<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, 1997

----- 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)           


300 Airport Road, 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. -------.
                               
State Issuer's revenues for the most recent fiscal year:  $1,855,094.

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 30, 1997 was approximately $804,000.

Number of shares outstanding as of December 30, 1997:   4,468,772.



 Index for exhibits is located on page 29.  This document contains 31 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 1998 annual shareholders meeting (the
"Proxy Statement") are incorporated by reference into Part III, Items 9-12 as
follows:


<TABLE>
<CAPTION>
Part of Form 10-K                                           Portion of Proxy Statement
-----------------                                           --------------------------
<S>                                                         <C>

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.
</TABLE>





                                       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 designs, manufactures and markets emergency parachute 
         recovery systems for use with light aircraft.  The Company has
         products in both the recreational and general aviation markets.  The
         Company believes it  was one of the first and is the only remaining US
         manufacturer of whole aircraft recovery systems.  In addition, the
         Company has designed systems for use in the highly competitive
         military and civilian unmanned aircraft markets.

         The Company began with products for ultralight aircraft in the
         early 1980's and expanded its efforts in the general aviation market in
         the late 1980's with the design and testing of a recovery system for
         the Cessna 150/152 model aircraft. The development of the Cessna
         150/152 model system was the primary purpose for the Company going
         public in 1986, with a secondary offering in 1988.  In early 1993, the
         Company received Federal Aviation Administration ("FAA") approval for
         the GARD-150 product for installation on FAA-certified Cessna 150/152
         aircraft.

         Beginning in 1994, 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.  Since that time, the
         Company has established additional funding sources for its research
         and development.  Outside funding for research and development
         activities is an ongoing objective for the Company.

         The Company is currently working under an agreement to receive
         research and development funding from a privately held company that is
         developing a four-place composite, certified aircraft. This company has
         agreed to install one of the Company's emergency parachute system on
         each aircraft as standard equipment.  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 Company has been
         informed that  certification and production of this aircraft is
         expected to begin during the Company's fiscal year 1998. There can be
         no assurances that this aircraft will actually receive certification
         during the Company's fiscal year 1998 or at any future time, nor that
         its volumes, if certified, will have a material affect on the Company.

         Another ongoing project is 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 $582,000 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
         government contractor. The contract with revisions, covers an 18 month
         period and a maximum amount of $151,000, 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.





                                       3


<PAGE>   4


Item 1.  Description of Business (Continued)

(b)      Narrative Description of Business

         PRINCIPAL PRODUCTS:

         The Company's principal product line is whole aircraft emergency
         parachute recovery systems.  The systems, in an in-air 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.  The Company's contract engineering services also deal
         with long-term product development and expansion of the ballistically
         deployed parachute recovery systems.

         Recreational Aviation Products:

         These products 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
         directly to individuals and through dealers and distributors who       
         also market and sell the aircraft and  related products.

         General Aviation Products:

         The Company's attempt to enter the general aviation market began
         in the mid 1980's when it began development of an emergency parachute
         recovery system for the Cessna 150/152 series of aircraft.  In 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.

         Although sales for the GARD-150 were disappointing, media attention
         for this new product resulted in domestic and international television
         and radio broadcasts as well as coverage in domestic and international
         aviation and non-aviation magazines.  The Company believes that the
         successful completion of the product for the Cessna 150/152, which
         generated media attention for both the product and the Company,
         created interest in the Company's product by   outside companies.

         Contract Research and Development:

         Contract research and development has allowed the Company to expand
         its product line and expertise in whole aircraft recovery systems.  In
         addition, the Company's expertise has allowed us to receive new and
         follow on contracts for both government contractors and civilian       
         companies.

         The Company is currently involved in three contract research and
         development projects.  One of the projects is for a privately held
         company that is developing a four-place all composite general aviation
         aircraft.  This company has agreed to install one of the Company's
         emergency parachute system on each aircraft as standard equipment.  If
         successfully certified, this aircraft will be the first FAA certified
         aircraft to offer one of the Company's recovery systems as standard
         equipment. Certification is scheduled to be completed during the
         Company's fiscal year 1998. See Note 2 of Notes to Financial Statements
         for further information.





                                       4


<PAGE>   5





Item 1.  Description of Business (Continued)

(b)      Narrative Description of Business (Continued)

         Contract Research and Development: (Continued)

         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 initial funding during its
         fiscal year 1995 through a Phase I grant, and received subsequent
         funding through a Phase II grant beginning in fiscal year 1996. The
         Phase II grant, which began in March 1996, is for a maximum of $582,000
         for a period not to exceed 24 months.  The purpose of the grant is not
         only to provide research in areas of interest to NASA, but also to
         develop products that can be commercialized by the small business
         entity.  The Company hopes that the research will lead to products that
         have both military and civilian applications complimenting or enhancing
         the Company's current product line. 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
         government contractor. The contract, with revisions, covers an 18 month
         period and is for a maximum amount of $151,000, and calls for the
         development and delivery of a series of recovery devices both for use
         in testing, and possibly in future production models. 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.

         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
         components manufactured to its specifications.  The two primary
         components, parachutes and ballistic devices are each purchased from
         certain key suppliers.  Other components are purchased from a variety
         of suppliers or internally produced.  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.  In addition, the
         Company possesses or can acquire the expertise necessary for internal
         production of all key components.

         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 solid fuel
         extraction device aspect of the systems 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" as part of a parachute recovery system.  The
         two employees 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 if possible. 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.





                                       5

<PAGE>   6

Item 1.  Description of Business (Continued)

(b)      Narrative Description of Business (Continued)

         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.  Nonetheless,
         seasonality will remain an issue for the Company until its product line
         expands to include aircraft that do not experience such seasonal
         fluctuations in their use and production.

         DEPENDENCE ON A SINGLE CUSTOMER:

         During the fiscal years ended September 30, 1997 and 1996, 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, 1997 and 1996, the Company had a backlog of
         orders totaling approximately $223,000 and $294,000, respectively. The
         1997 backlog is expected to be filled during fiscal year 1998.

         RESEARCH AND DEVELOPMENT:

         A summary of research and development is as follows:

<TABLE>
<CAPTION>
                                                                      1997           1996    
                                                                      ----           ----   
         <S>                                                         <C>            <C>            
         Total research and development
           expenditures                                              $365,836       $164,762

         Revenues recognized under contract
           research and development
           relationships                                             (416,503)      (119,747)
                                                                    ---------      ---------

         Research and development, net                               ($50,667)       $45,015
                                                                    =========        =======
</TABLE>


         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.





                                       6
<PAGE>   7





Item 1.  Description of Business (Continued)

(b)      Narrative Description of Business (Continued)

         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. Competition is strong in the German market based
         on price, but the Company believes that it continues to make relatively
         strong sales in that 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, there are no other manufacturers 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, 1997, the Company had 14 full-time and 2
         part-time employees at its South St. Paul facility.

Item 2.  Description of Property

         The Company leases a stand alone 13,000 square foot office and
         production facility located at Fleming Field Airport in South St. Paul,
         Minnesota.  The building is a World War II training hangar which the
         Company renovated. (See Note 11 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.





                                       7


<PAGE>   8



                                    PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

(a)      Market Information

         The Company was formerly listed on the NASDAQ stock exchange
         after going public.  However, the Company was delisted in 1992
         following a change in the listing requirements by NASDAQ.  Therefore,
         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 the
         1992 delisting.  Exact trading prices are not known since there is no
         mechanism in place to report the trading prices.  However, several
         Internet stock tracking services 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 asking price and the bid price would be $0.50
         as of September 30, 1997.

         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.
         These figures are strictly estimates and do not necessarily represent
         actual transactions.

                     First        Second      Third         Fourth
                     Quarter      Quarter     Quarter       Quarter
                     -------      -------     -------       -------

Common Stock:
-------------
1997     High        $0.81        $0.69        $0.56         $0.56
         Low         $0.44        $0.44        $0.31         $0.31

1996     High        $0.25        $0.50        $1.38         $1.19
         Low         $0.06        $0.06        $0.25         $0.69


(b)      Holders

         As of December 30, 1997, the Company estimates there were 
         approximately 1,100 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:

Sales

Sales for the current fiscal year were up by 7% over the prior year. This
increase follows a record year for the Company's recreational aircraft sales in
fiscal year 1996.  The improvements in fiscal year 1997 and fiscal year 1996
are mainly attributed to the agreement signed by the Company at the beginning
of that fiscal year which resulted in the Company's only US competitor ceasing
operations. See Note 5 of Notes to Financial Statements for further
information.

Sales in the recreational aircraft market for the next fiscal year are expected
to be slightly lower than the current fiscal year as a result of a temporary
downturn in order volumes during the first quarter of fiscal year 1998.  Order
flows, and therefore production, for the remainder of the year are expected to
continue at levels consistent with those of fiscal year 1997.  As an offset to
the lower revenues in the recreational market, the Company anticipates
receiving orders and producing units in the general aviation market for the new
to-be-certified four-place composite aircraft which is currently under
development.  Volume projections and timing of those volumes is uncertain at
this time.  There can be no assurances that this aircraft will actually receive
certification during the Company's fiscal year 1998 or at any future time, nor
that its volumes, if certified, will have a material affect on the Company.

Gross Margin

The gross margin for the current fiscal year was down 3.6% from the prior
fiscal year as a result of several factors.  The most significant factor was an
overall increase in component costs for the Company's products. The Company's
product components are primarily made of nylon and aluminum which have both
seen substantial increases in raw material costs to the Company's vendors.
Another factor includes the increase of operating expenses for the new
production facility that the Company moved into at the beginning of the current
fiscal year.  An increase in labor efficiency generated by the new facility
helped to minimize the impact on the gross margin.

The Company increased its selling prices during the current fiscal year, but
due to the timing of the increase, it did not have an impact on selling prices
until the end of the fiscal year.  It is expected that the increase will help
to increase the gross margin for the Company's fiscal year 1998.

Income from Operations

Fiscal year 1997 was the fourth consecutive year of profitability for the
Company.  Income from operations increased by 29.1% over the prior fiscal year.
Several factors contributed to the improvement including holding SG&A costs at
levels consistent with that of the prior year.  In addition, the Company was
able to generate outside funding to offset all of its research and development
expenditures as well as cover other expenses including administrative costs and
marketing efforts associated with those projects.  Sources for outside funding
of research and development projects provided offsets to expenses amounting to
$417,000 in fiscal year 1997 as opposed to $120,000 in fiscal year 1996.

All of the outside research and development projects underway at the end of
fiscal year 1997 are expected to be completed during the Company's fiscal year
1998.  The Company will continue to look for sources for further outside
funding of research and development, but there can be no assurances that the
Company will be successful in those efforts.





                                       9


<PAGE>   10



Item 6.  Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

Income Taxes Expense (Benefit)

The benefit recorded in the current fiscal year was a result of the valuation
of the Company's net operating loss carryforwards.  The benefit was recorded
based on the Company's ability to demonstrate that there is a reasonable
likelihood of being able to utilize the carryforwards to offset State and
Federal taxes on future taxable income.  If the Company continues to
demonstrate its ability to utilize even more of the carryforwards,
consideration will be given to the recording of additional benefits.

LIQUIDITY AND CAPITAL RESOURCES:

Management intends to fund all of its continuing operation out of its current
revenues with the exception of its contract research and development projects.
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 to maximize profitability.
Current contract research and development projects are expected to be completed
during the Company's fiscal year 1998.  The Company will continue to look for
sources for contract research and development projects, but there can be no
assurances that the Company will be successful in its efforts.

The Company anticipates a need to make capital improvements to its current
production facility as well as expenditures to increase inventory levels as a
result of the production of general aviation units for the recovery system
currently under development.  However, it is currently the intention of the
Company to fund the expenditures through current operations as well as revenues
generated by those units.

In addition, the cash flow needed for current debt service will be reduced by
the end of the first quarter of fiscal year 1998 as a portion of the covenant
not to compete debt will be retired.

The Company is currently involved in three outside funded research and
development projects.  The first of the three began in 1994 and calls for the
development of an emergency parachute system for use on a four-place composite,
certified aircraft.  The agreement is with a privately held company that
anticipates certification and production beginning during the Company's fiscal
year 1998. If successfully certified, the aircraft will become the first FAA
certified aircraft to offer one of the Company's parachute systems as standard
equipment.

The second ongoing project is 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 $582,000 over a period of 24 months.

The third project began in June 1996, when the Company received a development
contract for a recovery system for a prototype unmanned aircraft being
developed by a government contractor.  The contract, with revisions, covers an
18 month period and is for a maximum amount of $151,000, and calls for the
development and delivery of a series of recovery devices both for use in
testing, and possibly in future production models.

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 sales, 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.





                                       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


<TABLE>
<CAPTION>
                                                                                         Pg.
<S>                                                                                      <C>      
(1)      Financial Statements for the years ended September 30, 1997 and 1996:

         Independent Auditors' Report                                                    13

         Balance Sheets as of September 30, 1997 and 1996                                14

         Statements of Operations for the years ended September 30, 1997
         and 1996                                                                        15

         Statements of Shareholders' Equity for the years ended
         September 30, 1997 and 1996                                                     16

         Statements of Cash Flows for the years ended September 30,
         1997 and 1996                                                                   17

         Notes to Financial Statements                                                   18
</TABLE>


(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 sheets of Ballistic Recovery Systems,
Inc. as of September 30, 1997 and 1996 and the related statements of
operations, shareholders' equity, and cash flows for the years 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 audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes 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 audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ballistic Recovery Systems,
Inc. as of September 30, 1997 and 1996, and the results of operations, cash
flows and changes in shareholders' equity for the years then ended, in
conformity with generally accepted accounting principles.


/s/ Callahan, Johnston & Associates, LLC

Callahan, Johnston & Associates, LLC
Minneapolis, Minnesota
November 21, 1997





                                       13


<PAGE>   14





                   PART II - Item 7.  Financial Statements

                        BALLISTIC RECOVERY SYSTEMS, INC.
                                 BALANCE SHEETS
                          September 30, 1997 and 1996


<TABLE>
<CAPTION>
                           ASSETS                                       1997            1996
                                                                        ----            ----
<S>                                                                   <C>              <C>            
Current assets:
    Cash                                                                 $119,197         $117,343
    Accounts receivable - net of allowance for doubtful
         accounts of $12,500 and $12,500, respectively                    210,006           73,793
    Inventories                                                           266,484          307,213
    Deferred tax asset - current portion                                  138,000              ---
    Prepaid expenses                                                        2,984            4,197
                                                                   --------------   --------------
         Total current assets                                             736,671          502,546
                                                                     ------------     ------------

Furniture, fixtures and leasehold improvements                            147,473           75,747
    Less accumulated depreciation                                        (60,184)         (59,901)
                                                                    -------------    -------------
         Furniture, fixtures and leasehold improvements - net              87,289           15,846
                                                                    -------------    -------------

Other assets:
    Patents less accumulated amortization of
         $7,238 and $6,552, respectively                                    4,426            5,112
    Deferred tax asset - long-term portion                                 62,000              ---
    Covenant not to compete less accumulated
         amortization of $72,726 and $34,782, respectively                306,712         344,656 
                                                                     ------------    -------------
         Total other assets                                               373,138          349,768
                                                                     ------------     ------------

Total assets                                                           $1,197,098         $868,160
                                                                       ==========      ===========

            LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                      $51,961          $60,923
    Customer deposits                                                      95,401          126,017
    Accrued payroll                                                        31,031           26,314
    Other accrued liabilities                                             141,744          117,747
    Line-of-credit borrowings                                                 ---           25,000
    Current portion of bank note                                           12,219              ---
    Current portion of covenant not to compete                             30,806           31,334 
                                                                     ------------    -------------
         Current liabilities                                              363,162          387,335
                                                                      -----------      -----------

Long-term bank note and covenant , less current portions                  289,639          314,325 
                                                                      -----------     ------------

Shareholders' equity:
    Common stock ($.01 par value; 10,000,000 shares authorized;
        4,468,772 and 4,454,474 shares, respectively, issued
        and outstanding)                                                   44,688           44,545
    Additional paid-in capital                                          2,625,639        2,620,282
    Accumulated deficit                                                (2,126,030)      (2,498,327)
                                                                      -----------      -----------
         Total shareholders' equity                                       544,297          166,500 
                                                                     ------------  ---------------

Total liabilities and shareholders' equity                             $1,197,098         $868,160
                                                                       ==========      ===========
</TABLE>

      The Accompanying Notes are an Integral Part of these Financial Statements.





                                       14


<PAGE>   15

                        BALLISTIC RECOVERY SYSTEMS, INC.
                            STATEMENTS OF OPERATIONS
                    Years Ended September 30, 1997 and 1996


<TABLE>
<CAPTION>
                                                                         1997             1996
                                                                         ----             ----
<S>                                                                    <C>              <C>
Sales                                                                  $1,855,094       $1,731,414
Cost of sales                                                           1,222,546        1,078,789
                                                                       ----------       ----------
Gross profit                                                              632,548          652,625

Selling, general and administrative                                       429,801          411,244
Research and development, net (Notes 2, 3 and 4)                          (50,667)          45,015
                                                                       ----------       ----------

Income from operations                                                    253,414          196,366

Other income (expense):
    Interest expense                                                      (44,532)         (41,617)
    Covenant amortization                                                 (37,944)         (34,782)
    Other - net                                                             3,358           (7,500)
                                                                       ----------       ----------
Income before income taxes                                                174,296          112,467

Income taxes expense (benefit) (Notes 1 and 9)                           (198,000)             300
                                                                       ----------       ----------
Net income                                                               $372,296         $112,167
                                                                       ==========       ==========

Primary earnings per share                                                  $0.08            $0.02
                                                                       ==========       ==========
    Weighted average number of shares outstanding                       4,895,332        5,042,576
                                                                       ==========       ==========
Fully diluted earnings per share                                            $0.07            $0.02
                                                                       ==========       ==========
    Weighted average number of shares outstanding                       5,006,007        5,582,692
                                                                       ==========       ==========
</TABLE>




   The Accompanying Notes are an Integral Part of these Financial Statements.





                                       15



<PAGE>   16



                        BALLISTIC RECOVERY SYSTEMS, INC.
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                    Years Ended September 30, 1997 and 1996



<TABLE>
<CAPTION>
                            Common Stock       
                            ------------             Additional                       Share-
                        Number of                     Paid-in         Accumulated     holders'
                         Shares        Amount         Capital    Equity(Deficit)      Equity
                        ---------      ------        ----------  ----------------     --------
<S>                     <C>            <C>           <C>          <C>                 <C>
Balance 10/1/95          4,454,474      $44,545       $2,620,282    ($2,610,493)       $54,334

Net income                      --           --               --         12,167        112,167
                         ---------     --------       ----------    -----------       --------
Balance 9/30/96          4,454,474      $44,545       $2,620,282    ($2,498,326)      $166,501

Issuance of stock in
lieu of director fees       14,298          143            5,357             --          5,500

Net income                      --           --               --        372,296        372,296
                         ---------     --------       ----------    -----------       --------

Balance 9/30/97          4,468,772      $44,688       $2,625,639    ($2,126,030)      $544,297
                         =========     ========       ==========    ===========       ========
</TABLE>




   The Accompanying Notes are an Integral Part of these Financial Statements.





                                       16


<PAGE>   17

                        BALLISTIC RECOVERY SYSTEMS, INC.
                            STATEMENTS OF CASH FLOW
                    Years Ended September 30, 1997 and 1996


<TABLE>
<CAPTION>
                                                                           1997             1996
                                                                           ----             ----
<S>                                                                     <C>              <C>
Cash flows from operating activity:
    Net income                                                           $372,296         $112,167
    Adjustments to reconcile net income to net cash
    from operating activity:
         Depreciation and amortization                                     14,141            7,527
         Provision for deferred tax benefit                              (200,000)             ---
         Amortization of covenant not to compete                           37,944           34,782
         Inventory valuation reserve                                       25,000           10,000
         Loss on disposal of fixed assets                                     773              ---
         Discount on covenant not to compete                              (17,345)             ---
         Stock issued in lieu of board fees                                 5,500              ---
         Provision for bad debts                                              ---            7,500
         (Increase) decrease in:
             Accounts receivable                                         (136,213)         (15,255)
             Inventories                                                   15,729         (141,859)
             Prepaid expenses
                                                                            1,213           (1,227)
         Increase (decrease) in:
             Accounts payable                                              (8,962)            (640)
             Customer deposits                                            (30,616)          50,834
             Accrued expenses
                                                                           28,715           54,059
                                                                         --------         --------
    Net cash flows from operating activities                              108,175          117,888
                                                                         --------         --------
Cash flows from investing activities:
    Capital expenditures                                                  (85,671)          (8,743)
                                                                         --------         --------
    Net cash flows from investing activities                              (85,671)          (8,743)
                                                                         --------         --------
Cash flows from financing activities:
    Net borrowing under line-of-credit agreement                          (25,000)          25,000
    Proceeds form bank note                                                70,030              ---
    Principal payments on debt                                             (9,327)             ---
    Principal payments on covenant not to compete                         (56,353)         (33,779)
                                                                         --------         --------
    Net cash flows from financing activities                              (20,650)          (8,779)
                                                                         --------         --------

Increase (decrease) in cash                                                 1,854          100,366
Cash  - beginning of year                                                 117,343           16,977
                                                                         --------         --------
Cash - end of period                                                     $119,197         $117,343
                                                                         ========         ========
</TABLE>




   The Accompanying Notes are an Integral Part of these Financial Statements.





                                       17


<PAGE>   18



                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996


1.       Summary of Significant Accounting Policies

         Nature of Business

         Ballistic Recovery Systems, Inc. (the "Company") designs,
         manufactures and distributes ballistically deployed emergency parachute
         systems used on recreational aircraft and certain models of general
         aviation aircraft.  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.  The
         Company is currently developing an emergency recovery system for a
         four-place general aviation aircraft. that is expected to be certified
         and produced with the Company's parachute as standard equipment
         beginning in  the Company's fiscal year 1998.  Other research and
         development contracts currently underway also have the potential to
         produce future business for the Company.  The Company's products are
         sold both domestically and internationally.

         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 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).  In
         addition, the Company's research and development projects are billed to
         its customers on an uncollateralized credit basis with terms of between
         net 15 and net 30 days.  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 74% of accounts receivable at September 
         30, 1997.

         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 requires order deposits from most of its domestic
         and international customers.  These deposits represent either 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, 1997 AND 1996


1.       Summary of Significant Accounting Policies (Continued)

         Fixed Assets

         Fixed assets are stated at cost. Depreciation is computed using
         the straight-line method over the estimated useful lives of the related
         assets, ranging from three 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 in calculating the primary earnings
         per share when the average market price of the common stock obtainable
         on exercise during the period exceeds the exercise price of the
         options.  Options are considered common equivalent shares in
         calculating fully diluted earnings per share when the ending market
         price of the common stock obtainable on exercise 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. Beginning in fiscal year 1997 a deferred tax
         asset, net of a valuation reserve, has been reflected for future
         benefit of the Company's net operating loss carry forwards and net
         timing differences.

         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 $28,929 in 1997 and $26,774 in 1996.





                                       19


<PAGE>   20


                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996


2.       Research and Development Funding and Income Recognition

         The Company is currently working under an agreement to receive
         research and development funding from a privately held 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. 
         Although not guaranteed, certification and production of this aircraft
         is expected to begin during the Company's fiscal year 1998.

         Under this agreement, $163,599 and $23,304 was reflected as an
         offset to research and development expenses and is netted in the
         expense for 1997 and 1996, respectively.  At the end of fiscal year
         1997, the Company had a receivable due under the first contract of
         $73,649.  Additional funding, although not guaranteed, is expected to
         be received on a monthly basis over the next six to twelve  months as
         the research and development progresses.

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

         The Company did not establish a liability for the $197,114 taken
         as an offset to expense to date under this projects due to the
         uncertainty of the future of the project and the future viability of
         the products to be developed.  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)

         On March 8, 1996, the Company signed a follow on Phase II
         contract under  the Small Business Innovation Research grant program
         (SBIR) through NASA for use in the research of low-cost, lightweight
         aircraft emergency recovery systems.  The Phase II contract follows a
         Phase I award in 1995. The Company has used the grant to expand its
         research in the area of lightweight fabrics and components for use in
         recovery systems. The total contract award was for a firm fixed price
         grant of $581,875 for a period not to exceed 24 months.

         For the years ended September  30, 1997 and 1996, the Company
         recognized $157,842 and $82,321, respectively, as an offset to research
         and development expenditures for work performed on the Phase II
         project.  As of September 30, 1997, the Company had recorded a
         receivable for $80,837 for this contract.





                                       20


<PAGE>   21



                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996


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
         $151,000 and covers approximately 18 months.  The purchase order calls
         for development funding for the recovery system as well as the delivery
         of completed recovery systems. $90,896 and $14,123, respectively,  has
         been recognized as an expense offset under this purchase order as of
         September 30, 1997 and 1996.  As of September 30, 1997, the Company had
         recorded a receivable for $21,813 for this contract. 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

         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>


         The non interest bearing note called for monthly payments of
         $1,500 for forty-six months (February 1996 to November 1999).  However,
         the Company negotiated a discount on this note and accelerated payments
         to be completed by December 1997.  This discount represented reductions
         in principal and interest payments amounting to approximately $17,000
         and was reflected as Other Income in the financial statements for the
         period ending September 30, 1997.  The 4% ten year note calls for
         monthly payments of $4,036 (November 1995 to October 2005).  Payments
         under this agreement are unsecured.





                                       21


<PAGE>   22


                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996


5.       Covenant Not to Compete (Continued)

         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:

                                        Future       Present
                                        Dollars      Dollars
                                        -------      -------
         1998                            60,276      30,806
         1999                            48,436      25,302
         2000                            48,436      26,176
         2001                            48,436      29,204
         2002                            48,436      32,583
         Thereafter                      91,882     126,170
                                       --------    --------
                                       $345,902    $270,241
                                       ========    ========


         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.       Long-Term Debt

         On November 5, 1996, the Company signed a note payable with the
         bank in the amount of $70,030.  The purpose of the loan was to pay for
         renovations to the current production facility which the company took
         possession of on October 1, 1996.  The note calls for interest at a
         rate 2% over the bank's index rate which was 8.25% at the time of
         signing.  The index rate was 8.75% as of September 30, 1997 which
         computes to a total interest rate of 10.75%.  The note has scheduled
         payments over a sixty month period of $1,501 per month.  The scheduled
         maturity date of the note is November 5, 2001.  However, the note has a
         demand provision which can be exercised by the bank at any time, but no
         demand for payment in full is expected during the term of the note. 
         The balance on the loan at September 30, 1997 was $60,703.  This loan
         is secured by all of the Company's assets.

         Future maturities on long-term debt at September 30, 1997 are as 
         follows:

    1998                 $  12,219
    1999                    13,566
    2000                    15,061
    2001                    16,721
    2002                     3,136
                          --------
                           $60,703
                          ========





                                       22


<PAGE>   23





                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996


7.       Other Financial Information

         Inventories

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

                                                   1997         1996
                                                   ----         ----
                Raw materials                      $160,555     $170,291
                Work in process                      54,637       50,146
                Finished goods                       51,292       86,776
                                                   --------     --------
                     Total Inventories             $266,484     $307,213
                                                   ========     ========


         Depreciation Expense

         Depreciation expense totaled $13,455 in 1997 and $6,840 in 1996.

         Major Customers

         During the fiscal years ended September 30, 1997 and 1996, 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 39% in 1997 and 41% in 1996.

         Major Suppliers

         During the fiscal years ended September 30, 1997 and 1996, 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.

8.       Line-of Credit Borrowings

         In December of both 1996 and 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 and is secured by all of the
         Company's assets.  The latest line-of-credit expires February 28, 
         1998.  The line calls for a variable interest rate of 2% over prime. 
         At September 30, 1997, there was no outstanding balance under the line.
         The Company expects to renew the line each year following the review of
         its financial results and projections with the bank.





                                       23


<PAGE>   24





                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996


9.       Income Taxes

         Income taxes benefit (expense) consisted of the following at 
         September 30:


                                                   1997         1996
                                                   ----         ----
Current:                                    $       ---    $     ---
    Federal                                      (2,000)        (300)
                                            -----------    ---------
    State                                        (2,000)        (300)
                                            -----------    ---------

Deferred:                                   
    Federal                                     138,000          ---
    State                                        62,000          ---
                                            -----------    ---------
                                                200,000          ---
                                            -----------    ---------
Income tax benefit (expense)                   $198,000        ($300)
                                            ===========    =========


The reconciliation between expected federal income tax rates and actual tax
rates is as follows:


                                          
                                        1997                      1996
                                        ----                      ----
                                 Amount      Percent       Amount      Percent
                                 ------      -------       ------      -------
 Expected federal tax benefit
  (expense)                      ($59,000)   (34.0%)       ($38,000)   (34.0%)
 Surtax exemption                   8,000      4.6%          11,000      9.8%
 State income tax, net of federal
   tax benefit                    (11,000)    (6.3%)         (7,000)    (6.2%)
 Valuation and utilization of net
 operating loss carryforwards     262,000    150.4%          34,000     30.4%
 State minimum fees                (2,000)    (1.1%)           (300)    (0.1%)
                                 --------    -----          -------    -----
 Income tax benefit (expense)    $198,000    113.6%           ($300)    (0.1%)
                                 ========    =====          =======    =====




                                       24


<PAGE>   25




                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996


9.      Income Taxes (Continued)

        Differences between accounting rules and tax laws cause differences
        between the bases of certain assets and liabilities for financial
        reporting purposes and tax purposes.  The tax effects of these
        differences, to the extent they are temporary, are recorded as deferred
        tax assets and liabilities under SFAS 109, and consisted of the
        following:
        
<TABLE>
<CAPTION>
                                                                1997                      1996
                                                                ----                      ----
<S>                                                       <C>                   <C>              
Deferred tax assets:
    Allowance for doubtful accounts                       $    5,000            $       5,000
    Inventory valuation allowance                             19,900                    9,900
    Section 263A adjustment                                   10,000                   12,600
    Depreciation of leaseholds                                 1,800                      ---
    Vacation accrual                                           4,700                      ---
    Bonus accrual                                                ---                    8,000
    Other accruals                                            24,300                   14,100
    Net operating loss carryforwards                         933,000                  995,000
                                                          ----------            -------------
Gross deferred tax asset                                     998,700                1,044,600
Valuation allowance                                         (798,700)              (1,044,600)

    Net deferred tax asset                                   200,000                      ---

Deferred tax liability                                           ---                      ---
                                                          ----------            -------------

    Net deferred tax asset (liability)                     $ 200,000          $           ---
                                                          ==========          ===============

Current deferred tax asset                                 $ 138,000          $           ---
                                                                                              
Long-term deferred tax asset                                  62,000                      ---
                                                          ----------            -------------

                                                           $ 200,000          $           ---
                                                          ==========          ===============

</TABLE>

        During 1997, the Company reduced the valuation allowance to reflect the
        deferred tax assets utilized in 1997 to reduce current income taxes,
        approximately $62,000, and to recognize a deferred tax asset of
        $200,000.  The recognized deferred tax asset is based upon expected
        utilization of the net operating loss carryforwards and reversal of
        certain timing differences.
        
        The Company has assessed its past earnings history and trends, sales
        backlog, budgeted sales, and expiration dates of carryforwards and has
        determined that it is more likely than not that $200,000 of deferred
        tax assets will be realized.  The remaining valuation allowance of
        $798,700 is maintained on deferred tax assets which the Company has not
        determined to be more likely than not realized at this time.
        




                                       25

<PAGE>   26



                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996


9.       Income Taxes (Continued)

         At September 30, 1997, the Company has carryforwards available
         to offset future taxable income, as follows:


<TABLE>
<CAPTION>
                                                                            State
                                    Federal     Federal        State          R&D
                                    Regular         AMT          NOL       Credit
                                    -------         ---          ---       ------
    <S>                         <C>          <C>            <C>           <C>
    2001                        $      ---    $     ---     $    ---      $ 4,000
    2002                               ---          ---          ---        4,000
    2003                            158,000     174,000          ---        5,000
    2004                            519,000     512,000          ---          ---
    2005                            713,000     706,000          ---          ---
    2006                            132,000     126,000          ---          ---
    2007                            113,000     107,000       12,000          ---
    2008                            457,000     450,000       97,000          ---
    2009                            181,000     175,000      182,000          ---
                                -----------  ----------    ---------     --------
                                 $2,273,000  $2,250,000     $291,000      $13,000
                                ===========  ==========    =========     ======== 
</TABLE>

10.      Common Stock

         Stock Options

         In fiscal year 1988, and as amended in fiscal year 1991, 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 400,000 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 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 on a discretionary basis.





                                       26


<PAGE>   27
\




                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996


10.      Common Stock (Continued)

         Stock Options (Continued)
    
         Transactions during 1997 and 1996, 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, 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
    Granted                                          60,000          $0.56 to $0.69
                                                -----------
    Balance at September 30, 1997                 2,172,518          $0.25 to $0.8125
                                                ===========


    At September 30, 1997:
         Options vested and exercisable           2,042,518
         Shares available for options               234,240

</TABLE>

11.      Commitments and Contingencies

         Leases

         The Company leases its production facility on an airport in
         South St. Paul, Minnesota. Total rental expense for operating leases
         during 1997 and 1996 was $31,672 and  $19,632, respectively.

         Future minimum lease payments required on non cancelable
         operating leases at September 30, 1997 are as follows:

    1998                 $  28,200
    1999                    28,200
    2000                    28,200
    2001                    28,200
    2002                    28,200
    Thereafter               7,050
                         ---------
                          $148,050
                         =========


12.      Supplemental Cash Flow Information

                                     1997         1996
                                     ----         ----
Cash paid for:
     Interest                       $44,532     $41,617
     Income taxes                    1,637          300





                                       27


<PAGE>   28


                        BALLISTIC RECOVERY SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 1997 AND 1996


12.      Supplemental Cash Flow Information (Continued)
         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 1997, common stock was issued in lieu of directors fees of $5,500.





                                       28


<PAGE>   29




                              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.



                                    PART IV


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

<TABLE>
<CAPTION>
                (a)              Exhibits
                                 --------
                <S>              <C>              <C>
                 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.
                                                             
</TABLE>





                                       29
<PAGE>   30

                             PART IV (CONTINUED)

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

<TABLE>
<CAPTION>

                (a)              Exhibits
                                 --------
                <S>             <C>              <C>
                 Page             Exhibit
                 Number           Number           Description
                 ------           ------           -----------

                                  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.

</TABLE>

(b)      The Company did not file any Current Reports on Form 8-K during the
         fourth quarter ended September 30, 1997.





                                       30


<PAGE>   31




                                   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.

<TABLE>
<CAPTION>
Signature                               Title                                 Date
---------                               -----                                 ----
<S>                                   <C>                                    <C>

 /s/ Darrel D. Brandt                   Director                           January 12, 1998
---------------------------                                                 
Darrel D. Brandt

 /s/ Boris Popov                        Director                           January 12, 1998
----------------------------                                                
Boris Popov

 /s/ Robert L. Nelson                   Director                           January 12, 1998
--------------------------                                                          
Robert L. Nelson

 /s/ Thomas H. Adams                    Director                           January 12, 1998
-----------------------                                                             
Thomas H. Adams
</TABLE>





                                       31