SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934 for the fiscal year ended June 30, 1997

Commission file number                                  0-22924

                            HILITE INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                               75-2147742
---------------------------------                            -------------------
  (State or other jurisdiction                                (I.R.S. Employer
of incorporation or organization)                            Identification No.)
                                                            



        1671 S. Broadway
        Carrollton, Texas                                           75006
----------------------------------------                          ----------
(Address of principal executive offices)                          (Zip code)

                                 (972) 466-0475
              ----------------------------------------------------
              (Registrant's telephone number, including area code)
              

Securities registered pursuant to Section 12(b) of the Act:   None

Securities  registered  pursuant to Section 12(g) of the Act: Common Stock, $.01
                                                      par value (Title of Class)

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

Based upon the closing price on the NASDAQ  National  Market System on September
12, 1997, the aggregate market value of the voting stock held by  non-affiliates
of the registrant was $6,463,000.

As of  September  12,  1997,  the Company had  4,900,000  shares of Common Stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Registrant's  Definitive  Proxy Statement to be filed pursuant to Regulation 14A
promulgated  by the  Securities  and Exchange  Commission  under the  Securities
Exchange Act of 1934,  which  Definitive  Proxy  Statement is  anticipated to be
filed within 120 days after the end of the  registrant's  fiscal year ended June
30, 1997 is incorporated by reference in Part III hereof.

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.     Yes [X] No [_]


<PAGE>

                                     PART I

ITEM 1 - BUSINESS

Hilite  Industries,  Inc.  (the  "Company")  designs,  manufactures  and sells a
diversified  line  of   highly-engineered   products  primarily  for  automotive
applications.  These products include brake valves such as proportioning valves,
power  transmission  components  such  as  electromagnetic  clutches,   mounting
brackets and pulleys, and specialty components and assemblies such as stampings,
specialty springs and automated  assemblies.  Some of the Company's products are
engineered  in close  cooperation  with the  Company's  customers  to meet their
specific performance requirements. Approximately 75% of the sales of the Company
are to  automotive  companies and their  suppliers for passenger  cars and light
trucks sold in the United  States.  The  Company's  customers  include all three
domestic  automotive  companies:  Ford Motor Company  ("Ford"),  General  Motors
Corporation ("General Motors") and Chrysler Corporation  ("Chrysler") as well as
other  automotive  companies  such as  Mitsubishi  Motor Sales of America,  Inc.
("Mitsubishi"),  Honda of America  Mfg.,  Inc.  ("Honda"),  Toyota  Motor Sales,
U.S.A., Inc. ("Toyota") and Navistar  International  Transportation  Corporation
("Navistar").  The Company also sells products to first-tier suppliers including
Borg-Warner  Corporation  ("Borg-Warner"),  Bosch  Braking  Systems  Corporation
("Bosch"),   Denso  of  Los  Angeles,   Inc.  ("Denso"),   Motivair  Corporation
("Motivair")   and  ITT   Automotive   of  North   America,   Inc.   Significant
non-automotive  customers  include Crane National  Vendors,  the Balance Systems
Division of Amesburg Group, Inc.,  Motorola,  Inc. and a variety of distributors
for industrial/hydraulic clutches.

Except for the historical  information  contained herein,  the document contains
forward looking statements that involve risks and  uncertainties.  The Company's
actual results could differ  materially from those discussed here.  Factors that
could cause or contribute to such differences  include,  but are not limited to,
those  discussed  in  the  sections  entitled  Risk  Factors,  Competition,  Raw
Materials and Regulations.

The Company's  revenues have grown in recent years through both internal  growth
and acquisition.  Sales increases in each of the previous three years were 1.2%,
61.8% and 21.7% in fiscal years 1997, 1996 and 1995, respectively.  According to
Ward's  Automotive  Reports,  U.S.  sales of  automobiles  and light trucks have
remained  flat over the past three years.  Vehicles  sold in the U.S.,  by model
year (July - June),  were 14.9  million in 1997,  15.0  million in 1996 and 14.9
million in 1995. A net loss of $1,657,000 was reported in fiscal year 1997 which
interrupts a five year record of exceptional  growth and  profitability  for the
Company.  The net loss for the year was entirely  attributable  to the specialty
components  and  assemblies  division  and includes a fourth  quarter  after tax
charge of $1,757,000  related to the  restructuring of the division.  The charge
includes provisions for the termination of certain contracts,  the write down of
certain  assets to estimated  fair value,  net of selling  costs and other costs
related to the reorganization.

The Company believes that its quick response to customer requirements,  creative
engineering   and   ability  to  design   and   manufacture   high   volumes  of
competitively-priced  products  to meet or exceed the quality  standards  of the
automotive  industry  are  the  principal  reasons  it has  been  successful  in
increasing its market share and in growing  faster than the domestic  automotive
industry. The Company has made significant  investments in capital equipment and
state-of-the-art  manufacturing  processes in order to continuously  improve its
productivity and maintain its position as a low cost, high quality manufacturer.

The Company's goal is to continue to increase  sales and income from  operations
by further  expanding its number of customers and by increasing the sales dollar
content per United  States light  vehicle  sold.  The  Company's  strategy is to
continue to invest in new and efficient  production  equipment and to capitalize
on  opportunities  in niche or emerging  markets by  expanding  its  engineering
capabilities to other automotive products.  Additionally, the Company may pursue
selected acquisitions which complement its existing business.

On July 21, 1995, the Company  acquired 100% of the outstanding  common stock of
North American Spring and Stamping Corp. ("NASS"). NASS manufactures and sells a
diversified  line of assembled  components,  stampings  and  specialty  springs,
primarily  for  electronic  automotive  applications,  and is referred to as the
specialty 

                                       2
<PAGE>


components and assemblies  division.  The  acquisition  was accounted for by the
purchase method of accounting and NASS' assets and liabilities  were recorded at
their fair value at the date of the  acquisition.  The  Company's  statements of
operations  include the results of  operations  of NASS  subsequent  to July 21,
1995.

Early in fiscal  1997 the  specialty  components  and  assemblies  division  was
confronted  with a rapidly  deteriorating  situation  resulting from the loss of
Ford's Q1 rating  and  mounting  losses on the  start-up  of new  business.  The
Company  responded  with a new  management  team for the  division  who began an
aggressive  program  to  contain  the  immediate  problems,   maintain  positive
communications  with  customers  and  develop a plan to return the  division  to
profitability.  The new management team, along with top Company management,  has
directed  an  intense   effort  to  create  a   restructuring   plan  that  will
substantially  cut the  division's  losses in the near term  while  providing  a
foundation for rebuilding the business to  profitability at the operating income
level in fiscal 1998. The  restructuring  plan was presented and approved by the
Board of Directors in June 1997 and consists of the following elements:

1.   Identify  the core  products of the division  which fit with the  Company's
     strengths.  The division will focus on value added stampings and assemblies
     and some specialty spring products, which represented  approximately 70% of
     fiscal 1997 sales. Improvements in pricing, processes and systems are being
     implemented to increase the profitability of these products.
2.   Identify  unprofitable,  commodity-type  products  and implement a plan for
     their orderly disposition which is intended to result in a 60% reduction in
     part numbers.  This  disposition  plan  involves  products with fiscal 1997
     sales of approximately  30%. Based upon discussions with our customers,  an
     orderly  transfer of these products to other vendors will take an estimated
     nine month period. Effective August 1, 1997, a price increase will occur on
     these parts to more accurately  reflect our manufacturing and support costs
     during the transition period.
3.   Streamline  the plant  operating  and  overhead  structure to adjust to the
     downsized  production  levels  while  increasing  quality  and  engineering
     capability.
4.   Upgrade  quality  systems and  manufacturing  and  management  processes to
     enable the  division to qualify  for a QS-9000  rating and to regain the Q1
     status at Ford.

As a  result  of  implementing  this  restructuring  plan a  pre-tax  charge  of
$2,700,000  ($1,757,000  after-tax) was recorded in the fiscal 1997 results. The
charge is  comprised  of a reduction  (approximately  $900,000)  in the net book
value of certain assets  primarily  machinery,  equipment and tooling,  to their
estimated fair value, net of estimated  selling costs,  accrual of certain costs
which the Company expects to incur in terminating contractual  obligations,  but
for which no future economic benefit will be received (approximately $1,600,000)
and other costs  (approximately  $200,000).  Operating  losses,  which may occur
during the phase-out period, have not been accrued.

As of June 30, 1997 the plan was  substantially in place although much difficult
work lies ahead.  Operating  losses may continue at the division  but, at a much
reduced  rate,  in the  first two or three  quarters  of the 1998  fiscal  year.
Management's  goal is to have a small  operating  profit in the division for the
year and a business  unit that is  streamlined,  focused on quality,  engineered
products  that fits well with the  Company's  strengths and which will provide a
foundation  for future  growth.  The  achievement of this goal is dependent upon
regaining Q1 status with Ford and achieving QS-9000 certification. Not achieving
this goal may have a significant adverse effect on the division's profitability.
See Risk Factors.

PRODUCTS

The following  table sets forth the Company's net sales for brake valves,  power
transmission  components  and  specialty  components  and  assemblies  divisions
together with their corresponding percentages of total net sales for each of the
three fiscal years ended June 30, 1997:


                                       3
<PAGE>




                                           Year ended June 30,
                          -----------------------------------------------------
                                1997              1996                1995
                          ---------------    ---------------    ---------------
                                         (dollars in thousands)

Net sales:
   Brake valves           $22,195   30.2%    $23,909   32.9%    $22,503   50.1%
   Power transmission                                          
     components            21,762   29.6      21,533   29.7      22,397   49.9
   Specialty components                                        
     and assemblies        29,535   40.2      27,200   37.4        --      0.0
                          -------  ------    -------  ------    -------  ------
   Total net sales        $73,492  100.0%    $72,642  100.0%    $44,900  100.0%
                          =======  ======    =======  ======    =======  ======
                                                         

BRAKE VALVES

Brake valves sales were  $22,195,000,  accounting for 30.2% of the Company's net
sales for the 1997  fiscal  year.  Brake  proportioning  valves,  the  principal
product of this division, provide the proper amount of pressure to the front and
rear brakes to  facilitate a controlled  stop within a minimum  distance.  These
valves are found on both  conventional  and anti-lock  braking  systems for most
passenger cars and light trucks. The Company manufactures various types of brake
valves,  including  in-line valves and remote  valves,  and will produce two new
types of products in fiscal year 1998,  relief  valves and actuator  assemblies.
The relief  valve is an integral  part of a power brake  booster  system used on
vehicles  which have  inadequate  vacuum to support power  braking.  An actuator
assembly  is used  with a height  sensing  brake  valve to modify  the  pressure
distributed to the rear wheels based on the changing loads in the vehicle.

Brake proportioning  valves have been used in automotive brake systems since the
1960s.  The primary  function  of the  proportioning  valve is to provide,  at a
specific point,  reduced hydraulic pressure to the rear brakes of the vehicle to
proportion  the  pressure  between  the front and rear brakes in relation to the
shift in dynamic weight  distribution during stopping.  Controlled  reduction of
this  pressure  minimizes  vehicle  stopping  instability.  The range of vehicle
performance during braking is subject to certain federally-mandated  guidelines.
The need for a  different  brake  valve  for each  vehicle  model is a result of
various  factors such as automobile  size and  specifications.  Brake valves are
used both in  automobiles  which are equipped with  anti-lock  brakes as well as
traditional brake systems.

The Company's  proprietary and patented  in-line valves are generally  installed
directly  in the master  cylinder  of the brake  system.  In-line  valves  offer
advantages to automotive  manufacturers,  including lower cost, reduced size and
flexibility. The remote valve, which is installed away from the master cylinder,
is  a  more  sophisticated   proportioning  valve  used  in  applications  where
additional  functions are required,  such as metering,  switching and sending an
electrical signal to a dashboard light indicating brake malfunction.  During the
past  decade,  there  has been a trend  for the  Company's  customers  to select
in-line valves for new brake system applications.

Since the late 1980s,  there has been a trend  toward  anti-lock  brake  systems
("ABS").  ABS  technology  reduces  vehicle  stopping  distances,  under certain
conditions,  with improved handling capability.  Most vehicles must have a brake
proportioning  valve,  whether  or not they have ABS.  The  features  of ABS are
engaged  only  under  specific   circumstances  such  as  unusual  road  surface
conditions or "panic" stops.  Proportioning  valves,  like those produced by the
Company,  are required in normal  braking  functions and act as a backup to ABS.
Moreover,  the  trend  to use ABS  and  consumer  demand  for  shorter  stopping
distances  and improved  braking  control in adverse  situations  has  motivated
automotive  manufacturers to redesign many brake systems resulting in additional
opportunities for the Company.

The Company  supplies valves for many well-known car and mini-van models for all
three major  automotive  companies  and is  expanding  the  applications  of the
Company's  brake  valves.  In the second half of fiscal 1997,  the Company began
supplying  brake valves on General  Motors "P90" and "W" car models and will, in
fiscal 1998,  





                                       4
<PAGE>

begin shipping relief valves to Bosch and actuator  assemblies to Chrysler.  The
Company  believes,  based on its  estimate of the number of brake  proportioning
valves used in  automobiles  and light  trucks,  that its market  share of brake
proportioning valves sold in the United States is approximately 21%.

POWER TRANSMISSION COMPONENTS

Power transmission component sales were $21,762,000, accounting for 29.6% of the
Company's  net sales  for 1997.  This  division's  products  fall into two broad
categories: electromagnetic clutches and other power transmission products.

Electromagnetic Clutches. Electromagnetic clutches provide the on-off control of
rotary motion.  They are used in a wide range of  applications,  including sport
utility  vehicles,  hydraulic pumps,  automotive air  conditioning  compressors,
generators,  alternators  and water pumps.  The  Company's  clutches can also be
found on  various  trucks,  fishing  boats and  manufacturing  and  construction
equipment. The Company has received the Borg-Warner Automotive Certified Quality
Vendor  Award  every  year  since  1987.   Electromagnetic  clutches  have  been
manufactured since 1956 under the trade name Pitts Industries.  Recent favorable
exchange  rates  between the U.S.  dollar and the Japanese yen have improved the
opportunities  for the Company to supply clutches to the heavy truck market.  In
fiscal 1995,  the Company began shipping air  conditioning  clutches to Navistar
and Motivair and will begin shipping clutch  components in transmissions to Borg
Warner in fiscal 1998.

Other Power Transmission  Products.  The Company's other products,  manufactured
under the MAPCO trade name, consist primarily of mounting brackets,  pulleys and
fans.  These products  generally  require less  engineering than brake valves or
clutches. Mounting brackets are used in a variety of applications, including the
installation of automotive air conditioning compressors which are primarily sold
to Japanese  companies for cars sold in the United States.  Pulleys and fans are
sold in a variety of  specifications  for a wide range of  automotive  and truck
applications.

In the early 1980s the Company began supplying Japanese companies doing business
in the United  States  with  precision  machined  automotive  components.  These
relationships began with Denso, a first-tier supplier of Toyota. The Company now
supplies  products to Honda both  directly and through  Calhac,  a  wholly-owned
system  supplier for Honda,  and to  Mitsubishi.  The  Company's  experience  in
understanding,  implementing  and  producing  products  which  meet the  quality
requirements  and other  specifications  of its Japanese  customers  provide the
Company  with an  opportunity  for growth with its existing  customers  and with
other Japanese  companies doing business in the United States. The Company plans
to expand  these  relationships.  The  Company has  received  the top awards for
quality and delivery from both Honda and Denso over the last several years.

SPECIALTY COMPONENTS AND ASSEMBLIES

Specialty components and assemblies sales were $29,535,000, accounting for 40.2%
of the Company's net sales for the 1997 fiscal year. NASS was originally founded
in 1950 as Shaffer  Spring  Company and  subsequently  changed its name to North
American  Spring and Stamping Corp. in 1976. This division is  restructuring  to
provide  stronger  focus  on high  volume,  precision  stampings  and  automated
assemblies and to de-emphasize and eliminate commodity products.

The specialty components and assemblies division primarily manufactures products
for OEM automotive  customers with Ford Motor Company being the largest customer
at 58% of this  division's  total sales in fiscal  1997.  Currently,  75% of the
division's  business is OEM automotive with the remaining 25% in  non-automotive
applications.   Some  of  the  applications   using  components  and  assemblies
manufactured  by the division for the  automotive  industry  include  electronic
controllers  for  engines,  air bags,  fuel  systems and  anti-lock  brakes.  In
addition to Ford, the division sells automotive  components to Delco Electronics
and ITT  Automotive.  Products  sold  for  non-automotive  applications  include
delivery coils for vending machines,  components used in the  telecommunications
industry,  window  counter-balance  springs and various  other  products.  These
products will continue to be supplied by the division after the restructuring is
complete.




                                       5
<PAGE>



In late  September  1996,  the  division was placed on Q1 probation by Ford as a
result of certain quality concerns  regarding its products.  While on probation,
the division is prohibited  from being  considered for additional  business from
Ford  (although  existing  programs  in the  development  stages are  allowed to
continue).  A  team  of  corporate  and  division  management  has  developed  a
restructuring  plan  focused on  returning  the  division to  profitability  and
regaining Q1 status by the end of the fiscal year. In fiscal 1997, sales to Ford
by the division were approximately  $17,000,000;  there can be no assurance,  at
this  time,  that the Q1 status can be  regained  or what  effect the  continued
probation or revocation will have on future sales.

PRODUCT DESIGN, RESEARCH AND DEVELOPMENT

The Company employs a staff of over 40 engineers and  technicians,  one-third of
whom  devote  full time to new  product  design and  research  and  development,
primarily for the brake valve division.  The remaining engineers are involved in
production, manufacturing processes and tooling.

The design of new brake valve  products  generally  begins  several years before
production.  The process  begins  when the  automotive  manufacturers  or system
suppliers  request the  assistance  of the Company's  engineering  department in
designing  products to meet their cost and performance  requirements  for future
vehicle  models.  The Company's  engineering  department  works closely with the
customer by providing drawings and prototype samples. These drawings and samples
frequently  undergo numerous  revisions until a design is accepted.  The Company
believes  that its  expertise in this area as well as the quick  response of its
engineering  department are critical elements of the success of its brake valves
and other products.

During  the  1997,  1996 and 1995  fiscal  years,  the  Company's  research  and
development  expenditures were  approximately  $882,000,  $945,000 and $879,000,
respectively.   Of  these   expenditures,   $240,000,   $343,000  and  $596,000,
respectively,  were sponsored by customers and $642,000,  $602,000 and $283,000,
respectively, were sponsored by the Company.

CUSTOMERS

The  Company's  customers  include  automotive  manufacturers  as well as  major
first-tier   suppliers  of  brake  and   transmission   systems  to   automotive
manufacturers.  Approximately  75% of the Company's total net sales for the 1997
fiscal  year  were  to the  automotive  industry.  The  Company's  five  largest
customers with their  percentages of the Company's net sales for the 1997,  1996
and 1995 fiscal years were as follows:


                                             Percentage of Net Sales
                                             -----------------------
                                               Year ended June 30,
                                               -------------------
Customer                                     1997      1996      1995
--------                                     ----      ----      ----
Ford.......................................   30%       30%       23%       
Chrysler...................................    7         7         1
Borg-Warner................................    6         7        17
General Motors.............................    6         9        12
Bosch (formerly AlliedSignal)..............    6         7        10
                                 
Sales for NASS are included from the  acquisition  date,  July 21, 1995.  During
fiscal 1996 Bosch purchased the braking systems division from AlliedSignal.  The
percentages above reflect the sales to the manufacturing  facilities  previously
operated by AlliedSignal,  as if no change in ownership occurred.  The Company's
customers are


                                       6
<PAGE>

primarily in the automotive  industry and, as a result,  the Company is impacted
by the overall economic conditions within the industry.

SALES AND MARKETING

The Company utilizes a non-exclusive,  independent sales representative  company
based in Detroit,  Michigan  to assist the Company in selling its brake  valves.
The representative's employees work directly with the engineering and purchasing
personnel of the automotive  manufacturers and their first-tier suppliers.  This
sales representative,  who has considerable  experience in selling brake valves,
is paid by commission  based upon sales.  The Company believes this sales method
has  contributed  to the sales growth of the  Company's  brake  valves,  is cost
effective,  assists the Company in identifying new applications for its products
and fosters good relations with its customers.

Company  employed  sales and customer  service  personnel are primarily used for
selling power transmission  components.  Clutches and machined products are sold
by the Company's  direct sales  personnel who utilize trade journal  advertising
and  direct  customer  contacts.  Clutches  are also sold  through  distributors
throughout  the United  States  which  sell to the  marine and mobile  equipment
industries. The Company believes these sales methods are cost effective,  assist
the Company in identifying new customers and  applications  for its products and
foster good relations with its customers.

Sales of the specialty components and assemblies division are predominantly made
through independent sales representatives.  As part of the restructuring plan at
the  division,   effective   July  1997,   the  Company   terminated  the  sales
representative  responsible  for sales to Ford.  They were  replaced by the same
Ford sales representative  agency used by the brake valve division.  This agency
has a long  standing  relationship  and  excellent  contacts  at all three major
automotive  companies.  The move was made to  reduce  costs and to  broaden  the
future sales growth opportunities for the division. The other nonexclusive sales
representatives  for the division operate under agreements pursuant to which the
representative is paid a commission based upon sales.

Inventory is delivered to various  customer  locations  throughout  the country,
based on automotive  release  schedules using common carriers that are typically
selected by the customers.  Consistent with industry practice,  outbound freight
is generally paid by the customer.

PATENTS AND PROPRIETARY TECHNOLOGY

The Company  holds several  patents for brake valves  including a patent for the
manufacturing  method of the  in-line  brake  proportioning  valve.  This method
provides a cost  advantage to the Company since it reduces  material  costs.  In
addition, the Company uses many proprietary processes and technologies which are
either not  patentable  or are not yet  patented.  The  Company's  trade secrets
includes proprietary engineering designs and manufacturing processes.

COMPETITION

The  automotive  industry  is  highly  specialized  and  competitive.  There are
approximately four principal competitors of the Company that supply brake valves
to the major  domestic  automotive  manufacturers.  All of these  companies  are
larger and more diversified than the Company.  However,  the Company believes it
has the second  largest  brake  proportioning  valve market share and its market
share is  growing.  The Company  believes  that it has a  competitive  advantage
compared to these  competitors  in that it is the only brake valve  manufacturer
capable of  manufacturing  both in-line and remote brake  proportioning  valves.
Furthermore,  the Company is the only manufacturer of brake proportioning valves
that does not compete with its customers.  In addition,  one of its competitors,
General Motors,  has begun  outsourcing some of its brake valves to the Company.
Because of the capital investment in facilities and automated machining, testing
and  assembly  equipment,   the  Company  has  a  state-of-the-art  brake  valve
manufacturing  capability  and  believes  it is the low cost  producer  of brake
valves.



                                       7
<PAGE>


There are two principal  competitors  which dominate the high volume  automotive
clutch market, one of which is a Japanese company.  The Company  participates in
specialized  niches in the lower volume heavy truck clutch  market which has few
competitors. The Company also manufactures a specialized clutch for a first-tier
automotive supplier of transmission systems.

There are several  manufacturers  which supply machined  products similar to the
Company's  machined  products,  certain  of which are  larger  and have  greater
financial  resources  than the Company.  In addition,  the  Company's  customers
manufacture,  engineer and design  components  which  compete with the Company's
products and they could expand this activity, thereby reducing opportunities for
the Company.

There are numerous  smaller and a few larger  companies  located  throughout the
United  States  which  produce  products  similar  to  those  of  the  specialty
components and assemblies  division.  Management believes that its niche will be
stampings  and  automated  assemblies  that  provide  more value added  benefits
through  investment in equipment and  engineering  thus avoiding parts that fall
exclusively into "commodity" categories. Growth opportunities have been achieved
in the  electronics  area with a number of automated  assemblies  and  specialty
stampings  which are the primary area on which this  division  will  concentrate
according to the restructuring plan.

A favorable trend has been for major  automotive  manufacturers  and their large
first-tier suppliers to outsource the  manufacture  of specialty  components and
assemblies such as brake valves, clutches and machined brackets. The Company has
benefited from this trend which is expected to continue.  However, many of these
companies have the  engineering  and financial  resources to  manufacture  these
products themselves should they choose to do so.

The Company's products, which are primarily sold to automotive manufacturers and
their first-tier suppliers, are utilized in over sixty major car models. Each of
these models represents  significant sales to the Company.  Although the Company
generally is the sole supplier of the Company's parts for the life of the model,
customer's marketing and engineering decisions can limit the life of a car model
or  technological  changes can cause a particular part to become  obsolete.  The
Company  competes for business during the development of new models and upon the
redesign of certain  existing  models by its  customers.  Development of new and
redesigned  models usually begins several years prior to their  introduction  to
the public.  In recent years,  the Company has been  successful in obtaining new
business for new and redesigned models.  However, there can be no assurance that
the sales of  products  for use in new models  will fully  offset the  potential
reduction in volume caused by discontinued models.

The  Company  believes  that it must  compete  on the  basis of  responsiveness,
pricing,  quality and breadth of product  line and that it is  competitive  with
respect to each of these  areas.  The  Company's  business is  characterized  by
technological   change.  New  technology  may  be  developed  by  the  Company's
competitors as well as its customers. If the Company does not successfully adapt
to  these  changes,  it may  lose  part of its  customer  base.  To  maintain  a
technologically   competitive  position,   the  Company  must  make  significant
expenditures  for new machinery  and  manufacturing  processes.  The Company has
incurred substantial capital expenditures during recent years which have enabled
it to adapt to technological changes in the automotive industry.

RAW MATERIALS

The Company uses a variety of raw  materials in the  production of its products,
including aluminum,  copper and steel as well as specialty parts. The automotive
companies  and  first-tier  suppliers  require  specific  practices  and quality
standards to be maintained by the Company over their  suppliers of raw materials
and  purchased  components.  These  practices  are  reflected  in the  Company's
purchasing policies. The Company believes that its supplies of raw materials for
manufacturing requirements are adequate and are available from multiple sources.
It is common,  however,  for  customers to require their prior  approval  before
certain raw  materials or  components  can be used,  thereby  possibly  reducing
sources of supply that would otherwise be available.  The Company  believes that
there are adequate numbers of its suppliers which meet these standards.



                                       8
<PAGE>

BACKLOG

The  Company's  backlog  at June 30,  1997  was  approximately  $22,300,000,  as
compared to $20,500,000 at June 30, 1996, representing an increase of 9%. All of
the backlog at June 30, 1997 is expected to be delivered  during the 1998 fiscal
year.  The  increase  in backlog  is  primarily  due to the large  number of new
programs  starting up during the first  quarter of fiscal  1998.  Backlog at any
particular  date may not be  indicative  of sales during the entire fiscal year.
See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."

REGULATION

The Company is subject to various federal,  state and local regulations relating
to the  operation of its  business  and the  manufacture  of its  products.  The
Company believes that its  manufacturing  processes and facilities have been and
are being  operated in  compliance  in all  material  respects  with  applicable
regulations  including those relating to  environmental,  health and safety laws
and  regulations.  Automobiles are subject to federal safety  regulations  which
require,  among  other  things,  that brakes  perform  within  certain  stopping
distances.  Moreover,  automobiles  are often  marketed on the basis of enhanced
safety  features.  While the Company is not directly  responsible for compliance
with these safety standards,  it must manufacture its products in a manner which
permits its customers to comply.  These regulations are subject to change and no
assurance can be given that existing laws and regulations will not be amended or
new laws and  regulations  will not be adopted  that will impose more  extensive
regulations on the Company and its customers.

EMPLOYEES

At June 30, 1997,  the Company had 697  employees,  of whom 572 were paid hourly
wages.   These  hourly  employees  were  primarily   engaged  in  manufacturing,
maintenance and warehousing.  Of the 697 employees,  389 were employed in Texas,
306 were employed in Illinois and two were employed elsewhere.

Approximately  102 hourly employees who are engaged in clutch  manufacturing are
covered under a collective  bargaining agreement with the International Union of
Electronic, Electrical, Salaried Machine and Furniture Workers, AFL-CIO ("IUEE")
Local Union #1007 which  expired on  September  20,  1997.  A new  agreement  is
currently under negotiation.  A separate agreement with Local Union #1023 of the
IUEE covering approximately 145 employees, engaged in brake valve manufacturing,
expires on May 20, 1999.  All of the employees of the IUEE are located in Texas,
a  right-to-work  state.  Approximately  270 hourly  employees  in Illinois  are
represented by the AFL-CIO Local unions #10 and #24. One contract,  which covers
approximately  231  employees  expires on January 1, 1998;  the other  contract,
which covers 39 employees, expired on November 30, 1996. A new contract is being
negotiated.

Management  anticipates that satisfactory contracts will be negotiated with each
of these employee unions without a work stoppage or a material increase in cost,
of which  there  can be no  assurance.  The  Company  believes  that it has good
relations with its employees.

RISK FACTORS

The risk factors below, along with those discussed in Business, Competition, Raw
Materials and Regulations sections of this Annual Report on Form 10-K, are some,
but not  necessarily  all, of the matters which present risks and  uncertainties
which could have a material  adverse affect on the Company's  ability to operate
its business  successfully or in a manner  consistent with historical  operating
results.  The Company's  actual results could differ  materially  from projected
results due to some or all of the factors discussed below.

Reliance on Major Customers - The Company's sales to Ford represented 30% of the
Company's  total  sales  in  fiscal  1997  and  represented  30%  and 23% of the
Company's total sales in fiscal 1996 and 1995,  respectively.  No other 


                                       9
<PAGE>


customer  represented  more than 10% of the Company's total sales in fiscal 1997
and 1996. In fiscal 1995,  Borg-Warner,  General Motors and  AlliedSignal  Brake
Systems North  America had sales in excess of 10% of the Company's  total sales,
but with the acquisition of NASS, the sales percentage fell below 10%, while the
amount  of  sales  did  not   significantly   change.   While  the  Company  has
long-standing relationships with these companies and sells a variety of products
to various divisions of each company,  the loss of a significant  portion of its
sales to any of these  customers  could  have a material  adverse  effect on the
Company. See "Business."

Reliance  on  Sales  Representatives  -  With  the  hiring  of  the  same  sales
representative  agency that  represents the Company for the brake valve division
to represent the Company's  specialty  components and  assemblies  division with
Ford,  this agency is now  responsible  for  approximately  50% of the Company's
total annual sales.  While the Company has maintained a close  relationship with
this agency for over ten years,  any break with this  relationship  could have a
material adverse affect on the Company. See "Sales and Marketing."

Automotive  Industry  Cyclicality  and Conditions - The  automotive  industry is
cyclical and subject to fluctuations based on general economic conditions.  Unit
sales of passenger cars and light trucks have been  essentially flat since 1993.
Significant  declines in North American passenger vehicles and light truck sales
could have an adverse effect upon the Company.

In recent years,  there has been  substantial  and continuing  pressure from the
major automotive manufacturers to reduce costs, including reduction in prices by
outside  suppliers  such as the Company.  As a result,  certain of the Company's
customers  have  requested  and the  Company  has agreed on  occasion to provide
selling price reductions and absorb inflationary cost increases. There can be no
assurance  that the Company  can  sustain  current  profit  margins  under these
business conditions. See "Business."

Quality  Control and Product  Liability  - While the Company  maintains  quality
assurance procedures in the event a defect in its products is not detected prior
to  shipment to a customer,  or use by a  consumer,  substantial  costs could be
incurred by the  Company  relating  to a recall  claim.  While this has not been
material in the past, a recall could have a material effect on the Company.

In  addition,  the sale of the  Company's  products  could expose the Company to
liability  claims.  The  Company  currently  has  liability  insurance  which it
believes is adequate for its current activities.  There can be no assurance that
the Company will be able to maintain  insurance at a reasonable cost, if at all,
or that insurance will be adequate to cover  liabilities  resulting from product
liability claims or that the Company will have funds available to pay any claims
over the limit of its insurance. While the Company has had no material liability
claims to date,  either an  underinsured  or an  uninsured  claim  could  have a
material adverse effect on the Company.

Competition,  Rapidly  Changing  Markets  and Capital  Intensive  Business - The
automotive parts industry is highly competitive.  The Company competes with many
automotive parts suppliers,  many of which are larger and have greater financial
resources  than the  Company.  Although  the trend  has been for the major  U.S.
automobile  manufacturers  and their  suppliers to outsource the  manufacture of
specialty  components  such as brake valves,  clutches and  assemblies,  many of
these  companies have the engineering  and financial  resources,  to manufacture
these  products  internally.  If this were to occur,  it could  have a  material
adverse effect on the Company. See "Business - Competition."

The market for the Company's  products continues to change as customers redesign
their vehicles,  introduce new models and change technologies.  A decline in the
demand for the  Company's  products  due to changes  in  technologies  or market
conditions  may  have  an  adverse  effect  on  the  Company.  See  "Business  -
Customers."

To remain  competitive,  the Company is required to continue to make significant
capital investments in new machinery and manufacturing  processes.  There can be
no assurance,  however, that the financial resources will be available to enable
the Company to continue to effectively respond to future  technological  changes
or market 


                                       10
<PAGE>

demands of it customers.  See "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources."

Loss of Ford's Q1 Status at the Specialty  Components and Assemblies  Division -
In late September 1996, this division was put on Q1 quality probation by Ford as
a result of certain  concerns  regarding its products.  While on probation,  the
division is prohibited from being  considered for additional  business from Ford
(although  certain  existing  programs in the development  stages are allowed to
continue).  A team  of  corporate  and  division  management  have  developed  a
restructuring  plan  focused on  returning  the  division to  profitability  and
regaining Q1 status by the end of the fiscal year. In fiscal 1997, sales to Ford
by the division were approximately  $17,000,000;  there can be no assurance,  at
this  time,  that the Q1 status can be  regained  or what  effect the  continued
probation or revocation would have on future sales.


ITEM 2 - PROPERTIES

The Company owns its primary facility which is located on seven acres of land in
Carrollton,  Texas,  approximately  12 miles from  Dallas,  Texas.  The facility
consists of 106,000  square  feet of  manufacturing  space for brake  valves and
clutches,  and  approximately  25,000 square feet of corporate office space. The
Company  has  granted  a  security  interest  in  its  plant  and  equipment  to
collateralize certain bank loans. See Note 7 of Notes to Consolidated  Financial
Statements.

The  Company  leases  approximately  70,000  square feet of space in Fort Worth,
Texas,  66,000 square feet for the manufacture of machined  components and 4,000
square feet of office space. The lease for this space expires in August 2001.

NASS is located in Elk Grove,  Illinois, a suburb of Chicago,  where it operates
its main manufacturing  facility.  This real estate and facility,  consisting of
74,500 square feet of manufacturing space and 2,500 square feet of office space,
is owned by NASS. In addition, NASS leases 21,150 square feet of space in nearby
Lombard, Illinois where it manufactures non-automotive springs.

Certain  inventory  for the Elk Grove plant and for  after-market  products  are
maintained  in a leased  warehouse,  consisting  of 40,000  square feet,  in Elk
Grove,  Illinois.  The lease  expires in December  2001. An  after-market  sales
office,  located in Atlanta,  Georgia,  uses 250 square feet of space; its lease
expires in January  1998.  As part of the  restructuring  plan these offices are
expected to be vacated during fiscal 1998 and sublease arrangements pursued.

The  Company  believes  that the owned and leased  space is  sufficient  for its
current manufacturing needs but supplemental warehousing space, in Texas, may be
necessary for anticipated sales increases over the next three years.  Sufficient
available warehouse space exists in the area to fulfill any planned expansion.


ITEM 3 - LEGAL PROCEEDINGS

In May 1997 the Company initiated a law suit in the United States District Court
for the Northern  District of Illinois  (Eastern  Division)  against the selling
shareholders  ("Selling  Shareholders")  of NASS  (now  known  as the  specialty
components and assemblies  division).  The Company alleges,  among other things,
the Selling Shareholders made material misrepresentations in connection with the
Company's  acquisition  of  NASS.  The  Company  is  seeking  that  the  Selling
Shareholders pay substantial  damages to the Company and/or that the transaction
be rescinded.  The Selling  Shareholders have responded by denying all claims of
the Company and  countersuing  for  recovery of legal costs.  Management  of the
Company intends to vigorously prosecute this action.



                                       11
<PAGE>



In the normal course of business,  the Company is subject to certain  claims and
litigation related to on-the-job injuries. The Company does not believe that any
claims will have a material adverse effect on the Company.


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

There were no matters  submitted  to a vote of  security  holders,  through  the
solicitation  of proxies or otherwise,  during the fourth quarter ended June 30,
1997.


                                    PART II

ITEM 5 - MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS

(a)  Market Information

     The Common  Stock of the  Company is traded on the NASDAQ  National  Market
     System.  The  quarterly  range of prices  per share in the last two  fiscal
     years was as follows:


                                             High                Low
                                             ----                ---
1996:
----
First Quarter .............................  9 1/4              7 1/4
Second Quarter ............................  11 3/4             8 3/4
Third Quarter .............................  11 3/4             8 3/4
Fourth Quarter ............................      11                 7



1997:
----
First Quarter .............................  10 1/4                 5
Second Quarter ............................       6             4 1/4
Third Quarter .............................  5 1/2              4 3/4
Fourth Quarter ............................  5 1/2              3 1/4

(b)  Holders

     As of September 12, 1997,  the  approximate  number of security  holders of
     record of the  Company  were 48. The  Company  believes  that the number of
     beneficial shareholders is much larger.

(c)  Dividends

     There were no dividends declared or paid in the past three fiscal years.


ITEM 6 - CONSOLIDATED SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data with respect
to the Company and should be read in conjunction with the consolidated financial
statements  of the  Company  and the related  notes  thereto  and  "Management's
Discussion  and  Analysis of Financial  Condition  and  Consolidated  Results of
Operations,"  which  are  included  elsewhere  in this  document.  The  selected
consolidated financial data presented below for each of the five years as of and
for the years ended June 30, 1997 are derived  from the  Company's  consolidated
financial  statements  and reflect the  acquisition of NASS and its results from
the acquisition date of July 21, 1995.


                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                                         Year ended June 30,
                                                --------------------------------------------------------------------
                                                   1997           1996           1995          1994          1993
                                                -----------    -----------   -----------   -----------   -----------
                                                       (Dollars in thousands, except share and per share data)
<S>                                             <C>            <C>           <C>           <C>           <C>        
Net sales ...................................   $    73,492    $    72,642   $    44,900   $    36,896   $    27,241
Cost of sales ...............................        63,938         57,711        34,849        28,517        20,654
                                                -----------    -----------   -----------   -----------   -----------
  Gross profit ..............................         9,554         14,931        10,051         8,379         6,587
Selling, general and administrative .........        10,340          7,576         4,286         3,696         3,019
                                                -----------    -----------   -----------   -----------   -----------
  Operating income (loss) ...................          (786)         7,355         5,765         4,683         3,568
Interest expense, net .......................         1,714          1,659           130           234           370
                                                -----------    -----------   -----------   -----------   -----------
  Income (loss) before income taxes .........        (2,500)         5,696         5,635         4,449         3,198
Income tax provision (benefit) ..............          (843)         2,064         2,016         1,668         1,227
                                                -----------    -----------   -----------   -----------   -----------
  Net income (loss) .........................   $    (1,657)   $     3,632   $     3,619   $     2,781   $     1,971
                                                ===========    ===========   ===========   ===========   ===========
Earnings (loss) per share ...................   $      (.34)   $       .74   $       .74   $       .66   $       .53
                                                ===========    ===========   ===========   ===========   ===========

Weighted average number of shares 
  outstanding................................     4,900,000      4,900,000     4,900,000     4,235,479     3,743,752
                                                ===========    ===========   ===========   ===========   ===========
</TABLE>



<TABLE>
<CAPTION>
                                                                      June 30,
                                                ----------------------------------------------------
                                                  1997       1996       1995       1994       1993
                                                --------   --------   --------   --------   -------- 
                                                                   (In thousands)
<S>                                             <C>        <C>        <C>        <C>        <C>      
Balance sheet data:
     Working capital ........................   $  8,329   $ 11,285   $  8,048   $  9,779   $    (29)
     Property, plant and equipment, net......     26,323     27,790     16,664      9,725      7,763
     Total assets ...........................     57,219     56,199     30,248     26,013     14,305
     Long-term obligations (1) ..............     18,271     19,533      3,419      2,255      2,343
     Total liabilities ......................     35,216     32,538     10,219      9,603      9,695
     Stockholders' equity ...................     22,004     23,661     20,029     16,410      4,610
</TABLE>

(1) Includes noncurrent portion of long-term debt obligations.


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

OVERVIEW

For  fiscal  1997,  sales  increased  approximately  1.2%  to  $73,492,000  from
$72,642,000  in fiscal  1996.  For the first  time since the  Company's  initial
public  offering in fiscal 1994,  a net loss was recorded for the year.  The net
loss of $1,657,000 in fiscal 1997 was a significant  decline from the net income
of  $3,632,000  in fiscal  1996.  The net loss for the year,  which was entirely
attributable  to the specialty  components and assemblies  division,  includes a
fourth  quarter after tax charge of $1,757,000,  or $0.36 per share,  related to
the  restructuring  of the division.  The net sales of the Company's brake valve
products  decreased  7.2% in the 1997 fiscal year to sales of  $22,195,000  from
reported sales of  $23,909,000  in fiscal 1996. Net sales of power  transmission
components  increased  1.1% in the 1997  fiscal  year with sales of  $21,762,000
compared to $21,533,000  in the 1996 fiscal year.  The specialty  components and
assemblies  division  experienced  an 8.6% increase in sales over the prior year
with sales of  $29,535,000  compared to  $27,200,000.  Management of the Company
expects  that the sales growth of the Company will exceed the growth in sales of
the  automobile  industry  as a whole  over the next two  years.  The  Company's
backlog at June 30, 1997 was  





                                       13
<PAGE>



approximately $22,300,000, which represents an increase of 8.7% over the backlog
of  approximately   $20,500,000  at  June  30,  1996.   Additionally,   customer
commitments for new tooling at June 30, 1997 were approximately  $1,700,000,  as
compared to approximately $900,000 at June 30, 1996.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of net
sales represented by certain items in the Company's statements of operations:


                                             1997      1996      1995
                                            -----     -----     -----
Net sales:                                   
     Specialty components and assemblies...  40.2%     37.4%     0.0%
     Brake valves..........................  30.2      32.9      50.1
     Power transmission components.........  29.6      29.7      49.9
                                            -----     -----     -----
         Total net sales................... 100.0     100.0     100.0
                                            -----     -----     -----
Cost of sales..............................  87.0      79.4      77.6
                                            -----     -----     -----
Gross profit...............................  13.0      20.6      22.4
Selling, general and
 administrative expenses...................  14.1      10.5       9.5
                                            -----     -----     -----
Operating income (loss)....................  (1.1)     10.1      12.9
Interest expense, net......................   2.3       2.3       0.3
                                            -----     -----     -----
Income (loss) before income taxes..........  (3.4)      7.8      12.6
Income tax provision (benefit).............  (1.1)      2.8       4.5
                                            -----     -----     -----
Net income (loss)..........................  (2.3)%     5.0%      8.1%
                                            =====     =====     ===== 

YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996

Net sales in fiscal year 1997 were  $73,492,000  compared to $72,642,000 for the
comparable period of the prior fiscal year, representing an increase of $850,000
(1.2%).  Net sales are  comprised of sales from the Company's  three  divisions:
specialty  components  and  assemblies,  brake  valves  and  power  transmission
components.  Specialty  components  and  assemblies  sales for fiscal  1997 were
$29,535,000,  an increase of $2,335,000  (8.6%) over sales of $27,200,000 in the
prior year.  The  increase  is  primarily  due to a full  year's  sales from the
division  which was  acquired  on July 21,  1995 and  increased  sales of spring
assemblies used in the telecommunication  industry. Brake valve sales for fiscal
year 1997 were  $22,195,000,  a  decrease  of  $1,714,000  (7.2%)  from sales of
$23,909,000  in the prior year.  The decrease was a result of products  that had
lower  volumes  or  were  being  phased  out by  customers.  Power  transmission
components sales were $21,762,000,  an increase of $229,000 (1.1%) over sales of
$21,533,000 in the prior year. The impact of price changes was not significant.

Fiscal year 1997 gross profit  decreased by  $5,377,000  (36.0%) to  $9,554,000,
representing  13.0% of net sales,  as compared to gross profit of $14,931,000 or
20.6% of net sales in the same  period of the prior  fiscal  year.  The  primary
reason for the decrease in gross profit is due to the  problems  experienced  in
the specialty components and assemblies  division.  Early in the fiscal year the
division was confronted with a rapidly  deteriorating  situation  resulting from
the loss of its Q1 quality rating from Ford Motor Company and mounting losses on
the  start-up  of new  business.  A new  management  team  was put in  place  to
immediately   address  customer   concerns,   to  focus  division  personnel  on
engineering,  manufacturing  and  quality  problems,  to  implement  short  term
corrective  action and to develop a longer term plan for  restoring the division
to  profitability.  In order to  accomplish  the short term  tasks,  significant
amounts  were  expended  for quality and  engineering  resources  and  increased
maintenance and tooling on equipment.  The long-term plan, which was approved by
the Board of Directors in June 1997, involves the orderly disposition of certain
unprofitable commodity type products,  representing  approximately $8,000,000 of
fiscal  1997  revenues,  and focuses  the  division  on value added  assemblies,
stampings and specialty  springs.  As a result of the plan, a pre-tax  charge of
$2,738,000  ($986,000 in cost of sales and  $1,752,000  in selling,  general and
administrative  costs) was  recognized  which  includes  termination  of certain
contracts, write down of certain assets to




                                       14
<PAGE>


fair  value,  net of  estimated  selling  costs and other  costs  related to the
reorganization.  The long  term  plan  projects  substantial  reductions  in the
operating  losses for the  division in fiscal 1998,  a continued  commitment  to
regaining  Q1 status at Ford  Motor  Company  and a return  of the  division  to
profitability  at the operating income level by the third quarter of fiscal year
1998. The impact of price increases on materials was not significant  during the
period.

The gross profit  percentage at the brake valve division  declined slightly over
the prior year  primarily due to the decline in sales without a similar  decline
in fixed costs. Gross profit  percentages at the power  transmission  components
division were slightly  higher than the prior year due to a favorable  change in
product mix and operating efficiencies.

Selling,  general  and  administrative  costs  in  the  1997  fiscal  year  were
$10,340,000  (14.1% of net sales) as compared to $7,576,000 (10.5% of net sales)
in the 1996 fiscal year,  representing  an increase of $2,764,000  (36.5%).  The
increase is primarily due to expenses  associated with the restructuring  charge
at the specialty components and assemblies  division.  The remaining increase is
primarily due to higher commissions,  legal expenses and salary and travel costs
associated  with the  replacement of management at the specialty  components and
assemblies division.

Net interest expense of $1,714,000 for the year ended June 30, 1997 represents a
$54,000  increase over the prior year. The increase  results from higher average
debt balances due to increases in bank debt.

The net loss was  $1,657,000  for the 1997 fiscal year compared to net income of
$3,632,000  for the same period of the prior fiscal year.  The loss was entirely
attributable to problems  encountered at the specialty components and assemblies
division. The net loss for the 1997 fiscal year represented a 7% negative return
on equity and debt represents 48% of total capitalization.

YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995

Net sales in fiscal year 1996 were  $72,642,000  compared to $44,900,000 for the
comparable  period  of the  prior  fiscal  year,  representing  an  increase  of
$27,742,000  (61.8%).  Net sales are comprised of sales of brake  valves,  power
transmission  components and specialty  components and assemblies.  The increase
primarily  resulted from sales of  $27,200,000  by the specialty  components and
assemblies  division,  which was  acquired  on July 21,  1995.  The brake  valve
division  sales  increased  by  $1,406,000  (6.2%) to  $23,909,000  compared  to
$22,503,000  in the 1995 fiscal year. The increase is primarily due to supplying
a full year's  production  to Chrysler for the  mini-van  and mid-size  1996 car
lines.  This increase in sales was partially offset by a decline in year-on-year
production  levels  for Ford and  General  Motors.  Sales of power  transmission
components of $21,533,000  in the 1996 fiscal year decreased by $864,000  (3.9%)
from sales of $22,397,000  for the prior year.  Increased  sales of clutches for
the heavy truck  market were  offset by  declining  demand for "shift on the fly
clutches" and lower sales of air conditioning  mounting  brackets which had been
significant in the prior year. The impact of price changes was not significant.

Fiscal year 1996 gross profit  increased by $4,881,000  (48.6%) to  $14,931,000,
representing  20.6% of net sales,  as compared to gross profit of $10,050,000 or
22.4% of net sales in the same  period of the prior  fiscal  year.  The  primary
reason for the  increase in gross  profit is  increased  sales volume due to the
acquisition of the specialty components and assemblies division.  The decline in
the gross profit  percentage  in comparison to the same period of the prior year
was affected by the acquired company,  whose gross margin percentage is slightly
lower than that of the combined margins of the already existing divisions. Also,
the gross margin  percentage is affected by the timing and extent of the changes
in product mix,  sales volume,  new product  start-up  costs and numerous  other
factors.  Brake  valve  gross  margins  improved  throughout  fiscal 1996 as new
equipment was put into place and  efficiencies  were  realized.  The brake valve
facility expansion completed in November 1995 also contributed  significantly to
improvement in the second half of the year. The power  transmission gross margin
percentage  decreased due to the under  utilization  of capacity  resulting from
lower sales and changing product mix. The impact of price increases on materials
was not significant during the period. 




                                       15
<PAGE>

Selling,  general  and  administrative  costs  in  the  1996  fiscal  year  were
$7,576,000 (10.5% of net sales) as compared to $4,286,000 (9.5% of net sales) in
the 1995  fiscal  year,  representing  an increase of  $3,290,000  (76.8%).  The
increase  is  primarily  due to expenses  associated  with the  acquisition  and
amortization  expense  on  goodwill  of  $317,000.  The  selling,   general  and
administrative  expenses of the Company,  excluding  those  attributable  to the
acquired business,  increased  approximately $317,000 over the prior year due to
higher net research and development expenses.

Net interest  expense of  $1,659,000  for the year ended June 30, 1996  includes
interest  income of $9,000 which was earned on excess cash balances prior to the
acquisition.  Before deducting interest income,  interest expense was $1,669,000
as compared to $254,000 for the year ended June 30,  1995.  The increase was due
to the debt  incurred  in  connection  with  the  acquisition  of the  specialty
components and assemblies division.

Net income was $3,632,000  (5.0% of net sales) for the 1996 fiscal year compared
to $3,619,000  (8.1% of net sales) for the same period of the prior fiscal year,
representing  an increase of $13,000  (0.4%).  Net income as a percentage of net
sales is lower in the current year  primarily due to lower gross margins and the
impact of goodwill  amortization  and interest  associated with the acquisition.
Net income for the 1996 fiscal year  represented a 18% return on equity and debt
represents 48% of total capitalization.

LIQUIDITY AND CAPITAL RESOURCES

For the 1997 fiscal year both cash flow and working capital were affected by the
operational  problems  and  resulting  restructuring  charge  at  the  specialty
components and assemblies  division.  Cash provided by operations before changes
in operating assets and liabilities amounted to $4,123,000.  Additional cash was
provided by a net decrease in operating  assets and  liabilities  of $1,860,000,
resulting in net cash  provided by operations  of  $5,983,000.  Cash provided by
operations before changes in operating assets and liabilities was $7,602,000 and
$5,749,000  for  fiscal  1996  and  1995,  respectively;  cash  was used for net
increases in operating  assets and  liabilities  of $2,745,000 and $3,037,000 in
fiscal 1996 and 1995,  respectively;  the net cash  provided by  operations  was
$4,858,000 in fiscal 1996 and  $2,712,000  in fiscal 1995.  Despite the net loss
reported for the year, the Company generated  positive cash flow from operations
which was adequate to fund capital  expenditures  of $4,824,000  and to pay down
the Company's debt by $1,159,000.

The net change in operating  assets and  liabilities for the year ended June 30,
1997 which  increased cash provided by operations by $1,860,000 is primarily due
to a decrease  in trade  accounts  receivable  of  $1,365,000.  The effect of an
increase  in  inventory  was  substantially  offset by an  increase  in accounts
payable and accrued expenses. The average days sales outstanding decreased to 44
days at June 30, 1997 from 52 days at June 30, 1996, based upon the three months
sales prior to the end of the period.  The  decrease in the number of days sales
outstanding  is  primarily  due to a  temporary  acceleration  in  payment  by a
significant  customer associated with a special project. As of June 30, 1997, no
significant receivables were considered uncollectible.

The Company made  expenditures  of $4,824,000  in 1997 for capital  equipment to
improve  productivity  and increase  capacity and to correct the  production and
quality problems at the specialty  components and assemblies  division.  Capital
spending  in fiscal  1996 was  $5,765,000.  Capital  spending  in fiscal 1998 is
expected to be approximately $4,000,000.

The Company's  long-term  debt  includes  consolidated  term and mortgage  notes
(original  principal  amounts of  $13,700,000  and $960,000,  respectively,  and
current  balances at June 30, 1997 of  $9,973,000  and  $667,000,  respectively)
which are payable in monthly installments of $163,095 and $5,333,  respectively,
plus interest at either LIBOR plus 1 1/2% or the bank's prime rate.  All amounts
borrowed  under the  consolidated  term and  mortgage  notes are  secured by the
Company's real estate, accounts receivable,  inventory,  machinery and equipment
and have maturities of August 1, 2002 and November 1, 2007, respectively.



                                       16
<PAGE>


The Company has a revolving  credit  agreement of  $10,000,000  and an equipment
acquisition  facility of $3,000,000  (collectively the "Credit  Facilities") for
working capital and capital  equipment  needs. The Credit  Facilities  mature on
July 21, 1998. As of June 30, 1997,  $3,500,000  was available  under the credit
agreement and $1,231,000 was available under the equipment acquisition facility.
An annual  fee of one  quarter of one  percent is payable  monthly on the unused
portion of the Credit  Facilities.  The bank has the right to accelerate each of
the  maturity  dates of the  consolidated  term  note and  real  estate  note to
coincide with the maturity date of the Credit Facilities. See Note 7 of Notes to
the Consolidated Financial Statements.

Subsequent to June 30, 1997 the Company's bank increased the credit agreement to
$12,000,000  and extended the  maturity  date by one year to July 21, 1999.  The
Company's  bank also  increased the remaining  availability  under the equipment
acquisition facility from $1,231,327 to $3,000,000.

The current ratio of the Company  declined to 1.6 to 1 at June 30, 1997 compared
to 2.0 to 1 at June 30, 1996 primarily due to the accruals  associated  with the
restructuring  charge at NASS.  The book value per share  decreased  to $4.49 at
June 30, 1997 from $4.83 at June 30, 1996. Management anticipates that cash flow
from  operations  and bank  credit  availability  will be  adequate  to fund the
existing debt,  anticipated capital and tooling requirements and working capital
needs for the next two years.

SEASONALITY

Net sales and  operating  results do not follow a predictable  seasonal  pattern
from quarter to quarter because the  development  and initial  production of new
products may occur at different times of the year.  Generally,  in these periods
certain  inefficiencies  are  experienced  which  result in higher  costs to the
Company. In addition,  the Company usually  experiences  somewhat lower sales in
the quarters  ended  December 31 and  September 30 as  automobile  manufacturers
traditionally close their plants for vacations or model changeovers during these
periods resulting in lower demand for the Company's products.

INFLATION

The Company  believes that the  relatively  moderate rate of inflation in recent
years  has  not  had  a  significant   impact  on  the  Company's   revenues  or
profitability.


ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

For  information  required  with  respect  to  this  Item 8,  see  "Consolidated
Financial Statements and Schedules" on pages F-1 through F-16 of this report.


ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE

Not applicable.



                                       17
<PAGE>



                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required for this Item 10 is hereby incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A promulgated by
the Securities  and Exchange  Commission  under the  Securities  Exchange Act of
1934, which proxy statement is anticipated to be filed within 120 days after the
end of the Company's fiscal year ended June 30, 1997.


ITEM  11 - EXECUTIVE COMPENSATION

Information required for this Item 11 is hereby incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A promulgated by
the Securities  and Exchange  Commission  under the  Securities  Exchange Act of
1934, which proxy statement is anticipated to be filed within 120 days after the
end of the Company's fiscal year ended June 30, 1997.


ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required for this Item 12 is hereby incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A promulgated by
the Securities  and Exchange  Commission  under the  Securities  Exchange Act of
1934, which proxy statement is anticipated to be filed within 120 days after the
end of the Company's fiscal year ended June 30, 1997.


ITEM  13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required for this Item 13 is hereby incorporated by reference to the
definitive proxy statement to be filed pursuant to Regulation 14A promulgated by
the Securities  and Exchange  Commission  under the  Securities  Exchange Act of
1934, which proxy statement is anticipated to be filed within 120 days after the
end of the Company's fiscal year ended June 30, 1997.




                                    PART IV


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

(a) (1) and (2)  Consolidated Financial Statements and Schedules

The consolidated  financial statements and schedules of Hilite Industries,  Inc.
are included in Part IV of this report on the pages indicated below: Page

Report of Independent Accountants                                           F-1

Consolidated Financial Statements:

Consolidated Balance Sheets at June 30, 1997 and 1996                       F-2

Consolidated Statements of Operations for the years ended
 June 30, 1997, 1996 and 1995                                               F-3

Consolidated Statements of Cash Flows for the years ended
 June 30, 1997, 1996 and 1995                                               F-4

Consolidated Statements of Stockholders' Equity for the 
 years ended June 30, 1997, 1996 and 1995                                   F-5

Notes to Consolidated Financial Statements                            F-6 - F-15

Consolidated Financial Statement Schedules:

II.      Valuation and Qualifying Accounts and Reserves
        for the years ended June 30, 1997, 1996 and 1995                   F-16


Consolidated Financial Statement Schedules Omitted
--------------------------------------------------

Certain  consolidated  financial  statement schedules are omitted because of the
absence  of  conditions  under  which they are  required  because  the  required
information is presented in the financial statements or notes thereto.

(a) (3) Exhibits

Exhibit
Number                  Description

3.1            Amended and Restated  Certificate of Incorporation of the Company
               (Incorporated herein by reference to Exhibit 3.1 of the Company's
               Registration Statement on Form S-1, Registration No. 33-72014)

3.2            Amended and Restated Bylaws of the Company  (Incorporated  herein
               by  reference  to  Exhibit  3.2  of  the  Company's  Registration
               Statement on Form S-1, Registration No. 33-72014)

4.1            Specimen  of Common  Stock  certificate  (Incorporated  herein by
               reference to Exhibit 4.1 of the Company's  Registration Statement
               on Form S-1, Registration No. 33-72014)

4.2            Form of  Representative's  Share  Purchase  Option  (Incorporated
               herein by reference to Exhibit 4.2 of the Company's  Registration
               Statement on Form S-1, Registration No. 33-72014)

10.1           1993 Stock  Option  Plan  (Incorporated  herein by  reference  to
               Exhibit 10.1 of the Company's Registration Statement on Form S-1,
               Registration No. 33-72014)

10.2           Employment  Agreement  dated July 1, 1993 between the Company and
               Samuel M. Berry (Incorporated herein by reference to Exhibit 10.2
               of the Company's Registration Statement on Form S-1, Registration
               No. 33-72014)

10.3           Lease Agreement  between the Company and Roger C. Hunsacker d/b/a
               Hunsacker Properties dated September 2, 1993 (Incorporated herein
               by  reference  to  Exhibit  10.4  of the  Company's  Registration
               Statement on Form S-1, Registration No. 33-72014)

10.4           Lease Agreement between the Company and Leonard  Properties dated
               August 1992 and Amendment No. 1 thereto  (Incorporated  herein by
               reference to Exhibit 10.5 of the Company's Registration Statement
               on Form S-1, Registration No. 33-72014)

10.5           Equipment  Acquisition Note dated December 12, 1994 (Incorporated
               herein by reference to Exhibit  10.1 of the  Company's  Report on
               Form 10-Q for the fiscal  quarter ended  December 31, 1994,  File
               No. 0-22924)

10.6           Equipment  Acquisition  Note  dated June 26,  1995  (Incorporated
               herein by reference to Exhibit 10.13 of the  Company's  Report on
               Form 10-K for the year ended June 30, 1995, File No. 0-22924)

10.7           Stock  Purchase  Agreement  dated  July 21,  1995,  among  Hilite
               Industries, Inc., a Delaware Corporation,  Registrant and Michael
               L.   McKee,   Donald  P.   Degenhardt   and  Robert  S.   Johnson
               (Incorporated   herein  by  reference  to  Exhibit  10.1  of  the
               Company's Report on Form 8-K on August 7, 1995, File No. 0-22924)

10.8           Amended and Restated  Secured Loan Agreement  ("Loan  Agreement")
               dated July 21, 1995, among Hilite  Industries,  Inc. and COMERICA
               Bank - Texas (Incorporated herein by reference to Exhibit 10.2 of
               the  Company's  Report on Form 8-K on August  7,  1995,  File No.
               0-22924)

10.9           Management contract between the Company and Lineberger & Co., LLC
               dated July 1, 1996.  (Incorporated herein by reference to Exhibit
               10.16 of the  Company's  Report on Form  10-K for the year  ended
               June 30, 1996, File No. 0-22924)

10.10          First Amendment to Loan Agreement dated August 21, 1997.

10.11          Second Amendment to Loan Agreement dated August 30, 1997.

23.1           Consent of Price Waterhouse LLP

(b)  Reports on Form 8-K

No reports on Form 8-K were filed by the Company  during the quarter  ended June
30, 1997.

                                       20

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and
       Shareholders of Hilite Industries, Inc.

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 14(a)(1) and (2) on page 19 present fairly, in all material
respects,  the financial position of Hilite Industries,  Inc. and its subsidiary
at June 30, 1997 and 1996,  and the results of their  operations  and their cash
flows  for each of the  three  years in the  period  ended  June  30,  1997,  in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements   are  the   responsibility   of  the  Company's  m  anagement;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.


PRICE WATERHOUSE LLP



Dallas, Texas
August  12,  1997,  except as to the last  paragraph  of Note 7,  which is as of
September 18, 1997.










                                      F-1

<PAGE>

                             HILITE INDUSTRIES, INC.
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                     As of June 30,
                                                              ---------------------------
                                                                  1997           1996
                                                              ------------   ------------
                          ASSETS
                                                              ------------   ------------
<S>                                                           <C>            <C>    
Current assets:
  Cash and cash equivalents ..................................   $       --      $       --
  Accounts receivable, less allowance for doubtful accounts of
    $195,427 at June 30, 1997 and $91,100 at June 30, 1996 ...      9,991,098      11,356,477
  Tooling receivable .........................................         96,734         760,982
  Inventories ................................................     10,075,786       8,845,457
  Income taxes receivable ....................................        235,615
  Deferred income taxes ......................................      1,774,082         472,627
  Prepaid expenses and other current assets ..................        739,803         542,089
    Total current assets .....................................     22,677,503      22,213,247

Property, plant and equipment ................................     38,400,240      38,139,671
Less accumulated depreciation and amortization ...............    (12,077,533)    (10,349,569)
                                                                 ------------    ------------
Property, plant and equipment, net ...........................     26,322,707      27,790,102
                                                                 ------------    ------------

Assets held for disposal .....................................      2,330,800            --
Goodwill, net of accumulated amortization ....................      5,888,167       6,195,290
                                                                 ------------    ------------

TOTAL ASSETS .................................................   $ 57,219,177    $ 56,198,639
                                                                 ============    ============

           LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses ......................   $ 11,875,962    $  8,607,287
  Long-term debt - current portion ...........................      2,422,950       2,320,672
  Income taxes payable .......................................         49,883            --
                                                                 ------------    ------------
    Total current liabilities ................................     14,348,795      10,927,959
                                                                 ------------    ------------

Long-term debt ...............................................     16,486,252      17,672,368
Subordinated debt ............................................      1,785,184       1,860,184
Deferred income taxes ........................................      2,595,392       2,077,589
                                                                 ------------    ------------
    Total non-current liabilities ............................     20,866,828      21,610,141
                                                                 ------------    ------------

Commitments and Contingencies (See Note 11.)

Stockholders' equity:
  Preferred Stock, $.01 par value; 5,000 shares authorized,
    none issued and outstanding ..............................           --              --
  Common stock, $.01 par value; 15,000,000 shares authorized,
    4,900,000 isssued and outstanding at June 30, 1997 and
    1996......................................................         49,000          49,000
  Additional paid-in capital .................................      9,105,674       9,105,674
  Retained earnings ..........................................     12,848,880      14,505,865
                                                                 ------------    ------------
    Total stockholders' equity ...............................     22,003,554      23,660,539
                                                                 ------------    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................   $ 57,219,177    $ 56,198,639
                                                                 ============    ============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       F-2

<PAGE>

                             HILITE INDUSTRIES, INC.
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                 For the Year Ended June 30,
                                                         ----------------------------------------
                                                             1997           1996         1995
                                                         -----------    -----------   -----------
<S>                                                      <C>            <C>           <C>        
Net sales............................................    $73,492,117    $72,641,500   $44,899,515
Cost of sales ........................................    63,938,186     57,710,737    34,849,251
                                                         -----------    -----------   -----------

Gross profit .........................................     9,553,931     14,930,763    10,050,264

Selling, general and administrative expenses .........    10,339,722      7,575,953     4,286,120
                                                         -----------    -----------   -----------

Operating income (loss) ..............................      (785,791)     7,354,810     5,764,144

Interest income ......................................          --            9,390       124,873
Interest expense .....................................     1,713,763      1,668,763       254,376
                                                         -----------    -----------   -----------

Income (loss) before income taxes ....................    (2,499,554)     5,695,437     5,634,641

Income tax provision (benefit) .......................      (842,569)     2,063,580     2,016,000
                                                         -----------    -----------   -----------

Net income (loss)....................................    $(1,656,985)   $ 3,631,857   $ 3,618,641
                                                         ===========    ===========   ===========

Per share data:

Earnings (loss) per share............................    $     (0.34)   $      0.74   $      0.74
                                                         ===========    ===========   ===========


Weighted average number of shares outstanding ........     4,900,000      4,900,000     4,900,000
                                                         ===========    ===========   ===========
</TABLE>




              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       F-3
<PAGE>
                             HILITE INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                    For the Year Ended June 30,
                                                           --------------------------------------------
                                                               1997            1996             1995
                                                           ------------    ------------    ------------
<S>                                                       <C>              <C>             <C>         
Cash flows from operations:
Net income (loss)......................................   $  (1,656,985)   $  3,631,857    $  3,618,641
  Adjustments to reconcile net income (loss) to net
   cash provided by operations:
     Depreciation ......................................      3,517,792       3,005,474       1,649,518
     Goodwill amortization .............................        307,123         316,968            --
     Restructuring charge ..............................      2,738,352            --
     Increase (decrease) in net deferred income taxes ..       (783,652)        647,962         481,000
                                                           ------------    ------------    ------------
Cash provided from operations before changes in
   operating assets and liabilities ....................      4,122,630       7,602,261       5,749,159

     Changes in operating assets and liabilities
       (Increase) decrease in accounts receivable ......      1,365,379      (2,491,920)        280,734
       (Increase) decrease in tooling receivable .......        664,248        (106,215)       (385,618)
       Increase in inventories .........................     (1,370,079)       (149,820)     (1,807,335)
       (Increase) decrease in prepaid expenses and
         other current assets ..........................       (370,017)        332,406         371,154
       Increase (decrease) in accounts payable and
         accrued expenses ..............................      1,285,554         (80,014)     (1,306,850)
       Increase (decrease) in income taxes payable .....        285,498        (248,952)       (188,747)
                                                           ------------    ------------    ------------
    Total changes in operating assets and liabilities ..      1,860,583      (2,744,515)     (3,036,662)
                                                           ------------    ------------    ------------

Net cash provided by operations ........................      5,983,213       4,857,746       2,712,497
                                                           ------------    ------------    ------------

Cash flows from investing activities:
  Additions to property, plant and equipment, net ......     (4,824,375)     (5,764,817)     (8,589,351)
  Acquisition of subsidiary ............................           --        (7,789,000)           --
                                                           ------------    ------------    ------------
Net cash used in investing activities ..................     (4,824,375)    (13,553,817)     (8,589,351)
                                                           ------------    ------------    ------------

Cash flows from financing activities:
  Proceeds from acquisition financing ..................           --        15,397,000            --
  Repayment of subordinated debt .......................        (75,000)           --
  Proceeds from long-term debt .........................      1,212,258       1,841,085       2,600,000
  Repayments of long-term debt .........................     (2,296,096)     (9,662,557)       (916,000)
                                                           ------------    ------------    ------------

Net cash provided by (used in) financing activities ....     (1,158,838)      7,575,528       1,684,000
                                                           ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents ...           --        (1,120,543)     (4,192,854)
Cash and cash equivalents at beginning of period .......           --         1,120,543       5,313,397
                                                           ------------    ------------    ------------

Cash and cash equivalents at end of period.............    $       --      $       --      $  1,120,543
                                                           ============    ============    ============
</TABLE>

As part of the  acquisition of North American  Spring and Stamping Corp. on July
21,  1995,  $2,000,000  in  subordinated  notes  were  issued to the  sellers as
consideration  for the purchase price.  The issuance of the  subordinated  notes
increased the price for the acquisition. See Note 2 of Notes to the Consolidated
Financial Statements.

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                       F-4

<PAGE>
                             HILITE INDUSTRIES, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                      Common Stock           Additional                     Total
                                -------------------------     Paid-in       Retained    Stockholders'
                                   Shares        Amount       Capital       Earnings       Equity
                                -----------   -----------   -----------   -----------   -----------
<S>          <C> <C>              <C>              <C>        <C>           <C>          <C>       
Balance June 30, 1994 .......     4,900,000        49,000     9,105,674     7,255,367    16,410,041

Net income for the year ended
  June 30,1995 ..............          --            --            --       3,618,641     3,618,641
                                -----------   -----------   -----------   -----------   -----------

Balance June 30, 1995 .......     4,900,000        49,000     9,105,674    10,874,008    20,028,682

Net income for the year ended
  June 30,1996 ..............          --            --            --       3,631,857     3,631,857
                                -----------   -----------   -----------   -----------   -----------

Balance June 30, 1996 .......     4,900,000        49,000     9,105,674    14,505,865    23,660,539

Net loss for the year ended
  June 30,1997 ..............          --            --            --      (1,656,985)   (1,656,985)
                                -----------   -----------   -----------   -----------   -----------

Balance June 30, 1997 .......     4,900,000   $    49,000   $ 9,105,674   $12,848,880   $22,003,554
                                ===========   ===========   ===========   ===========   ===========


</TABLE>




              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       F-5

<PAGE>
                            HILITE INDUSTRIES, INC.

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

1.      BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Hilite  Industries,  Inc.  ("Hilite" or the "Company") is engaged in the
        manufacture of products used primarily in the automotive  industry.  The
        Company's  products are sold primarily to  manufacturers  of automobiles
        and their suppliers,  pursuant to credit terms  customarily  extended in
        the  industry.  The Company  operates  separately  under the names Pitts
        Industries  ("Pitts"),  Surfaces,  Machine Parts  Company  ("MAPCO") and
        North American Spring and Stamping Corp.  ("NASS").  Pitts  manufactures
        electromagnetic clutches for various applications. Surfaces manufactures
        brake   proportioning   valves  for  automotive  brake  systems.   MAPCO
        manufactures   mounting   brackets,   fan  blades  and   pulleys.   NASS
        manufactures specialty springs, stamping products and assemblies.

        On July 21, 1995, the Company  acquired 100% of the  outstanding  common
        stock of  North  American  Spring  and  Stamping  Corp.  from its  three
        stockholders   ("Selling   Shareholders").   In  consideration  for  the
        transaction, the Company paid $17,397,000. The acquisition was accounted
        for  by  the  purchase   method  of  accounting  and  NASS'  assets  and
        liabilities  were  recorded  at  their  fair  value  at the  date of the
        acquisition. The Company's consolidated statements of operations include
        the results of operation of NASS subsequent to July 21, 1995.

        The Company's significant accounting policies are as follows:

        Cash and Cash  Equivalents - Cash and cash  equivalents  include cash on
        hand and short-term investments with original maturities of three months
        or less.

        Inventory - Inventories are stated at the lower of cost or market,  cost
        being determined on a first in-first out ("FIFO") basis.

        Property,  Plant and  Equipment  -  Property,  plant and  equipment  are
        carried at cost.  Depreciation  and  amortization  are  computed  on the
        straight  line basis over the  estimated  useful  lives of the assets as
        follows:

          Buildings and improvements         20 years or  remaining  useful life
          Machinery and equipment            5 to 10 years 
          Other assets                       3 years

        Repair  and  maintenance  expenditures  are  charged  to  operations  as
        incurred  and  expenditures  for  major  renewals  and  betterments  are
        capitalized.  When  units of  property  are  disposed  of,  the cost and
        related accumulated  depreciation are removed from the accounts, and the
        resulting gains or losses are included in the results of operations.

        Property,  plant and  equipment  are  reviewed for  impairment  whenever
        events or changes in  circumstances  indicate the carrying  amount of an
        asset or group of assets may not be recoverable.  The impairment  review
        includes a comparison  of future cash flows  expected to be generated by
        the asset or group of assets with their  associated  carrying  value. If
        the carrying value of the asset or group of assets exceeds expected cash
        flows (undiscounted and without interest charges), an impairment loss is
        recognized to the extent carrying amounts exceed fair value.

        The  Company  routinely  makes  expenditures  for tooling  fixtures  and
        equipment  required for  production of specific  products for customers.
        These  costs are often  reimbursed  by  customers.  To the  extent  that
        expenditures  exceed related  reimbursements,  the excess is capitalized
        and included in property,  plant and equipment  (other) and  depreciated
        over the related  production  life. Net costs expended for tooling which
        are  expected to be  reimbursed  within one year are included in prepaid
        expenses  and other  current  assets.  Net  reimbursements  in excess of
        amounts expended which are expected to be fully expended are recorded in
        accounts  payable and accrued  expenses until  expended.  


                                      F-6

<PAGE>


        Goodwill - The excess of cost over the fair value of net assets acquired
        in an  acquisition  (goodwill)  is  being  amortized  over 20 years on a
        straight-line  basis. The  recoverability of goodwill is assessed by the
        Company on an  ongoing  basis by  comparing  the  undiscounted  value of
        expected future  operating cash flows to the carrying value of goodwill.
        Accumulated  amortization  was $624,000 and $317,000 as of June 30, 1997
        and 1996, respectively.

        Revenue  Recognition  - Sales  revenue  and  related  cost of sales  are
        recognized as products are shipped.  In the ordinary course of business,
        certain  products sold by the Company are subject to  retroactive  price
        adjustments.  No material retroactive price adjustments were recorded in
        the financial  statements for the 1997,  1996 or 1995 fiscal years.  The
        Company's  management  believes that there are no sales  recorded in the
        financial   statements   for  periods  which  are  subject  to  material
        retroactive adjustment.

        Research and  Development - The Company is engaged in numerous  research
        and  development  projects.  Costs  associated  with these  projects are
        charged to operations  when incurred.  Research and  development  costs,
        which are  included  in general  and  administrative  expenses,  totaled
        $882,000,  $945,000 and $879,000 for the years ended June 30, 1997, 1996
        and 1995, respectively.  Of these expenditures,  $240,000,  $343,000 and
        $596,000,  respectively,  were  sponsored  by  customers  and  $642,000,
        $602,000 and $283,000, respectively, were sponsored by the Company.

        Income  Taxes -  Deferred  income  taxes  are  provided  for  using  the
        liability method. Under this method, deferred tax assets and liabilities
        are  recognized on the tax effect of  differences  between the financial
        statement  and tax  basis of  assets  and  liabilities  using  presently
        enacted tax rates.

        Use of  Estimates - Financial  statements  prepared in  conformity  with
        generally  accepted  accounting  principles  require  management to make
        estimates  and  assumptions   about  reported   amounts  of  assets  and
        liabilities,   disclosure  of  contingent  assets  and  liabilities  and
        reported  amounts of revenue  and  expenses.  Management  must also make
        estimates and judgments  about future  results of operations  related to
        specific elements of the business in assessing  recoverability of assets
        and recorded  values of  liabilities.  Actual  results could differ from
        these estimates.

        Stock-Based  Compensation - The Company  adopted,  on a disclosure basis
        only,  Statement of Financial  Accounting  Standards No. 123, Accounting
        for Stock-Based  Compensation,  in fiscal 1996. The Company continues to
        measure compensation costs under Accounting Principles Board Opinion No.
        25, Accounting for Stock Issued to Employees.

        Reclassifications - Certain prior year amounts have been reclassified to
        conform with the current year presentation.


2.      NASS ACQUISITION

        On July 21, 1995, the Company  acquired 100% of the  outstanding  common
        stock of  North  American  Spring  and  Stamping  Corp.  from its  three
        stockholders.  In consideration  for the  transaction,  the Company paid
        $17,397,000. The amount paid at closing included:


Cash paid to Selling Shareholders.........................  $  7,789,000
Cash used to refinance certain long-term debt of NASS.....     7,608,000
                                                            ------------
   Total cash portion of acquisition......................    15,397,000

Subordinated notes payable ("Subordinated Notes") issued 
 to the Selling Shareholders..............................     2,000,000
                                                            ------------
             Total........................................  $ 17,397,000
                                                            ============
                                      F-7

<PAGE>

        The  Subordinated  Notes bear interest at 9% and the interest is payable
        quarterly.  Interest  payments on these notes were  suspended  effective
        April 30,  1997  pending  the  outcome of the claim  against the Selling
        Shareholders  (See  footnote  11.).  During the year ended June 30, 1996
        certain  adjustments  were made to the purchase price as a result of tax
        considerations   which  lowered  the   Subordinated   Notes  balance  to
        $1,860,184. The Subordinated Notes mature on July 21, 2002 at which time
        the entire balance is due to the Selling  Shareholders.  The Company may
        elect to prepay the Subordinated Notes at any time prior to the maturity
        date at its discretion.

        The  acquisition  was accounted for by the purchase method of accounting
        and NASS' assets and  liabilities  were  recorded at their fair value at
        the date of the acquisition.  The Company's  consolidated  statements of
        operations  include the results of operations of NASS subsequent to July
        21, 1995. In connection with the acquisition, goodwill of $6,512,000 was
        recorded.

        Supplemental Proforma Results of Operations (Unaudited)

        The  following  unaudited  proforma  summary  presents the  consolidated
        results of operations as if the acquisition occurred at the beginning of
        fiscal  1995 and does not  purport to be  indicative  of what would have
        occurred had the  acquisition  actually  been made as of such date or of
        results which may occur in the future.

                                     1996                  1995
                                     ----                  ----

        Net sales.............. $ 73,744,530          $ 74,140,211
        Net income.............    3,597,833             4,113,712
        Net income per share...        0.73                   0.84

        Adjustments  made in  arriving  at the  proforma  unaudited  results  of
        operations include the difference in depreciation expense resulting from
        the change in the  carrying  value of property  and  equipment  to their
        estimated  fair values,  differences  in cost of sales for the change in
        inventory valued on the FIFO method of inventories  rather than the LIFO
        method  and  increase  in  goodwill  amortization   resulting  from  the
        transaction.


3.      RESTRUCTURING CHARGE

        As a  result  of  operating  problems  and  inefficiencies  at the  NASS
        division,  the  Company's  Board of Directors  approved a plan,  in June
        1997,   to   substantially   restructure   the  NASS   operations.   The
        restructuring plan includes the orderly  discontinuance of a significant
        number of commodity-type products currently manufactured and distributed
        by NASS.  A leased  warehouse  facility  is  scheduled  to be closed and
        certain contracts including a sales representative  arrangement has been
        terminated.  In addition,  certain  members of NASS management have been
        released.  It is  expected  that  the  orderly  discontinuance  of these
        products and  transitions  with customers will occur over an approximate
        nine-month period.

        In conjunction  with this plan, the Company recorded a charge to pre-tax
        earnings totaling approximately  $2,700,000 ($1,000,000 in cost of sales
        and $1,700,000 in selling, general and administrative costs). The charge
        is  comprised  of a reduction  (approximately  $900,000) in the net book
        value of certain assets, primarily machinery,  equipment and tooling, to
        their estimated fair value, net of estimated  selling costs,  accrual of
        certain  costs  which  the  Company  expects  to  incur  in  terminating
        contractual  obligations,  but for which no future economic benefit will
        be received  (approximately  $1,600,000) and other costs  (approximately
        $200,000).  Operating  losses,  which may  occur  during  the  phase-out
        period, have not been accrued.

                                      F-8

<PAGE>

4.      INVENTORIES

        Inventories at June 30, 1997 and 1996 consisted of the following:


                                            1997                 1996
                                            ----                 ----
        Raw materials...............    $ 3,916,344          $ 3,432,454
        Work in process.............      2,254,960            2,194,099
        Finished goods..............      3,904,482            3,218,904
                                        -----------          -----------
                                        $10,075,786          $ 8,845,457
                                        ===========          ===========


5.      PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment at June 30, 1997 and 1996 consisted of the
        following:


                                            1997                 1996
                                            ----                 ----
        Land........................    $  1,150,000        $  1,150,000
        Building and improvements...       6,855,531           6,428,585
        Machinery and equipment.....      29,834,599          29,644,173
        Other.......................         560,110             916,913
                                        ------------        ------------
                                          38,400,240          38,139,671
        Less accumulated depreciation
         and amortization...........     (12,077,533)        (10,349,569)
                                        ------------        ------------
                                        $ 26,322,707        $ 27,790,102
                                        ============        ============

        Progress  payments  for  machinery  ordered  and not  placed in  service
        totaling  $1,635,000  and  $1,149,000  as of June  30,  1997  and  1996,
        respectively,  are included in machinery and equipment. Open commitments
        to purchase machinery and equipment at June 30, 1997 totaled $1,353,000.

        As  part  of the  restructuring  plan  at  NASS,  net  fixed  assets  of
        $2,330,800  (fixed assets of $3,476,318 and accumulated  depreciation of
        $1,146,518)  were  reclassified  on the balance sheet as assets held for
        disposal.  During  fiscal year 1997,  retirements  of fully  depreciated
        machinery  and  equipment  were  $644,310.  There  were  no  significant
        disposals during fiscal year 1996 and 1995.

        Routine  repairs and  maintenance  charged to expense  were  $1,847,735,
        $1,355,757 and  $1,334,532  for the years ended June 30, 1997,  1996 and
        1995, respectively.


                                      F-9

<PAGE>



6.      ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

        Accounts  payable  and  accrued  liabilities  at June 30,  1997 and 1996
        consisted of the following:


                                            1997          1996
                                            ----          ----
        Trade accounts payable......    $ 5,531,022   $ 5,193,615
        Restructuring accrual.......      2,082,026         --
        Accrued payroll and payroll
         related....................      1,447,151     1,196,754
        Accrued employee benefit
         plan costs.................        698,539       660,181
        Accrued health plan claims..        291,961       235,335
        Accrued occupational injury
         plan costs.................        475,000        50,640
        Other accrued expenses......      1,350,263     1,270,762
                                        -----------   -----------
        Total.......................    $11,875,962   $ 8,607,287
                                        ===========   ===========

7.      LONG-TERM DEBT

        Long-term debt at June 30, 1997 and 1996 consisted of the following:


                                            1997           1996
                                            ----           ----
        Consolidated term loans.....    $ 9,973,385    $11,905,952
        Revolving line of credit....      6,500,477      5,933,659
        Equipment acquisition
         term notes payable.........      1,768,673      1,422,762
        Real estate term note
         payable....................        666,667        730,667
                                        -----------    -----------
                                         18,909,202     19,993,040
        Less current portion........     (2,422,950)    (2,320,672)
                                        -----------    -----------
                                        $16,486,252    $17,672,368
                                        ===========    ===========

        Effective  July  21,  1995,  the  Company,   in  conjunction   with  its
        acquisition  of  NASS,  executed  an  amendment  to  its  existing  loan
        agreement ("the Agreement") with a bank to reflect new credit facilities
        totaling  $26,700,000.  The  credit  facilities,  as of June  30,  1997,
        consist of the following:

        1)      Term  loans  of  $13,700,000   original  principal  balance  and
                $9,973,385  outstanding at June 30, 1997.  Principal payments on
                the term loan of approximately  $163,000  together with interest
                are  payable  monthly.  The  maturity  date of the term loans is
                August 1, 2002.  The term loans bear  interest at a blended rate
                of 6 month and 12 month  LIBOR  plus 1 1/2%  (7.428% at June 30,
                1997).  The term loans were used for funding the  acquisition of
                NASS and for refinancing Company debt,

        2)      A revolving line of credit of $10,000,000  with interest payable
                monthly at either the bank's prime rate less 1/2% (8.00% at June
                30, 1997) or a blended rate of 6 month and 12 month LIBOR plus 1
                1/4 % (7.9375%) at June 30, 1997.  As of the balance sheet date,
                the revolving  line of credit was due to expire on July 21, 1998
                and is  reflected  as a  long-term  liability  on the  financial
                statements.  A commitment fee of 1/4%, per annum,  is charged on
                the average  unused  portion of the revolving  line of credit to
                the bank, payable quarterly. As of June 30, 1997, $6,500,477 had
                been used on the line of credit, of which $5,590,000 was used to
                complete financing on the acquisition of NASS, and $3,499,523 is
                available,

                                      F-10
<PAGE>

        (3)     An  equipment   acquisition   facility  of  $3,000,000  for  the
                financing of equipment  purchases  with term loans of $2,142,440
                original   principal   balance   used  under  the  facility  and
                $1,768,673   outstanding  and  $1,231,327  available  under  the
                facility at June 30, 1997.  Any term notes payable  issued under
                this facility bear interest,  at the Company's option, at either
                prime  rate or LIBOR  plus 1 1/2%  (7.727%  at June  30,  1997).
                Principal  payments  on the  equipment  acquisition  facility of
                approximately $35,700 together with interest are payable monthly
                and have a five year term;

        In addition to the above credit facility, the Company has a fifteen year
        real  estate  note with the same bank that  expires on November 1, 2007.
        The note,  which has an  original  principal  amount of  $960,000  and a
        $666,667  outstanding  balance at June 30,  1997,  is payable in monthly
        installments  of $5,333  plus  interest at the prime rate (8.50% at June
        30, 1997).

        All of the notes and line of credit are  collateralized  by the accounts
        receivable,  inventory,  equipment  and real estate of the Company.  The
        bank  has the  right to  accelerate  each of the  maturity  dates of the
        consolidated  term  note  and  real  estate  note to  coincide  with the
        maturity date of the revolving  line of credit.  The Agreement  contains
        certain  covenants  relating to tangible  effective net worth,  debt and
        cash flow coverage ratio.

        Principal  payments on long-term  debt,  excluding the revolving line of
        credit,  due in each of the next five fiscal  years and  thereafter  are
        $2,422,950, $2,422,950, $2,422,950, $2,348,067, $2,123,421 and $668,387,
        respectively.  Interest  payments  during the years ended June 30, 1997,
        1996 and 1995 were $1,662,215, $1,659,373 and $283,377, respectively.

        As of August 30, 1997,  the bank  increased the revolving line of credit
        to $12  million  and  extended  the  expiration  date to July 21,  1999.
        Effective   September   18,  1997  the  bank   increased  the  remaining
        availability under the agreement from $1,231,327 to $3,000,000.


8.      INCOME TAXES

        The  provision  for  federal  income  taxes for the years ended June 30,
        1997, 1996 and 1995 consisted of the following:

                                    1997               1996              1995
                                    ----               ----              ----
       Current:                 
        Federal ................ $ (205,251)        $1,274,580        $1,411,000
        State ..................    145,699            113,000           123,000
        Deferred ...............   (783,017)           676,000           482,000
                                 ----------         ----------        ----------
       Total ................... $ (842,569)        $2,063,580        $2,016,000
                                 ==========         ==========        ==========

        The  following  is a  reconciliation  between the  Company's  income tax
        expense  calculated using the statutory  federal income tax rate and the
        tax expense calculated using the effective income tax rate for the years
        ended June 30, 1997, 1996 and 1995:


                                            1997           1996          1995
                                            ----           ----          ----
        Pretax book income at 
            statutory rate..............$ (849,897)    $1,936,450    $1,916,000
        State taxes.....................    33,257        113,000       123,000
        Other...........................   (25,929)        14,130       (23,000)
                                        ----------     ----------    ----------
                                        $ (842,569)    $2,063,580    $2,016,000
                                        ==========     ==========    ==========

                                      F-11

<PAGE>

        The components of net deferred tax assets and liabilities at of June 30,
        1997 and 1996 consisted of the following:


                                               1997              1996
                                               ----              ----
        Deferred assets:
         Book accruals and reserves 
           in excess of cumulative tax
           deductions...................... $ 1,599,293     $   413,627
        Inventory capitalization...........     174,789          59,000
                                            -----------     -----------
        Total.............................. $ 1,774,082     $   472,627
                                            ===========     ===========
        Deferred liability - tax 
         depreciation in excess of book.... $ 2,595,392     $ 2,077,589
                                            ===========     ===========

Tax payments  during the years ended June 30, 1997, 1996 and 1995 were $139,000,
$1,630,000 and $1,725,000, respectively.


9.      SALES TO MAJOR CUSTOMERS

        The  Company's  five largest  customers  with their  percentages  of the
        Company's  net sales for the 1997,  1996 and 1995  fiscal  years were as
        follows:




                                                   Percentage of Net Sales
                                                   -----------------------
                Customer                            1997    1996    1995
                                                    ----    ----    ----
        Ford........................................ 30%     30%     23%     
        Chrysler....................................  7       7       1      
        Borg-Warner.................................  6       7      17
        General Motors..............................  6       9      12
        Bosch (formerly AlliedSignal)...............  6       7      10

        The Company's customers are primarily in the automotive industry and, as
        a result,  the Company is impacted  by the overall  economic  conditions
        within the industry.


10.     TRANSACTIONS WITH RELATED PARTIES

        During the year  ended June 30,  1997,  1996 and 1995 the  Company  paid
        management fees of $235,000 to Lineberger & Co., LLC, an entity owned by
        the Company's Chairman of the Board.

        In connection with the acquisition of North American Spring and Stamping
        Corp. on July 21, 1995, Lineberger & Co., LLC was paid a transaction fee
        of $150,000.


11.     CONTINGENCIES

        In May 1997 the Company  initiated a suit in the United States  District
        Court for the Northern District of Illinois  (Eastern  Division) against
        the Selling  Shareholders of NASS (now known as the specialty components
        and assemblies division).  The Company alleges, among other things, that
        the Selling Shareholders made material  misrepresentations in connection
        with the Company's  acquisition  of NASS and the Company is seeking that
        the Selling  Shareholders pay substantial  damages to the Company and/or
        that  the  transaction  be  rescinded.  The  Selling  Shareholders  have
        responded in 


                                      F-12

<PAGE>


        court by denying all claims of the Company and countersuing for recovery
        of  legal  costs.  Management  of  the  Company  intends  to  vigorously
        prosecute this action.

        In the  normal  course of  business,  the  Company is subject to certain
        claims and litigation related to on-the-job  injuries.  The Company does
        not believe that any claims will have a material  adverse  effect on the
        Company.


12.     LEASE COMMITMENTS

        The  following  is a schedule of future  minimum  lease  payments  under
        operating leases with initial lease terms in excess of one year:


                                                        Operating
                                                         Leases
                                                      -----------
        Year ending June 30,
            1998.................................     $   362,531
            1999.................................         352,593
            2000.................................         210,520
            2001.................................          83,399
            2002.................................           4,624
            Thereafter...........................              --
                                                      -----------
            Total minimum lease payments.........     $ 1,013,667
                                                      ===========

        Total  minimum  lease  payments have been reduced by $171,000 to reflect
        the  total  minimum  lease  payments  expected  to be  received  under a
        noncancelable  sublease arrangement.  Rental expense for the years ended
        June  30,  1997,  1996 and 1995 was  $500,047,  $419,231  and  $202,426,
        respectively.


13.     EMPLOYEE BENEFITS

        The Company  sponsors three defined  contribution  retirement  plans for
        Company  employees.  Employees are eligible to  participate  in the plan
        upon attaining certain age and service requirements.  Under these plans,
        eligible  employees may contribute  amounts through payroll  deductions.
        Employer contributions are made either through matching contributions of
        employee deductions or through a discretionary contribution.  During the
        years ended June 30, 1997, 1996 and 1995, a  discretionary  contribution
        was expensed of $346,000, $360,000 and $231,000, respectively.

        The Company has  noncontributory  defined benefit pension plans covering
        NASS salaried and  bargaining  unit  employees.  Pension plan assets are
        primarily  invested in marketable  equity  securities  and corporate and
        government securities. Benefits are generally based on years of service,
        age at retirement and the employee's compensation. The Company's funding
        policy is to contribute amounts equal to, or exceeding,  minimum funding
        requirements of the Employee  Retirement Income Security Act of 1974, as
        amended ("ERISA"). The projected benefit obligation, plan assets and net
        periodic  pension cost  associated  with these defined  benefit  pension
        plans  are  not  significant  to the  Company's  consolidated  financial
        statements.

        In December  1995,  the Company  froze all  benefits in the NASS defined
        benefit pension plan for salaried employees.  In June 1997, the Board of
        Directors of the Company  approved the  termination  of the plan.  Those
        participants  who are vested and  receiving  benefits  will  continue to
        receive benefit  


                                      F-13
<PAGE>

        payments  through  termination  date when all  remaining  assets will be
        distributed in accordance with the plan provisions.

        The  Company  sponsors  two  self-funded  employee  benefit  plans which
        provide comprehensive medical benefits and life and accidental death and
        dismemberment  insurance  to  Company  employees  and their  dependents.
        Eligible  employees include all employees  (excluding union employees at
        the NASS  location) who work  full-time (at least thirty hours per week)
        and have completed  either thirty or sixty days of continuous  full-time
        employment,  depending on their  classification.  During the years ended
        June  30,  1997,  1996  and  1995,  the  Company   incurred  expense  of
        $1,637,000, $1,230,000 and $1,084,000, respectively, under these plans.

        Union employees at the NASS location  receive medical benefits through a
        trust  administered by a third party. The Company paid premiums into the
        trust  during the years ended June 30, 1997 and 1996  totaling  $682,000
        and $613,000, respectively.

        Prior  to  September  1,  1995  the  Company  elected  to  use  a  Texas
        Occupational   Injury   Program  in  lieu  of  standard  Texas  workers'
        compensation  coverage as  permitted by state law.  Under this  program,
        occupational   injuries   sustained  in  the  course  and  scope  of  an
        individual's  employment  with the Company  were  handled by the Company
        through  self-insured  and insured  programs.  On September 1, 1995, the
        Company acquired Texas workers' compensation coverage which entitles all
        employees,  through premium  payments made by the Company,  to full work
        related  injury  benefits as stipulated  by state law.  Employees at the
        NASS  facilities  are  covered  under  Illinois  workers'   compensation
        coverage.


14.     STOCK BASED COMPENSATION

        During November 1993, the  stockholders of the Company  approved a stock
        option  plan and  100,000  shares  of Common  Stock  were  reserved  for
        issuance  upon  exercise  of the  options to be  granted  to  employees,
        officers  and  directors  of  the  Company   under  the  plan.   Options
        exercisable  for 57,800  shares  were  granted  at $9.00 per share,  the
        initial  public  offering  price of the common  stock.  All  options are
        exercisable at June 30, 1997,  and no options were exercised  during the
        years ending June 30, 1997, 1996 and 1995.

        Effective November 18, 1994 the Company granted ten year incentive stock
        options to four of its  officers to each  purchase  3,000  shares of the
        Company's  Common Stock, par value $0.01 per share, at an exercise price
        of $9.00, the fair market value at the date of grant. The options become
        exercisable  as to 1,000 shares on November  18,  1995,  1,000 shares on
        November 18, 1996 and 1,000 shares on November 18, 1997.

        Effective January 29, 1997, the Company granted ten year incentive stock
        options to five of its  officers  and one other  employee.  The options,
        exercisable for 30,200 shares, were granted at $5.13 per share, the fair
        market  value at the date of grant.  All options are  exercisable  as of
        June 30, 1997.  The Company  granted an additional  20,200 shares to the
        officers and employee  pending  stockholder  approval of an amendment to
        the 1993 Stock Option Plan to increase  the number of shares  authorized
        thereunder to 125,000.  These options have been  accounted for herein as
        granted and vested as of June 30, 1997 as  management  and directors own
        sufficient common stock to ensure the amendment will be adopted.

        In conjunction with the public offering, 100,000 warrants were issued to
        certain  Underwriters.  The exercise  price for these warrants is $10.80
        per share.  At June 30, 1997 all of these warrants are  outstanding  and
        exercisable.

                                      F-14
<PAGE>


        In fiscal 1996,  the Company  adopted the  disclosure-only  option under
        Statement of Financial  Accounting  Standards No. 123,  "Accounting  for
        Stock-Based  Compensation"  ("FAS  123").  If the Company  had  recorded
        compensation  expense  in  fiscal  1997 and 1996 for the  stock  options
        granted in accordance  with the  provisions of FAS 123, the proforma net
        income (loss) would have been  ($1,754,457)  and  $3,631,857 and the pro
        forma net income  (loss) per share would have been ($0.36) and $0.74 for
        the year ended June 30, 1997 and 1996, respectively.  The estimated fair
        value of the options granted during the year ended June 30, 1997,  using
        the Black-Scholes pricing model, is $147,017.

        The significant assumptions used to estimate the fair value of the stock
        options  granted in fiscal 1997  include a  risk-free  rate of return of
        6.70%,  expected option life of ten years, expected volatility of 29.48%
        and no expected dividend payments.

        A summary of stock option activity is as follows:

                            Summary of Stock Options
<TABLE>
<CAPTION>
                                   1997                    1996                    1995
                            -------------------     -------------------     -------------------
                            Number      Average     Number      Average     Number      Average     
                            of          Exercise    of          Exercise    of          Exercise
                            Shares      Price       Shares      Price       Shares      Price
                            ------      -------     ------      -------     ------      -------
<S>                         <C>         <C>         <C>         <C>         <C>         <C>    
Options outstanding at
   beginning of year        69,800      $  9.00     69,800      $  9.00     57,800      $  9.00
Options granted             50,400      $  5.13        --       $   --      12,000      $  9.00
Options exercised              --       $    --        --       $   --          --      $    --
Options canceled               --       $    --        --       $   --          --      $    --
                            ------      -------     ------      -------     ------      -------
Options outstanding at
  end of year              120,200      $  7.38     69,800      $  9.00     69,800      $  9.00
                           =======      =======     ======      =======     ======      =======

Options exercisable at
   end of year             116,200      $  7.32     53,396      $  9.00     40,998      $  9.00
                           =======      =======     ======      =======     ======      =======
</TABLE>


        The following  information is presented for stock options outstanding at
        June 30, 1997.



                Outstanding                              Exercisable     
        --------------------------------            ----------------------
                    Average     Average                          Average
                    Life        Exercise                         Exercise
        Shares      (in years)  Price                Shares      Price
        --------------------------------            ----------------------
        69,800         7        $  9.00              65,800      $  9.00
        50,400        10        $  5.13              50,400      $  5.13
       -------                  -------             -------      -------
       120,200                                      116,200
       =======                                      =======



                                      F-15

<PAGE>

                                                                     SCHEDULE II

                            HILITE INDUSTRIES, INC.

                       VALUATION AND QUALIFYING ACCOUNTS
                    Years ended June 30, 1997, 1996 and 1995



<TABLE>
<CAPTION>
                                                            Additions
                                                   ------------------------
                                                                Charged to   
                                       Balance     Charged to      other     Increases/      Balance
                                    at beginning   costs and     accounts    (Deductions)    at end
          Description                of period     expenses      describe     describe       of period
          -----------                ---------     --------      --------     --------       ---------
<S>                 <C> <C>          <C>            <C>           <C>         <C>            <C>      
                                                                                    
Allowance for doubtful accounts:                                                 
    Year ended June 30, 1995         $  70,000      $    --       $     --    $    --        $  70,000
                                     =========      =========     =========   ========       =========
                                                   
    Year ended June 30, 1996         $  70,000      $    --       $     --    $ 21,100  (1)  $  91,100
                                     =========      =========     =========   ========       =========
                                                   
    Year ended June 30, 1997         $  91,100      $ 104,327 (2) $     --    $    --        $ 195,427
                                     =========      =========     =========   ========       =========
</TABLE>



(1)     Amount  represents  reserve on receivables for North American Spring and
        Stamping Corp., acquired on July 21, 1995.

(2)     Amount  represents  specific  reserves for primarily pricing disputes at
        the specialty components and assemblies division.


                                      F-16

<PAGE>



                                   SIGNATURES

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

                                        HILITE INDUSTRIES, INC.
                                                (Registrant)


September 26, 1996                      /s/Daniel W. Brady
                                        ----------------------------
                                        Daniel W. Brady
                                        Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of the Company and in
the capacities and on the dates indicated.


September 26, 1996                      /s/James E. Lineberger
                                        ----------------------------
                                        James E. Lineberger
                                        Chairman of the Board


September 26, 1996                      /s/Daniel W. Brady
                                        ----------------------------
                                        Daniel W. Brady
                                        Chief Executive Officer and Director
                                        (Principal Executive Officer)


September 26, 1996                      /s/Samuel M. Berry
                                        ----------------------------
                                        Samuel M. Berry
                                        President, Chief Operating Officer and
                                        Director

September 26, 1996                      /s/Ronald G. Assaf
                                        ----------------------------
                                        Ronald G. Assaf
                                        Director


September 26, 1996                      /s/James D. Gerson
                                        ----------------------------
                                        James D. Gerson
                                        Director


September 26, 1996                      /s/Roy Wiegmann
                                        ----------------------------
                                        Roy Wiegmann
                                        Vice President and Chief Financial 
                                        Officer (Principal Financial and 
                                        Accounting Officer)

                                       21