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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 EXCHANGE ACT
     OF 1934

     FOR THE FISCAL YEAR ENDED MAY 31, 2001    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 ( ) NO (X)

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. ( )

State issuer's revenues for its most recent fiscal year: $ 12,065,000.

The aggregate value of the Registrants Common Stock held by non-affiliates of
the Registrant was approximately $2,190,396 as of August 28, 2001, based upon
the closing sale price on the American Stock Exchange on that date at which the
stock was last sold.

There were approximately 6,670,000 shares of the Registrants Common Stock issued
and outstanding as of August 28, 2001.

Part III, other than Item 12, is incorporated by reference from the Registrant's
Proxy Statement for its 2001 Annual Meeting of Stockholders which was filed with
the Commission within 120 days of May 31, 2001.

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

================================================================================

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<TABLE>
                                   HI-SHEAR TECHNOLOGY CORPORATION
                                             FORM 10-KSB
<CAPTION>

                                          TABLE OF CONTENTS

                                                                                                 PAGE
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<S>      <C>                                                                                      <C>
PART I.

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

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

         ITEM 3    LEGAL PROCEEDINGS.........................................................      5

         ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................      5


PART II.

         ITEM 5    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................      6

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

         ITEM 7    FINANCIAL STATEMENTS......................................................      9

         ITEM 8    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                   FINANCIAL DISCLOSURE......................................................     10


PART III.

         ITEM 9    DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES...........................     10

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

         ITEM 11   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                   AND MANAGEMENT............................................................     10

         ITEM 12   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................     10


PART IV.

         ITEM 13   EXHIBITS AND REPORTS ON FORM 8-K..........................................     11

SIGNATURES         ..........................................................................     12

EXHIBIT INDEX      ..........................................................................     13

INDEX TO FINANCIAL STATEMENTS................................................................     14

                                                  i
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                                     PART I


ITEM 1.  BUSINESS

                                GENERAL OVERVIEW

         Hi-Shear Technology Corporation ("Hi-Shear" or the "Company") designs
and manufactures high reliability pyrotechnic, mechanical and electronic
products for the aerospace industry, and has adapted its technology to a select
group of emerging non-aerospace products. Its aerospace products are primarily
used in commercial space satellites and launch vehicles, exploration missions,
strategic missiles, advanced fighter aircraft and military systems. Customers
such as commercial satellite manufacturers, launch vehicle assemblers, the U.S.
Government including NASA, foreign space agencies and commercial launch
ventures, and others in the aerospace business widely use the Company's
aerospace products.

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

                                HI-SHEAR PRODUCTS

         Hi-Shear's products were originally introduced for the United States
space program, and consist primarily of pyrotechnic power cartridges and various
types of aerospace separation devices designed to meet the demand for reliable
high performance devices with the strength to fasten two structures under
rigorous conditions and then provide quick release upon command. In addition,
the Company designs and manufactures electronic systems that sequentially fire
the pyrotechnic devices according to pre-programmed parameters. These electronic
devices are used in missiles, launch vehicles, fighter aircraft ejection seats
and other applications. The Company has also adapted its technology to produce
advanced competitively priced products for non-aerospace markets. Hi-Shear's
products can be grouped into five product categories as follows:

         POWER CARTRIDGES/INITIATORS. 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 designs, markets
and manufactures pyrotechnic power cartridges/initiators that have a high-energy
output. These power cartridges are hermetically sealed electro-explosive devices
that are compact, lightweight, environment and corrosion resistant and operate
with ultra high reliability. The power cartridge provides the energy to operate
the Company's separation devices, pin pullers, thrusters, actuators and cutters.
These devices are used to open satellite doors, deploy solar panels, booms,
communications antennae, missile fins, and in driving stage separation on many
of today's major launch vehicles. Hi-Shear manufactures the highest reliability
NASA standard initiator used throughout the Space Shuttle.

         CARTRIDGE ACTUATED DEVICES. The Company's cartridge actuated devices
are gas-activated products utilized for satellites, missiles and other space
vehicles. These devices include separation nuts, separation bolts, thrusters,
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 action required for rapid separation or deployment of structures or
components in multistage launch vehicles, nose cones and capsules, launching
pads and sleds, ejection seats, booster rockets, tanks, solar arrays, antenna
booms and other devices. The Company maintains an active development program for
new designs, including low shock deployment systems for the increasingly lighter
satellites used in communications and other commercial applications.

                                       1
<PAGE>

         ELECTRONIC AND LASER PRODUCTS. Hi-Shear remains a key supplier of
sequencers for the U.S. Air Force ACES II crew ejection seat now placed in many
fighter aircraft, including the A-10, B-2, F-15 and F-16. The Company originally
developed the Analog Recovery Sequencer, 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.

         Hi-Shear also supplies electronic safe arm fuzes for tactical and
conventional military programs. The Company's upgraded Patriot (PAC-3) missile
system product is fully developed and has entered 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
electronics without risk to personnel or damaging the integrity of the missile
system. This allows for economical system safety checks, and also a shelf life
estimated at 30 years making it among the longest in the industry.

         The Company has been actively pursuing the development of laser
ordnance and initiation systems and has continued to evolve and enhance its
laser firing products. Hi-Shear's unique laser pyro-initiator control system is
fully qualified and is used to fire the hold-down post detonators on the X-33
Space Vehicle. This innovative system provides the full optical energy to test,
perform diagnostics and initiate ordnance devices on this futuristic space
vehicle. In addition, Hi-Shear has also developed and tested a breech-mounted
laser that delivers the full optical energy to ignite the main charge propellant
for the Army's 155mm Howitzer.

         EMERGENCY CUTTERS. Hi-Shear sells emergency cutters that are fast,
safe, and reliable rescue tools designed for use in a wide range of emergency
situations for fire and rescue, law enforcement, and military rescue teams. The
LIFESHEAR cutter's light weight, mobility, ease of use, and inexpensive design
enable it to quickly cut through a variety of tough materials and auto parts in
order that a victim can readily be extracted from a life threatening situation
or access can be quickly gained to a locked area. The Company manufactures the
LIFESHEAR and its accompanying power cartridges for its sales in the United
States, Canada and Japan. Hi-Shear's European licensee is manufacturing and
selling the LIFESHEAR product for sales in its assigned territory and forwarding
royalties on these sales to the Company.

         AIR BAG INFLATOR TECHNOLOGY. Hi-Shear has developed and patented unique
automobile air bag inflator technology. The Company's inflator propellants and
the gas it produces are benign and environmentally safe in contrast to the toxic
gases and materials used in existing air bag systems. Hi-Shear has established
proprietary rights in the field of air bag inflator technology. The Company has
been awarded several innovative patents for its air bag technology and believes
its technology offers the automobile industry high performance, non-toxic, low
cost alternatives to current air bag inflator systems. The Company seeks an
alliance with a major air bag inflator manufacturer to strategically exploit the
benefits of this technology in the marketplace.

                             CUSTOMERS AND CONTRACTS

         Most of the Company's customers tend to be large aerospace prime or
subcontractors. Lockheed Martin, the Boeing Company, and Hughes Space &
Communications Co. together accounted for 39% of the Company's revenues in
fiscal year 2001. 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 24% of revenue in fiscal
year 2001. Contract awards and contract competition phases vary from year to
year and therefore sales distribution among customers during any one fiscal year
should not be considered indicative of future sales to those customers.

         In fiscal year 2001 most of the Company's contracts were on a fixed
price contract basis where 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

                                       2
<PAGE>

of adverse changes over the contract period. Due to economies that can be
encountered over the period of the contract, these fixed price contracts can
also offer significant profit potential. Company contracts that evolve from the
U.S. Government or from subcontractors are subject to termination for
convenience by the customer or the U.S. Government. However, if this termination
for convenience were exercised, the Company would be entitled to payment of
costs incurred up to the date of termination and a reasonable termination fee.
U.S. Government contracts extending beyond one year are also conditioned upon
the continuing availability of Congressional appropriations because Congress
usually appropriates on a fiscal year basis even though contract performance may
take several years.

                                     BACKLOG

         The Company's average time to design, manufacture and ship its products
is typical of the lead times required for highly engineered, custom manufactured
aerospace products. The final negotiation of the detailed contract requirements
together with the purchase of long lead time material, manufacturing processes
and testing take between 4 to 12 months or more to accomplish. During fiscal
year 2001, the Company continued its programs to reduce many of its
manufacturing lead-times to help its customers with more timely delivery. This
is part of an overall strategy by Hi-Shear's aerospace customers to carry fewer
components in inventory and to speed the construction of launch vehicles and
satellites.

         Total requirements included in contracts undertaken by the Company may
contain options that extend beyond one year, and accordingly, portions are
carried forward from one year to the next as part of the backlog. Some of the
Company's contracts with the U.S. Government and its prime contractors are
supply contracts and/or multi-year options whose requirements are primarily
based on the Government's demand for products on a periodic basis. Because many
factors affect the scheduling of projects, no assurances can be given as to when
revenue will be realized on projects that are included in the Company's backlog.
Although backlog represents business that is considered to be firm, there can be
no assurance that cancellation, changes in quantities, funding changes, or scope
adjustments will not occur. As of May 31, 2001 the Company's backlog was $12.3
million.

                                   COMPETITION

         The Company's aerospace products are thoroughly tested individually, as
well as tested in conjunction with the end product into which they are
incorporated. After commencement of a given program, it is very costly for
competitors to design new competitive components or for customers to change
suppliers of the components since the customer would then be required to
re-qualify the products. Therefore, due to the Company's extensive financial
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 that 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. The Company currently
qualifies as a small business entity for the purposes of obtaining small
business set aside contracts and dealing with U.S. Government contracts or
programs.

                          MANUFACTURING AND PRODUCTION

         Production 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 machining components in the Company's Precision Manufacturing / Testing
Center (PMTC), 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

                                       3
<PAGE>

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 forty years.

                              INTELLECTUAL PROPERTY

         Hi-Shear's policy is to apply for patents and other appropriate
statutory protection when it develops new or improved technology. This has
resulted in over 40 U.S. patents as well as numerous trademark and copyrights.
All employees are required to assign to the Company any intellectual property
developed by the employee during the course and scope of the employment and
agree to preserve as confidential all information pertaining to the Company's
business obtained by the employee as a result of their employment. The Company
also relies on the laws of unfair competition and trade secrets to protect its
unpatented proprietary rights.

                                    EMPLOYEES

         The Company's success depends on its ability to attract and retain
highly qualified personnel. As of May 31, 2001 Hi-Shear had 96 full time
employees, the majority of whom are engineers and technicians. None of the
employees are represented by a labor union and the Company has no knowledge of
any labor organizing activities, has never suffered a work stoppage, and
considers its relations with its employees to be excellent.

                             ADDITIONAL INFORMATION

         The Company files annual and quarterly reports and proxy statements
with the Securities and Exchange Commission (the "Commission") pursuant to
federal securities laws. You may inspect such reports, including the exhibits
thereto, without charge, at the Public Reference Room of the Commission at 450
Fifth Street N.W., Washington, D.C., and at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York. You
may obtain copies of the reports from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
the prescribed fees. You may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. You may also access
such material electronically by means of the Commission's home page on the
Internet at http://www.sec.gov.

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

ITEM 2.  PROPERTIES

         The Company's manufacturing and executive offices are located in
Torrance, California, in a 75,000 square foot building organized for electronic,
mechanical, and pyrotechnic manufacturing and assembly operations. The Company
leases these offices pursuant to a lease for five (5) years at a monthly rate of
$38,500 which terminates in August 2004. The Company owns 16 acres of land in
Santa Clarita, CA that it acquired during the fiscal year ending May 31, 2000 by
exercising its purchase option for land that it previously leased. While the
Company continues to utilize the land as a storage and blending site, it has
been management's intention since the date of the purchase to sell the property
for a profit. Four acres of the property are being appropriated for construction
of a new highway which will connect to the local freeway. The Company believes
that its current leased facilities in Torrance and property in Santa Clarita are
adequately covered by insurance and will adequately support its operations for
the foreseeable future.

                                       4
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         The Company is subject to certain legal proceedings and claims that
have arisen in the ordinary course of its business.

         In November 2000 Hi-Shear sued USBI Company, a Delaware Corporation,
and United Space Alliance, LLC, a Delaware limited liability company, in the
Circuit Court of the Eighteenth Judicial Circuit in and for Brevard County,
Florida. Hi-Shear filed suit to recover damages resulting from the defendants'
refusal to pay in whole or in part on four separate invoices totaling $1,319,000
for specially manufactured aerospace components. In addition, the Company also
seeks compensatory damages alleging that the defendants fraudulently induced
Hi-Shear to make an excessively low bid on a request for proposal to manufacture
certain other parts. Further damages are sought for defendants' misappropriation
of Hi-Shear's confidential, proprietary and/or trade secret protected designs,
drawings, and specifications for other aerospace components. The lawsuit is
currently in the discovery phase. No counterclaims have been asserted against
the Company.

         The Company is a party to an arbitration proceeding initiated August
2000 by Cincom Systems, Inc. ("Cincom"), a software supplier, for collection of
license and consulting fees in the amount of $171,200, plus service fees
continuing at $68 per day. Cincom later amended its claim to include a copyright
infringement claim for damages of $508,000 or more. Hi-Shear has denied all
allegations contained in Cincom's claims and has counterclaimed for damages in
the amount of $1.2 million. The arbitration proceeding is in its final stages
and a decision is expected in the near future.

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

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

         None.

                                       5
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                                     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:

                                                              High        Low
                                                              ----        ---
         Fiscal Year 2001 ending May 31, 2001

                           4th Quarter                        2.60        1.60
                           3rd Quarter                        2.80        0.81
                           2nd Quarter                        1.63        1.00
                           1st Quarter                        2.37        1.37

         Fiscal Year 2000 ending May 31, 2000

                           4th Quarter                        3.50        2.00
                           3rd Quarter                        3.50        2.43
                           2nd Quarter                        5.00        2.93
                           1st Quarter                        5.50        4.75


         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 10, Financial Statements). Dividends 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 59 and the number of beneficial shareholders was approximately
1,004 as of August 28, 2001.


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

                                GENERAL OVERVIEW

         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, and product launches and future financial
performance that involve risks and uncertainties. The Company's actual results
may differ materially from those anticipated in these forward-looking statements
as a result of certain factors. These include the acceptance of its new
aerospace and non-aerospace products, the acceptance and pricing of its
non-aerospace products, the development and nature of its relationship with key
strategic partners, the allocation of the federal budget and the economy in
general.

                                       6
<PAGE>

                              RESULTS OF OPERATIONS

FISCAL YEAR ENDED MAY 31, 2001 COMPARED WITH FISCAL YEAR ENDED MAY 31, 2000

         The lower level of revenues experienced during the year, the higher
proportion of total revenues derived from lower margin electronic product
contracts and the recognition of inventory cost provisions resulted in a net
loss for fiscal year 2001. An increase in orders in late fiscal year 2001 and
early fiscal 2002 is currently being driven by increased product demand. These
increases in product demand, together with the Company's efficiency improvements
carried out during the year, are expected to result in improved margins for new
business projected in fiscal year 2002.

         Total revenues for the year did not reach the levels of the prior two
years due to lower customer requirements for satellite and launch vehicle
components during the period. Our major customers experienced reduced military
and commercial launch and satellite activity and long-term interruption in their
planned launch schedules due to major launch vehicle mishaps. Although
Hi-Shear's components are in no way related to these events, the lower
requirement for the Company's products was reflected in this fiscal years'
revenues of $12,065,000 compared to $13,989,000 in the prior fiscal year.
Customer demand for launch vehicle and satellite components has recently surged
as launch vehicle schedules are returning to prior levels.

         Cost of revenues for the year of $9,393,000 compared to $10,015,000
last year reflect the lower volume of revenues in the year and includes
increases to inventory reserves of $595,000 compared to $473,000 for last year.
In addition to lower volume of revenues and higher inventory reserves and
write-offs, gross margin was further reduced by a higher proportion of total
revenues derived from lower margin electronic product contracts than last year.
The results of these factors was that gross margin for fiscal year 2001 was
$2,672,000 compared to $3,974,000 realized last year.

         Implementation of cost reduction measures, including consolidating
sales and administrative functions among fewer employees and reducing
expenditures for product enhancements not covered by customer contracts
contributed to the decrease of selling, general and administrative expenses to
$2,793,000 in fiscal year 2001 from $3,413,000 during the previous year.
Offsetting some of the reductions in new costs incurred during fiscal year 2001
was a $266,000 charge to expenses for padlock tooling costs. This decision
reflects management's strategy of focusing its resources on expanding the
Company's core aerospace and defense product lines.

         The Company incurred an operating loss of $121,000 compared to
operating income of $561,000 for last year. Despite realizing significant cost
reductions derived from the successful implementation of many consolidation and
efficiency changes, which were intended to reduce expenses without jeopardizing
the Company's ability to effectively satisfy the growing demands of its
customers, the combination of increased inventory cost reserves, write-off of
capitalized tooling costs, lower revenues and a higher proportion of total
revenues derived from lower margin electronic product contracts resulted in the
decrease in operating income.

         Certain legal costs of $102,000 that related to litigation in which the
Company is currently involved were included in accounts receivable in the Form
10-QSB filed for the third quarter ended February 28, 2001. Those costs had been
capitalized rather than recognized as period costs. The Company recognized the
expenses in the fourth quarter ended May 31, 2001. Included in the $102,000 that
was capitalized at the end of the third quarter was $54,000 that was omitted
from the second quarter expenses. The financial statements included in Forms
10-QSB for the quarters ended November 30, 2000 and February 28, 2001 will be
amended.

                                       7
<PAGE>

         Interest expense increased from $490,000 for last fiscal year to
$617,000 for fiscal year 2001. The increase is a result of both higher interest
rates, which were linked to higher benchmark prime rates during most of fiscal
year 2001, and the need to supplement working capital derived from operations
with increased borrowing against the Company's bank line of credit. The increase
in average monthly borrowing throughout fiscal year 2001 compared to last year
was necessitated by the continued reduction in customer progress payments in
advance of contract completion.

         Despite the reported loss before income taxes of $738,000, an income
tax expense of $250,000 was recognized for fiscal year 2001 as a result of
management's assessment that it was more likely than not that some, but not all
of, the net deferred tax assets will be realized. The deferred tax assets
considered realizable, however, could be increased or reduced in the future if
estimates of future taxable income during the carryforward period are increased
or reduced. Contrary to fiscal year 2001, management last year determined that
it was more likely than not that all of the net deferred assets remaining at
that time would be realized prior to expiration. Accordingly, recognition in
fiscal year 2000 of all previously unrecognized potential net deferred tax
assets resulted in the reported net tax benefit of $607,000.

         The net loss for fiscal year 2001 was $988,000 or $(0.15) per share
compared to net income for fiscal year 2000 of $678,000 or $0.10 per share.

                               FINANCIAL CONDITION

         Accounts receivable balances, which consist of billed and unbilled
amounts, were $8,328,000 and $8,906,000 at the end of fiscal year 2001 and at
the end of fiscal year 2000, respectively. The billed component of the total
accounts receivable balance at May 31, 2001 was $4,072,000 compared to
$7,075,000 at the end of the previous fiscal year. The reduction in the billed
balance is reflective of reduced billings near the end of fiscal year 2001
compared to last year, and improvement in the Company's ability to accelerate
collection of outstanding accounts receivable.

         Included in the billed portion of accounts receivable at the end of
both fiscal years was a total balance of $1,319,000 due from one account. The
Company has filed a lawsuit to expedite collection of the billed receivable.

         Unbilled receivables represent revenues recognized on a
percentage-of-completion basis from long-term fixed price contracts for which
billings have not been presented to customers. As contracts are completed,
previously unbilled receivables are converted to billed accounts receivable with
the preparation and submission of billings to customers. Unbilled receivables at
May 31, 2001 were $3,425,000 compared to $1,783,000 at the end of fiscal year
2000. The increase in the unbilled receivable balance is reflective of the
Company having spent more on long-term contracts without progress payments as of
the end of fiscal year 2001 than as of the end of the previous year.

         Claims receivable balances at the end of both fiscal year 2001 and
fiscal year 2000 was composed of the total unpaid balance for two claims on
contracts terminated by the customers for "convenience". The claims were
recorded at amounts which management expects to be realized within fiscal year
2002. The total unpaid amounts of those two claims at May 31, 2001 and at May
31, 2000 are $816,000 and $1,121,000, respectively.

         The increase in total inventories from $2,909,000 at the end of fiscal
year 2000 to $3,618,000 at the end of fiscal year 2001 was primarily the result
of the increase in work in process inventories for aerospace contracts from
$620,000 at May 31, 2000 to $1,286,000 at May 31, 2001. That increase is
reflective of management's commitment to accelerate delivery of contract product
by maintaining larger inventories of sub-component parts that relate to multiple
contracts.

                                       8
<PAGE>

         During fiscal year 2000 the Company exercised a purchase option of
$1,128,000 for sixteen acres of land that it previously leased. While the
Company continues to utilize the land as a storage and blending site, it has
been management's intention since the date of the purchase to sell the property
for a profit. The City of Santa Clarita has appropriated four acres of the land
in order to construct a new highway. Management believes the $247,000 it has
been offered by the City in an eminent domain proceeding for the land being
taken is inadequate. Nonetheless, it accepted $247,000 during fiscal year 2001
as a deposit toward a proper valuation of the property taken. The Company and
the City are actively engaged in settlement discussions and settlement of this
issue is expected to occur during fiscal year 2002. Accordingly, $282,000, which
is the pro-rata portion of the total purchase price, is included in other
current assets on the balance sheet.

         Trade accounts payable increased from $725,000 at the end of fiscal
year 2000 to $1,557,000 at the end of fiscal year 2001. The increase in trade
accounts payable occurred as a result of the increase in purchased parts near
the end of fiscal year 2001 that contributed to the overall increase in
inventories discussed above.

         Long-term debt, all of which was incurred during prior fiscal years in
order to finance the acquisition of machines used in the Company's precision
machining center and the acquisition of land held for sale, was reduced from
$2,374,000 at the end of fiscal year 2000 to $1,322,000 at the end of fiscal
year 2001 through principal payments of $1,052,000 during fiscal year 2001
compared to principal payments of $433,000 during fiscal year 2000.

                         LIQUIDITY AND CAPITAL RESOURCES

         Net cash of $731,000 was provided by operating activities during the
year compared to net cash of $2,118,000 used in operating activities during the
previous fiscal year. The difference in operating cash flows for the two fiscal
years was primarily a combination of collecting a significantly higher
proportion of accounts receivable during fiscal year 2001 than during fiscal
year 2000, and using significantly less cash to reduce accounts payable during
fiscal year 2001 than during fiscal year 2000, despite increased inventories
during fiscal year 2001 compared to decreased inventories during fiscal year
2000.

         Although total accounts receivable billings were less during fiscal
year 2001 than during fiscal year 2000, the availability for collection during
the fiscal year 2001 of a much larger accounts receivable balance at the
beginning of the fiscal year than the beginning balance available for collection
for fiscal year 2000 contributed to the increase in cash flow from fiscal year
2000 to fiscal year 2001. Improvement in the Company's ability to accelerate
collection of outstanding accounts receivable, the partial collection of a claim
on a contract terminated by a customer and royalties for the sale of LIFESHEAR
commercial cutting tools also contributed to the increase in cash flow during
fiscal year 2001 compared to fiscal year 2000.

         The Company's primary sources of capital during the fiscal year 2001
were its operating cash flow and commercial financing. The Company maintains a
revolving line of credit with a commercial bank and pays market interest on the
outstanding balance. The outstanding balance under this line of credit at May
31, 2001 was $4,857,000 compared to an outstanding balance of $4,550,000 at May
31, 2000. Maximum borrowing under the line of credit was $5,100,000 as of May
31, 2001. The maximum borrowing limit was changed to $4,800,000 and $4,600,000
as of July 30 and October 1, 2001, respectively. The revolving line of credit,
which matures on October 15, 2001, contains various financial covenants. At May
31, 2001 the Company was not in compliance with two of those covenants. While
the bank will not waive these covenant violations, it has agreed to continue the
loan until its maturity. The Company is currently in the process of seeking and
obtaining a new revolving line of credit.

ITEM 7.  FINANCIAL STATEMENTS

         The reports of the independent accountants and financial statements and
notes listed in the accompanying index are part of this report. See "Index to
Financial Statements" on page 14.

                                       9
<PAGE>

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

         McGladrey & Pullen, LLP were the independent public accountants
previously engaged to audit the Company's financial statements for the period
ended May 31, 2000. McGladrey & Pullen, LLP resigned from their position as the
Company's independent accountants on August 25, 2000. Effective October 16,
2000, the Board of Directors approved the appointment of Grant Thornton LLP to
serve as the Company's independent accountants and to conduct the audit of the
Company's financial statements for the fiscal year ending May 31, 2001 and
successive years.

         McGladrey & Pullen, LLP reports on the financial statements as of and
for the years ended May 31, 1999 and May 31, 2000 contained no adverse opinions
or disclaimers of opinion and were not modified or qualified as to uncertainty,
audit scope or accounting principles.

         During the fiscal year ended May 31, 2000 and through the date of their
resignation there were no disagreements with McGladrey & Pullen, LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of McGladrey & Pullen, LLP would have caused that firm to make
reference to the subject matter of the disagreement in connection with either of
its reports on the Company's financial statements for such years.


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

         Information required by this item will be contained in the Company's
Proxy Statement which was filed with the Securities and Exchange Commission
within 120 days after May 31, 2001 and is incorporated herein by reference.


ITEM 10. EXECUTIVE COMPENSATION

         The information required by this item will be contained in the
Company's Proxy Statement which was filed with the Securities and Exchange
Commission within 120 days after May 31, 2001 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 which was filed with the Securities and Exchange
Commission within 120 days after May 31, 2001 and is incorporated herein by
reference.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item will be contained in the
Company's Proxy Statement under the heading "Executive Compensation", which was
filed with the Securities and Exchange Commission within 120 days after May 31,
2001 and is incorporated herein by reference.

                                       10
<PAGE>

                                     PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits: See "Exhibit Index", page 13.

         (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, 2001.

                                       11
<PAGE>

                                    SIGNATURE

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

<TABLE>
<CAPTION>
<S>                                               <C>
                                                  HI-SHEAR TECHNOLOGY CORPORATION


Date: October 10, 2001                            By:  /s/ George W. Trahan
      ----------------                                 ---------------------------------------------------
                                                       President, Chief Executive Officer and Co-chairman

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

Date: October 10, 2001                            By:  /s/ George W. Trahan
      ----------------                                 ---------------------------------------------------
                                                       President, Chief Executive Officer and Co-chairman


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


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


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


                                                  By:  /s/ David W. Einsel
                                                       ---------------------------------------------------
                                                       Director
</TABLE>

                                                    12
<PAGE>

                                  EXHIBIT INDEX

                                                                   SEQUENTIALLY
EXHIBIT NUMBER              DESCRIPTIONS                             NUMBERED
--------------              ------------                             --------

3.1          Certificate of Incorporation, as amended(1)

3.2          Bylaws, as amended(2)

4.1          Form of Common Stock(3)

10.1         1993 Stock Option Plan(2)

10.2.1       Consulting Agreement with Thomas R. Mooney(6)

10.3         Employment Agreement with George W. Trahan(5)

10.3.1       Amendment to Employment Agreement with George W. Trahan(6)

10.4.1       Torrance Property Lease(6)

10.5.1       Form of Buy/Sell Agreement(6)

10.6         Southern California Bank Credit Facility (now U.S. Bank)(4)

10.6.1       Promissory Note Relating to U.S. Bank Credit Facility(5)

10.6.2       Promissory Note Related to U.S. Bank Credit Facility

10.6.3       Promissory Note and Amendment Relating to U.S. Bank Credit Facility

23.1         Consent of Grant Thornton LLP

23.2         Consent of McGladrey & Pullen, LLP

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

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

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

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

(4) PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-KSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1998.

(5) PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-KSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 1999.

(6) PREVIOUSLY FILED AND INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-KSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 24, 2000.

                                       13
<PAGE>

<TABLE>
                                INDEX TO FINANCIAL STATEMENTS
<CAPTION>

                                                                                       PAGE
                                                                                       ----
<S>                                                                               <C>
Report of Independent Certified Public Accountants, Grant Thornton LLP.........          F-1

Independent Auditor's Report, McGladrey & Pullen, LLP..........................          F-2

Balance Sheet..................................................................          F-3

Statements of Operations.......................................................          F-4

Statements of Stockholders' Equity  ...........................................          F-5

Statements of Cash Flows   ....................................................          F-6

Notes to Financial Statements  ................................................   F-7 - F-17

                                             14
</TABLE>
<PAGE>

                            [Grant Thornton LLP LOGO]



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



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


We have audited the accompanying balance sheet of Hi-Shear Technology
Corporation as of May 31, 2001, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audit.


We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hi-Shear Technology Corporation
as of May 31, 2001, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.



/s/ Grant Thornton LLP


Los Angeles, California
July 20, 2001 (except for the second paragraph of Note 2,
  as to which the date is September 17, 2001)

                                       F-1
<PAGE>

                         [McGladrey & Pullen, LLP LOGO]



                          INDEPENDENT AUDITOR'S REPORT



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


We have audited the accompanying statements of operations, stockholders' equity
and cash flows for the year ended May 31, 2000 of Hi-Shear Technology
Corporation (the "Company"). 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 audit.


We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of the Company's operations and its cash
flows for the year ended May 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.



                           /s/ McGladrey & Pullen, LLP


Anaheim, California
August 1, 2000

                                      F-2
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

BALANCE SHEET
MAY 31, 2001

ASSETS                                                                  2001
--------------------------------------------------------------------------------

Current Assets
   Cash and cash equivalents                                        $    61,000
   Accounts receivable (Note 5)                                       7,512,000
   Claims receivable (Note 6)                                           816,000
   Inventories (Note 7)                                               3,618,000
   Deferred taxes (Note 11)                                             700,000
   Prepaid expenses and other current assets (Note 9)                   393,000
                                                                    ------------

     TOTAL CURRENT ASSETS                                            13,100,000

Land held for sale (Note 9)                                             846,000
Equipment, net (Note 8)                                               2,641,000
Deferred taxes (Notes 3 and 11)                                         901,000
Intangible assets, net                                                   74,000
                                                                    ------------

                                                                    $17,562,000
                                                                    ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
   Bank line of credit (Note 10)                                    $ 4,857,000
   Notes payable (Note 10)                                            1,322,000
   Trade accounts payable                                             1,557,000
   Accrued payroll and related costs                                    527,000
   Deposits held (Note 9)                                               247,000
   Other accrued liabilities                                            431,000
                                                                    ------------

     TOTAL CURRENT LIABILITIES                                        8,941,000

Excess of Net Assets Acquired Over Purchase Price                       276,000

Stockholders' Equity (Note 13)
   Preferred stock $1.00 par value; 500,000 shares authorized;
     no shares issued                                                       ---
   Common stock, $.001 par value; 25,000,000 shares authorized;
     6,670,000 shares issued and outstanding                              7,000
   Additional paid-in capital                                         7,193,000
   Retained earnings                                                  1,145,000
                                                                    ------------

     TOTAL STOCKHOLDERS' EQUITY                                       8,345,000
                                                                    ------------

                                                                    $17,562,000
                                                                    ============

See Notes to Financial Statements

                                      F-3
<PAGE>

<TABLE>
HI-SHEAR TECHNOLOGY CORPORATION

STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 2001 AND 2000
<CAPTION>

                                                            2001            2000
-------------------------------------------------------------------------------------
<S>                                                     <C>             <C>
REVENUES (Notes 4 and 5)                                $ 12,065,000    $ 13,989,000

Cost of Revenues (Notes 3 and 7)                           9,393,000      10,015,000
                                                        -------------   -------------

GROSS MARGIN                                               2,672,000       3,974,000

Selling, General and Administrative Expenses (Note 3)      2,793,000       3,413,000
                                                        -------------   -------------

OPERATING INCOME (LOSS)                                     (121,000)        561,000

Interest                                                     617,000         490,000
                                                        -------------   -------------

INCOME (LOSS) BEFORE INCOME TAX EXPENSE OR BENEFIT
                                                            (738,000)         71,000

Income Tax Expense (Benefit) (Notes 3 and 11)                250,000        (607,000)
                                                        -------------   -------------

NET INCOME (LOSS)                                       $   (988,000)   $    678,000
                                                        =============   =============

Basic Earnings (Loss) per Common Share and
      Per Common Share Assuming Dilution:               $      (0.15)   $       0.10

Weighted Number of Common Shares Outstanding -
       Basic and Assuming Dilution                         6,670,000       6,670,000

See Notes to Financial Statements.

                                         F-4
</TABLE>
<PAGE>

<TABLE>
HI-SHEAR TECHNOLOGY CORPORATION

STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 2001 AND 2000
<CAPTION>

                               Common Stock           Additional                     Total
                        --------------------------     Paid-In      Retained     Stockholders'
                           Shares         Amount       Capital      Earnings        Equity
---------------------------------------------------------------------------------------------
<S>                       <C>         <C>           <C>           <C>            <C>
Balance, May 31, 1999     6,670,000   $     7,000   $ 7,193,000   $ 1,455,000    $ 8,655,000

  Net income                      -             -             -       678,000        678,000
                        ------------  ------------  ------------  ------------   ------------

Balance, May 31, 2000     6,670,000   $     7,000   $ 7,193,000   $ 2,133,000    $ 9,333,000

  Net loss                        -             -             -      (988,000)      (988,000)
                        ------------  ------------  ------------  ------------   ------------

Balance May 31, 2001      6,670,000   $     7,000   $ 7,193,000   $ 1,145,000    $ 8,345,000
                        ============  ============  ============  ============   ============

See Notes to Financial Statements

                                             F-5
</TABLE>
<PAGE>

<TABLE>
HI-SHEAR TECHNOLOGY CORPORATION

STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 2001 AND 2000
<CAPTION>

                                                                         2001           2000
------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>
Cash Flows from Operating Activities
   Net income (loss)                                                 $  (988,000)   $   678,000
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization                                       864,000        552,000
     Provision for inventory reserves                                    595,000        473,000
     Amortization of excess of net assets                               (138,000)      (138,000)
       acquired over purchase price
     Deferred taxes                                                      234,000       (635,000)
     Changes in assets and liabilities:
       Accounts receivable                                               273,000     (1,239,000)
       Claims receivable                                                 305,000       (365,000)
       Inventories                                                    (1,304,000)      (107,000)
       Prepaid expenses and other assets                                 (11,000)        16,000
       Accounts payable                                                  832,000     (1,231,000)
       Accrued payroll and related costs                                 (88,000)       (58,000)
       Other accrued liabilities                                         157,000        (64,000)
                                                                     ------------   ------------

         NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES             731,000     (2,118,000)
                                                                     ------------   ------------

Cash Flows from Investing Activities
   Investment in land held for sale                                            0     (1,128,000)
   Proceeds from deposit for land held for sale                          247,000              0
   Purchase of equipment                                                (172,000)      (851,000)
                                                                     ------------   ------------

         NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES        75,000     (1,979,000)
                                                                     ------------   ------------

Cash Flows from Financing Activities
   Proceeds from bank line of credit                                     307,000      2,849,000
   Proceeds from notes payable net                                             0      1,648,000
   Principal payments on notes payable                                (1,052,000)      (433,000)
                                                                     ------------   ------------

       NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES              (745,000)     4,064,000
                                                                     ------------   ------------

       NET INCREASE (DECREASE) IN CASH                                    61,000        (33,000)

Cash and Cash Equivalents, beginning of period                                 0         33,000
                                                                     ------------   ------------

Cash and Cash Equivalents, end of period                             $    61,000    $         0
                                                                     ============   ============

Supplemental Disclosure of Cash Flow Information
   Cash paid during the year for interest                                634,000        447,000

   Cash paid during the year for income taxes                             50,000         27,000

See Notes to Financial Statements.

                                              F-6
</TABLE>
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

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


NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS:

Hi-Shear Technology Corporation ("HSR" or 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. The Company is listed on the American Stock Exchange (symbol
"HSR"). HSR's aerospace products are procured under both long and short-term
contracts with numerous aerospace contractors, subcontractors and agencies of
the United States Government. The Company is dependent on the continuation of
government sponsored military and aerospace programs in order to maintain its
revenues.

Hi-Shear also has diversified into two non-aerospace products. The Company has
made significant investments in inventory and tooling for the LIFESHEAR
emergency rescue cutting tool. The Company is marketing the tool in the U.S.,
Canada and Japan. However, since the Company has focused most of its attention
and resources on its core aerospace products, the sales volumes of this new
product have not been significant. In addition, the Company has developed unique
commercial air bag inflator technologies and has been awarded patents for
several of its automobile air bag inflator designs by the United States Patent
and Trademarks Office. All costs related to the development of the air bag
inflator designs have been expensed.

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

USE OF ESTIMATES:

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities. The statements disclose
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates and assumptions made by management are used for, but not
limited to, the realization of claims receivable and certain inventories, costs
to complete contracts, and the carrying value of long-lived assets. Actual
results could differ from those estimates.

REVENUE RECOGNITION:

Sales of non-aerospace 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.

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

                                      F-7
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

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


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

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.

ACCOUNTS RECEIVABLE:

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

INVENTORIES:

Inventory costs for defense and aerospace 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, and factory and engineering overhead. 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. Aerospace raw materials and components consist of purchased and
manufactured parts which are not allocated to an existing production contract
but will be utilized in anticipated future contracts. These parts are valued at
the lower of cost or estimated market value.

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

EQUIPMENT:

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

LAND HELD FOR SALE:

Investment in property held for sale, including land, is recorded at the lower
of cost or net realizable value.

INTANGIBLE ASSETS:

Intangible assets, consisting primarily of capitalized patent costs, are
amortized over the lesser of the expected economic life or the 17-year life of
the patent.

DETERMINING IMPAIRMENT ON LONG-TERM ASSETS:

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

                                      F-8
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

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


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

EXCESS OF NET ASSETS ACQUIRED OVER PURCHASE PRICE:

In June 1993, the total purchase price of the Company was allocated to the
assets acquired and liabilities assumed based upon their relative fair values at
the date of the acquisition using the purchase method of accounting. The
resulting net assets acquired over purchase price (also referred to as negative
goodwill) are being amortized into income over a ten-year period. Included in
Selling, General and Administrative expenses are amortization of negative
goodwill totaling $138,000 in each of 2001 and 2000.

INCOME TAXES:

Deferred taxes are provided on the 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.

RESEARCH AND DEVELOPMENT:

All Company sponsored research and development costs are expensed as incurred.
During fiscal year 2000 the Company incurred $489,000 in research and
development expenses. No such expenses were incurred in fiscal year 2001.

Certain research and development contracts placed with the Company by its
customers are contained in the Company's revenue and cost of revenue accounts.
These customer funded research and development efforts are not classified as
research and development expense.

EARNINGS (LOSS) PER SHARE:

Earnings (loss) per share (EPS) is computed as net income (loss) divided by the
weighted-average number of common shares outstanding for the period. EPS
assuming dilution reflects the potential dilution that could occur from common
shares issuable through stock options. There was no dilutive effect from
outstanding options for either fiscal year 2001 or fiscal year 2000.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

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

                                      F-9
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

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


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

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 that exceeds the
insurance limits of the FDIC. The Company has not experienced any losses on such
deposits.

STOCK-BASED COMPENSATION:

The Company accounts for stock-based employee compensation under the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require compensation to be recorded if the exercise price is at least equal to
the fair value at the measurement date. Nonemployee stock-based transactions are
accounted for under the requirements of SFAS No. 123 ACCOUNTING FOR STOCK BASED
COMPENSATION which requires compensation to be recorded based on the fair value
of the securities issued or the services received, whichever is more reliably
measurable.

NEW PRONOUNCEMENT:

In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 ("SFAS No. 141"), Business Combinations
and No. 142 ("SFAS No. 142"), Goodwill and Other Intangible Assets. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized, but are reviewed annually
(or more frequently if impairment indicators arise) for impairment. Separable
intangible assets will continue to be amortized over their useful lives, (but
with no maximum life). The amortization provisions of SFAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to the
unamortized deferred credit ("negative goodwill") acquired prior to July 1,
2001, the Company is required to adopt SFAS No. 141 effective fiscal year 2003;
however, early adoption is allowed in fiscal year 2002. The Company has elected
to adopt SFAS No. 142 and the transition provisions of SFAS No. 141 in fiscal
year 2002. The cumulative effect of this change in accounting principle will be
a write-off of the negative goodwill remaining at May 31, 2001 of $276,000,
which will be included in the statement of operations for the quarter ended
August 31, 2001. Due to the availability of net operating losses, there will be
no tax effect associated with the change.

RECLASSIFICATIONS:

The presentation of certain prior year information has been reclassified to
conform with the current year presentation.

NOTE 2.  RISKS AND UNCERTAINTIES

The Company's future operating results may be affected by a number of factors.
The Company is dependent on the continuation of government funding of government
sponsored military and aerospace programs in order to maintain and enhance its
revenues. During the past two fiscal years, revenues have decreased due to lower
customer requirements for military, satellite and launch vehicle components.
While the total values of new customer orders obtained since mid-fiscal year
2001, and continuing through early fiscal 2002, have returned to levels similar
to fiscal years prior to the recent slow-down period, continuation of this
recent trend of increased customer requirements and new orders are necessary for
the Company to achieve profitable operating profits.

                                      F-10
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

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


NOTE 2.  RISKS AND UNCERTAINTIES (CONTINUED)

The Company relies on its borrowing capacity to provide additional funds for its
operations. During all of fiscal year 2001 the Company was able to borrow
against a revolving line of credit that provided funding up to a limit of
$5,100,000. The line of credit, which matures on October 15, 2001, contains
various financial covenants. At May 31, 2001 the Company was in violation of two
covenants. While the bank has not waived these covenant violations, it has
agreed to continue the loan until its maturity. However, the maximum borrowing
limit was decreased to $4,800,000 effective July 30, 2001, and again decreased
to $4,600,000 effective October 1, 2001. The Company is currently in the process
of seeking and obtaining a new revolving line of credit.

NOTE 3.  FOURTH QUARTER ADJUSTMENTS

During the fourth quarter ended May 31, 2001 there were several significant
adjustments that resulted in the Company reporting a net loss for the fiscal
year. Most of those adjustments related to material changes in estimates.

Padlock tooling costs of $266,000 were written off to selling, general and
administrative expenses as a consequence of management's strategy of deferring
production of padlocks while Company resources are focused on expanding the core
aerospace and defense product lines. The Company increased the reserves for
inventories used to make LIFESHEAR commercial cutting tools by $191,000 due to
the level of sales of the LIFESHEAR product. In addition, the Company provided
an additional $404,000 of reserves against its stock inventory items used to
produce aerospace and defense products. Both inventory reserve adjustments were
charged to cost of revenues.

Certain legal costs of $102,000 that related to litigation the Company is
currently involved in were included in accounts receivable in the Form 10-QSB
filed for the third quarter ended February 28, 2001. Those costs had been
capitalized rather than recognized as period costs. The Company recognized the
expenses in the fourth quarter ended May 31, 2001.

Management's revised estimate that some, but not all, of the deferred tax assets
will be realized prior to expiration led to the fourth quarter decision to
establish a valuation allowance as of May 31, 2001 that resulted in a reduction
of net deferred tax assets and additional income tax expense of $236,000.

NOTE 4.  MAJOR CUSTOMERS

The Company derives a major portion of its revenues directly from certain large
satellite and launch vehicle companies and departments and agencies of the
United States Government. Sales to these major customers, which are in excess of
10% of total sales, consist of the following:

--------------------------------------------------------------------------------
                                                       2001                2000

Lockheed Martin                                         21%                17%
United States Government                                24%                17%
Boeing Company                                          17%                 *
United Space Alliance                                    *                 15%

*Customer's total revenues represented less than 10% of the Company's total
revenues for that year.

                                      F-11
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

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


NOTE 5.  ACCOUNTS RECEIVABLE

Due from United States Government, prime and subcontractors under long-term
contracts:

<TABLE>
<CAPTION>
<S>                                                                     <C>
         Billed                                                         $ 16,037,000
         Unbilled                                                          3,425,000
         Progress payments received                                      (12,558,000)
                                                                        -------------
                                                                           6,904,000
Billed and currently due from foreign sales, long-term contracts             593,000
                                                                        -------------

         Total billed and unbilled receivables on long-term contracts      7,497,000

Other receivables                                                             15,000
                                                                        -------------

         Total                                                          $  7,512,000
                                                                        =============
</TABLE>

Accounts receivable consists of billed and unbilled amounts due from the United
States Government, prime and subcontractors under long-term contracts. Billed
and unbilled receivables at May 31, 2001 were $4,072,000 and $3,425,000,
respectively.

The billed receivables include an overdue amount of $1,319,000 from one account.
To expedite collection of this receivable, the Company has filed a lawsuit. (See
Note 12)

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

During the fiscal years 2001 and 2000, the Company generated revenue of
approximately $1,474,000 and $2,208,000, respectively, from sources outside of
the United States.

NOTE 6.  CLAIMS RECEIVABLE

As of May 31, 2001 the outstanding amount due for two claims on contracts
terminated by customers for "convenience" was $816,000. Claims are subject to
review and audit by the customer. If no agreement is reached, the Company may
pursue other alternatives including litigation. The ultimate realization of the
claims may be different than the amount recorded and the difference could be
significant.

NOTE 7.  INVENTORIES

Aerospace inventory:
         Raw materials and components                               $ 2,028,000
         Production costs of contracts in process                     1,286,000
                                                                    ------------
                                                                      3,314,000
         Less inventory reserves                                       (164,000)
                                                                    ------------
                  Total aerospace inventory                           3,150,000

Non-aerospace inventory:
         Raw materials and components                                   545,000
         Work-in-process                                                282,000
                                                                    ------------
                                                                        827,000
         Less inventory reserves                                       (359,000)
                                                                    ------------
                  Total non-aerospace inventory                         468,000
                                                                    ------------
                           Total inventory                          $ 3,618,000
                                                                    ============

                                      F-12
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

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


NOTE 7.  INVENTORIES (CONTINUED)

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,
2001, is as follows:

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

Total contracts in process                                         $ 21,443,000
                                                                   =============
Costs incurred to date                                             $ 10,762,000
Estimated profit recorded                                             3,307,000
Less billed and unbilled amounts                                    (12,783,000)
                                                                   -------------

Total production costs of contracts in process                     $  1,286,000
                                                                   =============

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, 2001 would change contract profits or losses by
approximately $58,000.

NOTE 8.  EQUIPMENT

Machinery and equipment                                              $4,738,000
Office equipment and furniture                                          661,000
Leasehold improvements                                                  154,000
Projects in process                                                      83,000
                                                                     -----------
                                                                      5,636,000
Less accumulated depreciation and amortization                        2,995,000
                                                                     -----------

                                                                     $2,641,000
                                                                     ===========

NOTE 9. LAND HELD FOR SALE

The Company owns land in Santa Clarita, CA that it acquired during the fiscal
year ended May 31, 2000 by exercising its purchase option of $1,128,000 for
sixteen acres of land that it previously leased. While the Company continues to
utilize the land as a storage and blending site, it has been management's
intention since the date of the purchase to sell the property for a profit.

During the fiscal year ending May 31, 2001, the City of Santa Clarita through
condemnation proceedings took four acres of Hi-Shear's sixteen-acre site for
construction of a city highway. Hi-Shear is disputing the amount allocated by
the City for this property and is involved in legal proceedings to obtain the
fair value of this land. During fiscal year 2001 the Company accepted $247,000
as a deposit on the sale of the four acres. Since the Company's management
anticipates resolution of the dispute and full compensation for the land to
occur within the fiscal year ending May 31, 2002, the pro-rata share of the cost
of that land of $282,000 is classified in other current assets with the
remaining portion classified as land held for sale.

                                      F-13
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

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


NOTE 10.  DEBT

The Company has a business loan agreement with a bank for the purpose of
obtaining a revolving line of credit and term loans. Borrowings under this
business loan agreement are collateralized by substantially all of the Company's
assets. Throughout the fiscal year ending May 31, 2001 the revolving line of
credit agreement provided for maximum borrowings of $5,100,000. Outstanding
amounts bear interest at the Wall Street Journal's prime rate (7.00% at May 31,
2001) plus .50%. The revolving line of credit expires October 15, 2001. At May
31, 2001, $4,857,000 was outstanding under the line of credit and $243,000 was
available for borrowing. The maximum borrowing under the revolving line of
credit was decreased to $4,800,000 and $4,600,000 as of July 30 and October 1,
2001, respectively. The business loan agreement prohibits payments of dividends
without prior approval and contains various financial covenants including
minimum working capital, minimum tangible net worth, maximum debt to tangible
net worth, minimum cash flow coverage and positive cash flow from operations. At
May 31, 2001, the Company was not in compliance with two of these covenants. The
bank has agreed to continue the revolving line of credit until its maturity. The
Company is currently in the process of seeking and obtaining a new revolving
line of credit.

Notes payable at May 31, 2001, which are subject to the business loan agreement
above, are classified as current liabilities due to the Company's noncompliance
with the two covenants as noted above. The notes payable are as follows:

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

<S>                                                                                     <C>
Promissory Note, payable in monthly installments of $22,917 through August 2003, plus
interest at prime plus 0.5%, secured by substantially all assets                        $  619,000

Promissory Note, payable in monthly installments of $23,452 through March 2003, plus
interest at prime plus 0.5%, secured by substantially all assets                           516,000

Promissory Note, payable in monthly installments of $13,346 through August 2002, plus
    interest at prime plus 1%, secured by substantially all assets                         187,000
                                                                                        -----------

                                                                                        $1,322,000
                                                                                        ===========
</TABLE>

NOTE 11.  INCOME TAXES

Deferred income tax assets in the accompanying balance sheet at May 31, 2001,
consist of the following, of which $700,000 is included in current assets:

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

Deferred tax assets:
    Net operating loss carryforwards                                 $1,991,000
    Other                                                               335,000
                                                                     -----------

                                                                      2,326,000
    Less valuation allowance                                            725,000
                                                                     -----------
    Net deferred taxes                                               $1,601,000
                                                                     ===========

                                      F-14
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

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

NOTE 11.  INCOME TAXES (CONTINUED)

Realization of deferred tax assets is primarily dependent upon generating
sufficient taxable income prior to the expiration of the loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that some, but not all of, the net deferred tax assets will be realized
prior to expiration. That assessment is based upon the Company's expectations
for significant near term earnings derived from continuing growth in its backlog
plus unrealized gains anticipated upon the sale of certain real estate. The
amount of the deferred tax assets considered realizable, however, could be
increased or reduced in the near term if estimates of future taxable income
during the carryforward period are increased or reduced, or if certain changes
in the ownership structure of the Company occur.

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

                                                            2001         2000
--------------------------------------------------------------------------------

Federal income tax computed at the statutory rate        $(251,000)   $  25,000
Permanent differences, primarily negative goodwill         (53,000)     (55,000)
State taxes, less federal benefit                          (44,000)       4,000
Other state tax and minimum taxes                           14,000       21,000
Other                                                            0       14,000
Change in valuation allowance                              584,000     (616,000)
                                                         ----------   ----------

                                                         $ 250,000    $(607,000)
                                                         ==========   ==========

As of May 31, 2001, the Company had federal net operating loss carryforwards of
approximately $5,729,000, which expire $1,785,000 in 2009; $2,340,000 in 2011;
$170,000 in 2012; $333,000 in 2015 and $1,101,000 in 2016. The Company also has
state net operating loss carryforwards of approximately $719,000, which expire
$79,000 in 2002, $144,000 in 2005, and $496,000 in 2006.

The income tax expense charged to operations for the year ended May 31, 2001
includes current state taxes of $14,000 and a reversal of $236,000 deferred tax
benefit recognized in the fiscal year ended May 31, 2000. Management's
reassessment of the likelihood of full realization of the tax benefit of
deferred assets resulted in the change in the valuation allowance. The income
tax benefits credited to operations for the year ended May 31, 2000 included
current federal and state taxes of $28,000 and deferred tax benefits of
$635,000.

NOTE 12.  COMMITMENTS AND CONTINGENCIES

The Company leases its facilities and certain equipment under operating lease
agreements that expire at various dates through 2005. Rental expense under
operating leases for the years ended May 31, 2001 and 2000 was approximately
$620,000 and $575,000 respectively.

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

                             2002                  $  536,000
                             2003                     471,000
                             2004                     483,000
                             2005                     122,000
                                                   -----------
                                                   $1,612,000
                                                   ===========

                                      F-15
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

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


NOTE 12.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company is subject to certain legal proceedings and claims that have arisen
in the ordinary course of its business.

In November 2000 Hi-Shear sued USBI Company, a Delaware Corporation, and United
Space Alliance, LLC, a Delaware limited liability company, in the Circuit Court
of the Eighteenth Judicial Circuit in and for Brevard County, Florida. Hi-Shear
filed suit to recover damages resulting from the defendants' refusal to pay in
whole or in part on four separate invoices totaling $1,319,000 for specially
manufactured aerospace components. In addition, the Company also seeks
compensatory damages alleging that the defendants fraudulently induced Hi-Shear
to make an excessively low bid on a request for proposal to manufacture certain
other parts. Further damages are sought for defendants' misappropriation of
Hi-Shear's confidential, proprietary and/or trade secret protected designs,
drawings, and specifications for other aerospace components. The lawsuit is
currently in the discovery phase. No counterclaims have been asserted against
the Company.

The Company is a party to an arbitration proceeding initiated August 2000 by
Cincom Systems, Inc. ("Cincom"), a software supplier, for collection of license
and consulting fees in the amount of $171,200, plus service fees continuing at
$68 per day. Cincom later amended its claim to include a copyright infringement
claim for damages of $508,000 or more. Hi-Shear has denied all allegations
contained in Cincom's claims and has counterclaimed for damages in the amount of
$1.2 million. The arbitration proceeding is in its final stages and a decision
is expected in the near future.

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

NOTE 13.  STOCKHOLDERS' EQUITY

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 or directors under the Plan. Options are granted and
vested as determined by the Stock Options Committee. At May 31, 2001 there were
299,000 shares available for grant under the Company's option plan.

A summary of the status of the option plan and changes during fiscal years 2001
and 2000 is as follows:

<TABLE>
<CAPTION>
                                                           2001                            2000
                                              ------------------------------    ---------------------------
                                                                 Weighted-                      Weighted-
                                                                 Average                        Average
                                                                 Exercise                       Exercise
               Fixed Options                      Shares          Price           Shares         Price
-----------------------------------------------------------------------------------------------------------

<S>                                               <C>        <C>                  <C>        <C>
Outstanding at beginning of year                  110,000    $        5.91        186,000    $        5.95
     Granted                                        7,000             2.25          7,000             5.38
     Exercised                                          -                -              -                -
     Forfeited                                    (12,000)            5.76        (83,000)            6.09
                                             --------------------------------------------------------------

Outstanding at end of year                        105,000    $        5.67        110,000    $        5.81
                                             ==============================================================

Exercisable at end of year                         98,000    $        5.91        106,000    $        5.91

Weighted-average fair value per
     option granted during the year                          $        1.74                   $        3.55
</TABLE>

                                      F-16
<PAGE>

HI-SHEAR TECHNOLOGY CORPORATION

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


NOTE 13.  STOCKHOLDERS' EQUITY (CONTINUED)

A further summary about fixed options outstanding at May 31, 2001, 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
-------------------------------------------------------------------------------------------------------------------
<S>                               <C>         <C>            <C>                      <C>           <C>
$2.00 to $5.00                      7,000     10 years       $      2.25                   0        $         0
$5.00 to $7.00                     81,000     5 years               5.47              81,000               5.47
$7.38 to $8.50                     17,000     6 years               8.06              17,000               8.06
                           ---------------                                   ----------------

                                  105,000                    $      5.67              98,000        $      5.91
                           ===============                                   ================
</TABLE>

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

                                                       2001            2000
--------------------------------------------------------------------------------

Net income (loss)
    As reported                                $      (988,000)  $      678,000
    Pro forma                                       (1,000,000)         640,000

Earnings (loss) per common share and
    common share assuming dilution
    As reported                                $         (0.15)  $        0.10
    Pro forma                                            (0.15)           0.10

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 2001 and 2000, respectively. No dividend rate for all
years; price volatility of 65% in 2001 and 46% in 2000, risk-free interest rates
of approximately 5.4% in 2001 and 6.0% in 2000; and expected lives of ten years.

NOTE 14.  RELATED PARTIES

A director of the Company performs consulting services for the Company. The
Company incurred $138,000 and $34,000 for the years ended May 31, 2001 and 2000,
respectively.

                                      F-17