<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                                  FORM 10-KSB
(Mark One)
  X    Annual Report Pursuant to Section 13 or 15(d) of the Securities
-----  Exchange Act of 1934 (Fee Required)

       For the fiscal year ended September 30, 1996

-----  Transition Report Pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934 (No Fee Required)

       For the transition period from            to           
                                      ----------    ----------

Commission File number 0-15318
                       ---------

                        BALLISTIC RECOVERY SYSTEMS, INC.
                 ----------------------------------------------
                 (Name of Small Business Issuer in its Charter)


           Minnesota                                      41-1372079
           ---------                                      ----------       
(State or other jurisdiction of                    (IRS Employer ID Number)
incorporation or organization)

1845 Henry Avenue, South St. Paul, Minnesota              55075-3541
--------------------------------------------              ----------    
(Address of Principal Executive Offices)                  (Zip Code)


Issuer's telephone number including area code: (612) 457-7491
                                               -----------------

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)

Check whether the Issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days:
   X   Yes         No
 -----       -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Registration S-B contained in this form, and no disclosure will be contained,
to the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.   X  .
                               -----

State Issuer's revenues for the most recent fiscal year:  $1,731,414.

Based upon the average bid and asked prices of the Issuer's Common Stock, the
aggregate market value of the Common Stock held by Non-affiliates of the Issuer
as of December 9, 1996 was approximately $1,762,740.

Number of shares outstanding as of December 9, 1996:   4,454,474.


  Index for exhibits is located on page 28.  This document contains 29 pages.


                                       1
<PAGE>   2
                      DOCUMENTS INCORPORATED BY REFERENCE


Portions of the Company's Definitive Proxy Statement to be used in connection
with the election of directors at the 1997 annual shareholders meeting (the
"Proxy Statement") are incorporated by reference into Part III, Items 9-12 as
follows:



Part of From 10-K                        Portion of Proxy Statement
-----------------                        --------------------------           

1.   Part III, Item 9.                   1.    Proposal 1: Election
     Directors and Executive                   of Directors.
     Officers of the Registrant.

2.   Part III, Item 10.                  2.    Proposal 1: Executive
     Executive Compensation.                   Compensation.

3.   Part III, Item 11.                  3.    Common Stock Ownership of
     Security Ownership of                     Principal Shareholders and
     Certain Beneficial                        Management.
     Owners and Management.

4.   Part III, Item 12.                  4.    Certain Relationships and
     Certain Relationships and                 Related Transactions.
     Related Transactions.


                                       2
<PAGE>   3
                                     PART I


Item 1.  Description of Business

Ballistic Recovery Systems, Inc. (the "Company") was incorporated in 1980 under
the laws of the State of Minnesota.

(a)   Business Development

      The Company is engaged in the design, development, manufacturing,
      marketing and distribution of parachute recovery systems for use with
      recreational ("Sport Aviation") and general aviation ("GARD") aircraft.
      In 1993, the Company received Federal Aviation Administration ("FAA")
      approval of the GARD-150 product for installation on FAA-certified Cessna
      150/152 aircraft.

      Beginning in 1994, the Company established project engineering as a
      separate profit center.  The Company sought and established relationships
      with outside sources for research and development funding in order to
      continue its efforts towards long-term product development and expansion.
      During 1994, the Company began receiving outside funding for certain
      research and development projects including two projects that are ongoing
      at the present time.

      One of the ongoing projects calls for the development of a larger version
      of the GARD-150 system for use in a new certified general aviation
      aircraft.  This particular aircraft, if successfully certified, will be
      the first general aviation aircraft to have the Company's product
      included as standard equipment.

      The other ongoing project revolves around the continuation of the
      Company's Small Business Innovation Research grant (SBIR) through NASA.
      The purpose of the grant is to perform research of low-cost, lightweight
      aircraft emergency recovery systems.  The Company received a Phase I
      grant during 1994.  All work under this Phase I grant was completed
      during fiscal year 1995.  With the completion of Phase I, the Company
      applied for and received a Phase II grant to continue on with the
      research that it began in the first phase.  The Phase II grant, which
      began in March 1996, is for a maximum of $581,000 over a period of 24
      months.

      In June 1996, the Company received a development contract for a recovery
      system for a prototype unmanned aircraft being developed by a military
      contractor.  The contract, which covers an 18 month period and a maximum
      amount of $117,000, calls for the development and delivery of a series of
      recovery devices both for use in testing, and possibly in future
      production models.  This project is a development project for the
      government contractor and may or may not be successful.

      It is the intention of the Company to continue to look for additional
      contract engineering opportunities as well as to applying for other
      government funding through the SBIR program as well as other NASA
      sponsored programs.

(b)   Narrative Description of Business

      PRINCIPAL PRODUCTS:

      The Company's principal product line is ballistically deployed parachute
      recovery systems.  The systems, in an emergency situation, may be
      activated by the pilot releasing a parachute that is designed to open
      quickly, slow the decent of the aircraft, and lower it safely to the
      ground to prevent or reduce human injury and damage to the aircraft.
      Contract engineering services also deal with long-term product development
      and expansion of the ballistically deployed parachute recovery systems.



                                       3
<PAGE>   4
Item 1.  Description of Business (Continued)

(b)   Narrative Description of Business (Continued)

      Sport Aviation Products:

      These systems are used by unregistered aircraft such as ultralights, hang
      gliders, paragliders and aircraft registered with the FAA as
      experimental.  The Company manufactures these products and sells them to
      individuals and through dealers who also market and sell the aircraft and
      related products.

      General Aviation Recovery Device (GARD-150):

      In 1985, the Company began developing a parachute recovery system for
      general aviation aircraft.  This system employs similar technology as the
      Company's systems for lighter aircraft.   In May 1993, this system, known
      as the GARD-150, received a Supplemental Type Certificate (STC) from the
      FAA which allows owners of Cessna 150/152 model aircraft to install the
      system.

      The Company 's sales and marketing efforts generated seven GARD-150
      system sales to date.  However, the GARD-150 gained media interest.  The
      media attention  resulted in domestic and international television and
      radio broadcasts as well as coverage in domestic and international
      aviation and non-aviation magazines.  Marketing efforts for the GARD-150
      product have been suspended with the exception of the pursuit of
      additional media coverage.

      Contract Research and Development:

      Following the receipt of the STC on the GARD-150 product, the Company was
      approached by several aircraft manufacturers that expressed interest in
      developing parachute systems for their aircraft.  In 1994, the Company
      received initial funding and signed letters of intent for two research
      and development contracts for larger emergency parachute systems.  One of
      the projects is ongoing for a company that is developing a four place
      composite, certified aircraft.  If successfully certified, this aircraft
      will be the first FAA certified aircraft to offer one of the Company's
      recovery systems as standard equipment.   The other project was for a
      company that is developing three experimental category aircraft. This
      second project was suspended in 1995. See Note 2 of Notes to Financial
      Statements for further information.

      The Company is also involved in the Small Business Innovation Research
      grant (SBIR) program through NASA.  The purpose of the grant is to
      perform research of low-cost, lightweight aircraft emergency recovery
      systems.  The Company received a Phase I grant during 1994 which was
      completed during fiscal year 1995.  With the completion of Phase I, the
      Company applied for a Phase II grant to continue on with the research
      that it began in the first phase.  The Phase II grant, which began in
      March 1996, is for a maximum of $581,000 for a period of 24 months. See
      Note 3 of Notes to Financial Statements for further information.

      In June 1996, the Company received a development contract for a recovery
      system for a prototype unmanned aircraft being developed by a military
      contractor.  The contract, which covers an 18 month period and a maximum
      amount of $117,000, calls for the development and delivery of a series of
      recovery devices both for use in testing, and possibly in future
      production models.  This project is a development project for the
      government contractor and may or may not be successful. See Note 4 of
      Notes to Financial Statements for further information.

      The successful completion of any of these projects cannot be assured.
      Also, there can be no assurance that if these projects are completed,
      that they will produce revenues for the Company or that they will produce
      technology that can be applied to other similar aircraft or products, or
      that if produced, will be successfully marketed and sold.


                                       4
<PAGE>   5
Item 1.  Description of Business (Continued)

(b)   Narrative Description of Business (Continued)

      MANUFACTURING OPERATIONS AND SUPPLIERS:

      Assembly of the Company's product line is performed by the Company's
      personnel in a South St. Paul, Minnesota facility, using component parts
      made to its specifications.  Parachutes and ballistic devices are each
      purchased from certain key vendors.  Other components are purchased from
      a variety of suppliers.  The Company routinely searches for new vendors
      and feels alternate sources can be found should any of these vendors be
      unable to meet the Company's needs.

      PATENTS:

      On August 26, 1986, United States Patent No. 4,607,814 was issued to the
      founder of the Company, for an explosively  deployed parachute system for
      ultralight aircraft.  The patent, which with the payment of continuing
      maintenance fees, is effective until 2003 and has been assigned to the
      Company.  This patent does not cover the rocket charge deployment aspect
      of the system currently being sold by the Company.

      On September 5, 1989, United States Patent No. 4,863,119 was issued to
      the Company on behalf of two of the Company's employees for a "Parachute
      Reefing Device" deployed as part of a ballistic parachute system on an
      ultralight aircraft.  The two employees have assigned the patent to the
      Company, which with the payment of continuing maintenance fees is
      effective until 2006.  This patented feature is utilized in the Company's
      sport aviation line as well as in its general aviation product.  Current
      development projects also utilize the reefing device as a integral design
      component.

      When the Company completes development of additional ballistic parachute
      recovery systems, it intends to apply for patents for such systems.
      There can be no assurance, however, that any patents will be granted or,
      if granted that they will be of material benefit to the Company.

      SEASONALITY:

      Typically, the Company experiences seasonality in its sports aviation
      line.  The second and third quarters have the highest sales as this
      product line is marketed to recreational pilots who tend to fly their
      aircraft during the warmer months and equip their aircraft with a
      recovery system near the beginning of the flying season.  The Company's
      sales efforts have been expanded to increase its presence in new and
      existing markets as a means of reducing this seasonality.

      DEPENDENCE ON A SINGLE CUSTOMER:

      During the fiscal years ended September 30, 1996 and 1995, the Company
      was not dependent on any single customer that accounted for more that 10%
      of its sales.  The Company primarily distributes its products through
      dealers and distributors who in turn sell to the end consumer.  The
      Company believes that in the event that any individual dealers or
      distributors cease to represent the Company's products, that alternative
      dealers or distributors can be  established.

      BACKLOG OF ORDERS:

      As of September 30, 1996 and 1995, the Company had a backlog of orders
      totaling approximately $294,000 and $150,000, respectively. The 1996
      backlog is expected to be filled during fiscal year 1997.



                                       5
<PAGE>   6
Item 1.  Description of Business (Continued)

(b)   Narrative Description of Business (Continued)

      RESEARCH AND DEVELOPMENT:

      A summary of research and development is as follows:

                                                    1996           1995
                                                 ---------      ---------
      Total research and development
         expenditures                            $ 164,762      $ 109,361

      Revenues recognized under contract
         research and development
         relationships                            (119,747)       (90,448)
                                                 ---------      ---------
      Research and development, net              $  45,015      $  18,913
                                                 =========      =========


      The sources of the outside funding included:  current development of a
      recovery system for the planned to be certified aircraft; the SBIR grant;
      and the unmanned aircraft recovery system as discussed in Notes 2, 3 and
      4 of the Notes to Financial Statements.

      COMPETITION:

      The Company sells its ballistically deployed parachute recovery systems
      in the United States and internationally.  The Company entered into a
      covenant not to compete agreement on October 26, 1995 with Second Chantz
      ("SCI"), whom the Company believes was the only domestic competitor for
      ballistically deployed parachute systems for the domestic sport aviation
      market.  Several foreign companies have or are attempting to introduce
      new competitive products into the international sport aviation market. At
      present, none of the foreign companies have successfully entered the
      domestic market.  The Company believes its current systems were the first
      in the market and that its products and service are superior to its
      competitors.

      The Company has expanded its contract research and development activities
      to include an expansion in the certified general aviation market.  At
      present, the Company is unaware of any other manufacturer with the FAA
      Supplemental Type Certificate necessary for the Cessna 150/152 general
      aviation market.  The Company is unaware of any other manufacturer
      performing contract or self funded research and development activities in
      an effort to obtain Supplemental Type Certificates for any other FAA
      certified aircraft.

      Many companies with resources and capabilities greater than those of the
      Company could develop, manufacture and market a parachute recovery system
      competitive with that of the Company, although the Company believes that
      such development and approval could take several years  to complete.

      ENVIRONMENTAL COMPLIANCE:

      The Company believes that it is in compliance with all current federal
      and state environmental laws.

      EMPLOYEES:

      As of September 30, 1996, the Company had 14 full-time and 2 part-time
      employees at its South St. Paul facility.



                                       6
<PAGE>   7
Item 2.  Description of Property

      Through the end of fiscal year 1996, the Company leased 10,000 square
      feet of a 30,000 square foot commercial building at Fleming Field Airport
      in South St. Paul, Minnesota.   Beginning October 1, 1996, the Company
      signed a lease for a stand alone 13,000 office and production facility
      located on the same airport in South St. Paul, Minnesota.  The building
      is a World War II training hangar which included a small office structure
      inside the facility.  The Company renovated and expanded the office area
      and added rest room facilities.  The move of the production facility and
      offices was completed at the end of November 1996. (See Note 10 of Notes
      to Financial Statements).

Item 3.  Legal Proceedings

      The Company is not currently involved in any legal proceedings.

Item 4.  Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders through a
      solicitation of proxies or otherwise during the fourth quarter.


                                    PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

(a)   Market Information

      Effective May 12, 1992, the Company's common stock was deleted from the
      NASDAQ listings and there is currently no established trading market for
      the stock.  The stock is listed on the pink sheets and the electronic
      bulletin board on the over the counter market.  Stock trading has been
      sporadic since that date. Exact trading prices are not known since there
      is no mechanism in place to report the trading prices.  However, several
      stock tracking services, residing on the Internet, show the Company's
      trading volumes with bid and ask prices as far back as August 1995.
      Based on information provided by these Internet stock tracking services,
      the Company believes that the current asking price would be $0.69 and the
      current bid price would be $0.69.

      The following table sets forth the estimated high and low bid prices for
      the periods indicated.  The estimated bid prices shown are based on
      information from several Internet stock tracking services and discussions
      with brokers familiar with the Company's common stock.  These estimates
      represent inter-dealer prices, without retail markup, markdown, or
      commission, and do not necessarily represent actual transactions.


<TABLE>
<CAPTION>
                           First    Second   Third    Fourth
                           Quarter  Quarter  Quarter  Quarter
                           -------  -------  -------  -------
<S>                        <C>      <C>      <C>      <C>
          Common Stock:
          -------------
          1996     High     $0.25    $0.50    $1.38    $1.19
                   Low      $0.06    $0.06    $0.25    $0.69

          1995     High     $0.13    $0.13    $0.13    $0.25
                   Low      $0.06    $0.06    $0.06    $0.06
</TABLE>




                                       7
<PAGE>   8
Item 5.  Market for Common Equity and Related Stockholder Matters (Continued)

(b)   Holders

      As of December 9, 1996, the Company estimates there were approximately
      1,200 beneficial owners of the Company's common stock.

(c)   Dividends

      No dividends have been paid on the Company's securities and it is not
      anticipated that any dividends will be paid in the near future.


                                       8
<PAGE>   9
Item 6.  Management's Discussion and Analysis of Financial Condition and
Results of Operations

RESULTS OF OPERATIONS:

Fiscal year 1996 was the third consecutive year of profitability for the
Company.  The primary contributing factor was the Company's ability to generate
outside funding to offset the majority of research and development
expenditures.  This was in part due to the receipt of the SBIR grant, as well
as the several contract research and development projects.  These sources
generated $119,747 in outside funding that was taken as an offset to R&D
expenses.  This compares with $90,448 in outside funding for research and
development that was generated from all sources  in fiscal year 1995.

Sales for fiscal year 1996 were up 52% over 1995.  The increase in sales is
attributable to continuing improvement in ultralight aircraft sales for both
currently existing aircraft designs as well as those of new manufacturers.  In
addition, the Company believes that the SCI agreement has stimulated an
increase in the Company's sales.  The sales plans that were implemented in the
second and third quarters of the previous fiscal year have also contributed by
expanding the Company's dealer base and expanding sales to the existing
dealers.  The Company believes that sales volumes from the ultralight and
experimental aircraft markets for fiscal year 1997 will continue at levels at
least as that of fiscal year 1996.

The Company anticipates revenue contributions from current and planned research
and development projects which are expected to be completed or nearing
completion in fiscal year 1997.  The actual contribution cannot be determined
at this time, but revenues are planned for sale of systems for larger
experimental aircraft and possibly from the Company's contract research and
development projects.

Gross margins for the current fiscal year also improved by 4.2% up to 37.7%
from 33.5%.  The improvement was generated by increases in labor and overhead
efficiencies resulting from the higher and more efficient sales volumes for the
year.  In addition, minor pricing and discount adjustments implemented in the
early part of the second quarter contributed to the current year margin
increases.

Selling, general and administrative expenses went down as a percentage of
sales.  The actual dollar increase in expenses was a result of several factors
including the addition of sales personnel during the second quarter of the
prior fiscal year, increased support staff costs due to the increased sales
volumes, and increased travel expenses and legal fees.  Additional increases in
this category are expected for fiscal year 1997 as the Company expands its
marketing efforts in current and future markets, makes adjustments in
administrative expenditures.

The gross expenditures for research and development increased by approximately
$55,000 which represented increases in payroll costs and expenses that were
specifically associated with the outside funded projects.  As noted earlier,
this increase was offset in part by the increase in outside funding from
$90,448 in 1995 to $119,747 in 1996.

The other income and expense category increased as a direct result of the
covenant not to compete agreement entered into by the Company in October of the
current fiscal year.


LIQUIDITY AND CAPITAL RESOURCES:

Management intends to continue to improve the Company's operations and cash
flows in 1996 by continuing to monitor and enhance cost saving plans adopted in
the prior years and implementation of new ones. The following outlines
management's plans:



                                       9
<PAGE>   10
Item 6.  Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

LIQUIDITY AND CAPITAL RESOURCES: (CONTINUED)

The Company's focus on research and development has shifted over the past
several years.  Following the completion of the GARD-150 project, it became the
intention of the Company to find outside sources for research and development
funding in order to continue its efforts towards long-term product development
and expansion.  In 1994, the Company received initial funding and signed letters
of intent for two research and development contracts for larger emergency
parachute systems.  One of the projects is ongoing and that company is
developing a four place composite, certified aircraft.  The other project was
for a company developing three experimental category aircraft consisting of two
place, five place and seven place composite aircraft.  This second project was
suspended in 1995.  The successful completion of either of these projects cannot
be assured.  With the signing of these two agreements, the Company believes that
it has begun the process of possibly expanding its research and development
efforts into a profit center for the Company through outside funding.  In
addition, the receipt of outside funding has increased the Company's
opportunities to develop products for expanded applications throughout the
general aviation and experimental aircraft markets.  It will always be the
intention of the Company to retain the rights to any developed technology and
the rights to manufacture any related products.

In December 1994, the Company was awarded a Phase I, Small  Business Innovation
Research grant (SBIR) through NASA for use in the research of low-cost,
lightweight aircraft emergency recovery systems.  The $70,000 grant was used to
provide a feasibility study to determine whether or not future funding through
NASA in the form of a Phase II grant is warranted.  The Phase I research was
completed in June 1995 and the Phase II grant was applied for as part of the
final report.

The Company signed a Phase II contract with NASA on March 8, 1996 and work on
that project commenced at that time.  The total contract award was for a firm
fixed price grant of $581,875 for a period not to exceed 24 months.  No
assurances can be made as to the future success of this project, or whether or
not all of the contract amount will be allocated and received over the life of
the contract.

The Company anticipates applying for additional grants over the coming fiscal
years through the SBIR program and other programs sponsored by NASA.  No
assurances can be made as to the future success of the current grant nor the
likelihood of the receipt or success of any future grants.

In October 1995, the Company entered into a non-compete agreement with its only
domestic competitor, SCI.  As a result of other sales efforts that were
underway, the exact benefit of the SCI transaction in terms of sales volumes
cannot be specifically determined.  Although the agreement calls for debt
service over a ten year period, the Company believes that the agreement will
have a positive impact on both profitability and cash flow.  This agreement, in
addition to other sales programs that have been implemented by the Company over
the past several years, should continue to strengthen the Company's revenues and
profitability into the future.

In July 1996, the Company received a purchase order from a defense subcontractor
for the development of a parachute recovery system for an unmanned aircraft that
is being developed for possible military use.  The purchase order was for a
total of $117,814 and covers an 18 month period.  The purchase order calls for
development funding of the recovery system as well as the delivery of completed
recovery systems.   No assurances   can be made as to the success of the
development project or if its completion will lead to future revenues.  Also, no
assurances can be made that the project will proceed as intended in the purchase
order.

Management intends to fund all of its continuing operation out of its current
revenues with the exception of expanded research and development.  Management
believes that the current business operation is adequate to support the ongoing
operations of the Company during the next twelve month period and will maintain
expenses at the necessary levels until further funding opportunities
materialize.



                                       10
<PAGE>   11
Item 6.  Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

LIQUIDITY AND CAPITAL RESOURCES: (CONTINUED)

The Private Securities Litigation Reform Act of 1995 provides "safe harbor" for
forward looking statements.  Certain information included in this Form 10-KSB
and other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contain statements that
are forward-looking, such as statements relating to plans for research projects
and other business development activities as well as other capital spending,
financial sources and the effects of competition.  Such forward-looking
information involves important risks and uncertainties that could significantly
affect anticipated results in the future and, accordingly, such results may
differ from those expressed in any forward-looking statements made by or on
behalf of the Company.  These risks and uncertainties include, but are not
limited to, the elimination of funding for new research and development
projects, the decline in unregistered aircraft sales, potential product
liability claims, dependence on discretionary consumer spending, dependence on
existing management, general economic conditions, changes in federal or state
laws or regulations.



                                       11
<PAGE>   12
Item 7.  Financial Statements and Supplementary Data

                                                                           Pg.
(1)  Financial Statements for the years ended 
     September 30, 1996 and 1995:

     Independent Auditors' Report                                          13

     Balance Sheets as of September 30, 1996 and 1995                      14

     Statements of Operations for the years ended September 30, 1996
     and 1995                                                              15

     Statements of Shareholders' Equity for the years ended
     September 30, 1996 and 1995                                           16

     Statements of Cash Flows for the years ended September 30,
     1996 and 1995                                                         17

     Notes to Financial Statements                                         18


(2)  Financial Statement Schedules of Supplemental Information are no longer
     required under Regulation S-B.



                                       12
<PAGE>   13
                          INDEPENDENT AUDITORS' REPORT



Stockholders and Board of Directors
Ballistic Recovery Systems, Inc.
South St. Paul, Minnesota

We have audited the accompanying balance sheet of Ballistic Recovery Systems,
Inc. as of September 30, 1996 and the related statement of operations,
shareholders' equity, and cash flows for the year then ended.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audit.  The financial statements for the year ended September 30, 1995, were
audited by other accountants who have ceased operations.  They expressed an
unqualified opinion on them in their report dated November 13, 1995, but they
have not performed any audit procedures since that date.

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

In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the financial position of Ballistic Recovery Systems,
Inc. as of September 30, 1996 and the results of operations and cash flow for
the year then ended, in conformity with generally accepted accounting
principles.


/s/ Callahan, Johnston & Associates, LLC

Callahan, Johnston & Associates, LLC
Minneapolis, Minnesota
November 19, 1996



                                       13
<PAGE>   14
                    PART II - Item 7.  Financial Statements

                        BALLISTIC RECOVERY SYSTEMS, INC.
                                 BALANCE SHEETS
                          September 30, 1996 and 1995

<TABLE>
<CAPTION>
                              ASSETS                                  1996              1995
                                                                      ----              ----
<S>                                                             <C>               <C>
Current assets:
     Cash                                                        $   117,343       $    16,977 
     Accounts receivable - net of allowance for doubtful
          accounts of $12,500 and $5,000, respectively                73,793            66,038
     Inventories                                                     307,213           175,354
     Prepaid expenses                                                  4,197             2,969
                                                                 -----------       -----------
          Total current assets                                       502,546           261,338
                                                                 -----------       -----------

Furniture and fixtures                                                75,747            67,005
     Less accumulated depreciation                                   (59,901)          (53,061)
                                                                 -----------       -----------
          Furniture and equipment - net                               15,846            13,944
                                                                 -----------       -----------
Other assets:
     Patents less accumulated amortization of
          $6,552 and $5,866, respectively                              5,112             5,799
     Covenant not to compete less accumulated
          amortization of $34,782                                    344,656               ---

          Total other assets                                         349,768             5,799
                                                                 -----------       -----------

Total assets                                                     $   868,160       $   281,081
                                                                 ===========       ===========

     LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                            $    60,923       $    61,563
     Customer deposits                                               126,017            75,183
     Accrued payroll                                                  26,314            20,099
     Other accrued liabilities                                       117,747            62,114
     Deferred research and development funding                           ---             7,789
     Line-of-credit borrowings                                        25,000               ---
     Current portion of covenant not to compete                       31,334               ---
                                                                 -----------       -----------
          Current liabilities                                        387,335           226,748
                                                                 -----------       -----------

Long-term covenant not to compete, less current portion              314,325               ---
                                                                 -----------       -----------

Shareholders' equity:
     Common stock ($.01 par value; 10,000,000 shares authorized;
          4,454,474 shares issued and outstanding)                    44,545            44,545
     Additional paid-in capital                                    2,620,282         2,620,282
     Accumulated deficit                                          (2,498,327)       (2,610,494)
                                                                 -----------       -----------
          Total shareholders' equity                                 166,500            54,333
                                                                 -----------       -----------

Total liabilities and shareholders' equity                       $   868,160       $   281,081
                                                                 ===========       ===========
</TABLE>




      See Independent Auditors' Report and Notes to Financial Statements.



                                       14
<PAGE>   15
                        BALLISTIC RECOVERY SYSTEMS, INC.
                            STATEMENTS OF OPERATIONS
                    Years Ended September 30, 1996 and 1995



<TABLE>
<CAPTION>
                                                            1996         1995
                                                            ----         ----
<S>                                                    <C>          <C>
Sales                                                   $1,731,414   $1,137,134
Cost of sales                                            1,078,789      756,115
                                                        ----------   ----------
Gross profit                                               652,625      381,019

Selling, general and administrative                        411,244      307,641
Research and development, net (Notes 2, 3 and 4)            45,015       18,913
                                                        ----------   ----------

Income from operations                                     196,366       54,465

Other income (expense):
     Interest expense                                      (41,617)      (9,167)
     Covenant amortization                                 (34,782)         ---
     Other - net                                            (7,500)         505
                                                        ----------   ----------

Income before income taxes                                 112,467       45,803

Income taxes                                                   300          300
                                                        ----------   ----------

Net income                                              $  112,167   $   45,503
                                                        ==========   ==========


Primary earnings per share                              $     0.02   $     0.01
                                                        ==========   ==========

     Weighted average number of shares outstanding       6,379,492    4,454,474
                                                        ==========   ==========

Fully diluted earnings per share                        $     0.02   $     0.01
                                                        ==========   ==========

     Weighted average number of shares outstanding       6,379,492    6,294,752
                                                        ==========   ==========
</TABLE>


      See Independent Auditors' Report and Notes to Financial Statements.



                                       15
<PAGE>   16
                        BALLISTIC RECOVERY SYSTEMS, INC.
                  STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                    Years Ended September 30, 1996 and 1995


<TABLE>
<CAPTION>
                            Common Stock                                              
                       ---------------------    Additional                       Share-
                       Number of                 Paid-in     Accumulated         holders'
                        Shares        Amount     Capital       Deficit       Equity(Deficit)
                       ---------    --------   ----------     -----------    --------------
<S>                   <C>           <C>       <C>            <C>             <C>
Balance 9/30/94        4,416,324     $44,164   $2,610,377     ($2,655,997)     ($ 1,456)

Issuance of stock in
lieu of director fees     38,150         381        9,905              --        10,286

Net income                    --          --           --          45,503        45,503
                       ---------     -------   ----------     -----------      --------

Balance 9/30/95        4,454,474     $44,545   $2,620,282     ($2,610,494)     $ 54,333

Net income                    --          --           --         112,167       112,167
                       ---------     -------   ----------     -----------      --------

Balance 9/30/96        4,454,474     $44,545   $2,620,282     ($2,498,327)     $166,500
                       =========     =======   ==========     ===========      ========
</TABLE>


      See Independent Auditors' Report and Notes to Financial Statements.


                                       16
<PAGE>   17
                        BALLISTIC RECOVERY SYSTEMS, INC.
                            STATEMENTS OF CASH FLOW
                    Years Ended September 30, 1996 and 1995



<TABLE>
<CAPTION>
                                                                1996          1995
                                                                ----          ----
<S>                                                         <C>           <C>
Cash flows from operating activity:
   Net income                                                $ 112,167      $ 45,503
   Adjustments to reconcile net income to net cash
   from operating activity:
      Depreciation and amortization                              7,527         7,137
      Amortization of discount on debt                             ---           986
      Amortization of covenant not to compete                   34,782           ---
      Inventory valuation reserve                               10,000           ---
      Provision for bad debts                                    7,500           ---
      (Increase) decrease in:
         Accounts receivable                                   (15,255)      (45,695)
         Inventories                                          (141,859)      (26,145)
         Prepaid expenses                                       (1,227)          496
      Increase (decrease) in:
         Accounts payable                                         (640)      (10,135)
         Customer deposits                                      50,834        50,249
         Accrued expenses                                       54,059       (29,984)
                                                             ---------      -------- 

   Net cash flows from operating activities                    117,888        (7,588)
                                                             ---------      --------
Cash flows from investing activities:
   Capital expenditures                                         (8,743)       (9,445)
                                                             ---------      --------

   Net cash flows from investing activities                     (8,743)       (9,445)
                                                             ---------      --------
Cash flows from financing activities:
   Net borrowing under line-of-credit agreement                 25,000           ---
   Principal payments on debt                                      ---       (19,128)
   Principal payments on covenant not to compete               (33,779)          ---
                                                             ---------      --------

   Net cash flows from financing activities                     (8,779)      (19,128)
                                                             ---------      --------

Increase (decrease) in cash                                    100,366       (36,161)
Cash  - beginning of year                                       16,977        53,138
                                                             ---------      --------

Cash - end of period                                         $ 117,343      $ 16,977
                                                             =========      ========
</TABLE>




      See Independent Auditors' Report and Notes to Financial Statements.



                                       17
<PAGE>   18
                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1996 AND 1995


1.    Summary of Significant Accounting Policies

      Nature of Business

      Ballistic Recovery Systems, Inc. (the "Company") designs, manufactures and
      distributes ballistic recovery parachute systems used on recreational
      aircraft and has received approval for the production and distribution of
      recovery systems for Cessna 150/152 model general aviation aircraft.  The
      Company's products are sold both domestically and internationally.  The
      Company has also been successful in its efforts to receive outside funding
      to expand its research and development activities through research grants
      and contract R&D services.

      Use of Estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the
      financial statements and reported amounts of revenues and expenses during
      the reporting period. Actual results could differ from those estimates.

      Accounts Receivable

      The Company sells predominantly to domestic and foreign companies.  The
      Company grants uncollateralized credit to some customers, but the majority
      of sales are prepaid or shipped cash on delivery (COD).  The estimated
      loss that management believes is probable is included in the allowance for
      doubtful accounts.  Due to uncertainties in the collection process,
      however, it is at least reasonably possible that management's estimate
      will change during the next year.  That amount cannot be estimated.

      Two customers account for 78% of accounts receivable at 
      September 30, 1996.

      Inventories

      Inventories are recorded at the lower of cost (determined on a  first-in
      basis) or market. The estimated loss that management believes is probable
      is included in the inventory valuation allowance.  Due to uncertainties,
      however, it is at least reasonably possible that management's estimate
      will change during the next year.  That amount cannot be estimated.

      Customer Deposits

      The Company periodically receives partial or complete down payments for
      orders.  These down payments are recorded as customer deposits.  The
      deposits are recognized as revenue when the product is shipped.


                                       18
<PAGE>   19
                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1996 AND 1995


1.    Summary of Significant Accounting Policies (Continued)

      Furniture and Equipment

      Furniture and equipment is stated at cost. Depreciation is computed using
      the straight-line method over the estimated useful lives of the related
      assets, ranging from five to seven years. When assets are retired or
      otherwise disposed of, the cost and related accumulated depreciation are
      removed from the accounts and the resulting gain or loss is recognized in
      income for the period.  The cost of maintenance and repairs is expensed as
      incurred; significant renewals and betterments are capitalized. Deduction
      is made for retirements resulting from renewals or betterments.

      Intangibles

      Patents are recorded at cost and are being amortized on a straight-line
      method over 17 years.  The covenant not to compete is recorded at cost and
      is being amortized using the straight-line method over the ten year term
      of the agreement.

      Earnings Per Share

      Earnings  per common share is determined using the treasury stock method.
      Under this method, earnings per share is determined by dividing net income
      by the weighted average number of common shares and common equivalent
      shares outstanding during the year.  Options are considered common
      equivalent shares only when the average market price of the common stock
      obtainable on exercise during the period exceeds the exercise price of the
      options.

      Income Taxes

      Timing differences relate primarily to:  allowances for doubtful accounts;
      inventory valuation allowances; and accrued expenses not currently
      deductible. A deferred tax asset has not been reflected for future benefit
      of the Company's net operating loss carry forwards, net of the timing
      differences, due to concerns over its eventual realization.

      Research and Development Costs

      Research and development costs are charged to expense as incurred.

      Advertising Expenses

      Advertising expenses are recognized in the period incurred.  Advertising
      expenses totaled $26,774 in 1996 and $26,751 in 1995.




                                       19
<PAGE>   20
                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1996 AND 1995


2.    Research and Development Funding and Income Recognition

      In 1994, the Company received initial funding and signed letters of intent
      for two research and development contracts for larger emergency parachute
      systems.  One of the projects is ongoing for a companies is developing a
      four place composite, certified aircraft.  If successfully certified, this
      aircraft will be the first FAA certified aircraft to offer one of the
      Company's recovery systems as standard equipment.  The other project was
      for a company is developing three experimental category aircraft. This
      second project was suspended during fiscal year 1995.  Both of the
      companies are privately held.

      Under these two contracts, $23,304 and $20,712 was reflected as an offset
      to research and development expenses and is netted in the expense for 1996
      and 1995, respectively.  At the end of fiscal year 1996, the Company had a
      receivable due under the first contract of $5,278, and at the end of
      fiscal year 1995, the Company recorded a deferred research and development
      funding liability for $7,789.

      Additional funding, although not guaranteed, is expected to be received on
      a monthly basis over the next 12 to 18 months as the research and
      development progresses.  Although exact time lines and  production volumes
      are uncertain, it is expected that manufacturing of production units will
      commence at the end of the funding time line.

      The Company will retain the developed technology for the parachute systems
      in general and the outside companies will retain the developed technology
      that is specific to their individual aircraft.  In order to retain the
      developed technology, the Company will offer the company with the ongoing
      project, a discount on future purchases of completed systems which will
      total 110% of the advanced amount.

      The other company's project has been suspended and future work with this
      company is not certain.  The Company did not establish a liability for the
      $51,515 taken as an offset to expense to date under these projects due to
      the uncertainty of the future of the project and the future viability of
      the products to be developed.  In addition, the Company feels that the
      establishment of a reserve for a potential future obligation would be
      misleading to the financial statements as presented.  Any future purchase
      discounts that will be earned upon completion of the project will be
      offset against any future sales made to that company.

      The Company expects to be able to utilize the developed technology for
      applications on a wide range of aircraft.  The future applications will
      depend on a complete review of market conditions, product acceptance and
      available funding.

3.    Small Business Innovation Research Grant (SBIR)

      In December 1994, the Company was awarded a Phase I, Small Business
      Innovation Research grant (SBIR) through NASA for use in the research of
      low-cost, lightweight aircraft emergency recovery systems.  The $69,736
      grant over a six month period was used by the Company to expand its
      research in the area of lightweight fabrics and components for use in
      recovery systems.  The Phase I was completed in June 1995 and a proposal
      for Phase II funding was submitted at that time.  The $69,736 grant was
      recognized as an offset to research and development expenses during fiscal
      year 1995.



                                       20
<PAGE>   21
                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1996 AND 1995


3.    Small Business Innovation Research Grant (SBIR) (Continued)

      The Company signed a Phase II contract with NASA on March 8, 1996 and work
      on that project commenced at that time.  The total contract award was for
      a firm fixed price grant of $581,875 for a period not to exceed 24 months.
      Of the total contract price, the Company has received an allocation of
      $300,000 at this time.  Future allocations are expected throughout the
      term of the contract, but it is not guaranteed  as the allocations are
      part of the federal budget process.

      For the year ended September  30, 1996, the Company recognized $82,321 as
      an offset to research and development expenditures for work performed on
      the Phase II project.  As of September 30, 1996, the Company had
      established a receivable for $43,186 for this contract.

4.    Additional Contract Research and Development

      In June 1996, the Company received a purchase order from a defense
      subcontractor for the development of a parachute recovery system for an
      unmanned aircraft that is being developed for possible military use.  The
      purchase order, with revisions, is for a total of $117,814 and covers an
      18 month period.  The purchase order calls for development funding for the
      recovery system as well as the delivery of completed recovery systems.
      $14,123 has been recognized as an expense offset under this purchase order
      as of September 30, 1996, of which the total amount is reflected as a
      receivable as of that date.  No assurances can be made as to the success
      of the development project or if its completion will lead to future
      revenues.  Also, no assurances can be made that the project will proceed
      as intended in the purchase order.

5.    Covenant Not to Compete / Long-Term Debt

      On October 26, 1995 the Company entered into an agreement with the
      president and majority shareholder of Second Chantz Aerial Survival
      Equipment, Inc. (SCI), the Company's sole US competitor, whereby:

      1.   SCI ceased all business activities, and
      2.   SCI's president and majority shareholder entered into a ten year
           covenant not to compete with the Company.

      In exchange for the above the Company agreed to make payments on the
      covenant not to compete.  The agreement did not involve a stock or asset
      purchase.  In addition, the Company did not agree to assume any
      liabilities of SCI or its president.  The payments required under this
      agreement contains a non-interest bearing portion and a portion that bears
      interest at a rate below the Company's incremental borrowing rate.  Under
      generally accepted accounting principles the future payments have been
      discounted at the Company's incremental borrowing rate of 11.0% as
      follows:

<TABLE>
<CAPTION>
                                                  Future        Present
                                                 Dollars        Dollars
                                                --------       --------
     <S>                                        <C>            <C>
      Cash at signing                           $  5,000       $  5,000
      Parachute systems                           15,000         15,000
      Non-interest bearing four year note         80,000         63,732
      4% ten year note:   principal              400,000        295,706
                          interest                84,362            ---
                                                --------       --------
 
                                                $584,362       $379,438
                                                ========       ========
</TABLE>



                                       21
<PAGE>   22
                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1996 AND 1995


5.    Covenant Not to Compete / Long-Term Debt (Continued)

      The non interest bearing note calls for monthly payments of $1,500 for
      forty six months (February 1996 to November 1999).  The 4% ten year note
      calls for monthly payments of $4,036 (November 1995 to October 2005).
      Payments under this agreement are unsecured.

      The present value of the Company's obligation under this agreement was
      recorded as an intangible asset and is being amortized over ten years as
      shown in the accompanying financial statements.

      Future payments under this agreement are as follows:


<TABLE>
<CAPTION>
                                                 Future   Present
                                                Dollars   Dollars
                                               --------  --------
              <S>                             <C>       <C>
               1997                            $ 77,184  $ 43,747
               1998                              66,436    34,960
               1999                              66,436    39,005
               2000                              62,436    39,935
               2001                              48,436    29,204
               Thereafter                       197,781   158,808
                                               --------   -------
                                               $496,961  $345,659
                                               ========  ========
</TABLE>



      The Company also granted SCI's president an option to purchase 50,000
      shares of the Company's common stock at an exercise price of $.25.  This
      option has a ten year life and vests 20% per year over five years.

6.    Other Financial Information

      Inventories

      Inventories consisted of the following at September 30, 1996 and 1995:

<TABLE>
<CAPTION>
                                                 1996       1995
                                                 ----       ----
            <S>                               <C>        <C>
             Raw materials                     $195,291   $166,544
             Work in process                     50,146     18,125
             Finished goods                      86,776      5,685
             Less valuation reserve             (25,000)   (15,000)
                                               --------   --------
             Total Inventories                 $307,213   $175,354
                                               ========   ========
</TABLE>

      Depreciation Expense

      Depreciation expense totaled $6,840 in 1996 and $6,451 in 1995.


                                       22
<PAGE>   23
                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1996 AND 1995


6.    Other Financial Information (Continued)

      Major Customers

      During the fiscal years ended September 30, 1996 and 1995, the Company was
      not dependent on any single customer that accounted for more that 10% of
      its sales.  The Company primarily distributes its products through dealers
      and distributors who in turn sell to the end consumer.  The Company
      believes that in the event that any individual dealers or distributors
      cease to represent the Company's products, that alternative dealers or
      distributors can be established.

      Export Sales

      The Company's international sales are made through independent
      representatives in various foreign countries.  International sales as a
      percentage of total sales were 41% in 1996 and 44% in 1995.

      Major Suppliers

      During the fiscal years ended September 30, 1996 and 1995, the Company
      purchased its rockets and parachutes from certain key vendors.  The
      Company routinely searches for new suppliers and feels alternate sources
      can be found should any of these suppliers be unable to meet the Company's
      needs.

7.    Line-of Credit Borrowings

      In December 1995, the Company negotiated a $35,000 line-of-credit for use
      in operations.  The line-of-credit was established on a annual renewal
      basis which expires in mid-December 1996.  The line calls for a variable
      interest rate of 2% over prime.  At September 30, 1996, the outstanding
      balance under the line was $25,000.  The Company expects that the line
      will be renewed following the review of its fiscal year 1996 results with
      the bank.

8.    Income Taxes

      Below is a reconciliation between expected income tax expense that would
      result from applying domestic federal statutory rates to pretax income and
      income tax expense as recorded in the financial statements for the years
      ended September 30, 1996 and 1995:


<TABLE>
<CAPTION>
                                                     1996               1995
                                                     ----               ----
                                               Amount    Percent  Amount    Percent
                                              --------   -------  -------   -------
     <S>                                     <C>         <C>     <C>       <C> 
      Expected income tax expense             $ 16,800     15.0%  $ 6,800    15.0%
      State income taxes, net of federal
       tax benefit                               1,600      1.5       700     1.5
      Benefit of net operation loss            (18,400)   (16.5)   (7,500)  (16.5)
      State minimum fee                            300      0.1       300     0.1
                                              --------   ------   -------   -----
   
      Income tax expense                      $    300      0.1%  $   300     0.1%
                                              ========   ======   =======   =====
</TABLE>


      The net deferred tax asset consists primarily of net operating loss carry
      forwards, capital loss carry forwards and recognition of loss on disposal
      of intangible asset.  Below is a summary of  the net deferred tax asset at
      September 30:


                                       23
<PAGE>   24
                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1996 AND 1995


8. Income Taxes (Continued)


<TABLE>
<CAPTION>
                                        1996                                    1995
                          --------------------------------       ---------------------------------  
                           Current    Deferred       Total         Current    Deferred       Total
                          --------   ---------   ---------       ---------   ---------   ---------
<S>                      <C>        <C>         <C>             <C>         <C>         <C>
Federal                   $ 25,000   $ 593,000   $ 618,000       $  16,000   $ 636,000   $ 652,000
State                       10,000      40,000      50,000           7,000      76,000      83,000
                          --------   ---------   ---------       ---------   ---------   ---------
                            35,000     633,000     668,000          23,000     712,000     735,000
Valuation
  allowance                (35,000)   (633,000)   (668,000)        (23,000)   (712,000)   (735,000)
                          --------   ---------   ---------       ---------   ---------   ---------
Net deferred tax
  asset                   $    ---   $     ---   $     ---       $     ---   $     ---   $     ---
                          ========   =========   =========       =========   =========   =========
</TABLE>


      The Company has net operating loss and research and development credit
      carry forwards available to offset future taxable income.  If not
      utilized, these carry forwards will expire as follows:


<TABLE>
<CAPTION>
                          Net Operating Loss    
                        ----------------------     R & D
                 Year    Federal     Minnesota    Credits
                 -----  ----------   ---------    -------
               <S>     <C>           <C>         <C> 
                 2001   $  357,000    $     --    $ 4,000
                 2002      519,000          --      4,000
                 2003      713,000     164,000      5,000
                 2004      132,000      50,000         --
                 2005      113,000      13,000         --
                 2006      457,000      97,000         --
                 2007      181,000     182,000         --
                        ----------    --------    -------

                 Total  $2,472,000    $506,000    $13,000
                        ==========    ========    =======
</TABLE>


9.    Common Stock

      Stock Options

      In fiscal 1988, the Company adopted a non qualified stock option plan that
      authorizes the grant to officers and other employees of non qualified
      stock options for a maximum of 200,000 shares. Under the terms of the
      plan, the options become exercisable in annual increments of one-third of
      the shares covered by the option, beginning one year after grant, the
      exercise price of each option must be at least 85% of the fair market
      value of the stock as of the date of grant, and the maximum term of each
      option is 10 years. In fiscal 1991, the Board of Directors authorized, and
      the shareholders approved at the annual meeting, an increase in the number
      of shares available under the plan to 400,000.



                                       24
<PAGE>   25
                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1996 AND 1995


9.    Common Stock (Continued)

      Stock Options (Continued)

      In fiscal 1990, the Company adopted a stock option plan for non employee
      directors. The plan is authorized to grant options for a maximum, in the
      aggregate, of 300,000 shares of the Company's common stock to non employee
      directors. Under the plan, an option to purchase 10,000 shares of common
      stock, at an exercise price equal to the fair market value of the stock on
      the date of grant, is to be granted each year on the next business day
      following the annual shareholders meeting or April 1, whichever is later,
      to each non employee director then in office. Each option becomes
      exercisable in increments of 25% per quarter during the year of service
      and terminates 10 years following the date of grant.

      In addition to options issued pursuant to the above-described plans, the
      Company has issued options to various officers, employees and others.

      Transactions during 1996 and 1995, for the plans and other issuances above
      were as follows:


<TABLE>
<CAPTION>
                                         Number                Option Price
                                        Of Shares             Range per Share
                                        ---------             ---------------
   <S>                                  <C>                    <C>          
    Balance at September 30, 1994        1,807,428              $0.25 to $0.8125
    Granted                                285,000              $025 to $0.4375
    Canceled                               (50,000)             $0.5625
    Exercised                               (7,150)             $0.3125 to $0.453
                                         ---------

    Balance at September 30, 1995        2,035,278              $0.25 to $0.8125

    Granted                                140,000              $0.25 to $0.8125
    Canceled                               (62,760)             $0.4375 to $0.8125
                                         ---------

    Balance at September 30, 1996        2,112,518              $0.25 TO $0.8125
                                         =========

    At September 30, 1996:
       Options vested and exercisable    1,925,018
       Shares available for options        369,650
</TABLE>


10.   Commitments and Contingencies

      Leases

      Beginning October 1, 1996, the Company signed a lease for a different
      production facility located on the same airport in South St. Paul,
      Minnesota. Total rental expense for operating leases during 1996 and 1995
      was $19,632 and  $19,632, respectively.


                                       25
<PAGE>   26
                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1996 AND 1995


10.   Commitments and Contingencies (Continued)

      Leases (Continued)

      Future minimum lease payments required on non cancelable operating leases
      at September 30, 1996 are as follows:


      1997        $ 31,472
      1998          28,200
      1999          28,200
      2000          28,200
      2001          28,200
      Thereafter    35,250
                  --------
                  $179,522
                  ========

11.   Supplemental Cash Flow Information

<TABLE>
<CAPTION>
                                             1996    1995
                                           -------  ------
     <S>                                  <C>      <C>   
      Cash paid for:
         Interest                          $41,617  $9,326
         Income taxes                          300     300
</TABLE>


      Summary of non cash activity:

      -  On October 26, 1995, the Company entered into a covenant not to compete
         agreement as described in Note 5.  Consideration for this agreement
         included $374,438 in non cash consideration.


      -  In 1995, common stock was issued in lieu of directors fees of $10,286.




                                       26
<PAGE>   27
                              PART II (Continued)

Item 8.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosures

         There have been no disagreements with the Company's independent
         certified public accountants on accounting principles or practices or
         financial statement disclosures.


                                    PART III


Item 9.  Directors, Executive Officers, Promoters and Control Persons:
         Compliance with Section 16(a) of the Exchange Act

         The information required by this item is incorporated by reference from
         the Proxy Statement.

Item 10. Executive Compensation

         The information required by this item is incorporated by reference from
         the Proxy Statement.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         The information required by this item is incorporated by reference from
         the Proxy Statement.

Item 12. Certain Relationships and Related Transactions

         The information required by this item is incorporated by reference from
         the Proxy Statement.




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<PAGE>   28
                                    PART IV


Item 13. Exhibits, Lists and Reports on Form 8-K.

           (a)       Exhibits

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

                       3.1       Company's Articles of Incorporation, as
                                 amended, appear as Exhibit 3.1 to the Company's
                                 Registration Statement on Form S-1 (No.
                                 33-21843) filed May 12, 1988 ("Form S-1") and
                                 are incorporated herein by reference.

                       3.2       Company's Restated Bylaws as amended, were
                                 filed as Exhibit 3.2, under Form 8, Amendment
                                 No. 1 ("1990 Amendment") to the Company's
                                 Report on Form 10-K for the fiscal year ended
                                 September 30, 1990 (the "1990 10-K") and are
                                 incorporated herein by reference.

                       10.1      Covenant not to Compete Agreement dated October
                                 26, 1995 between the Company and the President
                                 and majority shareholder of Second Chantz
                                 Aerial Survival Equipment, Inc. appears as
                                 Exhibit 10.1 to the Company's Report on Form
                                 10-KSB for the fiscal year ended September 30,
                                 1995 and is incorporated herein by reference.

                       10.2      Non-qualified Stock Option Plan appears as
                                 Exhibit 10-1 to Amendment No. 1 to the Form S-1
                                 and is incorporated herein by reference.

                       10.3      Stock Option Plan for Non-employee Directors
                                 dated February 12, 1990 appears as Exhibit 10.5
                                 to the 1989 10-K and is incorporated herein by
                                 reference.


(b)   The Company did not file any Current Reports on Form 8-K during the fourth
      quarter ended September 30, 1996.



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<PAGE>   29
                                   SIGNATURES

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

                        BALLISTIC RECOVERY SYSTEMS, INC.


By     /s/ Mark B. Thomas
   ---------------------------
           Mark B. Thomas
           Principal Executive Officer, Principal Financial Officer and 
           Principal Accounting 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 Registrant and
in the capacities and on the dates indicated.


Signature                    Title                Date
--------------------        --------        -----------------

/s/ Darrel D. Brandt        Director        December 20, 1996
--------------------
Darrel D. Brandt

/s/ Boris Popov             Director        December 20, 1996
--------------------
Boris Popov

/s/ Robert L. Nelson        Director        December 20, 1996
--------------------
Robert L. Nelson

/s/ Thomas H. Adams         Director        December 20, 1996
--------------------
Thomas H. Adams



                                       29