business  was a  significant  line of  business  when the
Company was acquired  from HSI in 1993.  Management  has  allocated the negative
goodwill  associated  with the acquisition to the lines of business that existed
at that date.  The method used by the Company was based on the relative  size of
the  backlog  in  1993.  Management  believes  this  method  was an  appropriate
indication  of the  factors  that  contributed  to their  ability to acquire the
business  for less than the fair value of the net assets.  Unamortized  negative
goodwill of $1,150,000  was allocated to this business  activity and was written
off in 1996.  The  remaining  negative  goodwill of $967,000 will continue to be
amortized  over the  original  ten-year  period.  Revenues  from  this  business
activity were approximately $414,000 and $324,000 for fiscal year 1997 and 1996,
respectively.  Losses  on this  business  activity,  prior to the  write-off  of
negative goodwill were,  $224,000 and $737,000  (unaudited) for fiscal year 1997
and 1996, respectively.

NOTE 12.   BUSINESS SEGMENT INFORMATION

The Company operates in two primary segments;  (i) commercial  products and (ii)
defense and aerospace. The following table provides information on the Company's
commercial   products   segment.   All  other  activities  of  the  Company  are
concentrated in the defense and aerospace segment.

<TABLE>
<CAPTION>
                                                                                         1997                1996
---------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                         <C>    
 Revenues from unaffiliated customers                                        $        444,000            144,000

 Operating (loss) including research and development                                 (230,000)          (906,000)

 Depreciation and amortization                                                        207,000            250,000

 Additions to equipment                                                                   -              537,000

 Assets                                                                             1,211,000          1,576,000
</TABLE>

                                      F-20

<PAGE>


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

     Information  required by this item will be contained in the Company's Proxy
Statement to be filed with the  Securities  and Exchange  Commission  within 120
days after May 31, 1997 and is incorporated herein by reference.

     Mr.  Timothy R. Pagano has joined  Hi-Shear  Technology  in July of 1997 as
Vice  President  and General  Manager of Aerospace  Products  replacing Mr. John
Wenckus.  Mr. Pagano came to Hi-Shear from the Optical Corporation of America (a
unit of Corning Glass) where he held the position of Vice President, Operations.
He will be responsible for the design, engineering, manufacture, and shipment of
the  Company's  aerospace  products.  Mr.  Pagano has  extensive  experience  in
manufacturing,  engineering,  product assurance, precision machining and the new
product development of both commercial and military products.

ITEM 10.  EXECUTIVE COMPENSATION

     The  information  required by this item will be contained in the  Company's
Proxy Statement to be filed with the Securities and Exchange  Commission  within
120 days after May 31, 1997 and is incorporated herein by reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information  required by this item will be contained in the  Company's
Proxy Statement to be filed with the Securities and Exchange  Commission  within
120 days after May 31, 1997 and is incorporated herein by reference.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     None


                                       17

<PAGE>



                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits: See "Exhibit Index", page 20.

         (b)      Reports on Form 8-K. No reports on Form 8-K were filed  during
                  the last quarter of the fiscal year ended May 31, 1997.















                                       18
<PAGE>



                                    SIGNATURE

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

                                   HI-SHEAR TECHNOLOGY CORPORATION


Date: August 8, 1997               By:  /s/ George W. Trahan
      --------------                    ------------------------
                                        Executive Vice President
                                  

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

Date: August 8, 1997                By:      /s/ Thomas R. Mooney
      --------------                         -----------------------------------
                                            Chairman of the Board and President


                                     By:      /s/ George W. Trahan
                                              ----------------------------------
                                              Director,  Executive Vice 
                                              President,  Chief Financial
                                              Officer (Chief Accounting Officer)


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


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






                                       19
<PAGE>



                                  EXHIBIT INDEX


                                                                   SEQUENTIALLY
EXHIBIT NUMBER   DESCRIPTIONS                                         NUMBERED

 3.1             Certificate of Incorporation, as amended*

 3.2             Bylaws, as amended**

 4.1             Form of Common Stock***

9.1              Form of Buy/Sell Agreement**

10.1             1993 Stock Option Plan**

 10.2            Employment Agreement with Thomas R. Mooney*

10.3             Employment Agreement with George W. Trahan*

10.4             Torrance Property Lease and HSI Guaranty*

10.5             Saugus Property Lease*

10.6             Southern California Bank Credit Facility

23.1             Consent of Independent Auditors

27.1             Financial Data Schedule



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

*    PREVIOUSLY  FILED AND  INCORPORATED BY REFERENCE TO THE COMPANY'S FORM SB-2
     REGISTRATION  STATEMENT NO. 33-73972 FILED WITH THE SECURITIES AND EXCHANGE
     COMMISSION ON JANUARY 10, 1994.

**   PREVIOUSLY  FILED AND  INCORPORATED BY REFERENCE TO THE COMPANY'S FORM SB-2
     REGISTRATION  STATEMENT NO. 33-73972 FILED WITH THE SECURITIES AND EXCHANGE
     COMMISSION ON FEBRUARY 1, 1994.

***  PREVIOUSLY  FILED AND  INCORPORATED BY REFERENCE TO THE COMPANY'S FORM SB-2
     REGISTRATION  STATEMENT NO. 33-73972 FILED WITH THE SECURITIES AND EXCHANGE
     COMMISSION ON MARCH 23, 1994.

                                       20