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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark one)

|            |  |                                                                                   
|----------- |  | ----------------------------------------------------------------------------------
|(CHECK BOX) |  | Annual report under Section 13 of 15(d) of the Securities and
Exchange Act of 1934

For the fiscal year ended December 31, 2001

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|----- |  | ----------------------------------------------------------------------------------
|(BOX) |  | Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the transition period from ____________ to ____________

Commission file number 001-15069

Duraswitch Industries, Inc.(Exact name of registrant as specified in its charter)

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|-------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                         |  | 88-0308867                          
|                                                              
|                                                              
|                                                              
|                                                              
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
Identification No.)

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|---------------------------------------- |  | ----------
|234 S. Extension Road
Mesa, Arizona      |  | 85210     
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|(Address of principal executive offices) |  | (Zip Code)

(480) 586-3300
(Registrants Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:

|                               |  |                              
|------------------------------ |  | -----------------------------
|                               |  | Name of Each Exchange        
|Title of Each Class            |  | on Which Registered          
|                               |  |                              
|Common Stock, par value $0.001 |  | Nasdaq National Market System

Securities registered under Section 12(g) of the Exchange Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. (BOX)

The aggregate market value of the common stock held by non-affiliates of the
registrant as of February 28, 2002 was $47,315,768, computed by using the
closing price of $8.11 as reported by the Nasdaq National Market.

Number of registrants shares of common stock outstanding as of February 28,
2002 was 9,530,695.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement for the 2002 annual meeting are
incorporated by reference into Part III of this Form 10-K.

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|Part I  
|         | Item 1. Description of Business.                                                              
|         | Item 2. Description of Properties.                                                            
|         | Item 3. Legal Proceedings.                                                                    
|         | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|Part II 
|         | Item 5. Market for Common Equity and Related Stockholder Matters.                             
|         | Item 6. Selected Financial Data.                                                              
|         | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|         | Item 7A. Quantitative and Qualitative Disclosures About Market Risk.                          
|         | Item 8. Financial Statements.                                                                 
|         | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 
|Part III
|Part IV 
|         | Item 14. Exhibits and Reports on Form 8-K.                                                    
|EX-10.14
|EX-23.1 



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Duraswitch Industries, Inc.
Form 10-K
For the Year Ended December 31, 2001

Table of Contents

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|Item 14. |  | Exhibits and Reports on Form 8-K                                                      |  |  | 31 |     

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Part I




Item 1. Description of Business.

Overview

We have developed, patented and licensed innovative technologies utilizing
a magnetic based design for electronic switches. We are currently expanding the
use of these technologies by licensing manufacturers to produce and sell
products using our technologies. We believe these patented technologies allow
us and our licensees to provide innovative solutions to the design challenges
faced by original equipment manufacturers, (OEMs), and component suppliers.

We were incorporated on May 1, 1997, as Total Switch, Inc. (Total
Switch). In order to establish a market value for our stock to acquire other
businesses necessary for our growth, we combined with an inactive, publicly
traded company on December 31, 1997, and changed its name to Duraswitch
Industries, Inc. (Duraswitch Industries). As a result of this transaction,
Total Switch became a wholly owned subsidiary of Duraswitch, and Total Switchs
former stockholders acquired a controlling interest in Duraswitch. During 1998,
through the acquisition of Aztec Industries, Inc. (Aztec), formerly a
manufacturer of membrane switches, we commenced operations and designed,
manufactured, marketed and distributed integrated electronic control panels
developed with our patented technologies.

During 2000, we started to implement a business model of licensing our
technologies rather than manufacturing switches ourselves. During 2001, we
completed this transition and expect our future revenue to come from our
licensing efforts. As of December 31, 2001, we had 24 licensees, foreign and
domestic, and we are continuing our efforts to expand our licensee base
worldwide.

Industry Analysis

Electronic switches and Integrated Control Panels (ICPs) are used in a
wide variety of consumer, industrial and agricultural products, such as
appliances, military equipment, airplanes, automobiles, security systems,
temperature and point-of-sale systems, elevators, medical equipment, computers,
gas pumps, beverage dispensers, gaming units, fitness equipment, consumer
electronics, and commercial food preparation equipment.

History of Electronic Switches

In the last hundred years, two basic switches have dominated the market
for our switch technologies: electro-mechanical and membrane. In its simplest
form, an electronic switch controls the flow of electric current: press the
switch to complete the circuit and the current flows to operate a
micro-processor, which in turn, performs the desired function.
Electro-mechanical switches operate by pushing, turning or sliding a button,
knob or lever to mechanically activate a series of movable parts that will
close or complete an electrical circuit within the switch itself. Although they
offer excellent tactile feedback for the user, electro-mechanical switches are
bulky, mechanically complex and can be difficult to manufacture.

Membrane switches consist of multiple, thin-film layers topped by an
overlay with printed graphics or instructions to operate the device in which
the switch is incorporated. A typical example of a membrane switch is found on
most microwave oven control panels. Without tactile feedback, users may
activate the switch several times, which could cause the opposite effect of
what the user intended. To solve the feedback response problem, membrane switch
manufacturers typically have offered a beep sound, light, or status icons on
a display to inform the user when the switch has been activated. However, this
solution increases the cost, complexity and size of the product to which it is
added, thus decreasing the advantages of a membrane switch over an
electro-mechanical switch.

The second option to overcome the feedback response problem is to
incorporate a metal, rubber or plastic dome as part of the membrane switch.
When pressed by a user, the center of the dome will invert and contact the
circuit on the membrane layer beneath it. Domed membrane switches are prone to
failure due to material fatigue, are much less reliable than membrane switches
without domes, and require inconsistent amounts of force to be activated, which
has proven frustrating to the user and increased the cost and design complexity
while decreasing the reliability of the switch.

The Duraswitch Competitive Advantage

The keys to our technologies are their simplicity of design and reliance
on magnetic force, rather than mechanical parts or the elastic properties of
materials, to operate a switch. Based on our managements experience and
available research in the electronic switch and ICP industries, we believe our
technologies offer the following competitive advantages compared to switches
and ICPs using traditional electro-mechanical or membrane switch technologies:

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Significantly Greater Durability and Reliability. Our technologies rely on
a magnetic-based design with few moving parts and virtually no stress, fatigue,
or potential breaking points. By eliminating or reducing the mechanical
complexity and precision required by traditional technologies, we believe
switches made with our technologies are significantly more durable and reliable
than traditional electro-mechanical and membrane switches. From January 1998 to
January 2001, we tested one of our Duraswitch PushGate switches. It exceeded
500,000,000 activations on an electronic counter without material fatigue or
degraded tactile feedback. We believe this test result supports our belief in
the reliability and durability of products manufactured using our technologies.

Tactile Feedback Response That Does Not Degrade Over Time. Membrane
switches and some electro-mechanical switches require additional cues such as
beeps, lights or status icons to artificially provide feedback to the user
which increases the complexity and total cost of the switch. Our PushGate
design consistently produces a distinctive click each time the user activates
our switch and eliminates the costs associated with additional cues.

Ease of Integration in Slim Profile, Environmentally Sealed Design.
Because switches produced using our technologies use a thin, multiple layer
design that incorporates a flexible circuit rather than bulky mechanical parts,
they are easily integrated into flat panel/slim profile products currently
desired by the market. This design also eliminates the need to breach the
surface of the ICP, enabling our ICPs to be easily sealed, cleaned, disinfected
and protected from harsh environmental conditions.

Value Engineering Alternative.We believe switches produced using our
technologies offer a better overall value compared to switches using
traditional technologies. The integration attributes of our technologies allow
for a complete value engineering alternative to switch panel designs, which can
allow for cost reductions in various components and manufacturing processes. In
addition, devices using our switches are more durable and reliable than
electro-mechanical switches and are therefore less costly to maintain.

Strategy

Our objective is to become a leading switch technology provider in the
electronic switch and ICP industries by entering into licensing agreements with
established switch manufacturers, switch component assemblers and OEMs. In
order to achieve this objective, we intend to implement the following
strategies:

Maintain and Further Our Patented Technologies Competitive Advantages.We
intend to maintain and further our patented technologies competitive
advantages in order to make our technologies standard in the industry. We
intend to pursue this strategy by aggressively marketing our technologies
advantages and broaden market awareness. We are focusing our sales and
marketing efforts on our licensing program and are investing heavily in
research, development and testing to further refine our technologies and expand
their possible applications in a wide variety of industries.

Increase Market Awareness of Duraswitchs Patented Technological
Advantages.We will aggressively promote our patented technologies and design
expertise to achieve widespread market awareness of our technologies
advantages. Our promotional efforts will target design engineers and purchasing
managers, whom we believe are the primary decision makers within the switch
purchasing market. These efforts will include increasing exposure in trade
magazines, increasing traffic to our Web site, participating actively in
vendor-sponsored seminars for design engineers and aggressively promoting our
technologies in the trade media. We believe that promoting our success and our
licensees successes in providing custom-designed solutions for a number of
high-profile companies will further enhance market awareness of our
technologies and their unique competitive advantages.

License Switch Manufacturers.We are offering to license Duraswitch
technologies to switch manufacturers, turnkey manufacturers and OEMs as a
product extension and a market differentiation. Our switch technologies enable
integration of multiple types of switches into a flat panel environment and can
transform electrical type switches to electronic output utilizing their
traditional switch housings. Our licensing strategy incorporates a simplified
requirement whereby the licensee purchases defined licensed components from
Duraswitch. The component cost includes the royalty for the rights to
manufacture, assemble and sell patented Duraswitch technologies. In some cases
where no components are supplied, we are paid a royalty per switch
manufactured. We support our licensees with engineering, design, testing,
specification materials, training programs, marketing assistance, customer
leads, and patent protection. Every licensee has strict qualitative standards
to maintain as part of their licensing agreement.

Provide Full Service Training, Design Engineering, Testing and Design
Review.We intend to be a one stop shop for electronic switch solution design
engineering and testing for licensees of our technologies. With our history in
design and manufacturing of these technologies, we are able to provide
engineering support, design assistance, testing and prototype assembly services
to our licensees. Our manufacturing expertise is shared with our licensees
through in-house or

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on-site Duraswitch technologies training with our engineering and sales
and marketing teams, which includes hands-on training of Duraswitch
technologies, documentation manuals and product design reviews.

Form Strategic Technology Alliances.During 2001, we entered into two
strategic technology alliances. We formed an alliance with Hanaco Manufacturing
Co. to bring together our switch technologies with Hanacos silicone rubber
keypad overlays. We also formed an alliance with Durel Corp., an affiliate of
3M and Rogers Corp. The alliance with Durel capitalizes on Durels innovative
electroluminescent (EL) backlighting technology. Our strategic alliances with
companies offering complementary technologies leverage resources and expertise
in engineering, marketing, training and purchasing and increase the variations
and options that licensees can offer their customers by designing our
technologies into their products.

Technologies

We have a number of switch applications based on our patented
magnetic-based technologies. We have licensed the PushGate, thiNcoder RT and
MagnaMouse to our licensees. Our non-exclusive licensees pay between $0.10 and
$0.30 per PushGate, between $0.25 and $0.75 per thiNcoder RT, and between $0.28
and $0.78 per MagnaMouse depending on volume. Fees for additional technologies
will be determined upon release.

The Duraswitch PushGate.A typical Duraswitch PushGate switch consists of
up to five bonded micro-thin layers of material, which collectively measure
less than 1/10th of an inch. The top layer of the switch is printed with a
graphical overlay that indicates which buttons must be pressed to activate a
desired function, such as the on, defrost and cook buttons on a microwave
oven. Below the top layer is a thin, flexible layer of magnetic material. Below
the magnetic layer is spacer material containing a hole through which a
patented metal disc is pushed. The disc has a small, raised, off-center button
that is pushed by the user through the surface of the switch. A flexible
circuit is located at the bottom of the switch. When the button is pressed, the
disc separates from the magnet and the underside of the disc completes the
circuit by touching the contacts located on the flexible circuit. When the
button is released, the magnet pulls the disc upward and away from the switch
contacts into its resting position, and the circuit is broken. This
magnetic-based design produces a consistent tactile feedback response to the
user each time the switch is activated.

In 2001, we introduced the PushGate Island construction which reduces the
number of material layers and allows for the switching element of the
PushGate to be fabricated as a freestanding subassembly that can be easily
inserted into a foam layer. The ability to manufacture the PushGate as an
Island, simplifies the manufacturing process and reduces cost.

The Duraswitch thiNcoder RT.The Duraswitch thiNcoder RT resembles a
typical volume control knob on a car radio, except that unlike an
electro-mechanical rotary switch, the back of our switch is flat. The entire
assembly can be less than 1/10th of an inch thick. The Duraswitch thiNcoder RT
consists of a rotary knob containing embedded magnets all fastened to a flat
surface. The top of the surface displays instructions for the user. The bottom
of the surface seals a circular space below the magnet containing small, 1mm,
gold-plated balls. Beneath the circular space are printed electronic circuits,
which are activated through contact with the gold-plated balls. When the user
turns the knob, the magnet within the rotary knob causes the gold-plated balls
to rotate within their circular space. As the balls roll across the
flex-circuit membrane, they close or open the circuit and convey the users
instructions to the device. The design of the Duraswitch thiNcoder RT also
allows for a consistent tactile feedback response to the user, such that the
user can feel each click as the knob is turned.

The Duraswitch MagnaMouse. The Duraswitch MagnaMouse is an
omnidirectional switch that works by using a disc-shaped actuator held by
magnetic attraction. Pushing on the rim or any custom designed key cap closes
the contact and actuates the MagnaMouse. Electrodes are arranged to produce
different outputs when contacted in different locations. The MagnaMouse can be
pressure sensitive.

Switch Technologies Under Development.Switch technologies under
development are at various stages of modeling, prototyping and testing. These
switch technologies include the:



| |  |  | thiNcoder EZI, the next generation rotary encoder,                                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | thiNcoder EZI 5-bit, designed for use in the appliance industry and
other applications which require a large number of selector positions,
|
| |  |  | thiNcoder PK, a thiNcoder EZI incorporating a push knob,                                                                                  
|
| |  |  | Slider, a linear version of our thiNcoder RT,                                                                                             
|
| |  |  | Thumbwheel, a next generation thiNcoder RT configured for vertical, single digit (finger) operations,                                     
|
| |  |  | Rocker, a two position switch,                                                                                                            
|
| |  |  | thiNcoder PB, a standard thiNcoder RT incorporating a push button switch for multiple functionalities, and                                

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| |  |  | Various PushGate actuator designs to replace electro-mechanical and electronic push button mechanisms.
| | - |  | ------------------------------------------------------------------------------------------------------

Generally, our switches are custom-designed to meet specific design
challenges or a licensees customer requirements dictated by the nature of
specific applications. Accordingly, all of these switch designs may be adapted
to fit various types of integrated control panel arrays and electronic
products. We are constantly refining our technologies and designing new
variations to meet specific application design needs.

Customers

Our success depends in part on being able to supply switches to key
industry segments. As a result, we have licensed various custom and turnkey
switch manufacturers to produce switches in various devices in a wide variety
of industries. Some of the key industries in which our licensees operate
include the following: elevator, beverage dispensing, energy management, test
and measurement, medical, point of sale, appliance, vending machine, gaming,
recreational marine, industrial automation, health and fitness, restaurant
equipment, gas pump, mass transit, computer, lighting and sound, aerospace and
industrial controls.

In May 2000, Duraswitch received $4 million from Delphi Automotive Systems
LLC, now Delphi Corporation (Delphi) in exchange for (a) Delphis exclusive
right to utilize and manufacture our patented switch technologies for the
automotive industry, (b) a warrant to purchase 225,000 shares of our stock and
(c) an option to purchase approximately 1.65 million shares of our stock. The
license agreement with Delphi generated licensing revenue of $411,362 or 49% of
licensing revenue and $277,860 or 52% of licensing revenue in 2001 and 2000,
respectively. Licensing revenue from Delphi primarily resulted from the
amortization of deferred licensing revenue which was received in 2000.

Intellectual Property

Our success also depends in part on maintaining and protecting our
proprietary technologies. As a result, we have adopted an intellectual property
protection policy designed to deter and stop infringement. To deter
infringement, we file U.S. and foreign patents for relevant material
technological advances, and warn against potential infringement by posting
patent numbers on our products, packaging and published materials. These
materials include our Web site, business cards, letterhead, brochures,
advertisements, and some technology samples. We have not had to become involved
in infringement litigation to protect our intellectual property, however, we
intend to aggressively prosecute litigation against infringers if necessary.

In order to protect our trade secrets and other intellectual property, we
also require our employees, contract workers, consultants, advisors and
collaborators to enter into confidentiality agreements, which prohibit the
disclosure of proprietary information to third parties or the use of our
proprietary information for commercial purposes. Our technical and sales
employees also must agree to disclose and assign to us all methods,
improvements, modifications, developments, discoveries, and inventions
conceived or developed on our time, using our property, or relating to our
business. Our management team has extensive experience in protecting technology
from global competitors and will oversee our intellectual property protection
program. As of December 31, 2001, we had $588,272 of capitalized costs related
to patents.

As of December 31, 2001, we held 11 U.S. patents (Nos. 5,523,730,
5,666,096, 5,867,082, 5,990,772, 6,023,213, 6,069,545, 6,069,552, 6,130,593,
6,137,387, 6,262,646, and 6,305,071), two Taiwanese patents (Nos. NI-090979 and
NI-132948), one Chinese patent (No. 96110385.X), one Australian patent (No.
727962) and one Canadian patent (No. 05046291). We also have several patent
applications pending in the United States, Mexico, Canada, France, Great
Britain, China, Taiwan, Italy and Germany. We have made further filings under
the Patent Cooperation Treaty which makes it possible to seek patent protection
for an invention simultaneously in each of a large number of countries by
filing an international patent application.

We have registered the following trademarks with the United States
Patent and Trademark Office: Duraswitch®, Duraswitch as a stylized word
with a unique D and The World is Switching®. In addition, we have
registrations pending for the following; PushGate, thiNcoder, and
MagnaMouse.

Research and Development

We have 38 people in our research and development department who focus on
new technology development, new technology applications and testing. In 2001,
we restructured our research and development department to include a number of
technicians who were formerly part of our manufacturing department and are now
primarily involved in the prototyping and testing of the technologies under
development. In order for us to compete effectively, our technologies must
continue to evolve with changing standards and design demands of manufacturers
who need switches. To that end, we continue to dedicate a large amount of our
resources to research and development and the protection of our patented

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technologies. During 2001, 2000 and 1999, we spent $2,773,221, $1,716,825 and
$889,922 respectively, on research and development efforts

Sales and Marketing

We have 12 people in the sales and marketing department who focus on
supporting our existing licensees, marketing our technologies to OEMs and
obtaining new licensees. In support of our licensees, we train their internal
and independent sales and marketing teams on Duraswitch technologies.

Web Site: www.duraswitch.com

We believe design engineers and purchasing managers  the individuals most
likely to make the decision to incorporate our technologies in their products 
frequently use the Internet to search for design solutions. Therefore, our Web
site, www.duraswitch.com, is a key component of our current direct marketing
efforts. Most of our advertising and promotional materials direct readers to
our Web site. In addition to attracting potential licensees to our Web site for
information, we use our Web site to generate interest in our technologies.
Using our Web site as a promotional tool is also less expensive than other
methods, is interactive, and reaches a global audience. Our Web site has
several features, including:



| |  |  | Information about the advantages of our patented technologies,
accompanied by articles published by third parties about our products;                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Virtual demonstrations of our technologies and products;                                                                                                                  
|
| |  |  | Technical data to assist design engineers in designing ICPs and
electronic products using Duraswitch components;                                                          
|
| |  |  | E-mail communication links to our design engineers and sales
representatives to facilitate dialogue about how our technologies can be
integrated into customers products;
|
| |  |  | Information on products available through our current licensees
customers; and                                                                                           
|
| |  |  | Benefits and the process for obtaining information about licensing
rights to utilize and manufacture Duraswitch technologies.                                             

Public Relations

We target technical periodicals for media exposure in an effort to raise
awareness for Duraswitch technologies and our licensing strategy. Our public
relations campaigns have included editorial coverage of our technologies,
co-operative advertising opportunities with licensees and listings in
industry-specific supplier guides. We believe this is a cost-effective method
of capturing the attention of design engineers and OEMs and educating them on
the benefits of our technologies. For example, according to Design News,
approximately 335,000 design professionals throughout the world read Design
Newsbi-weekly publications. In addition to Design News, articles on our
technologies have been included in numerous trade publications including EDN
(Electronic Design News), Appliance Magazine, and ECN (Electronic Component
News).

Seminars and Trade Shows

We give educational presentations about our technologies at
vendor-sponsored seminars for product design engineers. At these seminars, we
are able to meet attendees and provide them with information about our
technologies through multi-media presentations, product demonstrations,
brochures and samples.

The appliance industry is a key target market for Duraswitch technologies.
In order to penetrate this market, we participated in the Mobile Marketing
Industry tour for the last two years. The tour, sponsored by Appliance
Magazine, brought our technologies directly to engineers from over 30 leading
appliance manufacturers including: Amana, Frigidaire, GE, Maytag and Whirlpool.

Competition

We operate in an industry characterized by intense competition. We
believe that our primary competitors are manufacturers of the
electro-mechanical and dome membrane switches. Many of these manufacturers
have established products, broad brand and name recognition, and significantly
greater resources than ours. Our tactic has not been to compete directly with
these manufacturers, but to offer to license them our switch technologies. If
these manufacturers, as licensees, incorporate our technology into their
switches, we will have turned our competitors into business partners.

While a licensing business model fosters cooperation, switch manufacturers
may not adopt Duraswitchs technologies. In particular, manufacturers may be
reluctant to alter current designs or have other long-standing

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relationships that may affect the manufacturers decision to use one
technology over another, even if our technologies offer additional benefits.

In order for us to compete effectively, our technologies must continue to
evolve with changing standards and design demands of manufacturers who need
switches. To that end, we continue to dedicate a large amount of our resources
to research and development and the protection of our patented technology.

Employees

As of December 31, 2001, we had 69 employees, 66 of which work full time.
None of our employees are covered by collective bargaining agreements and we
consider our employee relations to be good.




Item 2. Description of Properties.

Our principal administrative, design, testing, and prototype manufacturing
facilities are located in Mesa, Arizona, where we presently lease 33,650 square
feet of office and manufacturing space in a building located at 234 South
Extension Road. This facility consists of approximately 10,000 square feet of
office space and 23,650 square feet of testing and prototype manufacturing
space. Our lease terminates on January 1, 2004, subject to our option to extend
the term for an additional two years. The base monthly rent for 2001 was
$17,000. Future minimum monthly rental payments are $18,000 for 2002 and
$18,000 for 2003. We believe our current facilities will be sufficient for our
operational purposes for the foreseeable future and any additional facilities
needed thereafter will be available on commercially reasonable terms.




Item 3. Legal Proceedings.

From time to time we may be subject to claims and litigation incident to
our business. As of February 28, 2002, we were not a party to any material
legal proceeding.




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

None.




Part II




Item 5. Market for Common Equity and Related Stockholder Matters.

Market Information

On October 11, 2000, we began trading under the symbol DSWT on the
Nasdaq National Market System and ceased under the symbol DRA on the American
Stock Exchange. Between August 26, 1999 and October 11, 2000, our common stock
was traded on the American Stock Exchange under the symbol DRA. Prior to
August 26, 1999, our common stock was traded on the OTC Bulletin board under
the symbol DSWT. The high and low inter-dealer prices for the calendar
quarters during the past two fiscal years are as follows:

|                                    |  |      |       |     |  |   |       | 
|----------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal Year Ended December 31, 2001 |  | High |       | Low
|                                    |  |      |       |    
|March 31, 2001                      |  | $    | 12.25 |     |  | $ | 10.13 | 
|                                   
|                                   
|                                   
|                                   
|June 30, 2001                       |  |      | 17.92 |     |  |   | 12.70 | 
|                                   
|                                   
|                                   
|                                   
|September 30, 2001                  |  |      | 16.25 |     |  |   | 12.33 | 
|                                   
|                                   
|                                   
|                                   
|December 31, 2001                   |  |      | 12.50 |     |  |   | 7.04  | 

|                                    |  |      |       |     |  |   |      | 
|----------------------------------- |  | ---- | ----- | --- |  | - | ---- | 
|Fiscal Year Ended December 31, 2000 |  | High |       | Low
|                                    |  |      |       |    
|March 31, 2000                      |  | $    | 8.25  |     |  | $ | 5.38 | 
|                                   
|                                   
|                                   
|                                   
|June 30, 2000                       |  |      | 8.75  |     |  |   | 5.00 | 
|                                   
|                                   
|                                   
|                                   
|September 30, 2000                  |  |      | 13.44 |     |  |   | 6.50 | 
|                                   
|                                   
|                                   
|                                   
|December 31, 2000                   |  |      | 12.56 |     |  |   | 8.75 | 

These bid prices are inter-dealer prices without retail markup, markdown
or commission, and may not represent actual transactions.

8



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##### Table of Contents



Dividends

We have not declared any cash dividends on our common stock since
inception. We do not intend to declare any dividends on our common stock in the
foreseeable future.

Holders

As of February 28, 2002, there were approximately 308 holders of record of
our common stock. We believe that our common stock is held by more than 2,500
beneficial holders.




Item 6. Selected Financial Data.

|                                                              |                                       |   |                         |   |      |   |        |   |      |   |          |   |  |   |        |   |  |   |       |   | 
|------------------------------------------------------------- | ------------------------------------- | - | ----------------------- | - | ---- | - | ------ | - | ---- | - | -------- | - |  | - | ------ | - |  | - | ----- | - | 
|                                                              |                                       |   | Year Ended December 31, |   |      |   |       
|                                                              |                                       |   |                         |   |      |   |       
|                                                              |                                       |   | 2001                    |   | 2000 |   | 1999   |   | 1998 |   | 1997 (1)
|                                                              |                                       |   |                         |   |      |   |        |   |      |   |         
|Consolidated Statement of Operations Data (2)                 |                                       |   |                         |   |      |   |        |   |      |   |          |   |  |   |        |   |  |   |       |  
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | (In thousands, except per share data) |   |                         |   |      |   |        |   |      |   |          |   |  |   |        |   |  |   |       |   | 
|                                                             
|                                                             
|                                                             
|                                                             
|Net revenue                                                   |                                       | $ | 985                     |   |      | $ | 2,319  |   |      | $ | 1,674    |   |  | $ | 1,355  |   |  | $ | 6     |  
|                                                             
|                                                             
|                                                             
|                                                             
|Gross profit (loss)                                           |                                       |   | 728                     |   |      |   | 264    |   |      |   | (355     | ) |  |   | 55     |   |  |   | (1    | )
|                                                             
|                                                             
|                                                             
|                                                             
|Net loss                                                      |                                       |   | (5,390                  | ) |      |   | (4,110 | ) |      |   | (3,475   | ) |  |   | (1,599 | ) |  |   | (449  | )
|                                                             
|                                                             
|                                                             
|                                                             
|Non-cash discount (3)                                         |                                       |   |                        |   |      |   |       |   |      |   |         |   |  |   | (740   | ) |  |   |      |  
|                                                             
|                                                             
|                                                             
|                                                             
|Net loss attributable to common stockholders                  |                                       | $ | (5,390                  | ) |      | $ | (4,110 | ) |      | $ | (3,475   | ) |  | $ | (2,339 | ) |  | $ | (449  | )
|                                                             
|                                                             
|                                                             
|                                                             
|Net loss per common share,
basic and diluted                  |                                       | $ | (0.57                   | ) |      | $ | (0.49  | ) |      | $ | (0.58    | ) |  | $ | (0.55  | ) |  | $ | (0.12 | )
|                                                             
|                                                             
|                                                             
|                                                             
|Weighted average common shares outstanding,
basic and diluted |                                       |   | 9,443                   |   |      |   | 8,436  |   |      |   | 6,034    |   |  |   | 4,269  |   |  |   | 3,787 |  
|                                                              |                                       |   |                         |   |      |   |        |   |      |   |          |   |  |   |        |   |  |   |       |  
|Consolidated Balance Sheet Data (2)                           |                                       |   |                         |   |      |   |        |   |      |   |          |   |  |   |        |   |  |   |       |  
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | (In thousands)                        |   |                         |   |      |   |        |   |      |   |          |   |  |   |        |   |  |   |       |   | 
|                                                             
|                                                             
|                                                             
|                                                             
|Cash and cash equivalents                                     |                                       | $ | 12,016                  |   |      | $ | 16,446 |   |      | $ | 5,885    |   |  | $ | 144    |   |  | $ | 236   |  
|                                                             
|                                                             
|                                                             
|                                                             
|Total assets                                                  |                                       |   | 14,816                  |   |      |   | 19,098 |   |      |   | 8,238    |   |  |   | 1,528  |   |  |   | 380   |  
|                                                             
|                                                             
|                                                             
|                                                             
|Long-term debt, net of current portion                        |                                       |   | 26                      |   |      |   | 44     |   |      |   | 125      |   |  |   | 158    |   |  |   |      |  
|                                                             
|                                                             
|                                                             
|                                                             
|Total stockholders equity                                    |                                       | $ | 11,532                  |   |      | $ | 15,749 |   |      | $ | 6,871    |   |  | $ | 752    |   |  | $ | 324   |  



---

|(1) |  | Represents the period from May 1, 1997 (date of inception) to December 31, 1997.                                                                                   
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | No cash dividends were declared or paid in any year presented.                                                                                                     
|   
|   
|   
|   
|(3) |  | A non-cash charge of $740,000 was incurred in connection with a beneficial conversion feature relating to
the sale of convertible preferred stock on June 29, 1998.




Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements regarding our plans,
expectations, estimates and beliefs. Actual results could differ materially
from those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as believe,
anticipate, expect, intend, plan, will, may and other similar
expressions. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. Forward-looking statements in these documents
include, but are not necessarily limited to, those relating to our:



| |  |  | Beliefs regarding the competitive technological advantages and
anticipated commercial success of our technologies,    
| | - |  | ----------------------------------------------------------------------------------------------------------------------
|
| |  |  | Intention to achieve widespread commercial acceptance of our licensed technologies,                                   
|
| |  |  | Ability to obtain new licensees,                                                                                      
|
| |  |  | Ability to develop new or existing switch technologies,                                                               
|
| |  |  | Objective to establish Duraswitch technologies as the design standard
in the electronic switch and ICP industries,    
|
| |  |  | Estimates of anticipated growth in the switch and ICP markets,                                                        
|
| |  |  | Success in developing new or enhanced products to take advantage of
market opportunities or to respond to competition,
|
| |  |  | Manufacturing industrys acceptance and demand for our technology licenses,                                           
|
| |  |  | Licensees willingness and ability to successfully market our technologies to new and existing customers, and         
|
| |  |  | Opportunities derived from our investments.                                                                           

9



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##### Table of Contents



When you consider the forward-looking statements in this report, you
should keep in mind the cautionary information located elsewhere in this
report. Our performance may differ materially from that contemplated by such
forward-looking statements as a result of certain risk factors, including but
not limited to those set forth below.

Should we be unable to protect our proprietary technologies, their value
and our competitive position would be significantly impaired.Although we seek
to protect our intellectual property rights through patents, copyrights, trade
secret protection and other measures, we cannot be certain that:



| |  |  | We will be able to protect our technologies adequately;                                                                                                                                                                                                                   
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Competitors will not be able to develop similar or better technology independently;                                                                                                                                                                                       
|
| |  |  | Any of our pending patent applications will be issued; or                                                                                                                                                                                                                 
|
| |  |  | Intellectual property laws will continue to protect our intellectual
property rights, particularly as we expand our licensing in foreign
countries where the local laws do not provide a strong protection of
intellectual properties or recognize international treaties.

Claims that we infringe third party intellectual property rights could
result in significant expenses or restrictions on our ability to license
technology.In recent years, there has been significant litigation in the
United States involving patents and other intellectual property rights. From
time to time, third parties may assert patent, copyright, trademark and other
intellectual property claims against technologies used in our business. Any
such claims, with or without merit, could be time-consuming to defend, would
result in costly litigation and divert the efforts of our personnel. Claims of
intellectual property infringement might require us to enter into costly
royalty or license agreements. Additionally, we might be unable to obtain
royalty or license agreements on terms acceptable to us. A successful claim of
patent, or other intellectual property infringement against us could adversely
affect our business in a material way. We are not currently involved in any
litigation to protect our technologies from infringement nor to defend against
claims of infringement.

Our quarterly revenue and operating results may fluctuate.Our results
may fluctuate from those in prior quarters and will continue to do so due to a
variety of factors. These factors include:



| |  |  | The establishment, growth or loss of licensee relationships;                                                                                                                                  
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The timing of introductions, production and sales cycles of new
products by our licensees incorporating our technologies, which is at
the discretion of our licensees and their customers; and
|
| |  |  | Market acceptance of our technologies.                                                                                                                                                        

Our stock price may be volatile.The stock market has experienced extreme
volatility that often has been unrelated or disproportionate to the performance
of particular companies. These market fluctuations may cause our stock price
to decline regardless of our performance. The market price of our common stock
has been, and in the future could be, significantly affected by factors such
as, but not limited to:



| |  |  | Actual or anticipated fluctuations in operating results;                                                                                                                            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Announcements of our technologies or our competitors technologies,
new licensees or other business developments;                                                                   
|
| |  |  | Sales or the perception in the market of possible sales by insiders
or others which could have a disproportionate effect on our stock price
due to our typically low trading volume.

We are dependent on our management team.Our future success will be
largely dependent on the efforts of key management personnel who have extensive
experience in the switch industry. The loss of one or more of these key
employees could have a material adverse effect on our business. We are
particularly dependent upon the services of Robert J. Brilon, our Chief
Executive Officer, President and Chief Financial Officer and Anthony J. Van
Zeeland, our Chief Operating Officer and Executive Vice President of
Engineering. We have employment agreements with both of these individuals for
terms, which expire in April 2004.

Our technology may not gain market acceptance.Our success will depend
in part on the commercial acceptance of our patented technologies. To be
accepted, our technologies must meet the expectations of our potential
customers. We market our technologies directly to OEMs whose products utilize
switches and to our licensees to encourage them to incorporate our technologies
in the switches they supply to OEMs, focusing on the advantages of our switches
over the electro-mechanical and dome membrane switches. If the OEMs or our
licensees ultimately decide to continue with their existing switch
technologies, our business would be adversely affected.

10



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We have a history of operating losses and expect to incur losses in the
immediate future.We have had substantial losses since our inception and we
expect to incur additional losses as we expand our licensing business. We
expect to commit substantial resources to:



| |  |  | Research and development;                           
| | - |  | ----------------------------------------------------
|
| |  |  | The establishment of new licensee relationships; and
|
| |  |  | Enhanced sales and training capabilities.           

Because we have only recently completed our shift to a technology
licensing business model, we are unable to accurately estimate future revenue
and operating expenses based upon historical performance and we cannot assure
you if and when we will become profitable.

Risks related to rapidly changing technology.Our results of operations
will depend in part on successful management of the challenges of rapidly
changing technology and evolving industry standards characteristic of the
market for switch technology. These challenges include predicting the nature
and timing of technological changes and the direction of evolving industry
standards and identifying, developing and successfully marketing new
technologies as they emerge. We work with our licensees and OEMs to design
solutions specific to their needs and the needs of their customers.

Our growing international business activities subject us to risks that
could reduce the demand for our products and increase our operating expense.
In 2001, net revenue from international licensees made up an insignificant
portion of our total net revenue. We have been, however, expanding our
licensing business with international licensees and expect that net revenue
from international licensees will increase. To date, all of our licensing
revenue and costs have been denominated in U.S. dollars. It is our expectation
that net revenue and costs will continue to be denominated in U.S. dollars for
the foreseeable future. We could be significantly affected by other risks
associated with international activities, including:



| |  |  | Different technology standards and design requirements;                             
| | - |  | ------------------------------------------------------------------------------------
|
| |  |  | Longer payment cycles for and greater difficulties collecting accounts receivable;  
|
| |  |  | Fluctuations in currency exchange rates;                                            
|
| |  |  | Nationalization, expropriation and limitations on repatriation of cash;             
|
| |  |  | Social, economic, banking and political risks;                                      
|
| |  |  | Taxation;                                                                           
|
| |  |  | Changes in U.S. laws and policies affecting trade, foreign investment and loans; and
|
| |  |  | Changes in enforcement of laws protecting intellectual property.                    

General

The following discussion should be read in conjunction with our audited
consolidated financial statements and associated notes appearing elsewhere in
this report.

We have developed, patented and licensed innovative technologies utilizing
a magnetic based design for electronic switches. We are currently expanding the
use of these technologies by licensing manufacturers to produce and sell
products using our technologies. We believe these patented technologies allow
us and our licensees to provide innovative solutions to the design challenges
faced by original equipment manufacturers, (OEMs), and component suppliers.

We were incorporated on May 1, 1997, as Total Switch, Inc. (Total
Switch). In order to establish a market value for our stock to acquire other
businesses necessary for our growth, we combined with an inactive, publicly
traded company on December 31, 1997, and changed its name to Duraswitch
Industries, Inc. (Duraswitch). As a result of this transaction, Total Switch
became a wholly owned subsidiary of Duraswitch, and Total Switchs former
stockholders acquired a controlling interest in Duraswitch. During 1998,
through the acquisition of Aztec Industries, Inc. (Aztec), formerly a
manufacturer of membrane switches, we commenced operations and designed,
manufactured, marketed and distributed integrated electronic control panels
developed with our patented technologies.

During 2000, we started to implement a business model of licensing our
technologies rather than manufacturing switches ourselves. During 2001, we
completed this transition and expect our future revenue to come from our
licensing efforts. As of December 31, 2001, we had 24 licensees, foreign and
domestic, and we are continuing our efforts to expand our licensee base
worldwide.

Our research and development expenses are comprised mainly of research and
development personnel and occupancy costs. Our selling, general and
administrative expenses are comprised mainly of labor costs associated with our

11



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##### Table of Contents



sales and administrative salaries, depreciation and amortization, travel
costs, advertising and occupancy costs.

During the second quarter of 2001, we completed the transition to a
licensing business model away from switch manufacturing and, as a result, the
relationship between net revenue, cost of goods sold and operating expenses
reflected in our financial information may not represent future expected
financial relationships. Given the early stage of our licensing business model,
we do not believe period-to-period comparisons of results of operations are
meaningful.

Critical Accounting Policies

In accordance with recent Securities and Exchange Commission guidance, the
material accounting policies that we believe are the most critical to an
investors understanding of our financial results and condition and require
managements judgment are discussed below. As a technology licensing company,
we believe our critical accounting policies are those that deal with the value
of our patents and goodwill and with our method of recognizing revenue.
Information regarding all other significant accounting policies is included in
Note 2 of our Notes to the Consolidated Financial Statements.

Impairment of Long-Lived Assets and Assets to be Disposed of.The Company
reviews its long-lived assets and identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount
of the asset may not be recoverable. Our intangible assets are primarily our
patents and the goodwill associated with the acquisition of Aztec Industries.
If such assets were considered to be impaired, the impairment to be recognized
would be measured by the amount by which the carrying amount of the assets
exceeds the fair market value of the assets. As of December 31, 2001, no assets
have been considered to be impaired.

We evaluate the recoverability of property and equipment and intangibles
not held for sale by comparing the carrying amount of the asset or group of
assets against the estimated undiscounted future net cash flows expected to
result from the use of the asset or group of assets. Goodwill from acquisitions
related to a group of assets being evaluated for impairment is included in the
evaluation. If the undiscounted estimated cash flows are less than the carrying
value of the asset or group of assets being reviewed, an impairment loss would
be recorded. The loss would be measured based on the estimated fair value of
the asset or group of assets compared to cost. The estimated fair value would
be based on the best information available under the circumstances, including
prices for similar assets and the results of valuation techniques, including
the present value of expected future cash flows using a discount rate
commensurate with the risks involved.

Revenue Recognition.We enter into licensing agreements with our
customers. Our licensing strategy incorporates a simplified requirement
whereby the licensee purchases defined licensed components from Duraswitch.
The component cost includes the royalty for the rights to manufacture, assemble
and sell patented Duraswitch technologies. In some cases where no components
are supplied, we are paid a royalty per switch manufactured.

We support our licensees with engineering, design, testing, specification
materials, training programs, marketing assistance, customer leads, and patent
protection. Every licensee has strict qualitative standards to maintain as
part of their licensing agreement. Our non-exclusive licensees pay between
$0.10 and $0.78 per switch depending on the type of switch and volume.

The terms of some of our license agreements require prepayment of
royalties to Duraswitch. The prepayments are recorded as deferred revenue and
licensing revenue is recognized when the royalties are earned under the
licensing agreements. Royalties are considered earned when the licensee
purchases component parts from Duraswitch or, when component parts are not
supplied by Duraswitch, royalties are considered earned when the licensee
manufactures a switch utilizing Duraswitch technology. The deferred revenue
received from Delphi Automotive Systems LLC, now Delphi Corporation (Delphi)
in 2000 is being amortized over the initial seven-year term of the exclusive
license agreement.

Results of Operations for the Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

Net Revenue:

We recorded net revenue of $985,312 for the year ended December 31, 2001,
compared to $2,318,736 for the year ended December 31, 2000, a decline of
$1,333,424. The decline in our net revenue is primarily due to our shift in
our business model from switch manufacturing to technology licensing.
Accordingly, our licensing revenue for 2001 increased to $835,541 compared to
$533,137 in 2000, an increase of $302,404, and our product sales revenue
decreased to $147,771 for 2001 compared to $1,785,599 for 2000, a decline of
$1,635,828.

During 2000, we started to implement our new business model of licensing
our technologies rather than manufacturing switches ourselves. We have
completed this transition and expect almost all of our future revenue to come
from our licensing efforts. As of December 31, 2001, we had 24 licensees,
foreign and domestic. Because the revenue generated from licensing switch
technologies is lower than the revenue from manufacturing the same number of
switches,

12



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##### Table of Contents



we expected our net revenue to decline as we transitioned into a licensing
business model. During the transition, we have referred our switch customers
and product sales leads to our licensees. As expected, product revenue have
decreased as we completed delivery against our remaining customer purchase
orders.

The shift in our business model from manufacturing to licensing and the
addition of licensed manufacturers during the year accounted for the increase
in our licensing revenue. Our license agreement with Delphi generated licensing
revenue of $411,362 or 49% of our licensing revenue and 42% of our total net
revenue for the year ended December 31, 2001 and $277,860 or 52% of our
licensing revenue and 12% of our total net revenue for the year ended December
31, 2000. Licensing revenue from Delphi primarily resulted from the
amortization of deferred licensing revenue which was received in 2000.

Product revenue was $149,771 and $1,785,599 for the years ended December
31, 2001 and 2000, respectively, a decline of $1,635,828 resulting from the
implementation of our new business model, which called for transitioning away
from switch manufacturing. We have referred all of our switch customers to our
licensees. Our revenue in 2000 was primarily generated from designing,
developing, and producing prototypes of customer switch applications and low
volume production runs. Additionally, we had been performing pursuant to a
long-term purchase order with Siemens Building Technologies, Inc. This purchase
order was completed in the second quarter of 2001 and generated 74% of our
product revenue for the year ended December 31, 2001. This project has been
transitioned to one of our licensees.

Cost of Goods Sold:

Cost of goods sold was $256,838 for 2001, compared to $2,054,655 for 2000,
a decrease of $1,797,817. The decrease in cost of goods sold reflects our
transition from the low-margin business of manufacturing to the high-margin
business of licensing. Licensing cost of sales for 2001 was $100,540 compared
to $49,666 in 2000, an increase of $50,874 reflecting the growth of our
licensing business.

Product cost of goods sold was $156,298 in 2001 compared to $2,004,989 in
2000, a decline of $1,848,691. The decrease in product cost of goods sold was
primarily due to our transition to a licensing business model from a
manufacturing model. The decrease in overall cost of goods sold as a percentage
of net revenue was primarily due to the higher gross margins we achieved
through our licensing agreements and decreased manufacturing costs by utilizing
our licensees and subcontractors for manufacturing.

Selling, General and Administrative Expenses:

Selling, general and administrative expenses were $3,899,652 for 2001,
compared to $3,343,605 for 2000, an increase of $566,047. The increase in
selling, general and administrative expenses was primarily related to costs
associated with the Chairman of the Boards resignation of his CEO position.
Under the terms of his agreement, in the event of resignation, he was entitled
to salary and benefits for an 18-month period. As a result, we have recorded a
charge of $397,431 in 2001. Costs associated with additional sales and
administrative personnel added during 2001 also contributed to the increase.

Research and Development:

Research and development expenses were $2,773,221 for 2001, compared to
$1,716,825 for 2000, an increase of $1,056,396. The increase was primarily
attributable to costs related to additional research and development personnel,
expanded modeling and testing capabilities and related occupancy costs.

Loss from Operations:

As a result of the factors described above, the loss from operations was
$5,944,399 for 2001, compared to $4,796,349 for 2000, an increase of
$1,148,050.

Other Income-Net:

Other income-net was $554,245 for 2001, compared to $686,472 for 2000, a
decline of $132,227. The decrease in other income-net is due to the decrease in
investment income as a result of lower interest rates and lower average cash
balances.

Net Loss:

As a result of the factors described above, the net loss was $5,390,154
for 2001, compared to $4,109,877 for 2000, an increase of $1,280,277.

13



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##### Table of Contents



Results of Operations for the Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999

Net Revenue:

We recorded net revenue of $2,318,736 for the year ended December 31,
2000, compared to $1,674,174 for the year ended December 31, 1999, an increase
of $644,562. Licensing revenue for 2000 was $533,137 compared to $0 in 1999.
Our shift in our business model accounted for the increase in our licensing
revenue. The license agreement with Delphi generated licensing revenue of
$277,860 or 52% of our licensing revenue for the year ended December 31, 2000.
Licensing revenue from Delphi primarily resulted from the amortization of
deferred licensing revenue which was received in 2000.

During 2000, product revenue was $1,785,599 compared to $1,674,174 in
1999, an increase of $111,425. Effective March 31, 2000, we resolved the
Ericsson Inc. (Ericsson) purchase order cancellation discussed in our 1999
10-KSB annual report. This resolution was based on Ericssons acknowledgement
of financial responsibility for the purchase order dated April 7, 1999, between
Ericsson and Duraswitch for the custom design of a compact mode selector/volume
control rotary type switch. Ericsson agreed to pay and Duraswitch accepted
$340,000 as an equitable resolution. The payment from Ericsson represented 19%
of our product revenue for 2000. The remaining change in product revenue was
driven by market acceptance of our switches relying on our patented
technologies rather than older membrane switch technology and the shift to our
new business model of licensing.

Cost of Goods Sold:

Cost of goods sold was $2,054,655 for 2000, compared to $2,029,208 for
1999, an increase of $25,447. Licensing cost of sales for 2000 was $49,666
compared to $0 in 1999. The increase in licensing cost of sales was due to our
transition to a licensing business model, as opposed to a product-based model.
2000 was our initial transition year from manufacturing to licensing.

Product cost of goods sold was $2,004,989 in 2000 compared to $2,029,208
in 1999, a decline of $24,219. The decrease in cost of goods sold as a
percentage of net revenue was primarily due to our transition to a licensing
business model from a manufacturing model. The decrease in overall cost of
goods sold as a percentage of net revenue was primarily due to the higher gross
margins we achieved through our licensing agreements and decreased
manufacturing costs by utilizing our licensees and subcontractors for
manufacturing.

Selling, General and Administrative Expenses:

Selling, general and administrative expenses were $3,343,605 for 2000,
compared to $2,311,577 for 1999, an increase of $1,032,028. The increase in
selling, general and administrative expenses was directly related to building
an infrastructure to accommodate expected licensing programs and sales growth,
including increased salary costs, occupancy costs and travel costs. Documenting
our manufacturing processes, structuring the technology-licensing program and
training our licensees all contributed to increased expenses.

Research and Development:

Research and development expenses were $1,716,825 for 2000, compared to
$889,922 for 1999, an increase of $826,903. The increased costs were attributed
to hiring additional engineering personnel, engineering consulting services,
and additional modeling, occupancy and small tools purchased to continue
development, modeling and testing of new product applications.

Loss from Operations:

As a result of the factors described above, the loss from operations was
$4,796,349 for 2000, compared to $3,556,533 for 1999, an increase of
$1,239,816.

Other Income-Net:

Other income-net was $686,472 for 2000, compared to $81,615 for 1999, an
increase of $604,857. Additional cash generated from our public offering
(August 1999), and the exclusive license fee and equity transactions with
Delphi (May and June 2000, respectively) was the primary reason for the
increase.

Net Loss:

As a result of the factors described above, the net loss was $4,109,877
for 2000, compared to $3,474,918 for 1999, an increase of $634,959.

Liquidity and Capital Resources

Cash and cash equivalents were $12,016,430, $16,445,564 and $5,884,827 on
December 31, 2001, 2000 and 1999, respectively. The decrease in the cash and
cash equivalents during 2001 is primarily attributable to cash used in
operations

14



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##### Table of Contents



offset by the proceeds from the stock sales related to the exercise of
employee stock options. The increase in cash and cash equivalents during 2000
was primarily due to the exclusive license fee and equity transactions with
Delphi.

Net cash used in operating activities was $4,885,985, $1,206,287 and
$3,248,117 for 2001, 2000 and 1999, respectively. In 2001, cash used in
operating activities consisted primarily of the net loss and a decrease in
deferred licensing revenue which was partially offset by an increase in accrued
salaries and benefits, an increase in other non-current liabilities and by
depreciation and amortization. In 2000, cash used in operating activities
consisted primarily of the net loss, a decrease in accounts payable and accrued
salaries and benefits which was partially offset by an increase in deferred
licensing revenue, depreciation and amortization and a decrease in inventory.
In 1999, cash used by operating activities consisted primarily of the net loss
and an increase in inventory which was partially offset by depreciation and
amortization and an increase in accrued salaries and benefits.

Net cash used in investing activities was $670,114, $841,239 and $627,314
in 2001, 2000 and 1999, respectively. Our net cash used in investing activities
in 2001 and 2000 consisted primarily of purchases of computer equipment,
modeling and test equipment, and an increase in patents. In 1999, cash used in
investing activities consisted primarily of purchases of computer equipment,
modeling and test equipment and leasehold improvements and a loan to
Camplex/Concept W Corporation in anticipation of our acquisition of Camplex,
which we subsequently abandoned and received repayment of $60,000 by December
31, 1999.

Net cash provided by financing activities was $1,126,965, $12,608,263 and
$9,616,398 in 2001, 2000 and 1999, respectively. Cash provided by financing
activities in 2001 consisted primarily of net proceeds from the sale of stock
related to the exercise of employee stock options.

In 2000, cash provided by financing activities consisted primarily of net
proceeds from our equity transactions with Delphi. In May 2000, we received
$4.0 million from Delphi in exchange for (a) Delphis exclusive right to
utilize and manufacture our patented switch technologies for the automotive
industry, (b) a warrant to purchase 225,000 shares of our stock and (c) an
option to purchase approximately 1.65 million shares of our stock. In June
2000, Delphi exercised its option to purchase approximately 1.65 million shares
of our common stock, representing approximately 18% of our outstanding shares
at that time, for approximately $11.5 million in cash.

The license agreement with Delphi also requires Delphi to make minimum
royalty payments totaling $12 million during the initial seven-year term ending
June 30, 2007. Delphi can maintain exclusivity for the automotive industry
through June 30, 2012 by making additional minimum annual royalty payments
during that period. After June 30, 2012, either Delphi or the Company may
convert the agreement to a nonexclusive agreement through 2020.

In 1999, cash provided by financing activities consisted primarily of the
net proceeds from our private stock offering and our public stock offering. On
August 26, 1999, we filed a registration statement with the Securities and
Exchange Commission to issue 2,000,000 shares of our common stock at $5.00 per
share. The offering was concluded after all shares available were sold. The
underwriter of the stock offering was Roth Capital Partners (formerly
Cruttenden Roth). The net proceeds from the offering were $8,196,312, which is
net of $1,803,688 in costs paid by us related to the offering.

At December 31, 2001, we had approximately $14,890,000 in net operating
loss carryforwards available for federal and state income tax purposes. We have
not recognized any benefit from these operating loss carryforwards, which
expire in 2011 through 2021.

The Company has employment and separation agreements with key members of
management. These agreements call for a base salary and bonuses based upon the
performance of the Company. These agreements also provide for salary and
benefits in the event of separation. Effective December 31, 2001, the Chairman
of the Board resigned his CEO position and remained as Chairman. His employment
agreement provided for salary and benefits in the event of termination or
resignation. As such, the company has recorded a charge of $397,431 for the
year ended December 31, 2001 to be paid over an 18-month period.

We have experienced significant operating losses since our inception. We
expect that our capital expenditure and working capital requirements in the
foreseeable future would increase depending on the rate of our expansion, our
operating results, and other adjustments in our operating plan as needed in
response to competition or unexpected events. We do not have any current plans
to obtain additional financing through the sale of equity or by establishing
lines of credit. We believe that cash on hand will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at
least the next 12 months.

15



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##### Table of Contents






Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the potential loss arising from adverse changes in market
rates and prices, such as foreign currency exchange and interest rates. The
Company does not use derivative financial instruments to manage these risks and
does not hold or issue financial instruments for trading purposes.

We are currently exposed to credit risk on credit extended to our
licensees. Based on the credit worthiness of our licensee base and the relative
size of these financial instruments, we believe the risk associated with these
instruments will not have a material adverse affect on our business, financial
position, results of operations or cash flows.

Additionally, we are exposed to some market risk through interest rates
related to our investment of cash and cash equivalents of approximately $12
million. The risk is not considered material and we manage such risk by
evaluating the best investment rates available for short-term high-quality
investments.

Presently, all of the Companys receivables and payments are made in U.S.
dollars and, consequently, the Company believes it has no foreign currency
exchange rate risk. However, in the future, the Company may enter into
agreements in foreign currencies that may subject the Company to foreign
exchange rate risk. There can be no assurance that the Companys future
efforts to reduce foreign exchange risk will be successful.

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##### Table of Contents






Item 8. Financial Statements.







INDEPENDENT AUDITORS REPORT

Board of Directors
Duraswitch Industries, Inc.
Mesa, Arizona

We have audited the accompanying consolidated balance sheets of Duraswitch
Industries, Inc. and subsidiaries (the Company) as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December
31, 2001. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2001
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP
Phoenix, Arizona 
February 15,
2002

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##### Table of Contents



DURASWITCH INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

---

|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |             |            | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------- | ---------- | ----------- | ---------- | ---- | ---------- | ----------- | ---------- | 
|                                               |                                                                                                                                                                    |                             |            | 2001        |            | 2000
|                                               |                                                                                                                                                                    |                             |            |             |            |     
|ASSETS                                         |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                              
|                                              
|                                              
|                                              
|CURRENT ASSETS:                                |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                              
|                                              
|                                              
|                                              
|                                               | Cash and cash equivalents                                                                                                                                          |                             | $          | 12,016,430  |            |      | $          | 16,445,564  |           
|                                              
|                                              
|                                              
|                                              
|                                               | Accounts receivable (net of allowance for doubtful accounts
of $17,500 in 2001 and $20,000 in 2000)                                                                |                             |            | 101,934     |            |      |            | 224,419     |           
|                                              
|                                              
|                                              
|                                              
|                                               | Inventory (Note 4)                                                                                                                                                 |                             |            | 275,919     |            |      |            | 250,983     |           
|                                              
|                                              
|                                              
|                                              
|                                               | Prepaid expenses and other current assets                                                                                                                          |                             |            | 186,658     |            |      |            | 230,995     |           
|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                               |                                                                                                                                                                    | Total current assets        |            |             | 12,580,941 |      |            |             | 17,151,961 | 
|                                              
|                                              
|                                              
|                                              
|PROPERTY AND EQUIPMENT  Net (Notes 6 and 8)   |                                                                                                                                                                    |                             | 1,052,603  |             |            |      | 903,150    |            
|                                              
|                                              
|                                              
|                                              
|GOODWILL  Net                                 |                                                                                                                                                                    |                             | 443,874    |             |            |      | 516,840    |            
|                                              
|                                              
|                                              
|                                              
|PATENTS  Net                                  |                                                                                                                                                                    |                             | 588,272    |             |            |      | 337,481    |            
|                                              
|                                              
|                                              
|                                              
|OTHER ASSETS                                   |                                                                                                                                                                    |                             | 150,459    |             |            |      | 188,722    |            
|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |            
|TOTAL                                          |                                                                                                                                                                    | $                           | 14,816,149 |             |            | $    | 19,098,154 |            
|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |            
|LIABILITIES AND STOCKHOLDERS EQUITY           |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                              
|                                              
|                                              
|                                              
|CURRENT LIABILITIES:                           |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                              
|                                              
|                                              
|                                              
|                                               | Accounts payable                                                                                                                                                   |                             | $          | 84,812      |            |      | $          | 52,469      |           
|                                              
|                                              
|                                              
|                                              
|                                               | Accrued salaries and benefits                                                                                                                                      |                             |            | 575,738     |            |      |            | 321,649     |           
|                                              
|                                              
|                                              
|                                              
|                                               | Other accrued expenses and other current liabilities                                                                                                               |                             |            | 166,912     |            |      |            | 224,289     |           
|                                              
|                                              
|                                              
|                                              
|                                               | Deferred licensing revenue (Note 7)                                                                                                                                |                             |            | 458,150     |            |      |            | 477,880     |           
|                                              
|                                              
|                                              
|                                              
|                                               | Current portion of capital leases payable (Note 8)                                                                                                                 |                             |            | 17,457      |            |      |            | 46,035      |           
|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                               |                                                                                                                                                                    | Total current liabilities   |            |             | 1,303,069  |      |            |             | 1,122,322  | 
|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |            
|LONG-TERM LIABILITIES:                         |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                              
|                                              
|                                              
|                                              
|                                               | Capital leases payable (Note 8)                                                                                                                                    |                             |            | 26,323      |            |      |            | 43,780      |           
|                                              
|                                              
|                                              
|                                              
|                                               | Other non-current liabilities (Note 13)                                                                                                                            |                             |            | 181,240     |            |      |            |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Deferred licensing revenue  long-term (Note 7)                                                                                                                    |                             |            | 1,773,981   |            |      |            | 2,183,362   |           
|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                               |                                                                                                                                                                    | Total long-term liabilities |            |             | 1,981,544  |      |            |             | 2,227,142  | 
|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                               |                                                                                                                                                                    | Total liabilities           |            |             | 3,284,613  |      |            |             | 3,349,464  | 
|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |            
|COMMITMENTS AND CONTINGENCIES (Notes 3 and 13) |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                              
|                                              
|                                              
|                                              
|STOCKHOLDERS EQUITY (Notes 9 and 10):         |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                              
|                                              
|                                              
|                                              
|                                               | Common stock, $.001 par value, 40,000,000 shares authorized in
2001 and 2000, 9,528,695 and 9,266,696 shares issued and
outstanding in 2001 and 2000, respectively |                             |            | 9,529       |            |      |            | 9,267       |           
|                                              
|                                              
|                                              
|                                              
|                                               | Preferred stock, Series A, no par value, 10,000,000 shares authorized,
no shares issued and outstanding in 2001 and 2000                                           |                             |            |            |            |      |            |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Additional paid-in capital                                                                                                                                         |                             |            | 27,285,470  |            |      |            | 26,112,732  |           
|                                              
|                                              
|                                              
|                                              
|                                               | Accumulated deficit                                                                                                                                                |                             |            | (15,763,463 | )          |      |            | (10,373,309 | )         
|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |            
|Total stockholders equity                     |                                                                                                                                                                    |                             | 11,531,536 |             |            |      | 15,748,690 |            
|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |            
|                                               |                                                                                                                                                                    | TOTAL                       |            | $           | 14,816,149 |      |            | $           | 19,098,154 | 
|                                               |                                                                                                                                                                    |                             |            |             |            |      |            |            

See notes to consolidated financial statements.

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DURASWITCH INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

---

|                                                       |                                               |                          |                     |           |           |         |            |           |           |         |            |           |           |          |  
|------------------------------------------------------ | --------------------------------------------- | ------------------------ | ------------------- | --------- | --------- | ------- | ---------- | --------- | --------- | ------- | ---------- | --------- | --------- | -------- | -
|                                                       |                                               |                          |                     |           | 2001      |         | 2000       |           | 1999     
|                                                       |                                               |                          |                     |           |           |         |            |           |          
|NET REVENUE (Note 3):                                  |                                               |                          |                     |           |           |         |            |           |           |         |            |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Licensing (Note 7)                            |                          | $                   | 835,541   |           |         | $          | 533,137   |           |         | $          |          |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Product                                       |                          |                     | 149,771   |           |         |            | 1,785,599 |           |         |            | 1,674,174 |          
|                                                       |                                               |                          |                     |           |           |         |            |           |           |         |            |           |          
|                                                       |                                               | Total net revenue        |                     |           | 985,312   |         |            |           | 2,318,736 |         |            |           | 1,674,174 |         
|                                                      
|                                                      
|                                                      
|                                                      
|COST OF GOODS SOLD:                                    |                                               |                          |                     |           |           |         |            |           |           |         |            |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Licensing                                     |                          |                     | 100,540   |           |         |            | 49,666    |           |         |            |          |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Product                                       |                          |                     | 156,298   |           |         |            | 2,004,989 |           |         |            | 2,029,208 |          
|                                                       |                                               |                          |                     |           |           |         |            |           |           |         |            |           |          
|                                                       |                                               | Total cost of goods sold |                     |           | 256,838   |         |            |           | 2,054,655 |         |            |           | 2,029,208 |         
|                                                       |                                               |                          |                     |           |           |         |            |           |           |         |            |           |          
|                                                       |                                               |                          | Gross profit (loss) |           |           | 728,474 |            |           |           | 264,081 |            |           |           | (355,034 | )
|                                                       |                                               |                          |                     |           |           |         |            |           |           |         |            |           |          
|OPERATING EXPENSES:                                    |                                               |                          |                     |           |           |         |            |           |           |         |            |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Selling, general and administrative (Note 13) |                          |                     | 3,899,652 |           |         |            | 3,343,605 |           |         |            | 2,311,577 |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Research and development                      |                          |                     | 2,773,221 |           |         |            | 1,716,825 |           |         |            | 889,922   |          
|                                                       |                                               |                          |                     |           |           |         |            |           |           |         |            |           |          
|                                                       |                                               | Total operating expenses |                     |           | 6,672,873 |         |            |           | 5,060,430 |         |            |           | 3,201,499 |         
|                                                       |                                               |                          |                     |           |           |         |            |           |           |         |            |           |          
|LOSS FROM OPERATIONS                                   |                                               |                          | (5,944,399          | )         |           |         | (4,796,349 | )         |           |         | (3,556,533 | )        
|                                                      
|                                                      
|                                                      
|                                                      
|OTHER INCOME  Net                                     |                                               |                          | 554,245             |           |           |         | 686,472    |           |           |         | 81,615     |          
|                                                       |                                               |                          |                     |           |           |         |            |           |           |         |            |           |          
|NET LOSS                                               |                                               | $                        | (5,390,154          | )         |           | $       | (4,109,877 | )         |           | $       | (3,474,918 | )        
|                                                       |                                               |                          |                     |           |           |         |            |           |           |         |            |           |          
|NET LOSS PER COMMON SHARE, BASIC AND DILUTED           |                                               | $                        | (0.57               | )         |           | $       | (0.49      | )         |           | $       | (0.58      | )        
|                                                       |                                               |                          |                     |           |           |         |            |           |           |         |            |           |          
|WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED |                                               |                          | 9,443,313           |           |           |         | 8,435,856  |           |           |         | 6,033,767  |          
|                                                       |                                               |                          |                     |           |           |         |            |           |           |         |            |           |          

See notes to consolidated financial statements.

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DURASWITCH INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

---

|                           |                                                                     |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            |            |  |   |             |            |   |   |            |            |  
|-------------------------- | ------------------------------------------------------------------- |  | ------------ | --------- | ------ | --------------- | ------ | ----- | ------ | ------- | ---------- | ----------- | ------- | - | ------- |  | ---------- | - | -------- | -------- | - | - | ---------- | ---------- |  | - | ----------- | ---------- | - | - | ---------- | ---------- | -
|                           |                                                                     |  |              |           |        |                 |        |       |        |         | Series A   |             |         |   |         |  | Additional |   |          |          |   |   |            |            | 
|                           |                                                                     |  | Common Stock |           |        | Preferred Stock |        | Note  |        | Paid-in |            | Accumulated |         |   |         | 
|                           |                                                                     |  | Shares       |           | Amount |                 | Shares |       | Amount |         | Receivable |             | Capital |   | Deficit |  | Total     
|                           |                                                                     |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |           
|BALANCE, JANUARY 1, 1999   |                                                                     |  | 4,911,250    |           |        | $               | 4,911  |       |        |         |           |             |         | $ |        |  |            | $ |         |          |   | $ | 3,535,878  |            |  | $ | (2,788,514  | )          |   | $ | 752,275    |           
|                          
|                          
|                          
|                          
|                           | Net proceeds from sale of common
stock for cash in private offering |  |              | 305,992   |        |                 |        | 306   |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            | 955,280    |  |   |             |            |   |   |            | 955,586    |  
|                          
|                          
|                          
|                          
|                           | Net proceeds from sale of common
stock for cash in public offering  |  |              | 2,000,000 |        |                 |        | 2,000 |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            | 8,194,312  |  |   |             |            |   |   |            | 8,196,312  |  
|                          
|                          
|                          
|                          
|                           | Stock warrants exercised                                            |  |              | 275,685   |        |                 |        | 276   |        |         |            |             |         |   |         |  |            |   |          | (147,263 | ) |   |            | 565,995    |  |   |             |            |   |   |            | 419,008    |  
|                          
|                          
|                          
|                          
|                           | Issuance of stock for services                                      |  |              | 2,667     |        |                 |        | 3     |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            | 8,497      |  |   |             |            |   |   |            | 8,500      |  
|                          
|                          
|                          
|                          
|                           | Compensation expense
from stock options                             |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            | 13,965     |  |   |             |            |   |   |            | 13,965     |  
|                          
|                          
|                          
|                          
|                           | Net loss                                                            |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            |            |  |   |             | (3,474,918 | ) |   |            | (3,474,918 | )
|                           |                                                                     |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            |            |  |   |             |            |   |   |            |           
|BALANCE, DECEMBER 31, 1999 |                                                                     |  | 7,495,594    |           |        |                 | 7,496  |       |        |         |           |             |         |   |        |  |            |   | (147,263 | )        |   |   | 13,273,927 |            |  |   | (6,263,432  | )          |   |   | 6,870,728  |           
|                          
|                          
|                          
|                          
|                           | Issuance of option to purchase stock
for cash (Notes 7 and 9)       |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            | 688,132    |  |   |             |            |   |   |            | 688,132    |  
|                          
|                          
|                          
|                          
|                           | Issuance of warrant to purchase stock
for cash (Notes 7 and 9)      |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            | 446,206    |  |   |             |            |   |   |            | 446,206    |  
|                          
|                          
|                          
|                          
|                           | Stock option exercised (Notes 7 and 9)                              |  |              | 1,651,846 |        |                 |        | 1,652 |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            | 11,499,510 |  |   |             |            |   |   |            | 11,501,162 |  
|                          
|                          
|                          
|                          
|                           | Employee stock options exercised                                    |  |              | 76,386    |        |                 |        | 76    |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            | 119,993    |  |   |             |            |   |   |            | 120,069    |  
|                          
|                          
|                          
|                          
|                           | Stock warrants exercised                                            |  |              | 42,870    |        |                 |        | 43    |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            | 84,964     |  |   |             |            |   |   |            | 85,007     |  
|                          
|                          
|                          
|                          
|                           | Cash received from note receivable                                  |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          | 147,263  |   |   |            |            |  |   |             |            |   |   |            | 147,263    |  
|                          
|                          
|                          
|                          
|                           | Net loss                                                            |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            |            |  |   |             | (4,109,877 | ) |   |            | (4,109,877 | )
|                           |                                                                     |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            |            |  |   |             |            |   |   |            |           
|BALANCE, DECEMBER 31, 2000 |                                                                     |  | 9,266,696    |           |        |                 | 9,267  |       |        |         |           |             |         |   |        |  |            |   |         |          |   |   | 26,112,732 |            |  |   | (10,373,309 | )          |   |   | 15,748,690 |           
|                          
|                          
|                          
|                          
|                           | Employee stock options exercised                                    |  |              | 261,999   |        |                 |        | 262   |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            | 1,172,738  |  |   |             |            |   |   |            | 1,173,000  |  
|                          
|                          
|                          
|                          
|                           | Net loss                                                            |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            |            |  |   |             | (5,390,154 | ) |   |            | (5,390,154 | )
|                           |                                                                     |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            |            |  |   |             |            |   |   |            |           
|BALANCE, DECEMBER 31, 2001 |                                                                     |  | 9,528,695    |           |        | $               | 9,529  |       |        |         |           |             |         | $ |        |  |            | $ |         |          |   | $ | 27,285,470 |            |  | $ | (15,763,463 | )          |   | $ | 11,531,536 |           
|                           |                                                                     |  |              |           |        |                 |        |       |        |         |            |             |         |   |         |  |            |   |          |          |   |   |            |            |  |   |             |            |   |   |            |           

See notes to consolidated financial statements.

20



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##### Table of Contents



DURASWITCH INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

---

|                                                                          |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |            |         |          |            |  
|------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | ------- | -------- | ---------- | ---------- | ------- | --------- | ---------- | ---------- | ------- | -------- | ---------- | -
|                                                                          |                                                                             |                                              |                                                      |                                           |         | 2001     |            | 2000       |         | 1999     
|                                                                          |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |          
|CASH FLOWS FROM OPERATING ACTIVITIES:                                     |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Net loss                                                                    |                                              | $                                                    | (5,390,154                                | )       |          | $          | (4,109,877 | )       |           | $          | (3,474,918 | )      
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Adjustments to reconcile net loss to net cash used in
operating activities: |                                              |                                                      |                                           |         |          |            |            |         |           |            |            |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             | Depreciation and amortization                |                                                      |                                           | 418,546 |          |            |            | 294,023 |           |            |            | 223,788 |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             | Loss on disposal of equipment                |                                                      |                                           | 2,552   |          |            |            | 4,792   |           |            |            | (11,640 | )       
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             | Stock option compensation expense            |                                                      |                                           |        |          |            |            |        |           |            |            | 13,965  |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             | Issuance of stock for services               |                                                      |                                           |        |          |            |            |        |           |            |            | 8,500   |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             | Bad debt expense                             |                                                      |                                           |        |          |            |            |        |           |            |            | 30,654  |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             | Changes in operating assets and liabilities: |                                                      |                                           |         |          |            |            |         |           |            |            |         |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             |                                              | Accounts receivable                                  |                                           |         | 122,485  |            |            |         | 13,974    |            |            |         | (132,969 | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             |                                              | Inventory                                            |                                           |         | (24,936  | )          |            |         | 285,511   |            |            |         | (300,927 | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             |                                              | Prepaid expenses and other current assets            |                                           |         | 4,338    |            |            |         | (21,618   | )          |            |         | (92,737  | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             |                                              | Accounts payable                                     |                                           |         | 32,343   |            |            |         | (190,082  | )          |            |         | 21,308   |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             |                                              | Accrued salaries and benefits                        |                                           |         | 254,089  |            |            |         | (140,365  | )          |            |         | 310,068  |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             |                                              | Other accrued expenses and other current liabilities |                                           |         | (57,377  | )          |            |         | (3,887    | )          |            |         | 156,791  |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             |                                              | Other non-current liabilities                        |                                           |         | 181,240  |            |            |         |          |            |            |         |         |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |                                                                             |                                              | Deferred licensing revenue                           |                                           |         | (429,111 | )          |            |         | 2,661,242 |            |            |         |         |           
|                                                                          |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |            |        
|                                                                          |                                                                             |                                              |                                                      | Net cash used in operating activities     |         |          | (4,885,985 | )          |         |           | (1,206,287 | )          |         |          | (3,248,117 | )
|                                                                          |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |            |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                     |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Increase in patents                                                         |                                              |                                                      | (283,464                                  | )       |          |            | (185,102   | )       |           |            | (34,232    | )      
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Decrease (increase) in other assets                                         |                                              |                                                      | 14,838                                    |         |          |            | (164,425   | )       |           |            | (24,297    | )      
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Advance to Camplex                                                          |                                              |                                                      |                                          |         |          |            |           |         |           |            | (150,000   | )      
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Repayment of (payment of) advance to employee                               |                                              |                                                      | 40,000                                    |         |          |            | (40,000    | )       |           |            |           |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Proceeds from Camplex                                                       |                                              |                                                      |                                          |         |          |            | 31,578     |         |           |            | 60,000     |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Proceeds from sale of equipment                                             |                                              |                                                      | 7,000                                     |         |          |            |           |         |           |            | 12,500     |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Purchases of property and equipment                                         |                                              |                                                      | (448,488                                  | )       |          |            | (483,290   | )       |           |            | (491,285   | )      
|                                                                          |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |            |        
|                                                                          |                                                                             |                                              |                                                      | Net cash used in investing activities     |         |          | (670,114   | )          |         |           | (841,239   | )          |         |          | (627,314   | )
|                                                                          |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |            |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                     |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Net proceeds from sale of stock                                             |                                              |                                                      | 1,173,000                                 |         |          |            | 11,706,238 |         |           |            | 9,395,906  |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Proceeds from issuance of note payable                                      |                                              |                                                      |                                          |         |          |            |           |         |           |            | 550,000    |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Payment received on note receivable                                         |                                              |                                                      |                                          |         |          |            | 147,263    |         |           |            |           |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Proceeds from sale of warrant & option                                      |                                              |                                                      |                                          |         |          |            | 1,134,338  |         |           |            |           |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Principal payments on notes payable and capital leases                      |                                              |                                                      | (46,035                                   | )       |          |            | (304,576   | )       |           |            | (364,227   | )      
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Repayment of loans from officers                                            |                                              |                                                      |                                          |         |          |            |           |         |           |            | (40,281    | )      
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Net borrowings (repayments) on line of credit                               |                                              |                                                      |                                          |         |          |            | (75,000    | )       |           |            | 75,000     |        
|                                                                          |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |            |        
|                                                                          |                                                                             |                                              |                                                      | Net cash provided by financing activities |         |          | 1,126,965  |            |         |           | 12,608,263 |            |         |          | 9,616,398  |  
|                                                                          |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |            |        
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          |                                                                             |                                              | (4,429,134                                           | )                                         |         |          | 10,560,737 |            |         |           | 5,740,967  |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                              |                                                                             |                                              | 16,445,564                                           |                                           |         |          | 5,884,827  |            |         |           | 143,860    |           
|                                                                          |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |            |        
|CASH AND CASH EQUIVALENTS, END OF YEAR                                    |                                                                             | $                                            | 12,016,430                                           |                                           |         | $        | 16,445,564 |            |         | $         | 5,884,827  |           
|                                                                          |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |            |        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION  Cash paid for interest |                                                                             | $                                            | 12,169                                               |                                           |         | $        | 39,347     |            |         | $         | 76,985     |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:                            |                                                                             |                                              |                                                      |                                           |         |          |            |            |         |           |            |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Acquisition of equipment through capital lease                              |                                              |                                                      |                                          |         |          |            | 34,800     |         |           |            | 57,873     |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Reduction of debt in connection with exercise of warrants                   |                                              |                                                      |                                          |         |          |            |           |         |           |            | 175,000    |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Note receivable in connection with exercise of warrants                     |                                              |                                                      |                                          |         |          |            |           |         |           |            | 147,263    |        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Services received in exchange for reduction of advance to Camplex           |                                              |                                                      |                                          |         |          |            | 10,000     |         |           |            | 48,422     |        

See notes to consolidated financial statements.

21



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##### Table of Contents



DURASWITCH INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

1.      NATURE OF BUSINESS

Duraswitch Industries, Inc. (the Company) engineers, markets and
licenses electronic switch technologies used to operate or control
products in a wide variety of commercial and consumer applications. The
Company is building domestic and foreign patent protection for its
technologies and is entering into license agreements with switch
manufacturers and OEMs worldwide to achieve widespread distribution of its
technologies. During 2000, Duraswitch started to implement its new
business model of licensing its technologies rather than manufacturing
switches. The Company has completed this transition and expects almost all
of its future revenue to come from its licensing efforts. Licensing
royalties are based on licensed manufacturers use of the Companys
intellectual property for electronic switch applications on a per switch
basis.

The Company has experienced significant operating losses since its
inception. The Company raised approximately $8.2 million, net, from its
public offering in August 1999. In May 2000, the Company received $4.0
million from Delphi Automotive Systems LLC, now Delphi Corporation
(Delphi), for the exclusive right to utilize and manufacture the
Companys patented switch technologies for the automotive industry, a
warrant to purchase 225,000 shares of stock and a short-term option to
purchase approximately 1.65 million shares of common stock. In June 2000,
Delphi exercised this option to purchase approximately 1.65 million shares
of the Companys common stock, representing approximately 18% of the
Companys outstanding shares, for approximately $11.5 million in cash.
Management believes the Company will be able to meet the Companys
presently projected cash and working capital requirements for at least the
next 12 months. The timing and amounts of cash used will depend on many
factors, including the Companys ability to increase revenue, control
expenditures, and become profitable.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. The consolidated financial
statements are prepared in accordance with accounting principles generally
accepted in the United States of America. The following paragraphs
summarize the significant accounting policies followed by the Company in
the preparation of its financial statements.

Principles of Consolidation All material intercompany balances and
transitions have been eliminated in consolidation.

Cash Equivalents The Company considers all highly liquid debt
instruments purchased with maturities of three months or less to be cash
equivalents.

Inventoryis carried at the lower of cost, determined using the FIFO
(first-in, first-out) method, or market.

Property and Equipment Depreciation is computed using the
straight-line method over the useful lives of the related assets as
follows:

|                              |  |         | 
|----------------------------- |  | ------- | 
|Computer software             |  | 3 years
|                             
|                             
|                             
|                             
|Computer equipment            |  | 5 years
|                             
|                             
|                             
|                             
|Other machinery and equipment |  | 5 years
|                             
|                             
|                             
|                             
|Office furniture and fixtures |  | 7 years

Leasehold improvements are amortized over the lesser of their
estimated useful life or the term of the lease.

Patentsare reported at cost and are amortized using the
straight-line method over the estimated life of twenty years. Patents are
reported net of accumulated amortization of $103,722 and $71,049 at
December 31, 2001 and 2000, respectively.

Goodwillis recorded at cost and is being amortized on a
straight-line basis over ten years. Goodwill is recorded net of
accumulated amortization of $285,782 and $212,816 at December 31, 2001 and
2000 respectively.

Revenue Recognition We enter into licensing agreements with our
customers. Our licensing strategy incorporates a simplified requirement
whereby the licensee purchases defined licensed components from
Duraswitch. The component cost includes the royalty for the rights to
manufacture, assemble and sell patented Duraswitch technologies. In some
cases where no

22



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##### Table of Contents



components are supplied, we are paid a royalty per switch
manufactured. We support our licensees with engineering, design, testing,
specification materials, training programs, marketing assistance, customer
leads, and patent protection. Every licensee has strict qualitative
standards to maintain as part of their licensing agreement. Our
non-exclusive licensees pay between $0.10 and $0.78 per switch depending
on the type of switch and volume. The terms of some of our license
agreements require prepayment of royalties to Duraswitch. The prepayments
are recorded as deferred revenue and licensing revenue is recognized when
the royalties are earned under the licensing agreements. Royalties are
considered earned when the licensee purchases component parts from
Duraswitch or, when component parts are not supplied by Duraswitch,
royalties are considered earned when the licensee manufactures a switch
utilizing Duraswitch technology. The deferred revenue received from
Delphi in 2000 is being amortized over the initial seven-year term of the
exclusive license agreement.

Income TaxesDeferred taxes are provided on temporary differences
between the tax basis of assets and liabilities for financial reporting
purposes and income tax purposes. The valuation allowance reduces deferred
tax assets to an amount that represents managements best estimate of the
amount of such deferred tax assets that, more likely than not, will be
realized.

Loss Per Common Share Basic earnings or loss per share is computed
by dividing the loss attributable to the stockholders by the weighted
average number of common shares outstanding during the period. Diluted
earnings or loss per share is computed using the weighted average number
of shares of common stock outstanding plus the effect of any stock options
or warrants if they are dilutive.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of The Company reviews its long-lived assets and identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. If
such assets were considered to be impaired, the impairment to be
recognized would be measured by the amount by which the carrying amount of
the assets exceeds the fair market value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.

We evaluate the recoverability of property and equipment and
intangibles not held for sale by comparing the carrying amount of the
asset or group of assets against the estimated undiscounted future net
cash flows expected to result from the use of the asset or group of
assets. Goodwill from acquisitions related to a group of assets being
evaluated for impairment is included in the evaluation. If the
undiscounted estimated cash flows are less than the carrying value of the
asset or group of assets being reviewed, an impairment loss would be
recorded. The loss would be measured based on the estimated fair value of
the asset or group of assets compared to cost. The estimated fair value
would be based on the best information available under the circumstances,
including prices for similar assets and the results of valuation
techniques, including the present value of expected future cash flows
using a discount rate commensurate with the risks involved.

Fair Value of Financial Instruments The carrying values of cash and
cash equivalents, accounts receivable and accounts payable approximate
fair values due to the short-term maturities of these instruments. The
fair value of notes payable and capital leases approximate the carrying
value of these instruments because the terms are similar to those in the
market place under which they could be replaced.

New Accounting Standards In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangibles. SFAS No. 141 requires the
purchase method of accounting for business combinations initiated after
June 30, 2001, for which the date of acquisition is July 1, 2001 or later,
eliminates the pooling-of-interests method, and identifies criteria for
the establishment of identifiable intangible assets separate from goodwill
resulting from a business combination. SFAS No. 142 requires companies to
cease amortizing goodwill. SFAS No. 142 also establishes a new method of
testing goodwill and other intangibles for impairment on an annual basis
or on an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its carrying value.
The standard is effective for the Companys fiscal year beginning January
1, 2002. Management does not expect the adoption of these standards to
have a material effect on the Companys financial position or results of
operation. Total goodwill amortization was $72,966 in 2001, 2000 and 1999.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair
value for long-lived assets to be held and used or fair value less cost to
sell for long-lived assets to be disposed of, whether reported in
continuing operations or in discontinued operations. The standard is
effective for the Companys fiscal year beginning January 1, 2002.
Management does not expect the adoption of this standard to have a
material effect on the Companys financial position or results of
operations.

Use of Estimates The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America necessarily requires management to make estimates and
assumptions that affect the reported

23



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##### Table of Contents



amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

Reclassifications Certain reclassifications were made to the 2000
and 1999 amounts to conform to the 2001 presentation.

3.      CONCENTRATIONS

The Company maintained its cash and cash equivalents in three
financial institutions at December 31, 2001. At December 31, 2001, the
Company maintained cash and cash equivalents at financial institutions in
excess of federal depository insurance.

In 2001, Delphi represented 42 percent of net revenue and Siemens
Cerberus represented 11 percent of net revenue. In 2000, Delphi
represented 12 percent of net revenue and Ericsson, Inc. represented 19
percent of net revenue. In 1999, no customer exceeded 10 percent of net
revenue. Net revenue from Delphi resulted primarily from amortization of
deferred licensing revenue which was received in 2000.

4.      INVENTORY

Inventory consists of the following at December 31:

|                                    |  |      |         |      |  |   |         |  
|----------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                    |  | 2001 |         | 2000
|                                    |  |      |         |     
|Raw materials                       |  | $    | 263,987 |      |  | $ | 179,130 |  
|                                   
|                                   
|                                   
|                                   
|Work in process                     |  |      | 31,924  |      |  |   | 77,088  |  
|                                   
|                                   
|                                   
|                                   
|Finished goods                      |  |      | 12,708  |      |  |   | 14,765  |  
|                                   
|                                   
|                                   
|                                   
|Less reserve for obsolete inventory |  |      | (32,700 | )    |  |   | (20,000 | )
|                                    |  |      |         |      |  |   |         |  
|Total inventory                     |  | $    | 275,919 |      |  | $ | 250,983 |  
|                                    |  |      |         |      |  |   |         |  

The Company recorded a charge of $12,700 to increase the reserve for
obsolete inventory in 2001. No charge was recorded in 2000 or 1999.

5.      LOAN TO CAMPLEX

During the first six months of 1999, the Company advanced $150,000 to
Camplex/Concept W Corporation (Camplex), an entity that the Company had
considered as a possible acquisition candidate. On May 14, 1999, the
Company determined that it would not acquire Camplex. The $150,000
unsecured loan to Camplex was due December 31, 2000 and bore interest at 9
percent per annum. During 1999, the Company received partial cash payments
and services performed by Camplex, which reduced the amount owed by
Camplex. At December 31, 1999, the outstanding balance was $41,578. During
2000, Camplex repaid this loan in full through services rendered by
Camplex and cash payments by Camplex.

6.      PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31:

|                                |  |      |           |      |  |   |           |  
|------------------------------- |  | ---- | --------- | ---- |  | - | --------- | -
|                                |  | 2001 |           | 2000
|                                |  |      |           |     
|Computer equipment and software |  | $    | 669,207   |      |  | $ | 487,508   |  
|                               
|                               
|                               
|                               
|Other machinery and equipment   |  |      | 660,648   |      |  |   | 452,057   |  
|                               
|                               
|                               
|                               
|Leasehold improvements          |  |      | 294,314   |      |  |   | 251,597   |  
|                               
|                               
|                               
|                               
|Office furniture and fixtures   |  |      | 113,151   |      |  |   | 110,823   |  
|                                |  |      |           |      |  |   |           |  
|Total                           |  |      | 1,737,320 |      |  |   | 1,301,985 |  
|                               
|                               
|                               
|                               
|Less accumulated depreciation   |  |      | (684,717  | )    |  |   | (398,835  | )
|                                |  |      |           |      |  |   |           |  
|Property & equipment  net      |  | $    | 1,052,603 |      |  | $ | 903,150   |  
|                                |  |      |           |      |  |   |           |  

24



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7.      DEFERRED LICENSING REVENUE

In April 2000, the Company entered into a license agreement with
Delphi that gives Delphi the exclusive right to utilize and manufacture
the Companys patented switch technologies for the automotive industry. In
connection with the license agreement, the Company also issued a warrant
to Delphi to purchase 225,000 shares of common stock at $7.00 per share
and a short-term option to purchase 1,651,846 shares of common stock at
$7.00 per share. In exchange, Delphi paid the Company a nonrefundable
payment of $4.0 million and agreed to pay a royalty fee for each switch
sold by Delphi. The term of the exclusive license agreement is seven
years. The agreement also requires Delphi to make minimum royalty payments
totaling $12 million during the initial seven-year term ending June 30,
2007. Delphi can maintain exclusivity for the automotive industry through
June 30, 2012 by making additional minimum annual royalty payments during
that period. After June 30, 2012 either Delphi or the Company may convert
the agreement to a nonexclusive agreement through 2020.

The estimated fair value of the warrant and the option was
$1,134,338, as determined using the Black-Scholes valuation model. The
remaining value of the nonrefundable payment totaling $2,865,662 was
recorded as deferred revenue and is being amortized over the initial
seven-year term of the exclusive license agreement.

The licensing agreement with Delphi generated licensing revenue of
$411,362 and $277,860 for the years ended December 31, 2001 and 2000,
respectively, which primarily resulted from the amortization of deferred
revenue which was received in 2000.

8.      CAPITAL LEASES

The Company has capital leases for property and equipment with a
gross value of $182,680 and a net book value of $64,967 at December 31,
2001. The amortization of fixed assets acquired with capital leases is
included in depreciation expense. At December 31, 2001, the present values
of future minimum capital lease payments are as follows:

|                                                   |  |   |        |  | 
|-------------------------------------------------- |  | - | ------ |  | 
|2002                                               |  | $ | 22,924 | 
|                                                  
|                                                  
|                                                  
|                                                  
|2003                                               |  |   | 20,825 | 
|                                                  
|                                                  
|                                                  
|                                                  
|2004                                               |  |   | 8,766  | 
|                                                   |  |   |        | 
|Total                                              |  |   | 52,515 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Less interest at rates ranging from 13% to 24%     |  |   | 8,735  | 
|                                                   |  |   |        | 
|Present value of minimum capital lease obligations |  |   | 43,780 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Less current portion of capital lease obligations  |  |   | 17,457 | 
|                                                   |  |   |        | 
|Long-term portion of capital lease obligations     |  | $ | 26,323 | 
|                                                   |  |   |        | 

9.      STOCKHOLDERS EQUITY

Common Stock The Company sold 2,000,000 shares of common stock for
net proceeds of $8,196,312 in its 1999 public offering. On April 20, 2000,
the Company sold a short-term option to Delphi to purchase 1,651,846 shares of non-registered common stock at $7.00 per share (Note 7). On June
19, 2000, Delphi exercised this purchase option to acquire 1,651,846 shares of common stock at $7.00 per share, representing approximately 18
percent of outstanding shares.

Series A Convertible Preferred Stock As of December 31, 2001, no
preferred stock is outstanding. The Series A convertible preferred stock
is convertible into common stock at a rate of one for one and has the same
voting rights as the common stock. Dividends accumulate as declared by the
Board of Directors and none have been declared. Preferred stockholders
would have preferences in the event of liquidation and would receive
dividends prior to common stockholders if dividends were declared.

Warrants On March 1, 1999, the Company sold to two stockholders
warrants to purchase 23,530 shares of common stock at a price of $3.19 per
share. The stockholders purchased these warrants for $5,000. The warrants
were exercised on June 30, 1999 for a $75,000 reduction in principal of
promissory notes executed with the Company on April 30, 1999.

On April 30, 1999, a shareholder exercised warrants to purchase
252,155 shares of common stock at a price of $1.98 per share. As payment
for the exercise price, the shareholder paid approximately $250,000 in
cash, agreed to cancel our $100,000 loan and executed a note payable to us
in the amount of $147,263. This note bore interest at 8 percent per annum
and was payable

25



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##### Table of Contents



December 31, 1999. On December 30, 1999, the Company agreed to extend
the due date to March 1, 2000. On February 24, 2000, this note was paid in
full.

In connection with the public offering that closed in September 1999,
the underwriter was granted warrants to purchase 200,000 shares of common
stock at an exercise price of $8.25 per share. If not exercised, these
warrants will expire on August 26, 2004.

On April 20, 2000, the Company sold a warrant to Delphi to purchase
225,000 shares of common stock at $7.00 per share. If not exercised, this
warrant will expire on April 20, 2004 (Note 7).

A summary of changes in outstanding warrants is as follows:

|                           |  |          |          |             |  |   |              | 
|-------------------------- |  | -------- | -------- | ----------- |  | - | ------------ | 
|                           |  | Warrants |          | Price Range
|                           |  |          |          |            
|Balance, January 1, 1999   |  |          | 342,084  |             |  | $ | 1.98 - $3.19 | 
|                          
|                          
|                          
|                          
|Issued                     |  |          | 223,530  |             |  | $ | 3.19 - $8.25 | 
|                          
|                          
|                          
|                          
|Exercised                  |  |          | (275,685 | )           |  | $ | 1.98 - $3.19 | 
|                           |  |          |          |             |  |   |              | 
|Balance, December 31, 1999 |  |          | 289,929  |             |  | $ | 1.98 - $8.25 | 
|                          
|                          
|                          
|                          
|Issued                     |  |          | 225,000  |             |  | $ | 7.00         | 
|                          
|                          
|                          
|                          
|Exercised                  |  |          | (42,870  | )           |  | $ | 1.98         | 
|                           |  |          |          |             |  |   |              | 
|Balance, December 31, 2000 |  |          | 472,059  |             |  | $ | 3.19 - $8.25 | 
|                          
|                          
|                          
|                          
|Issued                     |  |          |         |             |  |   |              | 
|                          
|                          
|                          
|                          
|Exercised                  |  |          |         |             |  |   |              | 
|                           |  |          |          |             |  |   |              | 
|Balance, December 31, 2001 |  |          | 472,059  |             |  | $ | 3.19 - $8.25 | 
|                           |  |          |          |             |  |   |              | 

Common Stock Reverse Split Effective August 16, 1999, the Companys
Board of Directors declared a 1 for 4.25 reverse stock split for all
common shares outstanding, which became effective August 19, 1999. All
references in the financial statements to number of shares, per share
amounts and stock option data of the Companys common stock have been
restated to reflect the effect of the reverse stock split.

10.   STOCK OPTION PLANS

Effective May 1, 1997, the Board of Directors approved a stock option
plan (1997 Option Plan). This plan provides for the granting of
incentive and nonqualified stock options to officers, directors and
employees of the Company. The plan also provides for the granting of
nonqualified stock options to any director, consultant or other individual
whose participation the Board of Directors determines to be in the best
interest of the Company. The number of shares authorized for options under
the 1997 Option Plan is 823,535.

The Companys 1999 Stock Option Plan (the 1999 Option Plan) was
adopted by the Companys Board of Directors and was ratified by the
stockholders on March 8, 1999. The number of shares of common stock
authorized subject to options under the 1999 Option Plan is 235,294 shares.

The Companys 2000 Stock Option Plan (the 2000 Option Plan) was
adopted by the Companys Board of Directors and was ratified by the
stockholders on June 19, 2000. The number of shares of common stock
authorized subject to options under the 2000 Option Plan is 250,000 shares.

The Company accounts for the fair value of the options issued to
non-employees in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. The compensation cost that has been charged against income
for 2001, 2000 and 1999 for the plan options is $0, $0 and $13,965,
respectively. Options granted to non-employees were for services performed
such as engineering, consulting and public relations.

As permitted by SFAS No. 123, the Company has elected to continue to
measure cost for its stock-based compensation plans with employees and
Directors using the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, no compensation cost has been recognized, as the
option prices are equal to or greater than fair market value of the stock
on the grant dates. The fair value of all stock option grants is estimated
on the date of grant in accordance with SFAS No. 123 using the
Black-Scholes option pricing model with the following assumptions: an
expected risk-free interest rate of 4 percent, 6.5 percent, and 5 percent
for options granted in 2001, 2000 and 1999, respectively, an expected life
of three years, an expected volatility rate of 56 percent, 48 percent, and
45 percent for options

26



---



##### Table of Contents



granted in 2001, 2000 and 1999, respectively, and an expected
dividend rate of zero percent. Had compensation for the Companys stock
options granted to employees been determined based upon the fair value at
the grant date for awards consistent with a methodology prescribed in SFAS
No. 123, the Companys net loss and net loss per share for the years ended
December 31, 2001, 2000 and 1999 would have been increased to the pro
forma amounts indicated below:

|                                      |             |  |      |            |      |  |      |            |   |  |   |            |  
|------------------------------------- | ----------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                      |             |  | 2001 |            | 2000 |  | 1999
|                                      |             |  |      |            |      |  |     
|Net loss:                             |             |  |      |            |      |  |      |            |   |  |   |           
|                                     
|                                     
|                                     
|                                     
|                                      | As reported |  | $    | (5,390,154 | )    |  | $    | (4,109,877 | ) |  | $ | (3,474,918 | )
|                                     
|                                     
|                                     
|                                     
|                                      | Pro forma   |  |      | (6,024,817 | )    |  |      | (4,592,995 | ) |  |   | (3,673,313 | )
|                                     
|                                     
|                                     
|                                     
|Basic and diluted net loss per share: |             |  |      |            |      |  |      |            |   |  |   |           
|                                     
|                                     
|                                     
|                                     
|                                      | As reported |  |      | (0.57      | )    |  |      | (0.49      | ) |  |   | (0.58      | )
|                                     
|                                     
|                                     
|                                     
|                                      | Pro forma   |  |      | (0.64      | )    |  |      | (0.54      | ) |  |   | (0.61      | )

Options granted under all plans expire up to ten years from the date
of grant. Options that expire or terminate prior to exercise are added to
the shares available for future grants.

A summary of changes in stock options is as follows:

|                           |  |        |          |          |  |          |       | 
|-------------------------- |  | ------ | -------- | -------- |  | -------- | ----- | 
|                           |  |        |          |          |  | Weighted
|                           |  |        |          |          |  | Average 
|                           |  | Option |          | Exercise
|                           |  | Shares |          | Price   
|                           |  |        |          |         
|Balance, January 1, 1999   |  |        | 733,530  |          |  | $        | 11.60 | 
|                          
|                          
|                          
|                          
|Granted                    |  |        | 173,139  |          |  | $        | 4.01  | 
|                          
|                          
|                          
|                          
|Exercised                  |  |        |         |          |  | $        |      | 
|                          
|                          
|                          
|                          
|Expired or terminated      |  |        | (3,523   | )        |  | $        | 3.47  | 
|                           |  |        |          |          |  |          |       | 
|Balance, December 31, 1999 |  |        | 903,146  |          |  | $        | 10.17 | 
|                          
|                          
|                          
|                          
|Granted                    |  |        | 170,976  |          |  | $        | 6.48  | 
|                          
|                          
|                          
|                          
|Exercised                  |  |        | (76,386  | )        |  | $        | 1.57  | 
|                          
|                          
|                          
|                          
|Expired or terminated      |  |        | (23,944  | )        |  | $        | 13.50 | 
|                           |  |        |          |          |  |          |       | 
|Balance, December 31, 2000 |  |        | 973,792  |          |  | $        | 10.13 | 
|                          
|                          
|                          
|                          
|Granted                    |  |        | 131,100  |          |  | $        | 10.55 | 
|                          
|                          
|                          
|                          
|Exercised                  |  |        | (261,999 | )        |  | $        | 4.50  | 
|                          
|                          
|                          
|                          
|Expired or terminated      |  |        | (31,194  | )        |  | $        | 15.62 | 
|                           |  |        |          |          |  |          |       | 
|Balance, December 31, 2001 |  |        | 811,699  |          |  | $        | 11.80 | 
|                           |  |        |          |          |  |          |       | 

|                                                               |  |      |         |      |  |      |         |  |  |   |         | 
|-------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                                               |  | 2001 |         | 2000 |  | 1999
|                                                               |  |      |         |      |  |     
|Exercisable at the end of the year                             |  |      | 786,699 |      |  |      | 872,851 |  |  |   | 620,914 | 
|                                                               |  |      |         |      |  |      |         |  |  |   |         | 
|Weighted average fair value of options
granted during the year |  | $    | 4.29    |      |  | $    | 2.52    |  |  | $ | 0.99    | 
|                                                               |  |      |         |      |  |      |         |  |  |   |         | 

A summary of options outstanding and exercisable as of December 31,
2001 is as follows:

|                        |  |                     |         |                       |  |                  |     |             |  |                |       |  |  |          |         |  |  |   |       | 
|----------------------- |  | ------------------- | ------- | --------------------- |  | ---------------- | --- | ----------- |  | -------------- | ----- |  |  | -------- | ------- |  |  | - | ----- | 
|                        |  | Options Outstanding |         | Options Exercisable  
|                        |  |                     |         |                      
|                        |  |                     |         |                       |  | Weighted Average |     | Weighted    |  |                |       |  |  | Weighted
|                        |  | Options             |         | Remaining Contractual |  | Average          |     | Options     |  | Average       
|Range of Exercise Price |  | Outstanding         |         | Life                  |  | Exercise Price   |     | Exercisable |  | Exercise Price
|                        |  |                     |         |                       |  |                  |     |             |  |               
|$  0.02  -  $  1.32     |  |                     | 8,696   |                       |  |                  | 5.7 |             |  | $              | 1.31  |  |  |          | 8,696   |  |  | $ | 1.31  | 
|                       
|                       
|                       
|                       
|$  3.13  -  $  3.50     |  |                     | 20,200  |                       |  |                  | 7.8 |             |  | $              | 3.33  |  |  |          | 20,200  |  |  | $ | 3.33  | 
|                       
|                       
|                       
|                       
|$  6.00  -  $10.85      |  |                     | 528,915 |                       |  |                  | 7.8 |             |  | $              | 7.50  |  |  |          | 503,915 |  |  | $ | 7.49  | 
|                       
|                       
|                       
|                       
|$13.01  -  $22.31       |  |                     | 253,888 |                       |  |                  | 6.1 |             |  | $              | 21.81 |  |  |          | 253,888 |  |  | $ | 21.81 | 
|                        |  |                     |         |                       |  |                  |     |             |  |                |       |  |  |          |         |  |  |   |       | 
|$  0.02  -  $22.31      |  |                     | 811,699 |                       |  |                  | 7.2 |             |  | $              | 11.80 |  |  |          | 786,699 |  |  | $ | 11.94 | 
|                        |  |                     |         |                       |  |                  |     |             |  |                |       |  |  |          |         |  |  |   |       | 

27



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##### Table of Contents



11.   INCOME TAXES

Net deferred tax assets consist of the following at December 31:

|                          |                                  |   |            |           |      |   |            |           |  
|------------------------- | -------------------------------- | - | ---------- | --------- | ---- | - | ---------- | --------- | -
|                          |                                  |   | 2001       |           | 2000
|                          |                                  |   |            |           |     
|Deferred tax assets:      |                                  |   |            |           |      |   |            |          
|                         
|                         
|                         
|                         
|                          | Operating loss carryforwards     |   | $          | 5,955,008 |      |   | $          | 2,517,856 |  
|                         
|                         
|                         
|                         
|                          | Deferred licensing revenue       |   |            | 892,853   |      |   |            | 1,064,497 |  
|                         
|                         
|                         
|                         
|                          | Research and development credits |   |            | 190,090   |      |   |            | 78,000    |  
|                         
|                         
|                         
|                         
|                          | Other                            |   |            | 261,062   |      |   |            | 95,325    |  
|                          |                                  |   |            |           |      |   |            |           |  
|                         
|                         
|                         
|                         
|Total                     |                                  |   | 7,299,013  |           |      |   | 3,755,678  |          
|                         
|                         
|                         
|                         
|Less valuation allowance  |                                  |   | (6,977,284 | )         |      |   | (3,540,441 | )        
|                          |                                  |   |            |           |      |   |            |           |  
|                         
|                         
|                         
|                         
|Total                     |                                  |   | 321,729    |           |      |   | 215,237    |          
|                         
|                         
|                         
|                         
|Deferred tax liabilities: |                                  |   |            |           |      |   |            |          
|                         
|                         
|                         
|                         
|                          | Patents                          |   |            | (247,861  | )    |   |            | (132,345  | )
|                         
|                         
|                         
|                         
|                          | Other                            |   |            | (73,868   | )    |   |            | (82,892   | )
|                          |                                  |   |            |           |      |   |            |           |  
|Total                     |                                  | $ |           |           |      | $ |           |          
|                          |                                  |   |            |           |      |   |            |           |  

During the years ended December 31, 2001, 2000 and 1999, the Company
increased the valuation allowance by $3,436,843, $1,083,000 and
$1,301,000, respectively, against deferred tax assets. The increase in
the valuation allowance recorded in 2001 includes $1,121,965 for net
operating loss carryforwards related to stock compensation. The benefit
of the utilization of these net operating loss carryforwards would be
recorded as a credit to additional paid-in capital. The valuation
allowance reduces deferred tax assets to an amount that represents
managements best estimate of the amount of such deferred tax assets that,
more likely than not, will be realized. Realization of the deferred tax
assets is dependent upon generating sufficient future taxable income in
the period that temporary differences and carryforwards are expected to be
available to reduce taxable income.

The Companys net operating loss carryforwards of approximately
$14,890,000 for federal and state income tax purposes expire in 2011
through 2021.

The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax income
for 2001, 2000 and 1999 due to the following:

|                                              |                         |   |           |            |      |   |           |            |   |   |           |            |  
|--------------------------------------------- | ----------------------- | - | --------- | ---------- | ---- | - | --------- | ---------- | - | - | --------- | ---------- | -
|                                              |                         |   | 2001      |            | 2000 |   | 1999     
|                                              |                         |   |           |            |      |   |          
|Benefit calculated at statutory rate          |                         | $ | 1,832,652 |            |      | $ | 1,397,358 |            |   | $ | 1,181,472 |           
|                                             
|                                             
|                                             
|                                             
|Increase (decrease) in income resulting from: |                         |   |           |            |      |   |           |            |   |   |           |           
|                                             
|                                             
|                                             
|                                             
|                                              | State income taxes, net |   |           | 323,409    |      |   |           | 246,593    |   |   |           | 208,495    |  
|                                             
|                                             
|                                             
|                                             
|                                              | Permanent differences   |   |           | 159,290    |      |   |           | (560,951   | ) |   |           | (88,967    | )
|                                             
|                                             
|                                             
|                                             
|                                              | Valuation allowance     |   |           | (2,315,352 | )    |   |           | (1,083,000 | ) |   |           | (1,301,000 | )
|                                              |                         |   |           |            |      |   |           |            |   |   |           |           
|Total                                         |                         | $ |          |            |      | $ |          |            |   | $ |          |           
|                                              |                         |   |           |            |      |   |           |            |   |   |           |           

12.   SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

The following table presents unaudited operating results for each
quarter within the two most recent years. The Company believes that all
necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts stated below to present fairly the
following quarterly results when read in conjunction with the financial
statements included elsewhere in this report. Results of operations for
any particular quarter are not necessarily indicative of results of
operations for a full fiscal year:

28



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##### Table of Contents



|                                                 |  |                       |            |              |  |         |            |          |  |   |            |   |  |   |          |  
|------------------------------------------------ |  | --------------------- | ---------- | ------------ |  | ------- | ---------- | -------- |  | - | ---------- | - |  | - | -------- | -
|                                                 |  | 2001 - Quarter Ended,
|                                                 |  |                      
|                                                 |  | December 31           |            | September 30 |  | June 30 |            | March 31
|                                                 |  |                       |            |              |  |         |            |         
|Net revenue                                      |  | $                     | 297,837    |              |  | $       | 228,681    |          |  | $ | 197,218    |   |  | $ | 261,576  |  
|                                                
|                                                
|                                                
|                                                
|Gross profit                                     |  |                       | 236,850    |              |  |         | 202,164    |          |  |   | 148,300    |   |  |   | 141,160  |  
|                                                
|                                                
|                                                
|                                                
|Net loss                                         |  |                       | (1,871,456 | )            |  |         | (1,292,302 | )        |  |   | (1,286,728 | ) |  |   | (939,668 | )
|                                                
|                                                
|                                                
|                                                
|Net loss per common share, basic and diluted (1) |  | $                     | (0.20      | )            |  | $       | (0.14      | )        |  | $ | (0.14      | ) |  | $ | (0.10    | )

|                                                 |  |                       |            |              |  |         |          |          |  |   |            |   |  |   |            |  
|------------------------------------------------ |  | --------------------- | ---------- | ------------ |  | ------- | -------- | -------- |  | - | ---------- | - |  | - | ---------- | -
|                                                 |  | 2000 - Quarter Ended,
|                                                 |  |                      
|                                                 |  | December 31           |            | September 30 |  | June 30 |          | March 31
|                                                 |  |                       |            |              |  |         |          |         
|Net revenue                                      |  | $                     | 486,581    |              |  | $       | 602,371  |          |  | $ | 504,933    |   |  | $ | 724,851    |  
|                                                
|                                                
|                                                
|                                                
|Gross profit (loss)                              |  |                       | 89,835     |              |  |         | 172,975  |          |  |   | 65,794     |   |  |   | (64,523    | )
|                                                
|                                                
|                                                
|                                                
|Net loss                                         |  |                       | (1,227,755 | )            |  |         | (796,050 | )        |  |   | (1,051,380 | ) |  |   | (1,034,692 | )
|                                                
|                                                
|                                                
|                                                
|Net loss per common share, basic and diluted (1) |  | $                     | (0.13      | )            |  | $       | (0.09    | )        |  | $ | (0.14      | ) |  | $ | (0.14      | )



| | (1) |  | Earnings per share are computed independently for each quarter and the full year based upon respective average shares outstanding.  Therefore, the sum of the quarterly net earnings per share may not equal the annual amounts reported
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13.   COMMITMENTS

Management Services Agreement The Company has a management services
agreement with a company owned and operated by the founders, two major
stockholders. This management agreement requires the Company to pay a
management service fee equal to 1.1 percent of the invoiced sales price
for all Company-patented technology component switches and integrated
switch panels sold by the Company. Also, the Company has agreed to pay an
equivalent percentage of any license or sublicense fees received from the
patented technologies. This agreement remains in effect until the
expiration of the last patent, which may be issued on the switch
technologies. During 2001, 2000 and 1999, the Company paid approximately
$9,200, $67,000 and $8,900, respectively, under this agreement.

Employment and Separation Agreements The Company has employment and
separation agreements with key members of management. These agreements
call for a base salary and bonuses based upon the performance of the
Company. These agreements also provide for salary and benefits in the
event of separation.

Effective December 31, 2001, the Chairman of the Board resigned his
CEO position and remained as Chairman. His employment agreement provided
for salary and benefits in the event of termination or resignation. As
such, the company has recorded a charge of $397,431 for the year ended
December 31, 2001 to be paid over an 18-month period.

Lease Agreements Rent expense for the periods ended December 31,
2001, 2000 and 1999 approximated $199,000, $199,000 and $187,000,
respectively. Future minimum rental payments are as follows:

|      |  |   |         | 
|----- |  | - | ------- | 
|2002  |  | $ | 211,829 | 
|     
|     
|     
|     
|2003  |  |   | 222,094 | 
|      |  |   |         | 
|Total |  | $ | 433,923 | 
|      |  |   |         | 

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.




Part III

The information required to be presented in Item 10. Directors,
Executive Officers, Promoters and Control Persons, Compliance with Section
16(a) of the Exchange Act, Item 11. Executive Compensation, Item 12.
Security Ownership of Certain Beneficial Owners and Item 13. Certain
Relationships and Related Transactions of Part III of this report is
hereby incorporated by reference from our definitive Proxy Statement for
our 2002 Annual Meeting to be prepared in accordance with Schedule 14A and
filed with the Securities and Exchange Commission within 120 days of the
end of the fiscal year covered by this report.

30



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##### Table of Contents






Part IV




Item 14. Exhibits and Reports on Form 8-K.



| | (a) |  | Exhibits.                 
| | --- |  | --------------------------
|
| |     |  | See attached exhibit list.
|
| | (b) |  | Reports on Form 8-K.      
|
| |     |  | None.                     

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##### Table of Contents



SIGNATURES

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

|                            |  |     |  |                                                                                                                           
|--------------------------- |  | --- |  | --------------------------------------------------------------------------------------------------------------------------
|Duraswitch Industries, Inc.
|                           
|                           
|                           
|                           
|                            |  |     |  |                                                                                                                           
|                           
|                           
|                           
|                           
|Dated: March 22, 2002       |  | By: |  | /s/ R. Terren Dunlap

R. Terren Dunlap,
Chairman of the Board                                                             
|                           
|                           
|                           
|                           
|                            |  |     |  |                                                                                                                           
|                           
|                           
|                           
|                           
|Dated: March 22, 2002       |  | By: |  | /s/ Robert J. Brilon

Robert J. Brilon,
President, Chief Executive Officer, Chief
Financial Officer, Treasurer & Secretary
|                           
|                           
|                           
|                           
|                            |  |     |  |                                                                                                                           
|                           
|                           
|                           
|                           
|Dated: March 22, 2002       |  | By: |  | /s/ Anthony J. Van Zeeland

Anthony J. Van Zeeland,
Director & Chief Operating Officer                                    
|                           
|                           
|                           
|                           
|                            |  |     |  |                                                                                                                           
|                           
|                           
|                           
|                           
|Dated: March 22, 2002       |  | By: |  | /s/ Michael A. Van Zeeland

Michael A. Van Zeeland,
Director                                                              
|                           
|                           
|                           
|                           
|                            |  |     |  |                                                                                                                           
|                           
|                           
|                           
|                           
|Dated: March 22, 2002       |  | By: |  | /s/ John W. Hail

John W. Hail,
Director                                                                                  
|                           
|                           
|                           
|                           
|                            |  |     |  |                                                                                                                           
|                           
|                           
|                           
|                           
|Dated: March 22, 2002       |  | By: |  | /s/ William E. Peelle

William E. Peelle,
Director                                                                        
|                           
|                           
|                           
|                           
|                            |  |     |  |                                                                                                                           
|                           
|                           
|                           
|                           
|Dated: March 22, 2002       |  | By: |  | /s/ Lothar J. Veeser

Lothar J. Veeser,
Director                                                                          

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Exhibit Index

|         |  |                                                                                                                                        |  |                                                 |  |                
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- |  | ---------------
|Exhibit. |  |                                                                                                                                        |  | Incorporated by                                 |  |                
|No.      |  | Description                                                                                                                            |  | Reference to:                                   |  | Filed Herewith:
|         |  |                                                                                                                                        |  |                                                 |  |                
|3.1      |  | Amended and Restated
Articles of Incorporation                                                                                         |  | Form SB-2 filed with the SEC
on August 26, 1999 |  |                
|        
|        
|        
|        
|3.2      |  | Amended and Restated Bylaws                                                                                                            |  | Form 10-KSB filed with SEC
on March 30, 2001    |  |                
|        
|        
|        
|        
|4.1      |  | Articles 3, 4, 5, and 7 of the
Amended and Restated
Articles of Incorporation of
Duraswitch Industries, Inc.
(included in Exhibit 3.1) |  | Form SB-2 filed with the SEC
on August 26, 1999 |  |                
|        
|        
|        
|        
|4.2      |  | Articles II, III, and VII of the
Amended and Restated
Bylaws of Duraswitch
Industries, Inc.
(included in Exhibit 3.2)                  |  | Form 10-KSB filed with SEC
on March 30, 2001    |  |                
|        
|        
|        
|        
|4.3      |  | Specimen Common Stock
Certificate                                                                                                      |  | Form SB-2 filed with the SEC
on August 26, 1999 |  |                
|        
|        
|        
|        
|10.1     |  | Employment and Separation
Agreement dated May 1, 1997
by and between Duraswitch Industries,
Inc. and R. Terren Dunlap                  |  | Form SB-2 filed with the SEC on
August 26, 1999 |  |                
|        
|        
|        
|        
|10.1.1   |  | July 30, 1999 Amendment to
R. Terren Dunlap Employment
and Separation Agreement                                                        |  | Form SB-2 filed with the SEC on
August 26, 1999 |  |                
|        
|        
|        
|        
|10.2     |  | Employment and Separation
Agreement dated May 1, 1997
by and between Duraswitch Industries,
Inc. and Anthony J. Van Zeeland            |  | Form SB-2 filed with the SEC on
August 26, 1999 |  |                
|        
|        
|        
|        
|10.2.1   |  | July 30, 1999 Amendment to
Anthony J. Van Zeeland Employment
and Separation Agreement                                                  |  | Form SB-2 filed with the SEC on
August 26, 1999 |  |                
|        
|        
|        
|        
|10.3     |  | Employment and Separation
Agreement dated November 20, 1998
by and between Duraswitch Industries,
Inc. and J. Thomas Webb              |  | Form SB-2 filed with the SEC on
August 26, 1999 |  |                
|        
|        
|        
|        
|10.4     |  | Employment and
Separation Agreement dated
November 20, 1998 by and between
Duraswitch Industries, Inc.
and Robert J. Brilon            |  | Form SB-2 filed with the SEC on
August 26, 1999 |  |                

33



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##### Table of Contents



|         |  |                                                                                                                                                                    |  |                                                    |  |                
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------- |  | ---------------
|Exhibit. |  |                                                                                                                                                                    |  | Incorporated by                                    |  |                
|No.      |  | Description                                                                                                                                                        |  | Reference to:                                      |  | Filed Herewith:
|         |  |                                                                                                                                                                    |  |                                                    |  |                
|        
|        
|        
|        
|10.4.1   |  | Addendum #1 to Employment and
Separation Agreement dated
November 20, 1998 by and between
Duraswitch Industries, Inc.                                              |  | Form 10-KSB filed with the SEC on
March 30, 2000   |  |                
|        
|        
|        
|        
|         |  | and Robert J. Brilon                                                                                                                                               |  |                                                    |  |                
|        
|        
|        
|        
|10.5     |  | 1997 Stock Option Plan                                                                                                                                             |  | Form SB-2
filed with the SEC on August 26, 1999    |  |                
|        
|        
|        
|        
|10.6     |  | Form of Grant Letter pursuant to 1997
Stock Option Plan                                                                                                            |  | Form SB-2 filed with the SEC on
August 26, 1999    |  |                
|        
|        
|        
|        
|10.7     |  | 1999 Stock Option Plan                                                                                                                                             |  | Form SB-2
filed with the SEC on August 26, 1999    |  |                
|        
|        
|        
|        
|10.8     |  | Form of Representatives Warrants                                                                                                                                  |  | Form SB-2 filed with the SEC on
August 26, 1999    |  |                
|        
|        
|        
|        
|10.9     |  | Standard Sublease dated October 15,
1998, as amended February 2, 1999,
by and between 234 South Extension,
L.L.C. and Duraswitch Industries, Inc.                  |  | Form SB-2 filed with the SEC on
August 26, 1999    |  |                
|        
|        
|        
|        
|10.10    |  | Management Services Agreement
dated May 1, 1997 by and between
Total Switch, Inc. and VanDun, LLC                                                                  |  | Form SB-2 filed with the SEC on
August 26, 1999    |  |                
|        
|        
|        
|        
|10.11    |  | Agreement for Assignment of Present
and Future Inventions in Certain
Subject Matter dated May 1, 1997 by
and between Total Switch, Inc. and
Anthony J. Van Zeeland |  | Form SB-2 filed with the SEC on
August 26, 1999    |  |                
|        
|        
|        
|        
|10.12    |  | Licensing Agreement between Delphi
Automotive Systems LLC and
Duraswitch Industries, Inc. dated
April 20, 2000                                                     |  | Form 8-K filed with the SEC on
April 26, 2000      |  |                
|        
|        
|        
|        
|10.13    |  | 2000 Stock Option Plan                                                                                                                                             |  | Proxy Statement filed with the SEC on
May 12, 2000 |  |                
|        
|        
|        
|        
|10.14    |  | 2000 Stock Option Plan Amendment                                                                                                                                   |  |                                                    |  | X              
|        
|        
|        
|        
|23.1     |  | Consent of Deloitte & Touche                                                                                                                                       |  |                                                    |  | X              

34