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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 10549

                                   FORM 10-KSB

(Mark one)

[X] Annual report under Section 13 of 15(d) of 1934

For the fiscal year ended DECEMBER 31, 1999

[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
    of 1934

For the transition period from _______________ to ______________

Commission file number 333-79969

                           DURASWITCH INDUSTRIES, INC.
                 (Name of small business issuer in its charter)

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<S>                                                          <C>
NEVADA
(State or Other Jurisdiction of                                   88-0308867
Incorporation or Organization)                                 (I.R.S. Employer
                                                             Identification No.)

234 S. EXTENSION ROAD                                                85210
MESA, ARIZONA                                                      (Zip Code)
(Address of principal executive offices)
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                                 (480) 586-3300
                (Issuer's Telephone Number, Including Area Code)

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

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<CAPTION>
                                                Name of Each Exchange
               Title of Each Class               On Which Registered
               -------------------               -------------------
<S>                                            <C>
         COMMON STOCK, PAR VALUE $0.001        AMERICAN STOCK EXCHANGE
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Securities registered under Section 12(g) of the Exchange Act:  NONE

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No    .
                                                                      ---  ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X

The issuer's revenues for its most recent fiscal year were $1,674,174.

The aggregate market value of the voting common stock held by non-affiliates of
the issuer as of March 3, 2000 was $34,250,000.

Number of registrant's shares of common stock outstanding as of March 1, 2000
was 7,495,594.

  Transitional Small Business Disclosure Format (check one): Yes       No  X
                                                                 ---      ---
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                                TABLE OF CONTENTS

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                                                                            PAGE
<S>                                                                         <C>
Part I                                                                         3
Item 1. Description of Business.                                               3
Item 2. Description of Properties.                                            10
Item 3. Legal Proceedings.                                                    10
Item 4. Submission of Matters to a Vote of Security Holders.                  10
Part II                                                                       11
Item 5. Market for Common Equity and Related Stockholder Matters.             11
Item 6. Management's Discussion and Analysis of Results of Operations.        12
Item 7. Financial Statements.                                                 16
Item 8. Changes in and Disagreements With Accountants on Accounting
        and Financial Disclosure.                                             34
Part III                                                                      34
Item 9. Directors, and Officers of the Registrant.                            34
Item 10. Executive Compensation.                                              36
Item 11. Security Ownership of Certain Beneficial Owners and Management.      37
Item 12. Certain Relationships and Related Transactions.                      38
Item 13. Exhibits and Reports on Form 8-K.                                    39
</TABLE>


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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

OVERVIEW

         We have developed and patented an innovative technology 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 the technology. The flexibility and advantages afforded designers
and manufacturers using this new technology allows for creation of a new style
of switch packages. To prove the advantages of the technology and refine
manufacturing efficiencies we design, manufacture and distribute custom
electronic switches and integrated controls panels ("ICPs") in our manufacturing
facility. We believe this patented technology allows us and our licensees to
provide a complete solution to the design challenges faced by original equipment
manufacturers ("OEMs"), and component suppliers seeking durable, reliable, low
cost switches and ICPs that can easily be incorporated into a slim profile, flat
panel design without sacrificing the consistent tactile feedback response, or
"click," highly desired by end users. Design News, a trade magazine widely read
by design engineers, named our DuraSwitch PushGate(TM) switch "The Best New
Product of 1998" in the electrical/electronic category and the DuraSwitch
Rotor(TM) switch received honorable mention to "The Best New Product of 1999".

         Since commencing operations in May 1997, we have provided design
solutions for a number of leading companies in a variety of industries by
custom-designing switches and ICPs that met critical needs. Examples include:

         -        the panel operating the doors and the interior operating
                  controls of the monorail trains at Walt Disney World,

         -        lawn irrigation systems made by Rain Bird/Clemar Manufacturing
                  Corp.,

         -        boat trolling motors distributed by Johnson Outdoors,

         -        POS devices distributed by Hypercom,

         -        ship bridge radar control systems produced by Raytheon Marine
                  Company,

         -        restaurant food preparation equipment made by Frymaster and by
                  Ram Center, Inc.

         -        water filtration systems made by US Filters

INDUSTRY ANALYSIS

         Electronic switches and ICPs are used in a wide variety of consumer,
industrial and agricultural products, such as computers, consumer electronics,
mobile phones, consumer appliances, automobiles, fitness equipment, trains,
ships, airplanes, tractors, generators, medical devices and commercial food
preparation equipment. Electronic switches and ICPs generate a multi-billion
dollar global market.

HISTORY OF ELECTRONIC SWITCHES

         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. More
complex switches, such as volume control knobs on car radios, regulate the
precise voltage and electric current flowing through the circuit; turn the knob
to increase the voltage and the volume is increased.

         ELECTRO-MECHANICAL SWITCHES. Prior to the early 1970s, traditional
electro-mechanical switches represented the design standard in the switch and
ICP industries. According to a report by Frost & Sullivan on the 1998 World
Electronic Switch Market, switches and ICPs relying on this traditional
technology represented approximately $2.75 billion of this market.


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         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. The
primary advantage of electro-mechanical switches is their feedback response,
which permits the user to feel, and sometimes see or hear, changes in the switch
when it is activated. An example of feedback response is the clicking noise or
sensation perceived by a user when pushing a traditional car radio station
preset button or turning the mechanical volume control knob.

         Although they offer excellent tactile feedback to the user,
electro-mechanical switches are bulky and mechanically complex. We believe the
mechanically complex design of these switches makes them prone to excessive
wear, resulting in high production and maintenance costs to customers and end
users. Originally designed prior to the trend toward miniaturization in
electronic components, electro-mechanical switches are not used in many
electronic products produced today because their bulkiness and cost hinders
their incorporation into the slim-profile designs currently desired by the
market. In addition, the typical design of products incorporating
electro-mechanical switches requires the switch to protrude through a panel,
making these products difficult to clean and environmentally seal, a design flaw
that makes this type of switch undesirable for products used in environments
such as hospitals, kitchens and outdoors.

         MEMBRANE SWITCHES. In response to the increasing demand for slim
profile, low cost, flat controls panels and push-button switches for electronic
equipment, a new electronic switch design was introduced in the early 1970s
relying on membrane technology. Since their introduction, membrane switches have
captured a significant share of the electronic markets.

         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, which feature a graphical overlay layer with
numbered buttons and other controls functions, such as "start," "cook" and
"defrost." Membrane switches generally are thinner, last longer and less
expensive to produce and maintain than electro-mechanical switches. They usually
feature a flat, washable surface, which can be easily cleaned and disinfected.
Unfortunately, membrane switches, while responsive to customer demands for a
slimmer/flat profile, improved durability, and lower costs of production and
maintenance, provide no feedback response to the user. Without tactile feedback,
users cannot be certain they have activated the switch or they may activate the
switch several times, which could cause the opposite effect of what the user
intended. Also, the user may push the switch much harder than required to
activate the switch, resulting in excessive wear and premature failure.

         To solve the feedback response problem, membrane switch manufacturers
typically have offered two solutions. The first solution is to add electronic
audio or visual feedback responses, such as 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. When functioning properly, the dome will return
back to its original shape as the user releases his or her finder from the
switch, which is intended to provide tactile feedback response to the user.
Domed membrane switches, however, require inconsistent amounts of force to be
activated, which has proven frustrating to the user, and often do not provide
the desired tactile feedback response. In addition, domes are prone to failure
due to materials fatigue and, as a result, are much less reliable than membrane
switches without domes. Accordingly, using domes in membrane switches to solve
the feedback response problem does not provide the consistent tactile feedback
desired by the customer or end user, and increases the cost and design
complexity while decreasing the reliability of the switch. Domes are also more
costly and more difficult to manufacture and assemble than a non-tactile
membrane switch.

         ELECTRONIC INTEGRATED CONTROLS PANELS. An ICP typically combines
various types of switches, such as push-button, rotary, slider, toggle, dial and
rocker switches, into a single control panel with a printed circuit board,
lighting, displays and other components. ICPs may include membrane switches,
electro-mechanical switches, or a combination of both membrane buttons and
electro-mechanical switches. The ICP industry consists of several ICP component
parts manufacturers producing printed circuit boards, displays, panels and
switches, which we believe represents a global multi-billion dollar market that
is significantly larger than the electro-mechanical and membrane switch markets
combined.


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         OEMs that produce products using ICPs typically have faced a number of
design challenges, involving tradeoffs between size, cost, durability and
customer preferences. To obtain the benefits offered by membrane switches
without forfeiting the consistent tactile feedback response characteristic of
electro-mechanical switches, OEMs switches combine electro-mechanical rotary
switches with flat panel membrane push-button switches, requiring a marriage of
incompatible technologies. In addition to increasing the mechanical complexity
and bulkiness of the ICP, this design also requires that a hole be drilled
through the membrane switch surface to insert the electro-mechanical rotary
switch, increasing the ICP's cost, compromising its ability to be
environmentally sealed, and disrupting the flat profile of a typical ICP design
using only membrane switches. Also, OEMs usually must deal with a number of
different component producers used in their ICPs, which requires a relatively
high level of coordination and technological compatibility. As a result, both
OEMs and component suppliers are seeking low cost integrated solutions to the
design challenges presented by traditional switch technologies, which force
designers to sacrifice certain desired features in exchange for others.

THE DURASWITCH SOLUTION

         We have developed a patented technology that enables designers and
switch manufacturers to custom design switches and ICPs that overcome the design
challenges presented by traditional electro-mechanical and membrane switch
technologies. We believe our magnetic-based design enables us and our licensees
to provide switches and ICPs that:

         -        offer superior durability, enhanced reliability, inherent
                  sealability, and better value compared to switches utilizing
                  traditional technologies,

         -        can be easily integrated into flat panel, slim profile
                  designs, and

         -        provide the consistent tactile feedback response highly
                  desired by end users.

         In short, our technology enables us to combine the best features of
membrane switches without sacrificing the consistent tactile feedback response
provided by electro-mechanical switches. Our patented technology and design
expertise, together with our strategic alliances with other companies engaged in
the electronic switch and ICP industries, also enables us to offer an integrated
solution to the design challenges faced by OEMs.

COMPETITIVE ADVANTAGES

         The key to our technology is its 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 in the
electronic switch and ICP industries, we believe our products offer the
following competitive advantages compared to switches and ICPs using traditional
electro-mechanical or membrane switch technologies:

         SIGNIFICANTLY GREATER DURABILITY AND RELIABILITY. Because our products
rely on a magnetic-based design with few moving parts and virtually no stress,
fatigue, or potential breaking points, we believe they are significantly more
durable and reliable than traditional electro-mechanical and membrane switches.
Since January 1998, we have been testing one of our DuraSwitch PushGate
switches. To date, it has exceeded 370,000,000 activations on an electronic
counter and is still operating without a single failure. We believe this test
result supports our belief in the reliability and durability of our products. By
eliminating or reducing the mechanical complexity and precision required by
traditional technologies, we believe our patented design makes our switches and
ICPs significantly more reliable than electro-mechanical and membrane switches.

         CONSISTENT TACTILE FEEDBACK RESPONSE. Unlike membrane switches and some
electro-mechanical switches, our design consistently produces a distinctive
"click" each time the user activates our switch. This capability enables us to
design and produce switches that do not require the addition of audio or visual
cues, such as beeps, lights, or status icons to artificially provide feedback to
the user, a solution that would otherwise increase the complexity, size, and
cost of the switch design. We are unaware of another switch capable of providing
the consistent tactile feedback response highly desired by end users in a low
cost, slim profile design.

         EASE OF INTEGRATION IN SLIM PROFILE DESIGN. Because our switches use a
multiple thin 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.


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         ENHANCED VALUE TO COST RATIO. We believe our switches offer an enhanced
value to cost ratio compared to switches using traditional technologies. Our
switches cost significantly less to produce than comparable electro-mechanical
switches because our magnetic-based design typically requires fewer and less
expensive components. In addition, devices using our switches are more durable
and reliable than electro-mechanical switches and are therefore less costly to
maintain than devices using electro-mechanical switches. Although the initial
selling price of our switches may be higher than membrane switches in some
instances, we believe the durability and reliability of our switches, combined
with their ability to provide a consistent tactile feedback response, make our
switches more desirable to end users and less expensive to maintain than
membrane switches.

STRATEGY

         Our objective is to become a leader in the electronic switch and ICP
industries, by creating licensing agreements with qualified switch
manufacturers, switch component assemblies and OEMs, thereby making DuraSwitch
technologies the design standard for electronic switches and ICPs. In order to
achieve this objective, we intend to implement the following strategies:

EXPLOIT AND MAINTAIN OUR PATENTED TECHNOLOGY'S COMPETITIVE ADVANTAGES

         We intend to exploit and maintain our patented technology's competitive
advantages, compared to electro-mechanical and membrane switch technologies,
with the objective of making our technology the design standard in the industry.
We intend to pursue this strategy by aggressively marketing our technology
advantages and broaden market awareness. We are focusing our sales and marketing
efforts on our licensing program to more quickly achieve widespread distribution
of our technology, and investing heavily in research, development and testing to
further refine our technology and expand its possible applications in a wide
variety of industries.

INCREASE MARKET AWARENESS OF DURASWITCH'S PATENTED TECHNOLOGICAL ADVANTAGES

         We will aggressively promote our patented technology and design
expertise to achieve widespread market awareness of our technologies' advantages
compared to switches and ICPs relying on traditional technologies. 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 increased advertising in trade magazines,
substantially increasing traffic to our web site, participating actively in
vendor-sponsored seminars for design engineers, and aggressively promoting our
products 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 products and
their unique competitive advantages.

LEVERAGE OUR STRATEGIC ALLIANCES

         We intend to leverage our current strategic alliances as well as pursue
new strategic alliances to increase market awareness and penetration. We have
developed strategic alliances with various companies that design and produce
complementary electronic component products.

LICENSE SWITCH MANUFACTURERS, SWITCH COMPONENT ASSEMBLIERS AND OEMS

         We have begun licensing our technology to domestic and foreign membrane
switch manufacturers. In the U.S., we entered into a non-exclusive licensing
agreement with Xymox Technologies, Inc, of Milwaukee, Wisconsin. In February
2000, we granted to Markit Graphics a territory exclusive license in Australia
and New Zealand for PushGate technology.

         We are offering DuraSwitch technology to membrane switch manufactures
as a product extension, a market differenation and a switch product that
integrates rotary, slide and push-button switches into a flat panel environment.
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 products. We support our license with engineering, design,
testing, specification materials, marketing assistance, customer leads, and
patent protection. Every licensee has strict qualitative standards to maintain
as part of their licensee requirements.


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PROVIDE FULL SERVICE DESIGN ENGINEERING, TESTING AND MANUFACTURING CAPABILITY

         We intend to be a "one stop shop" for electronic switch solution design
engineering, testing, and prototype manufacturing for customers of our
technology. OEMs searching for a switch or ICP to install in their products
typically may be required to hire multiple engineers to design and test the
switch or ICP, hire a manufacturer to produce components, and contract with
another vendor for assembly. This multi-vendor approach is costly, complex, time
consuming, and requires a relatively high level of coordination and
compatibility. With our patented technology, experienced technical and
engineering staff, prototype production capabilities, and our licensee
relationships for high volume manufacturing, we are able to offer a single
source for custom-designed products that combine the best features of membrane
and electro-mechanical switch technologies in an integrated solution offering
superior value, durability and reliability.

PRODUCTS

         We have a number of switch products based on our patented
magnetic-based technology in various stages of production and development. We
are currently producing the PushGate(TM), Rotor(TM), and have suspended
production of the SnapRotor(TM) push turn switch until a final custom
application is identified. Prices of our switches and ICPs range from under $1
for our most basic pushbutton design to in excess of $700 for an ICP involving
several different custom-designed controls panels.

THE DURASWITCH PUSHGATE(TM)

         A typical DuraSwitch PushGate switch consists of up to five bonded
micro-thin layers of materials, 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
"on", "defrost" and "cook" buttons on a microwave oven. Below the top layer is a
metal shield which keeps the magnetic field inside the switch, and protects the
switch from external electrical and magnetic interference. Below the shield 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.

THE DURASWITCH ROTOR(TM)

         The DuraSwitch Rotor 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 Rotor 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 Rotor also
produces a consistent tactile feedback response to the user, such that the user
can feel each "click" as the knob is turned.

THE DURASWITCH SNAPROTOR(TM)

         The DuraSwitch SnapRotor is a combination of a push-button switch and a
rotary switch. When not in use, the top of the rotor knob is flush with the
surface of the device on which it is mounted. When the top of the rotor knob is
pressed, the push-button portion of the switch is activated, sending a signal to
a microprocessor and the rotor knob pops up from the device. After the rotor
knob pops up it can then be operated in the same manner as a typical rotary
switch, such as a volume control knob. After using the rotary switch feature,
the rotor can be pushed back into the device, which again activates the
push-button portion of the switch and sends a signal to a microprocessor. A
typical application for this switch would be combination on/off button and
volume control knob.

SWITCHES UNDER DEVELOPMENT

         Switches under development include the Slider(TM), MagnaMouse(TM),
Slammer(TM) and SecurIt(TM). The DuraSwitch Slider is similar to the DuraSwitch
Rotor, except that it uses a sliding lever instead of a rotating knob. When the
slide is moved, the sealed, gold-plated balls underneath the lever move,
activating a microprocessor as they pass across contacts on a flexible circuit.
As a result of the flexibility of the materials used in its design, the
DuraSwitch Slider has the additional advantage of being able to be mounted not
only on a flat surface but also on a curved


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surface such as the dashboard of a car. The DuraSwitch Slider is in the final
engineering stage and we are currently producing prototypes for sales samples.

         Generally, our switches are custom-designed to meet specific design
challenges or customer requirements dictated by the nature of specific
applications. Accordingly, all of these switch designs may be adapted quickly
and easily to fit various types of integrated controls panel arrays and
electronic products. We are constantly refining our products and designing new
variations to meet our customers' design needs.

CUSTOMERS

         We have produced a variety of prototype and production switches and
ICPs for original equipment manufacturers and component manufacturers that, in
turn, install them into various devices used in a wide variety of industries.
These industries and products include:

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<CAPTION>
INDUSTRY              APPLICATION
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<S>                   <C>
AMUSEMENT PARKS       Amusement park turnstiles and Monorail train/ride
                      controls

AUTOMOTIVE            Tire balancer

AVIONICS              Flight control simulator and Aircraft cockpit control
                      panels

COMMUNICATIONS        Military telcom equipment

COMPUTERS             Video conferencing equipment and Electrical power
                      distribution

ELECTRONIC ENTRY      Keyless locks

INDUSTRIAL CONTROLS   Chemical processor controls, Water treatment analysis,
                      Volt meter front panel test equipment, Paper shredder
                      controls, Industrial process controls, PCB manufacturing
                      equipment, Car wash controls, Portable magnetic drill
                      bases, Data entry stations, Label stitching equipment,
                      Commercial sprinkler controls, Industrial test equipment
                      and Water purification controls,

MARINE                Ship board radar controls and Boat trolling motors

MEDICAL               Hand-held temperature sensors, X-Ray equipment,
                      Veterinary oxygen sensor device and Endoscope
                      disinfectors

MILITARY              "Land Warrior" M-16 rifle computers

POINT OF SALE         Cash registers and Terminals

RESTAURANT            Oven controls, Portion dispensers, Beverage portion
                      dispensers, Order processing systems and Frozen food
                      dispensers
</TABLE>

INTELLECTUAL PROPERTY

         Our success depends in part on maintaining and protecting our
proprietary technology. 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 all our 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, and advertisements.
We intend to prosecute litigation aggressively against infringers. In order to
protect our trade secrets and other intellectual property, we also require our
employees, consultants, advisors and collaborators to enter into confidentiality
agreements which prohibit the disclosure of proprietary information to third
parties or the use of 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 March 15, 2000, we hold five U.S. Patents (Nos. 5,523,730,
5,666,096, 5,867,082, 5,990,772 and 6,023,213), one Taiwanese Patent (No.
NI-090979), and one Chinese Patent (No. 96110385.X) for a "switch with a
magnetically-coupled armature." We also have several patent applications pending
in the U.S., Mexico, Canada, France, Great Britain, China, Taiwan, Italy and
Germany. We have made further filings under the Patent Cooperation Treaty and
through the European Patent Committee.


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         We currently own the following trademarks and service marks:
DuraSwitch(R), PushGate(TM), Rotor(TM), SnapRotor(TM), Slider(TM), Slammer(TM),
DuraSwitch ICP(TM), MagnaMouse(TM), SecurIt(TM), Touch the Future(TM), and
DuraSwitch.com(TM). Each other trademark, trade name or service mark appearing
in this report belongs to its holder.

         We have begun focusing our efforts to enter into licensing agreements
with leading switch and ICP manufacturers in selected industries in order to
increase distribution of our technology and increase market awareness of our
products. We have identified automotive, avionics and beverage dispensing
industries as potential targets for industry exclusivity arrangements with key
players in those industries. We believe that our ability to convince leading
switch and ICP manufacturers to use our technology will more broadly and rapidly
create awareness and acceptance of our technology in multiple market segments

         On November 17, 1999, we entered into a non-exclusive license agreement
with Xymox Technologies for our PushGate technology. Xymox is known as one of
the largest manufacturers of membrane switches in North America.

         In February 2000, we entered into a territory exclusive license in
Australia and New Zeeland with Markit Graphics for PushGate technology.

WEB SITE: www.duraswitch.com

         Design engineers and purchasing managers, the individuals most likely
to make the decision to incorporate our technology 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 marketing efforts. All 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 technology products. We have
already made sales as a result of initial contact with customers through our web
site. 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 comparative advantages of our patented
                  technology, accompanied by articles published by third parties
                  about our products;

         -        virtual demonstrations of our products;

         -        technical data about our products to assist design engineers
                  in designing ICPs and electronic products using DuraSwitch
                  components;

         -        e-mail communications links to our design engineers and sales
                  representatives to facilitate dialogue about how our products
                  can be integrated into the customers' products; and

         -        on-line product ordering capability.


ADVERTISING/PUBLIC RELATIONS

         We have advertised in technical periodicals such as Electronic
Engineering Master (EEM), Engineering Design News (EDN) and Design News. We
believe this media exposure is a cost-effective method of capturing the
attention of design engineers. For example, Design News bi-weekly publications
are read by approximately 334,800 design professionals throughout the world. Our
advertisements are focused on directing new customers to our web site. We also
are listed in annual industry specifiers guides, including:

         -        Medical Device Link,

         -        Electronic Manufacturers on the Net,

         -        Thomas Register, and

         -        Electronic Engineering Master.


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         In addition, we are conducting a public relations campaign to generate
articles highlighting our products to be published in trade magazines. To date,
our products have been recognized in several trade magazines, including
Appliance Manufacturing and Engineering Design New. In fact, our DuraSwitch
Rotor switch has been named a finalist in the 1999 Innovation of the Year Awards
Contest sponsored by EDN Magazine. The Rotor is one of the only three products
chosen from a field of hundreds of candidates by EDN editors in the "Components,
hardware and interconnect" category. During 1998, Design News named the
DuraSwitch PushGate switch as "The Best New Product of 1998" in the
electrical/electronic category. The DuraSwitch Rotor switch received from Design
News honorable mention to "The Best New Product of 1999."

SEMINARS AND TRADE SHOWS

         We intend to give educational presentations about our products at
vendor-sponsored seminars for product design engineers. At these seminars, we
will be able to meet attendees and provide them with information about our
technology and products through multi-media presentations, product
demonstrations, brochures and samples. We plan to put attractive displays in our
strategic partners' booths at trade shows, which will offer mutually
advantageous opportunities by promoting our partners' products as well as
expanding awareness of our technology.

COMPETITION

         We operate in highly competitive markets, facing competition from over
125 other companies in the electro-mechanical switch industry, and a substantial
number of membrane switch and ICP manufacturing companies. Our five main
competitors in the electro-mechanical switch industry are Grayhill, Inc., Cherry
Corporation, C&K Components, Inc., Oak Grigsby, Inc., and Cole Instrument Corp.
Our five principal competitors in the membrane switch industry are Xymox
Technologies, GM Nameplate, Molex, Incorporated, Integrated Data Systems, Inc.
and Poly-flex Circuits, Inc.. Our five main competitors in the ICP industry are
Lucas Controls, Inc., Eaton Corporation, Rockwell International, Inc./Allen
Bradley Division, Johnson Controls, Inc. and United Technologies Corporation.
Many of our present and potential competitors have more established products,
greater name recognition, stronger sales distribution arrangements, and
significantly greater resources than we have. We also expect to compete with
companies that have substantial manufacturing, marketing and distribution
capabilities; areas in which we may have less experience. Competition, direct
and indirect, could materially and adversely affect our revenues and
profitability through pricing pressure and loss of sales. Competitors' long term
relationships and manufacturers' reluctance to try a new technology could result
in loss of sales. The failure to compete successfully would have a material
adverse effect our business and financial condition.

EMPLOYEES

         As of December 31, 1999, we had 79 employees, 75 of which work full
time.

ITEM 2. DESCRIPTION OF PROPERTIES.

         Our principal administrative, design, testing, manufacturing, and
assembly 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 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 1999 was $13,000. Future minimum
monthly rental payments are $16,000 for 2000 and $17,000 for 2001. 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 March 28, 1999 we are not involved in any claim or legal
proceeding.

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

None


                                       10
<PAGE>   11
                                     PART II

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

         On August 19, 1999, we effected a 4.25 to 1 reverse stock split in
which we combined each 4.25 shares of our common stock into one share. The
reverse split had no effect on the number or par value of authorized shares of
our common stock or preferred stock. As a result, the number of shares of common
stock outstanding at that time was reduced from 23,255,475 to 5,495,594 shares.
One additional share was issued to any stockholder who otherwise would have held
a fraction of a share as a result of the reverse stock split. All outstanding
options and warrants automatically were appropriately adjusted for the reverse
split.

MARKET INFORMATION

         Since August 26, 1999, our common stock has been traded on the American
Stock Exchange under the symbol "DRA." Prior to that, our common stock was
traded on the OTC Bulletin board under the symbol "DSWT." The high and low
inter-dealer prices (as adjusted for the 4.25 to 1 reverse stock split) on the
OTC Bulletin Board and AMEX (September 30, 1999 and December 31, 1999) for the
calendar quarters during the past two fiscal years are as follows:

<TABLE>
<CAPTION>
         PERIOD ENDED                             HIGH            LOW
         ------------                             ----            ---
<S>                                              <C>             <C>
         March 31, 1998 ...............          $24.44          $17.47
         June 30, 1998 ................          $21.25          $12.75
         September 30, 1998 ...........          $20.40          $12.75
         December 31, 1998 ............          $14.88          $ 6.38
         March 31, 1999 ...............          $ 9.56          $ 6.38
         June 30, 1999 ................          $11.69          $ 8.23
         September 30, 1999 ...........          $ 5.63          $ 3.00
         December 31, 1999 ............          $10.00          $ 2.50
</TABLE>

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

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 March 1, 2000, there were approximately 285 holders of record of
our common stock. We believe that our common stock is held by in excess of 1,000
beneficial holders.


                                       11
<PAGE>   12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 products,

         -        intention to achieve widespread commercial acceptance of our
                  technology and products,

         -        ability to carry out our business strategy,

         -        objective to establish DuraSwitch technology as the design
                  standard in the electronic switch and ICP industries,

         -        estimates of the size of and 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, and

         -        ability to complete any future acquisitions of products or
                  businesses.

         When you consider the forward-looking statements in this report, you
should keep in mind the cautionary information located elsewhere in this report,
because the risks discussed in that cautionary information could cause our
actual results to be worse than those described in any forward-looking
statements.

GENERAL

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

         We develop and patent technology for electronic switch designs based on
"magnetically coupled armature" technology. Using this unique technology, we
have produced custom switches and integrated controls panels. We were
incorporated on May 1, 1997 as "Total Switch, Inc." In order to use 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.". 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 the period from our date of inception, May 1, 1997, to December 31, 1997,
we focused on:

         -        developing our patented technology,

         -        financing our operations through private equity issuances, and

         -        searching for an acquisition candidate that had an existing
                  customer base, sales network and relevant manufacturing
                  capability.

         On January 31, 1998, we acquired Aztec Industries, Inc. ("Aztec"), a
membrane switch manufacturing and graphics printing firm, in exchange for 70,588
shares of our common stock and the cancellation of approximately $60,000 of
loans we made previously to Aztec. As a result of this acquisition, we acquired:

         -        an established infrastructure of technical design and
                  manufacturing personnel,

         -        customer contacts, and

         -        manufacturing capabilities sufficient to support a significant
                  increase in our sales.


                                       12
<PAGE>   13
         During 1999, we generated revenues primarily from designing,
developing, and producing prototypes of customer switch applications. Because we
typically custom design switches and ICPs to meet a specific customer's needs,
we initially charge our customer for non-recurring engineering and tooling costs
related to the new design. If the new design meets specifications and the
customer decides to proceed to the prototype stage, we typically charge the
customer for producing limited quantities of the new product. Finally, if the
customer proceeds to full production of the product utilizing our switch or ICP,
the customer will order the desired quantity of product. We intend to generate
additional revenues through licensing our technology to other companies in the
switch industry from which we expect to receive a royalty fee from the
manufacturing and sales of products utilizing our switches and ICPs.

         The majority of our net sales reported for the year ended December 31,
1998 were related to sales of membrane switches and graphic printing products to
existing customers. However, in 1999, our sales were primarily related to market
acceptance of our switches and ICPs relying on our patented technology rather
than older membrane switch technology. In addition, because our operations in
1998 were devoted primarily to design engineering and creating DuraSwitch
technology prototypes for new customers, we did not generate significant sales
from production purchase orders during 1998. However, in the process of
engineering and creating prototype switches for several customers, we have since
received production purchase orders for delivery during 1999 and 2000. At
December 31, 1999, we had approximately $1.1 million of purchase orders
outstanding.

         The principal elements comprising our cost of sales are raw and
packaging materials, engineering and assembly, labor, and manufacturing
overhead. The major raw materials used in the manufacture of our products
include magnets, stamped metal, plastics and conductive inks. Costs related to
engineering design work performed for customers and prototype models sold to
customers are charged to cost of goods sold. Costs of sales are affected by the
efficiency of production methods and utilization of manufacturing capacity,
areas in which we have significant experience.

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

         We are in the early stage of operations and, as a result, the
relationship between net sales, cost of goods sold and operating expenses
reflected in our financial information may not represent future expected
financial relationships. Much of our cost of goods sold and operating expenses
are relatively fixed costs. Given our current stage of operations and relatively
short operating history, we do not believe period to period comparisons of
results of operations are meaningful.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1999

Net Sales:

         We recorded net sales of $1,674,174 for the year ended December 31,
1999, compared to $1,354,790 for the year ended December 31, 1998. During 1999,
net sales increased based on higher volumes of sales and market acceptance of
our new switches and ICPs relying on our patented technology rather than older
membrane switch technology. Sales during 1998 were attributable primarily to
sales of membrane type switches and graphic printing services provided to
pre-existing customers of Aztec, our wholly owned subsidiary. During 1998, using
Aztec's sales and manufacturing capabilities, we began marketing our patented
technology and producing prototypes of custom-designed switches and ICPs.

         During 1999, we continued to operate as a full service manufacturer of
custom switches for OEMs to continue to expand applications for the technology
and end user acceptance. Our marketing research indicates that there is a large
potential market for our new technology and manufacturing services and that this
market is continuously growing.

Cost of Goods Sold:

         Cost of goods sold were $2,029,208 for 1999, compared to $1,300,190 for
1998. The increase in cost of goods sold was primarily due to increased
manufacturing overhead and application engineering costs related to developing
an infrastructure to accommodate high quality, custom, low volume prototype work
and anticipated increased volumes of new applications using our patented
technology. The setup costs and low volume purchasing for prototype quantities
were also factors of increased cost of goods sold. We have also incurred
significant costs during 1999 related to ensuring a top quality product in the
marketplace with our new technology at standards above the industry norm.


                                       13
<PAGE>   14
Selling, General and Administrative expenses:

         Selling, general and administrative expenses were $2,311,577 for 1999,
compared to $1,194,905 for 1998. 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
labor costs and increased occupancy costs relating to additional manufacturing
and office space in 1999. Preparing and proving our manufacturing processes,
setting quality assurance programs, refining our technology, structuring the
technology licensing program all contributed to increased expenses.

Research and Development:

         Research and development expenses were $889,922 for 1999, compared to
$409,425 for 1998. The increased costs were attributed to additional engineering
personnel, engineering consulting services, and additional modeling and computer
equipment in order to continue development and testing of new product
applications with our patented technologies.

Loss from Operations:

         As a result of the factors described above, the loss from operations
increased to $3,556,533 for 1999, compared to $1,549,730 for 1998.

Other Expense/Income:

         Net other income was $81,615 for 1999, compared to net other expense of
$49,698 for 1998. The change from net other expense to net other income was
based on the investment of cash we received from our public equity offering on
September 1, 1999.

Non-cash discount on proceeds of preferred stock for beneficial conversion
feature:

         We incurred a non-cash charge of $740,000 for a beneficial conversion
feature relating to the sale of convertible preferred stock on June 29, 1998,
which increased the net loss attributable to common stockholders in 1998 to
$2,339,428.

Net Loss:

         As a result of the factors described above, the net loss attributable
to common stockholders was $3,474,918 for 1999, compared to $2,339,428 for 1998.

LIQUIDITY AND CAPITAL RESOURCES

         The current ratio on December 31, 1999 was 5.55 to 1, compared to 1.0
to 1 on December 31, 1998. Working capital on December 31, 1999 was $5,652,332,
compared to ($25,695) on December 31, 1998. The increase in the current ratio
and working capital is primarily attributed to an increase in cash from our
public equity offering that closed on September 1, 1999. The public offering
generated cash of approximately $8,196,000 after associated expenses.

         Net cash used in operating activities for the year ended December 31,
1999 was $3,272,414, compared to $1,235,824 for 1998. Our net cash used in
operating activities in 1999 consisted primarily of net losses, an increase in
inventory, and accounts receivable, which was partially offset by depreciation
and amortization and an increase in accrued expenses.

         Net cash used in investing activities for 1999 was $603,017, compared
to $180,195 for 1998. Our net cash used in investing activities in 1999
consisted primarily of purchases of computer equipment, modeling and test
equipment, and leasehold improvements. During the six months of 1999, we made a
$150,000 loan to Camplex/Concept W Corporation in anticipation of an acquisition
of Camplex, which we subsequently abandoned and received repayment of $60,000 by
December 31, 1999.

         Net cash provided by financing activities for 1999 was $9,616,398,
compared to $1,323,898 for 1998. Our net cash provided by financing activities
in 1999 consisted primarily of net proceeds from our private stock offerings
occurring January 1999 through March 1999 and our public stock offering that
closed on September 1, 1999.

         In May 1999, we renegotiated our line of credit, which allows us to
borrow up to a total of $250,000 at the prime rate plus 2% and matures in May
2000. Outstanding borrowings on the line of credit are secured by a lien on our
inventory, accounts receivable and bank accounts. As of December 31, 1999,
$75,000 was outstanding under the line of credit.

         As part of the Aztec acquisition, we assumed a note payable, due March
31, 2002, which requires monthly payments of principal and interest of $4,536
with interest at 13.2% per year. This note is secured by a lien on some of our
property and manufacturing equipment. As of December 31, 1999, we owed $107,633
on this note payable. Also in connection with the Aztec acquisition, we assumed
an unsecured note payable to one of Aztec's former owners, due January 31, 2000,
which carried imputed interest at 8.0% per year. As of December 31, 1999, we
owed $3,435 on this note payable.


                                       14
<PAGE>   15
         During 1999, we entered into various capital leases for the purchase of
property and equipment. These capital leases bear interest at rates ranging from
15.6% to 24.0%. As of December 31, 1999, future principal payments under our
existing capital leases were approximately $98,523.

         In August 1999, we borrowed $150,000 from a stockholder. This loan bore
an annual interest rate of 10% and was unsecured. On December 31, 1999, the
outstanding balance was $150,000. On February 14, 2000 we repaid this note in
full.

         At December 31, 1999, we had approximately $5,650,000 in net operating
loss carry forwards available for federal income tax purposes. We have not
recognized any benefit from these operating loss carry forwards, which are
subject to significant restrictions under current tax law and begin to expire in
2011.

         As of December 31, 1999, we had purchase orders outstanding of
approximately $1.1 million, which decreased from $2.3 million on September 30,
1999. The significant change during the fourth quarter was due to the
cancellation of a significant purchase order in the amount of $1.5 million for
the SnapRotor designed for Ericsson. To date, resolution of the financial
responsibility Ericsson will bear for the cancellation is in negotiation.

         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 Cruttenden Roth. The net
proceeds from the offering were $8,196,312, which is net of $1,803,688 in costs
related to the offering, of which $53,354 consisted of reimbursements to our
officers or directors of the Company. As of December 31, 1999, the net proceeds
have been used for the following: repayment of indebtedness of $238,358,
repayment of the bank line of credit of $83,964, purchases of capital assets of
$241,898 and working capital of $7,632,092 of which $5,884,827 from the net
proceeds remained in cash.

         We have experienced significant operating losses since our inception.
We expect our capital expenditure and working capital requirements in the
foreseeable future to 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 believe that the net proceeds
from our recent public offering, together with available borrowings and our
current cash and cash equivalents, will be sufficient to meet our anticipated
cash needs for working capital, capital expenditures and required debt payments
through fiscal 2000. If we are unable to meet our liquidity requirements or if
our liquidity requirements increase, we may require additional financing. The
sale of additional equity or convertible debt securities could result in
additional dilution to our stockholders. There can be no assurance that
financing will be available in sufficient amounts or on terms we find
acceptable, if at all.

YEAR 2000 ISSUES

         Many currently installed computer systems and software products were
coded to accept only two-digit year entries in the date code field.
Consequently, subsequent to December 31, 1999, many of these systems became
subject to failure or malfunction. We did not experience any significant Year
2000 disruptions or issues as a result of the change in years from 1999 to 2000.
Although we are not aware of any material Year 2000 issues at this time, Year
2000 problems may occur or be made known to us in the future. Our current
products and all planned future releases are all believed to be Year 2000
compliant. We do not anticipate any significant additional expenditure for Year
2000 compliance.


                                       15
<PAGE>   16
ITEM 7. 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, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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, 1999
and 1998, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principals generally accepted in the
United States of America.

DELOITTE & TOUCHE LLP
Phoenix, Arizona

February 5, 2000


                                       16
<PAGE>   17
DURASWITCH INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS                                                                             1998             1999
<S>                                                                           <C>               <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                   $   143,860       $  5,884,827
  Accounts receivable (net of allowance for doubtful accounts
    of $9,346 in 1998 and $40,000 in 1999) (Note 9)                               136,078            238,393
  Inventory (Note 4 and 9)                                                        235,567            536,494
  Prepaid expenses and other current assets (Note 5)                               76,640            235,252
                                                                              -----------       ------------
           Total current assets                                                   592,145          6,894,966
PROPERTY AND EQUIPMENT - Net (Note 6, 7 and 10)                                   167,672            592,411
GOODWILL - Net                                                                    662,767            589,805
PATENTS AND OTHER ASSETS                                                          105,246            160,878
                                                                              -----------       ------------
TOTAL                                                                         $ 1,527,830       $  8,238,060
                                                                              ===========       ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable                                                            $   221,243       $    242,551
  Accrued salaries and benefits                                                   151,946            462,014
  Other accrued expenses and other current liabilities                             71,385            228,176
  Line of credit (Note 9)                                                          75,000
  Loans from officers (Note 8)                                                     40,281
  Current portion of notes payable and capital leases payable
    (Notes 7 and 10)                                                              132,985            234,893
                                                                              -----------       ------------
           Total current liabilities                                              617,840          1,242,634
                                                                              -----------       ------------
LONG-TERM LIABILITIES:
  Notes payable (Note 7)                                                          107,701             63,985
  Capital leases payable (Note 10)                                                 50,014             60,713
                                                                              -----------       ------------
           Total long-term liabilities                                            157,715            124,698
                                                                              -----------       ------------
           Total liabilities                                                      775,555          1,367,332
                                                                              -----------       ------------
COMMITMENTS AND CONTINGENCIES (Notes 14)

STOCKHOLDERS' EQUITY (Note 11 and 12):
  Common stock, $.001 par value, 40,000,000 shares authorized in 1998
    and 1999, 4,911,250 and 7,495,594 shares issued and outstanding in
    1998 and 1999, respectively                                                     4,911              7,496
  Preferred stock, Series A, no par value, 10,000,000 shares authorized,
    no shares issued and outstanding in 1998 and 1999
  Additional paid-in capital                                                    3,535,878         13,273,927
  Accumulated deficit (Note 11)                                                (2,788,514)        (6,263,432)
  Note receivable (Note 11)                                                             0           (147,263)
                                                                              -----------       ------------
           Total stockholders' equity                                             752,275          6,870,728
                                                                              -----------       ------------
TOTAL                                                                         $ 1,527,830       $  8,238,060
                                                                              ===========       ============
</TABLE>

See notes to consolidated financial statements.


                                       17
<PAGE>   18
DURASWITCH INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                        1998            1999
<S>                                                 <C>             <C>
NET SALES                                           $ 1,354,790     $ 1,674,174
COST OF GOODS SOLD                                    1,300,190       2,029,208
                                                    -----------     -----------
           Gross profit (loss)                           54,600        (355,034)
                                                    -----------     -----------
OPERATING EXPENSES:
  Selling, general and administrative                 1,194,905       2,311,577
  Research and development                              409,425         889,922
                                                    -----------     -----------
           Total operating expenses                   1,604,330       3,201,499
                                                    -----------     -----------
LOSS FROM OPERATIONS                                 (1,549,730)     (3,556,533)
OTHER (EXPENSE) INCOME - Net                            (49,698)         81,615
                                                    -----------     -----------
NET LOSS                                             (1,599,428)     (3,474,918)
DISCOUNT (NONCASH) ON PROCEEDS OF
  PREFERRED STOCK FOR BENEFICIAL CONVERSION
  FEATURE (Note 11)                                    (740,000)              0
                                                    -----------     -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS        $(2,339,428)    $(3,474,918)
                                                    ===========     ===========

NET LOSS PER COMMON SHARE, BASIC AND DILUTED        $      (.55)    $      (.58)
                                                    ===========     ===========
WEIGHTED AVERAGE SHARES OUTSTANDING,
  BASIC AND DILUTED                                   4,268,642       6,033,767
                                                    ===========     ===========
</TABLE>

See notes to consolidated financial statements.


                                       18
<PAGE>   19
DURASWITCH INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                  COMMON STOCK
                                                                    PAID FOR
                                            COMMON STOCK         BUT NOT ISSUED
                                        -------------------    ------------------
                                         SHARES      AMOUNT    SHARES      AMOUNT
<S>                                     <C>          <C>      <C>        <C>
BALANCE, JANUARY 1, 1998                4,138,609    $4,139    32,424    $ 260,000
  Issuance of stock for cash
    previously received                    32,424        32   (32,424)    (260,000)
  Issuance of stock for acquisition
    of Aztec Industries, Inc.              70,588        71
  Net proceeds from sale of
    common stock for cash                 143,451       143
  Net proceeds from sale of Series A
    preferred stock and common
    stock warrants
  Issuance of stock for services           15,765        16
  Stock options exercised                   6,102         6
  Compensation expense
    from stock options
  Conversion of Series A preferred
    stock to common stock                 504,311       504
  Net loss
                                        ---------    ------   -------    ---------
BALANCE, DECEMBER 31, 1998              4,911,250    $4,911      --      $    --
                                        =========    ======   =======    =========
</TABLE>

<TABLE>
<CAPTION>
                                               SERIES A
                                           PREFERRED STOCK       ADDITIONAL
                                         ------------------        PAID-IN    ACCUMULATED
                                         SHARES      AMOUNT        CAPITAL      DEFICIT         TOTAL
<S>                                     <C>         <C>          <C>          <C>             <C>
BALANCE, JANUARY 1, 1998                                         $  509,439    $  (449,086)   $   324,492
  Issuance of stock for cash
    previously received                                             259,968
  Issuance of stock for acquisition
    of Aztec Industries, Inc.                                       566,929                       567,000
  Net proceeds from sale of
    common stock for cash                                           533,608                       533,751
  Net proceeds from sale of Series A
    preferred stock and common
    stock warrants                       504,311      740,000       883,085       (740,000)       883,085
  Issuance of stock for services                                     41,826                        41,842
  Stock options exercised                                               124                           130
  Compensation expense
    from stock options                                               1,403                         1,403
  Conversion of Series A preferred
    stock to common stock               (504,311)   $(740,000)      739,496
  Net loss                                                                     (1,599,428)    (1,599,428)
                                        --------    ---------    ----------    -----------    -----------
BALANCE, DECEMBER 31, 1998                  --      $    --      $3,535,878    $(2,788,514)   $   752,275
                                        ========    =========    ==========    ===========    ===========
</TABLE>

                                                                     (Continued)


                                       19
<PAGE>   20
DURASWITCH INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                COMMON STOCK
                                                                  PAID FOR          SERIES A
                                            COMMON STOCK       BUT NOT ISSUED   PREFERRED STOCK
                                         ------------------   ---------------   ---------------
                                          SHARES     AMOUNT   SHARES   AMOUNT   SHARES   AMOUNT
<S>                                      <C>         <C>      <C>      <C>      <C>      <C>
BALANCE, JANUARY 1, 1999                 4,911,250   $4,911            $
  Net proceeds from sale of common
    stock for cash in private offering     305,992      306
  Net proceeds from sale of common
    stock for cash in public offering    2,000,000    2,000
  Stock warrants exercised                 275,685      276
  Issuance of stock for services             2,667        3
  Compensation expense
    from stock options
  Net loss
                                         ---------   ------   ------   ------   ------    -----
BALANCE, DECEMBER 31, 1999               7,495,594   $7,496            $                  $
                                         =========   ======   ======   ======   ======    =====
</TABLE>

<TABLE>
<CAPTION>


                                                       ADDITIONAL      ACCUM-
                                            NOTE        PAID-IN        ULATED
                                         RECEIVABLE     CAPITAL       DEFICIT         TOTAL
<S>                                      <C>          <C>            <C>            <C>
BALANCE, JANUARY 1, 1999                               $ 3,535,878    $(2,788,514)   $   752,275
  Net proceeds from sale of common
    stock for cash in private offering                     955,280                       955,586
  Net proceeds from sale of common
    stock for cash in public offering                    8,194,312                     8,196,312
  Stock warrants exercised                (147,263)        565,995                       419,008
  Issuance of stock for services                             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                (147,263)    $13,273,927    $(6,263,432)   $ 6,870,728
                                          =========    ===========    ===========    ===========
</TABLE>

See notes to consolidated financial statements                       (Concluded)


                                       20
<PAGE>   21
DURASWITCH INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                   1998           1999
<S>                                                            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                     $(1,599,428)   $(3,474,918)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization                                131,169        223,788
      Gain on sale of equipment                                    (11,640)
      Stock option compensation expense                              1,403         13,965
      Issuance of stock for services                                41,842          8,500
      Bad debt expense                                              11,033         30,654
      Obsolete inventory write offs                                 20,000        105,642
      Changes in operating assets and liabilities:
        Accounts receivable                                         16,507       (132,969)
        Inventory                                                   94,046       (406,569)
        Prepaid expenses and other current assets                  (54,551)      (117,034)
        Accounts payable                                           (26,735)        21,308
        Accrued salaries and benefits                               86,167        310,068
        Other accrued expenses and other current liabilities        42,723        156,791
                                                               -----------    -----------
           Net cash used in operating activities                (1,235,824)    (3,272,414)
                                                               -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Increase in patents and other assets                             (61,434)       (34,232)
  Advance to Camplex                                                             (150,000)
  Advances to Aztec Industries, Inc.                               (58,246)
  Proceeds from Camplex                                                            60,000
  Proceeds from sale of equipment                                                  12,500
  Purchases of property and equipment                              (60,515)      (491,285)
                                                               -----------    -----------
           Net cash used in investing activities                  (180,195)      (603,017)
                                                               -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from sale of stock                                1,416,966      9,395,906
  Proceeds from issuance of notes payable                                         550,000
  Principal payments on notes payable and capital leases           (80,451)      (364,227)
  Net draws on line of credit                                      (41,000)        75,000
  Payment of loans from officers                                    28,383        (40,281)
                                                               -----------    -----------
           Net cash provided by financing activities             1,323,898      9,616,398
                                                               -----------    -----------

(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS                   (92,121)     5,740,967

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                       235,981        143,860
                                                               -----------    -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                         $   143,860    $ 5,884,827
                                                               ===========    ===========
</TABLE>


                                       21
<PAGE>   22
DURASWITCH INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                 1998        1999
<S>                                                                           <C>          <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION - Cash paid for interest                                        $  58,970    $ 76,985

SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
  Acquisition of equipment through capital lease                                 55,684      57,873
  Reduction of debt in connection with exercise of warrants                                 175,000
  Note receivable in connection with exercise of warrants                                   147,263
  Increase in patents in exchange for reduction in advance to related party                  48,422
  Purchase of Aztec Industries, Inc.:
    Accounts receivable                                                         157,856
    Inventories                                                                 349,613
    Prepaids and other current assets                                             5,134
    Property and equipment                                                       38,352
    Goodwill                                                                    729,652
    Accounts payable                                                           (224,021)
    Accrued expenses                                                            (74,873)
    Advances from the Company                                                   (58,246)
    Line of credit                                                              (41,000)
    Notes payable                                                              (287,124)
    Leases payable                                                              (28,343)
    Common stock                                                               (567,000)
</TABLE>

See notes to consolidated financial statements.                      (Concluded)


                                       22
<PAGE>   23
DURASWITCH INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1999

1.       NATURE OF BUSINESS

The Company was incorporated as Total Switch, Inc. ("TSI") on May 1, 1997. On
December 31, 1997, TSI entered into a stock exchange agreement with SOS
International, Inc. ("SOS"), a Nevada corporation that was traded on the OTC
Bulletin Board. SOS had nominal assets and no liabilities on the date of the
acquisition. Under the stock exchange agreement, SOS changed its name to
DuraSwitch Industries, Inc. (the "Company") and acquired all of TSI's stock in
exchange for approximately 85 percent of SOS's outstanding common stock. As a
result of this transaction, TSI became a wholly-owned subsidiary of the Company,
and TSI's former stockholders took controlling interest in the Company. For
accounting purposes, the acquisition has been treated as a recapitalization of
TSI with TSI as the acquirer (reverse merger). As a consequence of this
combination, the Company became a publicly-traded company.

At December 31, 1997, the Company was in the development stage. During 1998,
through the acquisition of Aztec Industries, Inc. ("Aztec"), the Company
commenced operations and is no longer in the development stage. The Company
designs, manufactures, markets and distributes integrated electronic control
panels developed with its patented technology. The Company has begun marketing
efforts to broadly license its patented switch technology to other switch OEMs.

On January 31, 1998, the Company acquired 100 percent of the outstanding stock
of Aztec by issuing 70,588 shares of common stock valued at $8.03 per share,
which price was based on the price of recent sales of common stock at such time,
and the forgiveness of advances made to Aztec prior to the acquisition. The
purchase of Aztec was recorded using the purchase accounting method, which
requires an adjustment of all assets and liabilities of Aztec to their estimated
fair values on the date of acquisition. The excess of the consideration paid by
the Company over the estimated fair value of the net assets acquired
("goodwill") was $729,652 and is being amortized over ten years. The results of
operations of Aztec are included in the Company's consolidated financial
statements beginning on February 1, 1998.

The Company has experienced significant operating losses since its inception.
The Company raised approximately $8,196,000 from its public offering in August
1999. In addition, the Company has a $250,000 line of credit it may utilize, if
necessary, of which $75,000 was outstanding at December 31, 1999 (Note 9). As a
result of the public offering, management believes the Company will be able to
meet the Company's presently projected cash and working capital requirements for
the next 12 months. The timing and amounts of cash used will depend on many
factors, including the Company's ability to increase revenues, control
expenditures, and become profitable.


                                       23
<PAGE>   24
2.       SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

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 a maturity of three months or less to be cash equivalents.

INVENTORY is 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:

<TABLE>
<S>                                                 <C>
                    Computer equipment              3 years
                    Other machinery and equipment   5 years
                    Office furniture and fixtures   5 years
                    Leasehold improvements          5 years
</TABLE>

PATENTS are recorded at cost and amortized using the straight-line method over
five years. Patents are recorded net of accumulated amortization of $25,528 and
$52,550 at December 31, 1998 and 1999, respectively.

GOODWILL is recorded at cost and is being amortized on a straight-line basis
over ten years. Goodwill is recorded net of accumulated amortization of $66,885
and $139,851 at December 31, 1998 and 1999, respectively.

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.

LOSS PER COMMON SHARE - Basic earnings or loss per share is computed by dividing
the loss attributable to the common 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 dilutive effect of any stock options or warrants if they
are dilutive.


                                       24
<PAGE>   25
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF - The
Company reviews its long-lived assets and certain 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 are
considered to be impaired, the impairment to be recognized is 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of cash and cash
equivalents, accounts receivable, accounts payable and loans and notes 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 1998, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which was to be effective for fiscal years beginning after
June 15, 1999. Subsequently, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - An Amendment of FASB No. 133, which delays the
implementation of SFAS No. 133 for one year. Management has not competed the
process of evaluating the impact that will result from adopting SFAS No. 133.
The Company is therefore unable to disclose the impact, if any, that adopting
SFAS No. 133 will have on its financial position and results of operation when
such statement is adopted.

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

3.       CONCENTRATION

The Company maintained its deposits in three financial institutions at December
31, 1998 and in four financial institutions at December 31, 1999. At December
31, 1998 and 1999, the Company maintained deposits in excess of federal
depository insurance.

Over 50 percent of the Company's net sales were generated from sales to 13
customers in 1998 and 11 customers in 1999. In 1998, one customer constituted
over 11 percent of the Company's net sales. In 1999, no customers exceeded 10
percent of the Company's net sales.


                                       25
<PAGE>   26
4.       INVENTORY

Inventory consists of the following at December 31:

<TABLE>
<CAPTION>
                                                        1998             1999
                                                        ----             ----
<S>                                                  <C>              <C>
Raw materials                                        $ 101,765        $ 252,121
Work in process                                        111,764          204,729
Finished goods                                          42,038           99,644
Less reserve for obsolete inventory                    (20,000)         (20,000)
                                                     ---------        ---------
Total inventory                                      $ 235,567        $ 536,494
                                                     =========        =========
</TABLE>

5.       LOAN TO CAMPLEX

Included in prepaid expenses and other current assets is an advance to
Camplex/Concept W Corporation ("Camplex"). During the first six months of 1999,
the Company advanced $150,000 to 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 is due December 31, 2000 and bears 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.

6.       PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following at December 31:

<TABLE>
<CAPTION>
                                                        1998             1999
                                                        ----             ----
<S>                                                  <C>              <C>
Computer equipment                                   $  81,341        $ 207,110
Other machinery and equipment                          116,378          335,835
Leasehold Improvements                                 150,335
Office furniture and fixtures                           24,759           75,663
                                                     ---------        ---------
Total                                                  222,478          768,943
Less accumulated depreciation                          (54,806)        (176,532)
                                                     ---------        ---------
Property, plant and equipment - net                  $ 167,672        $ 592,411
                                                     =========        =========
</TABLE>


                                       26
<PAGE>   27
7.       NOTES PAYABLE

Notes payable consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                1998       1999
                                                                ----       ----
<S>                                                           <C>        <C>
Note payable to bank, payments of principal and interest
  of $4,536 with interest at 13.2% per annum, due March 31,
  2002, collateralized by property and equipment              $142,582   $107,633
Note payable to stockholder, who is an employee of the
  Company, interest at 10% per annum, due on demand by
  stockholder or December 31, 2000, unsecured, paid in
  full subsequent to year end                                  150,000
Note payable to former owner of Aztec, imputed interest
  at 8.0% per annum, due January 31, 2000, unsecured            72,787      3,435
                                                              --------   --------
Total                                                          215,369    261,068
Less current portion                                           107,668    197,083
                                                              --------   --------
Long-term notes payable                                       $107,701   $ 63,985
                                                              ========   ========
</TABLE>

         On January 15, 1999, we borrowed $100,000 from Blackwater Capital
Partners, L.P ("Blackwater"). The loan accrued interest at an annual rate of 9
percent. On April 30, 1999, Blackwater exercised warrants to purchase 126,077
shares of common stock. As partial payment for the exercise price, Blackwater
agreed to cancel our $100,000 loan in connection with their exercise of these
warrants.

On April 30, 1999, the Company borrowed $200,000 from two stockholders. The
outstanding borrowings are due July 1, 2000 and bear interest at a rate of 10
percent per annum. The promissory notes were reduced by $75,000 in connection
with the exercise of warrants on June 30, 1999. The Company borrowed an
additional $200,000 under the same terms on July 1, 1999. These notes were
repaid in full during September of 1999.

Future minimum maturities of notes payable as of December 31, 1999 are as
follows:

<TABLE>
<S>                                                                     <C>
2000                                                                    $197,083
2001                                                                      49,812
2002                                                                      14,173
                                                                        --------
Total                                                                   $261,068
                                                                        ========
</TABLE>

8.       LOANS FROM OFFICERS

Loans from officers consisted of two notes payable due to two stockholders who
are employees of the Company. The notes were paid in full in January and March
of 1999. The notes, which bore interest at a rate of 9.5 percent and 18 percent,
were not collateralized.


                                       27
<PAGE>   28
9.       LINE OF CREDIT

The Company maintains a $250,000 line of credit with a bank that bears interest
at the prime rate plus 2% (10.5% at December 31, 1999) and expires on May 27,
2000. Outstanding borrowings on the line of credit are collateralized by the
Company's accounts receivable and inventory. The Company has net borrowings of
$75,000 against this line of credit at December 31, 1999.

10.      CAPITAL LEASES

The Company has property and equipment with a gross value of $147,880 and book
value of $97,024 under various capital leases. The amortization of fixed assets
acquired in capital leases is included in depreciation expense. At December 31,
1999, the present value of future minimum capital lease payments are as follows:

<TABLE>
<S>                                                                     <C>
2000                                                                    $ 52,324
2001                                                                      48,213
2002                                                                      13,362
2003                                                                      11,263
                                                                        --------
Total                                                                    125,162
Less interest at rates ranging from 15.65% to 24.02%                      26,639
                                                                        --------
Present value of minimum capital lease obligations                        98,523
Less current portion of capital lease obligations                         37,810
                                                                        --------
Long-term portion of capital lease obligations                          $ 60,713
                                                                        ========
</TABLE>

11.      STOCKHOLDERS' EQUITY

COMMON STOCK - In January 1998, the company issued 32,424 shares of common stock
for cash that was received in December 1997.

In connection with the sale of common stock during 1998, the Company issued
warrants to purchase 89,929 shares of common stock as consideration for services
provided by consultants who assisted the Company in raising capital. The
estimated fair value of the warrants issued was $185,844, as determined using
the Black-Scholes valuation model assuming an expected average risk-free
interest rate of 5 percent, an expected life of four to five years, an expected
volatility of 45 percent and expected dividend rate of zero percent. These
warrants expire on June 30, 2003 (42,870 warrants with an exercise price of
$1.98 per share) and November 20, 2003 (47,059 warrants with an exercise price
of $3.19 per share).


                                       28
<PAGE>   29
SERIES A CONVERTIBLE PREFERRED STOCK - As of December 31, 1999, 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 have preferences in the event of
liquidation and would receive dividends prior to common stockholders if
dividends are declared.

During 1998, the Company raised $1,000,000 in a private placement from the sale
of 504,311 shares of Series A convertible preferred stock and warrants to
purchase 252,155 shares of common stock at a price of $1.98 per share. The
warrants were exercised during 1999. All shares of Series A convertible
preferred stock were converted to common stock on December 31, 1998. The Company
incurred offering costs of $116,915, which were treated as a reduction of
additional paid-in capital. The Series A convertible preferred stock sold in
1998 had a beneficial conversion feature because the preferred stock was
immediately convertible into common stock at a price less than the then current
fair market value, which value was based on the price of recent sales of common
stock at such time. The carrying amount of the preferred stock was discounted by
the intrinsic value of the beneficial conversion feature, which was determined
to be $740,000. The $740,000 discount was immediately amortized and charged to
accumulated deficit and is treated in a manner similar to a dividend to
preferred stockholders.

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. These
warrants were purchased by the stockholders 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, Blackwater exercised warrants to purchase 252,155 shares of
common stock at a price of $1.98 per share. As payment for the exercise price,
Blackwater 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
bears interest at 8% per year and is payable on the earlier of the completion of
this offering or December 31, 1999. On, December 30, 1999, the company agreed to
change the payable due date from December 31, 1999 to March 1, 2000. Subsequent
to year end Blackwater paid this note in full.

In connection with the public offering that closed in September 1999, the
underwriter, Cruttenden Roth Incorporated was granted 200,000 warrants at an
exercise price of $8.25 per share, which represents 165 percent of the per share
offering price. This grant of 200,000 warrants will expire on August 26, 2004.

A summary of changes in outstanding warrants is as follows:

<TABLE>
<CAPTION>
                                                          WARRANTS    PRICE RANGE
<S>                                                       <C>         <C>
Warrants issued and outstanding as of December 31, 1998    342,084    $1.98-$3.19
Warrants issued during 1999                                223,530    $3.19-$8.25
Exercised during 1999                                     (275,685)   $1.98-$3.19
                                                          --------    -----------
Balance, December 31, 1999                                 289,929    $1.98-$8.25
                                                          ========    ===========
</TABLE>


                                       29
<PAGE>   30
COMMON STOCK REVERSE SPLIT - Effective August 16, 1999, the Company's board of
directors declared a 4.25 for 1 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 and preferred stock have been restated to reflect
the effect of the reverse stock split.

12.      INCENTIVE STOCK OPTION PLAN

Effective May 1, 1997, the Board of Director's approved a stock option plan
("1997 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 this 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 ratified by the stockholders on March 8, 1999.
The maximum number of shares of common stock subject to options that may be
outstanding at any time under the 1999 Option Plan is 235,294 shares of common
stock.

The Company accounts for the fair value of the options issued to nonemployees in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation. The
compensation cost that has been charged against income for 1998 and 1999 for the
plan options is $1,403 and $13,965, respectively. Options granted to
nonemployees 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 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 on the grant dates. 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 attributable to common stock and net loss per share for
the years ended December 31, 1998 and 1999 would have been increased to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
                                                     1998               1999
<S>                                              <C>                <C>
Net loss:
  As reported                                    $(2,339,428)       $(3,474,918)
  Pro forma                                       (2,635,764)        (3,673,313)
Basic and diluted net loss per share:
  As reported                                           (.55)              (.58)
  Pro forma                                             (.62)              (.61)
</TABLE>


                                       30
<PAGE>   31
Options granted under both 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:

<TABLE>
<CAPTION>
                                                                        WEIGHTED
                                                                         AVERAGE
                                                         OPTION         EXERCISE
                                                         SHARES           PRICE
<S>                                                    <C>              <C>
Balance, January 1, 1998                                 98,700          $ 0.57
Options granted during 1998                             640,932           13.18
Exercised                                                (6,102)          (0.02)
                                                       --------          ------
Balance, December 31, 1998                              733,530           11.60
Options granted during 1999                             169,616            4.01
Exercised                                                     0               0
                                                       --------          ------
Balance, December 31, 1999                              903,146          $10.17
                                                       ========          ======
</TABLE>

<TABLE>
<CAPTION>
                                                         1998             1999
<S>                                                    <C>              <C>
Exercisable at the end of the year                      445,296          620,914
                                                       ========         ========
Weighted average fair value of options
  granted during the year                              $  13.18         $   4.01
                                                       ========         ========
</TABLE>

<TABLE>
<CAPTION>
    Range of
 Exercise Price            Options Outstanding              Options Exercisable
----------------   ------------------------------------   ----------------------
                                  Weighted
                                   Average     Weighted                 Weighted
                                  Remaining     Average                  Average
                      Option     Contractual   Exercise     Options     Exercise
                   Outstanding      Life         Price    Exercisable     Price
----------------   -----------   -----------   --------   -----------   --------
<S>       <C>      <C>           <C>           <C>        <C>           <C>
$ 0.02    $ 1.32      92,604         7.5        $ 0.61       89,552     $ 0.59
$ 3.13    $ 3.50     140,649         9.5        $ 3.17       28,649     $ 3.21
$ 6.38    $ 8.50     380,077         8.9        $ 6.52      213,368     $ 6.52
$13.01    $22.31     289,816         8.5        $21.42      289,345     $21.43
------    ------     -------         ---        ------      -------     ------
$ 0.02    $22.31     903,146         8.6        $10.17      620,914     $12.46
======    ======     =======         ===        ======      =======     ======
</TABLE>


                                       31
<PAGE>   32
13.      INCOME TAXES

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

<TABLE>
<CAPTION>
                                                        1998            1999
<S>                                                  <C>            <C>
Deferred tax assets:
  Operating loss carryforwards                       $ 913,600      $ 2,258,600
  Contribution carryforwards                             6,800            6,800
  Other                                                 18,900           31,200
                                                     ---------      -----------

Total                                                  939,300        2,296,600
Less valuation allowance                              (939,000)      (2,296,300)
                                                     ---------      -----------

Total                                                      300              300
Deferred tax liabilities - Depreciation                   (300)            (300)
                                                     ---------      -----------

Total                                                $    --        $      --
                                                     =========      ===========
</TABLE>

During the years ended December 31, 1998 and 1999, the Company recognized a
valuation allowance of $611,000 and $1,356,000, respectively, against deferred
tax assets. 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 sufficient future taxable income during 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 $5,650,000 for
federal income tax purposes begin to expire in 2011. Use of these operating loss
carryforwards are subject to significant restriction under current tax law.

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 the periods ended
December 31, 1998 and 1999 due to the following:

<TABLE>
<CAPTION>
                                                         1998           1999
<S>                                                   <C>           <C>
Benefit calculated at statutory rate                  $ 544,000     $ 1,181,000
Increase (decrease) in income resulting from:
  State income taxes, net                                96,000         208,000
  Nondeductible expenses                                (29,000)        (33,000)
  Valuation allowance                                  (611,000)     (1,356,000)
                                                      ---------     -----------
Total                                                 $    --       $      --
                                                      =========     ===========
</TABLE>


                                       32
<PAGE>   33


14. COMMITMENTS

MANAGEMENT SERVICES AGREEMENT - The Company has a management services agreement
with a company owned and operated by the 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 technology. This agreement remains in effect
until the expiration of the last patents which may issue on the switch
technology. During 1998 and 1999, the Company expensed approximately $800 and
$8,900, respectively, under this agreement.

EMPLOYMENT AND SEPARATION AGREEMENTS - The Company has several 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 termination.


LEASE AGREEMENTS - Rent expense for the periods ended December 31, 1998 and 1999
approximated $81,500 and $148,000, respectively. Future minimum rental payments
are as follows:
<TABLE>

<S>                              <C>
 2000                             $192,168
 2001                              201,906
 2002                              211,829
 2003                              222,094
                                  ========
Total                             $827,997
                                  ========
</TABLE>


During 1998, the Company entered into an exclusive financial advisor agreement
with Duff & Phelps Securities ("D&P"). This agreement was terminated on October
13, 1999. D&P introduced the venture capital firm that purchased $1,000,000 of
preferred stock and warrants (see note 11) and was to assist the Company in
raising capital. The Company paid D&P a fee, and the Company was required to pay
D&P additional fees if certain transactions occurred.

                                   * * * * * *


                                      33
<PAGE>   34
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

              None.

                                    PART III

ITEM 9. DIRECTORS, AND OFFICERS OF THE REGISTRANT.

OUR DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of DuraSwitch, their ages, and their
positions held with DuraSwitch are as follows:
<TABLE>
<CAPTION>
                                                YEAR
                                                TERM
NAME                                    AGE      ENDS     POSITION
----                                    ---      ----     --------
<S>                                    <C>      <C>      <C>
R. Terren Dunlap ....................   55       2002     Chief Executive Officer, Chairman of the Board and
                                                          Director

Anthony J. Van Zeeland ..............   58       2002     Chief Operating Officer, Executive V. P. of
                                                          Engineering and Director

Robert J. Brilon.....................   39        N/A     President, Chief Financial Officer, Treasurer and
                                                          Secretary

John W. Hail.........................   69       2000     Director

William E. Peelle....................   50       2000     Director

Michael A. Van Zeeland...............   25       2001     Director
</TABLE>

       R. TERREN (TERRY) DUNLAP has served as Chairman of the Board of Directors
and Chief Executive Officer of DuraSwitch since our formation in May 1997. From
1983 to March 1994, Mr. Dunlap served as Chairman and Chief Executive Officer of
Sensory Science Corp. (formerly Go-Video, Inc.), a publicly held manufacturer of
consumer electronic video products which he founded. From April 1994 to October
1999, Mr. Dunlap served as a consultant to Sensory Science Corp. Mr. Dunlap also
serves as a director of Advantage Marketing Systems, Inc., a publicly held
provider of health products. Mr. Dunlap received a B.S. degree in Business
Administration from Ashland University and a J.D. degree from Ohio Northern
University.

       ANTHONY J. VAN ZEELAND has served as a director and as Chief Operating
Officer and Executive Vice President of Engineering of DuraSwitch since our
formation in may 1997. From 1990 to 1997, Mr. Van Zeeland was employed as Vice
President of Engineering at DataHand Systems, Inc., a computer keyboard
manufacturing company. During the same time period, he was also a director and
Director of Development Engineering of Monopanel Technologies, Inc., a membrane
switch manufacturing company. Mr. Van Zeeland holds a B.S. degree in Physics and
a Masters of Science in Materials Engineering from the University of Wisconsin.
Anthony J. Van Zeeland is the father of Michael A. Van Zeeland., a director of
DuraSwitch.

       ROBERT J. BRILON became President and Chief Financial Officer of
DuraSwitch in November 1998. From May 1997 until November 1998, Mr. Brilon
served as a financial and business consultant to DuraSwitch. Between January
1997 and November 1998, Mr. Brilon was Chief Financial Officer of Gary Gietz
Master Builder, a luxury custom home builder. Between April 1995 and December
1996, Mr. Brilon was Corporate Controller for Rental Service Corp., a publicly
held industrial equipment rental company. Between April 1993 and April 1995, Mr.
Brilon served as Chief Financial Officer and Vice President of Operations and
Administration of DataHand Systems, Inc. Mr. Brilon holds a B.S. degree in
Business Administration from the University of Iowa and is a C.P.A.

       JOHN W. HAIL has served as a director of DuraSwitch since March 1999.
Since 1988, Mr. Hail has served as Chief Executive Officer and Chairman of the
Board of Directors of Advantage Marketing Systems, Inc., a publicly held
provider of health and beauty products. He also serves on the board of directors
of Pre-Paid Legal Services, Inc., a publicly held company engaged in the sale of
legal services contracts. Mr. Hail received an honorary doctorate degree from
Oklahoma City University.


                                       34
<PAGE>   35
       WILLIAM E. PEELLE has served as a director of DuraSwitch since May 1999.
Mr. Peelle founded Peelle Law Offices Co. in 1994 and has practiced law and
represented a number of businesses since 1975. Mr. Peelle has also served as the
elected prosecuting attorney of Clinton County, Ohio, since 1994. Mr. Peelle has
served as counsel or as a member of the Board of several community
organizations. Mr. Peelle received his J.D. degree from Ohio Northern
University, and has a B.S. degree in Business Administration from Ohio State
University.

       MICHAEL A. VAN ZEELAND has served as a director of DuraSwitch since May
1997. Mr. Van Zeeland is currently a graduate student at U.C.L.A., working on
his Ph.D. in plasma physics. From January 1998 to September 1998, we employed
him as an engineering physicist. During the summer of 1997, he was employed at
Arizona State University working on theoretical physics. During the summer of
1996, Mr. Van Zeeland worked as an intern at the University of California-Irvine
in a program funded by the National Science Foundation. From August 1995 to May
1996, Mr. Van Zeeland worked as an intern under the NASA Space Grant Program,
where he wrote FORTRAN programs, ran simulations and collected data to use to
study hurricane formation. From May 1992 to August 1993, he worked as an
Engineer Technician with DataHand System, Inc. Mr. Van Zeeland holds a B.S.
degree in Engineering Physics from the University of Arizona. Mr. Van Zeeland is
the son of Anthony Van Zeeland, DuraSwitch's director, Chief Operating Officer
and Executive Vice President of Operations.

       Executive officers serve at the discretion of the Board of Directors.

       Our success depends largely on the efforts of R. Terren Dunlap, Chief
Executive Officer and Chairman of the Board, and Anthony J. Van Zeeland, Chief
Operating Officer/Executive Vice President of Engineering and the inventor of
our patented technology. In particular, Mr. Van Zeeland has been the key
individual responsible for developing solutions to the design challenges
presented by our customers. We believe our relationships with these individuals
are good. However, we cannot ensure that the services of these individuals will
continue to be available to us in the future. Although we have obtained "key
man" life insurance with DuraSwitch as beneficiary, if we lose either of these
individuals and cannot find adequate replacement, there would be a material
adverse effect on our business, financial condition and results of operations.

STRUCTURE OF THE BOARD OF DIRECTORS

       Our bylaws provide for a board of directors of one to nine members. The
current board of directors consists of five members. All newly elected directors
will serve for a three year term and approximately one-third of the directors
will be elected annually. We have established an audit committee and
compensation committee, each of which have only independent directors. The audit
committee will review the professional services provided by our independent
auditors, our annual financial statements and our system of internal controls.
Our audit committee currently consists of Messrs. Peelle and Hail. The
compensation committee will review executive salaries and administer our bonus,
incentive compensation and stock option plans. In addition, the compensation
committee will consult with our management regarding our compensation policies
and practices. The compensation committee currently consists of Messrs. Hail and
Peelle.

       On September 29, 1999, the directors unanimously approved an amended and
restated bylaws of DuraSwitch. This amendment increased the quorum requirement
at all meetings of the board of directors or any committee thereof, to a
majority of the total number of directors of the entire then authorized board of
director or such committee.

       Our board of directors agreed collectively that a reduction in the size
of the board would be in the best interest of shareholders. Two of our
directors, J. Thomas Webb and Steven R. Green, voluntarily submitted
resignations effective October 23, 1999. Both agreed to be available for
consulting to us should the need arise. As a result, we now have five directors,
including two outside directors. There were no disagreements related to these
resignations.

DIRECTOR COMPENSATION

       Directors are reimbursed for reasonable expenses incurred in attending
meetings.


                                       35
<PAGE>   36
ITEM 10. EXECUTIVE COMPENSATION.

       The following table provides certain summary information concerning
compensation paid to our executive officers that had an aggregate salary and
bonus exceeding $100,000 for the fiscal year ended December 31, 1999.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                               LONG-TERM
                                                        ANNUAL COMPENSATION                  COMPENSATION

                                                                       OTHER ANNUAL            AWARDS OPTIONS
   NAME & PRINCIPAL POSITION       YEAR      SALARY     BONUS          COMPENSATION               SHARES

<S>                                <C>       <C>        <C>            <C>                     <C>
R. Terren Dunlap, CEO              1999      $137,346                    $4,442(1)
                                   1998        72,000                       390(1)
                                   1997        58,145    $10,000

Anthony J. Van Zeeland, COO        1999      $109,058    $11,365         $4,442(1)
                                   1998        72,000                       390(1)
                                   1997        34,154

Robert J. Brilon, CFO              1999      $129,242                                               80,000
                                   1998         --
                                   1997         --
</TABLE>



(1) Includes payments received by Van Dun, LLC, of which Mr. Dunlap and Mr. Van
    Zeeland are 50% owner.

OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                                            EXERCISE    EXPIRATION
NAME & PRINCIPAL POSITION            DATE           SHARES    PRICE       DATE

<S>                                 <C>            <C>      <C>         <C>
Robert J Brilon, CFO                9/29/99         80,000  $ 3.125     9/29/09
</TABLE>


EMPLOYMENT AND SEVERANCE AGREEMENTS

       In May 1997, we entered into a seven-year employment agreement with Mr.
Dunlap providing that Mr. Dunlap will serve as our Chief Executive Officer.

       In May 1997, we entered into a seven-year employment agreement with Mr.
Anthony Van Zeeland providing that Mr. Van Zeeland will serve as our Chief
Operating Officer. We have also agreed to pay Mr. Van Zeeland an annual one-time
bonus of $5,000 for each United States patent, and $1,000 for each foreign
patent issued in his name as inventor or co-inventor, with a maximum of $20,000
during any fiscal year.


                                       36
<PAGE>   37
       In November 1998, we entered into a three-year employment agreement with
Mr. Brilon that was amended in January 2000 to extend through April 2004
providing that Mr. Brilon will serve as our President and Chief Financial
Officer. In addition, Mr. Brilon receives an automobile allowance. Mr. Brilon is
also entitled to receive an incentive profit sharing bonus each year of 5% of
our net profit before tax, goodwill amortization and other non-cash charges. In
the event of a merger or acquisition of DuraSwitch, Mr. Brilon is entitled to an
incentive bonus equal to 5% of the gross consideration given by the acquiring
third party. On November 20, 1998 we issued stock options to Mr. Brilon to
purchase 176,472 shares of common stock at $6.38 per share, which vest as
follows:

-      58,824 on December 31, 1998,

-      58,824 on December 31, 1999, and

-      58,824 on December 31, 2000.

SEVERANCE AND CHANGE OF CONTROL PROVISIONS

       Each of the employment agreements described above provides for benefits
to our executive officers upon their severance or upon a change of control of
DuraSwitch. If we terminate any of these individuals, with or without cause, we
would be required to pay him his gross annual base salary and continue all
standard employee benefits for an additional two year period after termination.
In addition, in the case of Mr. Brilon, all stock options held but not vested
would vest immediately. If Mr. Dunlap or Mr. Van Zeeland leaves voluntarily, we
have agreed to pay them their gross annual base salary and continue to provide
all standard employee benefits for an additional 18 months after termination. If
Mr. Brilon leaves voluntarily, we have agreed to pay him his gross annual base
salary and continue to provide standard employee benefits for an additional 12
months after termination. Each of these executive officers have agreed that they
will not, for the two year period following his termination, or in the case of
Mr. Dunlap and Mr. Van Zeeland, for the one year period following termination,
compete with us within the United States.

       In the event that we are acquired and the executive officer is terminated
as a result of a takeover, we have agreed to make a lump sum payment to such
executive officer equal to 2.99 times his gross annual salary. In addition, in
the case of Mr. Brilon, all stock options held but not vested would vest
immediately.

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

       The following table sets forth certain information regarding the
beneficial ownership of our common stock as of March 3, 2000 by:


-      each person or entity known to us to own beneficially more than 5% of the
       outstanding shares of common stock,

-      each of our directors, and

-      all our directors and executive officers as a group.

       Shares beneficially owned and percentage of ownership indicated below are
based on 7,495,594 shares of common stock outstanding. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. In accordance with SEC rules, shares which may be acquired upon
exercise of stock options or warrants which are currently exercisable or which
become exercisable within 60 days of the date of the table are deemed
beneficially owned by the holder. Except as indicated by footnote, and subject
to community property laws where applicable, the persons or entities named in
the table below have sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by them.



                                       37
<PAGE>   38
       Except as otherwise noted, the mailing address of each of the
stockholders in the table below is 234 S. Extension Road, Mesa, Arizona 85210.
<TABLE>
<CAPTION>
                                                                               SHARES BENEFICIALLY OWNED
IDENTITY OF STOCKHOLDER OR GROUP                                                  NUMBER          PERCENTAGE
                                                                               -----------       ----------
<S>                                 <C>                                        <C>                 <C>
R. Terren Dunlap                    CEO, Chairman of the Board                   1,447,506           19.3%
Anthony J. Van Zeeland              COO, EVP of Engineering & Director           1,447,506           19.3%
Robert J. Brilon                    President, CFO, Treasurer & Secretary          269,116 (1)        3.6%
Michael J. Van Zeeland              Director                                        20,255 (3)        0.3%
John W. Hail                        Director                                        10,624 (2)        0.1%
William E. Peelle                   Director                                        20,863 (3)        0.3%
                                                                                 ---------           ----
Total Officers and Directors                                                     3,215,870           42.9%
                                                                                 =========           ====
Jurika & Voyles, L.P.               Investment Advisor                             483,000            6.4%
Blackwater Capital (Steven Green)   Former Director                                442,153            5.9%
</TABLE>


(1)    Includes 220,531 shares subject to options which are currently
       exercisable, and 47,059 shares subject to warrants which are currently
       exercisable.

(2)    Includes 3,741 shares owned by TVC, Inc., of which John W. Hail is the
       majority shareholder and 5,000 shares subject to options.

(3)    Includes 5,000 shares subject to options.

       We are not aware of any contract or other arrangement, including a pledge
of our securities, that could result in a change in the control of the
DuraSwitch. We are not aware of any voting trusts.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       On May 1, 1997, we entered into an agreement with VanDun, LLC, a limited
liability company wholly owned by Mr. A. Van Zeeland and Mr. R. Terren Dunlap,
pursuant to which VanDun provides intellectual property consulting services to
us. The agreement requires us to pay VanDun a management fee equal to 1.1% of
invoiced sales for all component switches and integrated component switch panels
sold by us during the term of this agreement. The agreement terminates upon the
expiration of our patents in approximately 20 years. In fiscal 1998 and 1999, we
paid VanDun $780 and $8,884, respectively. This agreement obligates Messrs. A.
Van Zeeland and R. T. Dunlap to preserve all their personal notes and records
regarding our intellectual property and to assist us in protecting our
intellectual property from infringement, including testify during legal or
administrative proceedings. These duties extend beyond the terms of Messrs. A.
Van Zeeland's and R. T. Dunlap's employment agreements and noncompetition
covenants.

       On January 15, 1999, we borrowed $100,000 from Blackwater Capital
Partners, L.P. At that time, the managing partner of Blackwater was serving on
our board of directors. He resigned from our board on October 23, 1999. The loan
accrued interest at an annual rate of 9%. On April 30, 1999, Blackwater
exercised warrants to purchase 252,155 shares of common stock at an exercise
price of $1.98 per share. As payment for the exercise price, Blackwater 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 bears interest at 8%
per year and was payable on December 31, 1999. On December 30, 1999, we agreed
to change the payable due date from December 31, 1999 to March 1, 2000. On
February 24, 2000, Blackwater paid this note in full.

       During the first six months of 1999, we loaned $150,000 to
Camplex/Concept W Corporation, an entity that we had considered as a possible
acquisition candidate. On May 14, 1999, we determined that we would not acquire
Camplex. The $150,000 loan was due January 1, 2000, and bears interest at 9% per
year. During 1999, we received partial cash payments and services by Camplex,
which reduced the balance of this note. As of December 31, 1999 the balance due
was $41,578 and the loan repayment terms were extended until December 31, 2000.
J. Thomas Webb, who served on our Board of Directors during 1999 until resigning
in October 1999, is a significant shareholder and officer of Camplex.


                                       38
<PAGE>   39
       Based on a prior relationship of Anthony J. Van Zeeland with his prior
employer, we granted to that prior employer a nonexclusive license to
manufacture products using our technology. We have sent to that prior employer a
notice of non-renewal of the license effective April 2000, in accordance with
the terms of the agreement.

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

       The exhibits to this Form 10-KSB are listed on the Exhibit Index
following the signature page.


                                       39
<PAGE>   40
SIGNATURES

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


                                      DuraSwitch Industries, Inc.




         Dated: 3/28/00            By:  /s/ R.Terren Dunlap
                                        ----------------------------------
                                        R. Terren Dunlap,
                                        Principal Executive Officer and Director




         Dated: 3/28/00            By:  /s/ Robert J Brilon
                                        ----------------------------------
                                        Robert J. Brilon, Principal
                                        Financial Officer




         Dated: 3/28/00            By:    /s/ Anthony J. Van Zeeland
                                        ----------------------------------
                                        Anthony J. Van Zeeland, Director and
                                        Chief Operations Officer




         Dated: 3/28/00            By:   /s/ Michael A. Van Zeeland
                                         ----------------------------------
                                         Michael A. Van Zeeland,
                                         Director




         Dated: 3/30/00            By:  /s/ John W. Hail
                                        ----------------------------------
                                         John W. Hail, Director




         Dated:                    By:
                                        ----------------------------------
                                        William E. Peelle, Director


                                       40
<PAGE>   41
                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

Exhibit.                                                 Incorporated by
No.          Description                                     Reference to:                  Filed Herewith:
---          -----------                                     -------------                  ---------------
<S>          <C>                                      <C>                                   <C>
3.1          Amended and Restated                     SB-2 filed with the SEC
             Articles of Incorporation                of Registrant on August 26, 1999

3.2          Amended and Restated Bylaws              Form 10-QSB filed with SEC
                                                      on November 15, 1999

4.1          Articles 3, 4, 5, and 7 of the           Form SB-2 filed with the SEC
             Amended and Restated                     on August 26, 1999
             Articles of Incorporation of
             DuraSwitch Industries, Inc.
             (included in Exhibit 3.1)

4.2          Articles II, III, and VII of the         Form SB-2 filed with the SEC
             Amended and Restated                     on August 26, 1999
             Bylaws of DuraSwitch
             Industries, Inc.
             (included in Exhibit 3.1)

4.3          Specimen Common Stock                    Form SB-2 filed with the SEC
             Certification                            on August 26, 1999

10.1         Employment and Separation                Form SB-2 filed with the SEC on
             Agreement dated May 1, 1997              August 26, 1999
             by and between Registrant and
             R. Terren Dunlap

10.1.1       July 30, 1999 Amendment to               Form SB-2 filed with the SEC on
             R. Terren Dunlap Employment              August 26, 1999
             Separation Agreement

10.2         Employment and Separation                Form SB-2 filed with the SEC on
             Agreement dated May 1, 1997              August 26, 1999
             by and between Registrant and
             Anthony J. Van Zeeland

10.2.1       July 30, 1999 Amendment to               Form SB-2 filed with the SEC on
             Anthony J. Van Zeeland Employment        August 26, 1999
             Separation Agreement

10.3         Employment and Separation                Form SB-2 filed with the SEC on
             Agreement dated November 20, 1998        August 26, 1999
             by and between DuraSwitch
             Industries, Inc. and
             J. Thomas Webb
</TABLE>


                                       41
<PAGE>   42
<TABLE>

<S>          <C>                                      <C>                                   <C>
10.4         Employment and                           Form SB-2 filed with the SEC on
             Separation Agreement dated               August 26, 1999
             November 20, 1998 by and between
             DuraSwitch Industries, Inc.
             and Robert J. Brilon

10.4.1       Addendum #1 to Employment and                                                  X
             Separation Agreement dated
             November 20, 1998 by and between
             DuraSwitch Industries, Inc.
             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         Form SB-2 filed with the SEC on
             1997 Stock Option Plan                   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         Series A Convertible Stock and           Form SB-2 filed with the SEC on
             Warrant Purchase Agreement dated         August 26, 1999
             June 30, 1998 by and among
             DuraSwitch Industries, Inc. and
             Blackwater Capital Partners, L.P.
             and Blackwater Capital Group, L.L.C.

10.10        Registration Rights Agreement dated      Form SB-2 filed with the
             SEC on June 30, 1998, by and             August 26, 1999
             between DuraSwitch Industries, Inc.
             and Blackwater Capital Group,
             L.L.C.

10.11        Registration Rights Agreement dated      Form SB-2 filed with the
             SEC on June 30, 1998, by and             August 26, 1999
             between DuraSwitch Industries, Inc.
             and Blackwater Capital
             Partners, L.P.


10.12        Letter agreement dated May 14, 1998,     Form SB-2 filed with the
             SEC on as amended July 14, 1998, by      August 26, 1999
             and between DuraSwitch Industries,
             Inc. and Duff & Phelps
             Securities, LLC

10.12A       Agreement to terminate dated             Form 10-QSB filed with SEC on
             September 13, 1999 between               November 15, 1999
             DuraSwitch Industries, Inc.
             and Duff & Phelps Securities, LLC
</TABLE>



                                       42
<PAGE>   43
<TABLE>

<S>          <C>                                      <C>                                   <C>
10.13        Promissory Note of DuraSwitch            Form SB-2 filed with the SEC on
             Industries, Inc. dated                   August 26, 1999
             January 30, 1998,
             and amended December 31, 1998, in
             the aggregate amount of $164,000
             Payable to Anthony G. Shumway

10.14        Warrant to Purchase 182,199 shares       Form SB-2 filed with the
             SEC on of Common Stock of                August 26, 1999
             DuraSwitch  Industries, Inc. issued
             June 30, 1998 and held by Duff &
             Phelps Securities, LLC

10.15        Standard Sublease dated October 15,      Form SB-2 filed with the
             SEC on 1998, as amended                  August 26, 1999 by
             February 2 ,1999, and between 234
             South Extension, L.L.C. and
             DuraSwitch Industries, Inc.

10.16        Management Services Agreement            Form SB-2 filed with the SEC on
             dated May 1, 1997 by and between         August 26, 1999
             Total Switch, Inc. and VanDun, LLC

10.17        Agreement for Assignment of Present      Form SB-2 filed with the SEC on
             and Future Inventions in Certain         August 26, 1999
             Subject Matter dated May 1, 1997 by
             And between Total Switch, Inc. and
             Anthony J. Van Zeeland

10.18        Ericsson, Inc. purchase order dated      Form SB-2 filed with the SEC on
             April 7, 1999 (portions of the           August 26, 1999
             exhibit have been omitted pursuant
             to a request for confidential
             treatment)

10.18.1      Cancellation of Ericsson, Inc.                                                 X
             purchase order dated April 7, 1999

23.1         Consent of Deloitte & Touche                                                   X

27           Financial Data Schedule                                                        X
</TABLE>


                                       43