<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year ended April 30, 1997             Commission File Number 0-21475

                           DYNAMIC INTERNATIONAL, LTD.
             (Exact Name of Registrant as Specified in its Charter)

<TABLE>
<CAPTION>
                       Nevada                                                             93-1215401
<S>                                                                            <C>
(State or other jurisdiction of incorporation or organization)                 (I.R.S. Employer Identification Number)
</TABLE>

   58 Second Avenue, Brooklyn, New York                     11215
 (Address of Principal Executive Offices)                (Zip Code)

Registrant's telephone number, including Area Code:        (718) 369-4160

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

           Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock (par value $.001 per share)
                                 Title of Class

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (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 ninety (90) days. Yes [X] No [ ]

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

                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                           DURING THE PAST FIVE YEARS

Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) under the Securities Exchange Act of 1934 after
the distribution of securities under a plan confirmed by a court. Yes [x] No [ ]

The aggregate market value of voting stock held by non-affiliates of the
Registrant: can not be determined because of the absence of an active trading
market for Registrant's securities.

The number of shares outstanding of Registrant's Common Stock as of June 30,
1997: 3,198,258
<PAGE>   2

                                     PART I

ITEM 1. BUSINESS

GENERAL

Dynamic International, Ltd., a Nevada corporation ("DIL"), is engaged in the
design, marketing and sale of a diverse line of hand exercise and light exercise
equipment, including hand grips, running weights, jump ropes and aerobic steps
and slides. It markets these products under the licensed trademarks SPALDING(TM)
and KATHY IRELAND(TM) as well as under its own trademarked name SHAPE SHOP(TM).
In addition, it designs and markets sports bags and luggage, which are marketed
primarily under the licensed name JEEP(TM) and under its own names PROTECH(TM)
and SPORTS GEAR(TM). The Company's objective is to become a designer and
marketer of goods that are associated with a free-spirited lifestyle and leisure
time.

The Company is the successor to Dynamic Classics, Ltd., a Delaware corporation,
incorporated in 1986 ("DCL," together with DIL, the "Company"), which was the
successor to a New York company incorporated in 1964. In August 1996, DCL merged
with and into DIL, which had been newly formed for the purpose of this merger.
The objective of the merger was to change the Company's state of incorporation
from Delaware to Nevada.

PLAN OF REORGANIZATION

In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Initially, the Company was successful in marketing
these products. For the fiscal year ended April 30, 1995, sales of these
products represented approximately 53% of the Company's gross sales. However,
due to serious manufacturing defects and poor construction of the Company's
products delivered by the Company's manufacturers, primarily located in the
People's Republic of China, the Company was forced to allow substantial charge
backs by its customers. Although, pursuant to a written agreement, one of the
manufacturers, China National Metals and Minerals ("CNA"), acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, it breached this agreement soon thereafter. In March 1995, CNA sued the
Company for monetary damages, alleging, among other things, breach of contract.
The Company and CNA subsequently settled the matter by releasing each other from
any claims and allowing CNA to collect an aggregate of $15,000 from the Company.
The Company suffered severe losses from its venture into this line of business
and in August 1995 filed a voluntary petition requesting relief under
Chapter 11 of the Bankruptcy Code.

In May 1996, the Bankruptcy Court approved a plan of reorganization pursuant to
which creditors received partial satisfaction of their claims. MG Holding
Corp. ("MG"), which had purchased a promissory note from the Company's principal
financial institution, received 2,976,000 shares of Common Stock, representing
approximately 93% of the issued and outstanding shares thereby gaining absolute
control over the Company's affairs. See ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT and ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS In addition, as part of the plan of reorganization, the Company,
then known under the name DCL, merged into DIL, a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. See ITEM
3. LEGAL PROCEEDINGS and ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

PRODUCTS

         EXERCISE EQUIPMENT - The Company's line of exercise equipment consists
         primarily of handheld products, including dumbbells, ankle and wrist
         weights, hand grips, jump ropes, exercise suits, slimmer belts and
         strength training products. In addition, the Company markets light
         weight equipment such as aerobic steps and slides and exercise mats.
         The Company also carries a line of small electronic devices designed to
         monitor physical activity such as stopwatches, pedometers, pulse meters
         and calorie counters.

                                       -2-
<PAGE>   3

         SPORTS BAGS/LUGGAGE - The Company's line of sports bags/luggage
         consists primarily of duffle bags, weekend bags, garment bags,
         suitcases, pilot cases and flight attendant wheeled cases. Some of the
         models are equipped with wheels and/or retractable handles.

         OTHER PRODUCTS - It is anticipated that in September 1997, the Company
         will begin marketing an insulated bag incorporating a wrap-around gel
         freeze pack with the ability to cool and preserve food and other
         products for an extended period of time. The Company, through a
         wholly-owned subsidiary, obtained the exclusive rights to the patents
         underlying the technology as well as the trademarks FREEZY-BAG(TM) and
         FREEZYGEL(TM) under which the products are sold. See "Intellectual
         Property"--"License Agreements" on the next page.

The Company may from time to time manufacture and/or market additional products
under its own names or under licensed names.

DESIGN AND DEVELOPMENT

The Company usually designs its own exercise equipment and creates its own
molds and tooling. Such molds and tooling are used by the manufacturers to
produce the equipment. The Company retains an ownership interest in the molds
which are returned to it upon the termination of the Company's relationship
with a particular manufacturer. The Company has been granted a number ofdesign
patents with respect to certain of its products. See "Intellectual Property."
The Company employs a designer on a full-time basis for the design of its
sports bags/luggage products. During the most recent fiscal year the Company
spent approximately $57,000 on design activities, including fees to designers
and patent attorneys. The Company may, from time to time, utilize the services
of consultants for product and package design.                  

Most of the Company's products are manufactured in the Philippines, Taiwan, and
Hong Kong, which in the most recent fiscal year accounted for approximately 38%,
27%, and 10% of the Company's products, respectively. In addition, the Company's
products are manufactured in the United States, People's Republic of China, and
Indonesia. Exercise equipment is usually shipped by the manufacturers to the
Company within 45 days of the placement of an order. Orders for sports
bags/luggage, which for the most part are produced in the Philippines and China,
usually require a period of 90 to 120 days before they are shipped. The Company
ordinarily has its products manufactured based on purchase orders and it has no
long term relationships with any of its manufacturers. The Company believes
that, if necessary, it will be able to obtain its products from firms located in
other countries at little if any additional expense. As a consequence, the
Company believes that an interruption in deliveries by a manufacturer located in
a particular country will not have a material adverse impact on the business of
the Company. Nevertheless, because of political instability in a number of the
supply countries, occasional import quotas and other restrictions on trade or
otherwise, there can be no assurance that the Company will at all times have
access to a sufficient supply of merchandise.

SALES AND MARKETING
The Company sells its products on a wholesale basis only. Most of its products
are sold to catalog showrooms, drug chains, discount stores and sporting goods
chains. For the fiscal year ended April 30, 1997 approximately 25% and 13% of
the Company's revenues were derived from sales to Kmart and Service Merchandise,
respectively. No other customer accounted for more than 10% of the Company's
revenues. For the fiscal year ended April 30, 1997, sales of exercise equipment
accounted for approximately 53% of the Company's revenues while 47% of the
Company's revenues were derived from the sale of sports bags/luggage.

                                       -3-
<PAGE>   4

The Company sells its products primarily through independent sales agents on a
commission-only basis. The Company currently engages approximately 23 sales
agents either on an individual basis or through independent sales organizations.
Although it has written agreements with a number of its agents, all of such
agreements are terminable at will. The Company has no long term arrangements
with any of its agents. The Company usually pays commissions ranging from 1% to
5% of the net sale price of its products. The Company believes its sales agents
sell products exclusively on behalf of the Company.

In addition, on a small scale, the Company markets existing products to
retailers for resale under their own private labels. The Company has already
begun deliveries to Service Merchandise Co. and expects to start deliveries to
other retailers in the fall of 1997. Although the scope of this marketing
effort is currently limited, the Company intends to expand the number of
private label transactions. No assurance can be given that its efforts in this
area will be successful.    

The Company currently anticipates that it may increasingly focus its attention
on direct response marketing. The Company believes that its products are
particularly well suited for so-called impulse buys. Therefore, it intends to
develop plans to use infomercials to market its products. To date, no
significant expenditures have been made in connection with this effort.

COMPETITION
The Company's exercise products compete with products marketed and sold by a
number of companies. The Company believes that its main competitors are Icon
Health and Fitness, Inc., Bollinger Industries and Legacy International Inc..
All of these companies possess far greater financial and other resources,
including sales forces, than the Company's. However, the Company believes that
as a result of its ability to use the trademarked names SPALDING(TM) and KATHY
IRELAND(TM) it will be able to retain its share of the market. Nevertheless,
there can be no assurance that the Company will be able to effectively compete
with these companies as well as with other smaller entities.

The Company's sports bags/luggage products compete with products designed by a
number of the largest companies in the industry, including Samsonite, Sky Way
and American Tourister. The Company believes that because of its concentration
on the upscale lifestyle and more specialized leisure market that are associated
with the trademark JEEP(TM) the Company will be able to continue to grow its
sports bags/luggage business. Nevertheless, there can be no assurance that the
Company will be able to effectively compete with these companies as well as with
other smaller entities.

INTELLECTUAL PROPERTY
The Company owns a number of trademarks, including POCKETSPLUS, PROTECH TRAVEL
SYSTEMS & DESIGN and EXER-SLIDE.

         LICENSE AGREEMENTS - The Company sells a number of its products under
         licensed names. The Company has entered into licensee agreements which
         provide for the grant of licenses to the Company and the payment of
         royalties by the Company, as follows:

         JEEP -- Under an agreement dated January 8, 1993, as amended by letter
         amendment dated January 8, 1996, between the Company and the Chrysler
         Corporation (as so amended, the "Jeep Agreement"), the Company was
         granted the exclusive license to use the names JEEP, WRANGLER and
         RENEGADE in connection with the manufacture, sale and distribution of
         sports bags/luggage products. The current expiration date of the Jeep
         Agreement is December 31, 1998. The parties have informally agreed to
         start negotiations regarding the terms of an extension of the current
         agreement.

         SPALDING -- Under two separate agreements between the Company and
         Spalding & Evenflo Companies Inc. dated November 1, 1992 and April 1, 
         1994, the Company was granted the exclusive                         

                                       -4-
<PAGE>   5

         right to use the name SPALDING in connection with the sale and
         distribution of a number of products, including weight bars and large
         exercise machines. The current expiration date of the agreements is
         September 30, 1997. However, the Company is currently negotiating a
         renewal of the agreement relating to hand held exercise equipment.

         KATHY IRELAND -- Under an agreement with Kathy Ireland, Inc., dated
         December 22, 1994, Ms. Ireland approves and endorses certain exercise
         equipment designed and manufactured by the Company. Under the
         agreement, the Company has the right to use her name in connection with
         the equipment and Ms. Ireland will make appearances to promote such
         equipment. In addition, the Company has the right to use her photograph
         and likeness in connection with the sale of the equipment. The
         agreement is currently scheduled to expire in June 1998 but is subject,
         at the Company's option, to renewal until June 2000.

         FREEZY-BAG/FREEZYGEL -- Under an agreement dated November 1, 1996,
         between New Century Marketing & Distributors, Inc. and a wholly-owned
         subsidiary of the Company, the Company obtained the exclusive rights to
         a patented technology as well as to the trademarked names FREEZY-BAG
         and FREEZYGEL. The technology has the ability to cool foods and other
         products and is used in the wrapping of such products. The agreement
         has a term of two years but is renewable, at the option of the Company,
         for additional one-year periods.

MANAGEMENT AGREEMENT WITH ACHIM IMPORTING CO., INC.

Pursuant to a Warehousing and Service Agreement dated as of September 1, 1996
(the "Warehousing Agreement") between the Company and Achim Importing Co., Inc.
("Achim"), Achim performs certain administrative services on behalf of the
Company. Under the Warehousing Agreement, Achim assists, among other things, in
the maintenance of financial and accounting books and records, in the
preparation of monthly financial accounts receivable aging schedules and other
reports and in the performance of credit checks on the Company's customers.
Achim also provides warehousing services consisting of receiving, shipping and
storing of the Company's merchandise. The Warehousing Agreement has a term of
two years and is automatically renewable for one year periods unless written
notice of termination shall have been given at least six months prior to the
commencement of a renewal period.

In consideration for the services performed under the Warehousing Agreement,
Achim receives an annual fee, payable monthly, calculated as a percentage of the
Company's invoiced sales ranging from 4% of invoiced sales under $30 million to
3% for sales of $60 million or more. In addition, Achim receives a service fee
in the amount of 1.5% of the Company's invoiced sales to customers and accounts
located in the United States if payment is made by letter of credit and 1% if
such customers and accounts are located outside the United States, irrespective
of manner of payment. The Company also pays a monthly fee of 3% of the Company's
invoiced sales in connection with the warehousing services performed by Achim
under the Warehousing Agreement. During the fiscal year ended April 30, 1997,
the Company accrued approximately $458,488 in fees under the Warehousing
Agreement.

Achim is controlled by Marton B. Grossman, the Company's Chairman and President.
The Company believes that the terms of the Warehousing Agreement with Achim are
at least as favorable as would have been obtained from an unaffiliated third
party.

In addition, pursuant to an unwritten understanding, Achim makes its lines of
credit available to the Company which will enable it to finance the purchases of
its inventory from its overseas suppliers. Also, from time to time, Achim will
purchase the products directly from the manufacturer and resell them to the
Company without markup. Achim charges the Company interest in order to
accommodate Achim's commercial lenders who often require a security interest in

                                       -5-
<PAGE>   6

the merchandise until it has been sold and the lender has been repaid. The
Company pays Achim for the invoiced amount of inventory without markup,
reimburses Achim for its bank charges, and pays it interest at the prime rate
plus one percent on the unpaid balance of the purchases. As of April 30, 1997,
the Company owed an amount of $2,590,360, including interest of $260,795 under
this arrangement. As of June 30, 1997, this sum had decreased to $1,871,029,
including interest of $276,894.    

EMPLOYEES

As of June 30, 1997, the Company employed 12 persons, of whom three were
executive officers, three were engaged in administrative and clerical
activities, four were engaged in sales and two were involved in warehousing and 
shipping.

ITEM 2. PROPERTIES

The Company occupies a warehouse consisting of approximately 54,400 square feet,
of which 4,500 square feet are dedicated to office space, located at 58 Second
Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is
owned by Isaac Grossman and one of his siblings. Mr. Grossman is the Company's
Vice Chairman, Treasurer and Secretary. Since Achim occupied the premises before
it became affiliated with the Company, it remains the lessee under the lease.
Achim makes the property available to the Company on an at-will basis. Other
than the service fees paid by the Company to Achim under the Warehousing
Agreement, the Company pays no rent for the property. See ITEM 1. BUSINESS
"Management Agreement with Achim Importing Co., Inc." and ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.

ITEM 3. LEGAL PROCEEDINGS

On August 23, 1995, the Company filed a petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York (the "Court"). On May 23, 1996, the Court entered an Order
confirming the Company's plan of reorganization. See ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

Not applicable.

                                       -6-
<PAGE>   7

                                     PART II

ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

Until 1995, the Company's Common Stock was traded in the over the counter
market. As a result of the Company's petition under Chapter 11 of the Bankruptcy
Code in August 1995, no trading information is available after the fiscal
quarter ended July 31, 1995. The following table sets forth the high and low bid
quotations for the Company's Common Stock and Warrants through the quarter ended
July 31, 1995. These quotations have been reported by the National Association
of Securities Dealers, Inc. and represent quotations by dealers without
adjustments for retail mark-ups, mark-downs or commissions and may not represent
actual transactions.

<TABLE>
<CAPTION>
                    Fiscal Quarter                       C o m m o n   S t o c k
                      Ended                                High            Low
                      -----                                ----            ---
                 <S>                                     <C>              <C>                  
                  April 30, 1995                          $2.000          $0.875
                  July 31, 1995                           $1.438          $0.375
</TABLE>

The Company has not paid a cash dividend on its Common Stock. The Company
intends to retain all earnings for the foreseeable future for use in the
operation and expansion of its business and, accordingly, the Company does not
contemplate paying any cash dividends on its Common Stock in the near future.

ITEM 6. SELECTED FINANCIAL DATA

The table on the following page summarizes certain financial data that are
qualified by the more detailed financial statements included herein. Effective
August 8, 1996, the Company emerged as the surviving entity in a merger with
DCL. The balance sheet of the combined entity was substantially similar to that
of DCL immediately prior to the merger. As a consequence, the financial data of
the Company for the reporting periods July 31, 1996 and prior consist of those
of DCL.

The Company has not paid a cash dividend to its public shareholders on its
Common Stock. The Company does not contemplate paying any cash dividends on its
Common Stock in the near future.

Due to the reorganization (see Note 2 to the Financial Statements), operating
results of the reorganized company may not be comparable to those of the
predecessor company.

                                       -7-
<PAGE>   8

<TABLE>
<CAPTION>
                         
                         REORGANIZED                                PREDECESSOR COMPANY
                           COMPANY*
                                         -------------------------------------------------------------------------------
                          9 Months       3 Months                              Year Ended April 30
                            Ended         Ended                           
                           4/30/97       7/31/96           1996            1995               1994              1993
                           -------       -------           ----            ----               ----              ----
<S>                     <C>           <C>              <C>             <C>                <C>              <C>
Net Sales               $7,492,729    $ 1,983,164      $ 7,151,715     $ 32,533,097       $29,497,353      $ 25,735,479

Income
(Loss)
for Period                 119,399        (76,364)       6,945,299      (11,227,335)          244,308          (427,409)

Net Income
(Loss)
per Share                      .04

Selected Balance
  Sheet Data:
Working
Capital
(Deficit)                  (45,789)                       (293,884)      (7,493,435)        3,094,821         3,173,751

Total
Assets                   4,807,062                       4,253,396        6,414,185        16,677,772        13,373,816

Long Term
Obligations
Including
Capitalized
Lease
Obligations                215,254                          23,965          116,124           127,877            92,129
</TABLE>

         *Management's assumptions used in determining the Company's
         reorganization value are discussed in Note 2 to the Financial
         Statements.

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

GENERAL

The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes thereto of the Company included elsewhere
herein. The discharge of claims under the bankruptcy proceedings described
immediately below, has been reflected in the financial statements for the fiscal
year ended April 30, 1996. Effective August 8, 1996, the Company completed a
migratory merger from Delaware to Nevada by merging into a newly formed Nevada
entity, thereby changing its name from Dynamic Classics, Ltd. to Dynamic
International, Ltd. The balance sheet of the combined entity was substantially
identical to that of the Company prior to the merger. The Company and its
predecessor are herein together referred to as the "Company."

As a consequence of the Company's fresh-start accounting,  as described below,
which the Company adopted on July 31, 1996, reporting for the year ended April
30, 1997 is accomplished by combining the financial results for the three month
period ended July 31, 1996 and those of the nine month period ended April 30,
1997.

PLAN OF REORGANIZATION

In August 1995, the Company filed a voluntary petition requesting relief
under Chapter 11 of the Bankruptcy Code.

In May 1996, the Bankruptcy Court approved a plan of reorganization (the "Plan")
pursuant to which creditors received partial satisfaction of their claims. The
amount of claims allowed under the bankruptcy proceedings, aggregated
approximately $17,223,800, which exceeded the assets as recorded immediately
subsequent to the confirmation of the Plan by approximately $12,970,400. Under
the Plan, the Company made cash payments in the amount of approximately
$515,800. MG, which had purchased a promissory note from the Company's principal
financial institution, received 2,976,000 shares of Common Stock in satisfaction
of such promissory note, representing approximately 93% of the issued and
outstanding shares thereby gaining absolute control over the Company's affairs.
See ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT and
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS An additional 160,000
shares and 62,798 shares were issued to the Company's unsecured creditors and
the Company's existing security holders, respectively. The value of the cash and
securities distributed under the plan of reorganization aggregated $531,561. An
amount of $16,692,193, representing the difference between the value of the
total distribution and the amount of allowable claims under the bankruptcy, was
recorded as an extraordinary gain.                           

                                       -8-
<PAGE>   9
In addition, under the Plan, the Company merged with a newly formed Nevada
corporation, for the purpose of changing its state of incorporation. The balance
sheet of the combined entity was substantially similar to the balance sheet of
the Company prior to the merger.

Upon emergence from bankruptcy, the Company adopted fresh-start reporting on
July 31, 1996 (see Note 2 to the Financial Statements). Under fresh-start
accounting, all assets and liabilities were restated to reflect their
reorganization value which approximated book value at July 31, 1996. The
reorganization value in excess of amounts allocable to identifiable assets is
amortized over a period of eleven years. 

Pending the resolution of the bankruptcy proceedings, the Company restructured
its operations and relocated its administrative headquarters and warehouse
facilities.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1997 AND THE THREE
MONTHS ENDED JULY 31, 1996 COMPARED TO THE FISCAL YEAR ENDED APRIL 30, 1996

Total sales of $7,493,000 and $1,983,000 for the nine months ended April 30,
1997 and the three months ended July 31, 1996, respectively, were, on a combined
basis, $2,324,000 or 32% higher than the previous fiscal year. Sales of exercise
equipment of $4,124,000 and $960,000 for the nine months ended April 30, 1997,
and the three months ended July 31, 1996, respectively, were $5,084,000, on a
combined basis. These combined sales of exercise products were $532,000 or 9.5%
less than the previous fiscal year. Sales of sports bags/luggage products of
$3,368,000 and $1,023,000 for the nine months ended April 30, 1997 and the three
months ended July 31, 1996, respectively, were $4,391,000, on a combined basis.
These combined sales of sports bags/luggage products were 6.6% less than the
previous fiscal year. Sales for the fiscal year ended April 30, 1996 were
reduced by $3,211,000 of customer credits for a discontinued line of manual
treadmills and ski machines.

The Company does not believe that the decrease in sales of its products
represents a material trend. The Company believes that the decrease is
primarily the result of the reorganization proceedings and that the trend will
be reversed. The Company intends to accomplish this by expanding its product
lines and increasing the attractiveness of its products by developing new
packaging.

Operating expenses of $2,227,000 and $556,000 for the nine months ended April
30, 1997 and three months ended July 31, 1996, respectively, were, on a combined
basis, $3,901,000 less than the fiscal year ended April 30, 1996, due to the
reorganization. This decrease was represented approximately  by net changes in
the following expenses:             


<TABLE>
<CAPTION>
         <S>                          <C>               <C>                                <C>
         Freight out                  218,000           Travel & entertainment              64,000
         Insurance claims              70,000           Office equipment rental              7,000
         Lawsuits                     289,000           Miscellaneous taxes                  7,000
         Showroom rent                341,000           Consultant fees                    105,000
         Research & development        24,000           Promotional material               210,000
         Officers' salaries           138,000           Trade shows                         24,000
         Office salaries              474,000           Pension costs                      749,000
         Warehouse salaries           207,000           Telephone                           44,000
         Salesmen salaries             37,000           Data-processing fees                10,000
         Payroll taxes                 72,000           Postage                             11,000
         Fringe benefits               65,000           Professional fees                  172,000
         Repairs & maintenance          8,000           Bad debt expense                   660,000
</TABLE>

The Company's pre-tax profits of $147,000 for the fiscal year ended April 30,
1997 is comprised of a $76,000 loss for the period of May 1, 1996 to July 31,
1996, and a $223,000 profit for the period August 1, 1996 to April 30, 1997. As
a result of the merger of Dynamic Classics, Ltd. into Dynamic International,
Ltd. (see Note 2 to the Financial Statements) and the ownership change due to
the reorganization, for tax purposes, the $76,000 loss is reportable in the
Company's final tax return (see Note 5 to the Financial Statements). As there is
a loss

                                       -9-
<PAGE>   10


for the period, no current tax provision was recorded for the period May 1, 1996
to July 31, 1996. The Company also has net operating loss carry-forwards of
approximately $19,500,000, of which approximately $16,700,000 would be
utilized to offset the extraordinary gain on the discharge of pre-Petition
liabilities in its final tax return. All deferred taxes arising from the
preconfirmation net operating losses were offset entirely by a valuation
allowance. Effectively, no deferred tax benefits were realized from
preconfirmation net operating losses. Any loss carry-forward not utilized in the
Company's final tax return is lost. Accordingly, the Company has no deferred
taxes as of July 31, 1996. The Company's new tax period ending April 30, 1997
begins on August 9, 1996. The current income tax provision of $104,000 for the
nine months ended April 30, 1997 is based on pretax profits of $223,000 for the
period August 9, 1996 to April 30, 1997. The effective tax rate is 46% comprised
of 26% of federal taxes and 20% of state and local taxes.

The following table sets forth the results of operations for the periods
discussed above:



<TABLE>
<CAPTION>                                                                 

                            REORGANIZED             PREDECESSOR            PREDECESSOR
                            COMPANY FOR             COMPANY FOR            COMPANY FOR
                            THE NINE                THE THREE              THE FISCAL
                            MONTHS ENDED            MONTHS ENDED           YEAR ENDED      
                            APRIL 30, 1997          JULY 31, 1996          APRIL 30, 1996
<S>                         <C>                     <C>                    <C>
SALES                          7,492,700               1,983,200              7,151,700
OTHER INCOME                      54,600                  10,200                 98,300
                             ----------------------------------------------------------
                               7,547,300               1,993,400              7,250,000
COST OF SALES                  4,850,000               1,454,600              9,480,500
                             ----------------------------------------------------------
GROSS PROFIT (LOSS)            2,697,300                 538,800             (2,230,500)
                             ----------------------------------------------------------

OPERATING EXPENSES             2,226,600                 556,500              6,683,200
INTEREST                         198,800                  57,300                383,500
                             ----------------------------------------------------------
                               2,425,400                 613,800              7,066,700
                             ----------------------------------------------------------

REORGANIZATION                    48,900                   1,300                449,700
                             ----------------------------------------------------------
                                  48,900                   1,300                449,700
                             ----------------------------------------------------------

PRE TAX INCOME (LOSS)            223,000                 (76,300)            (9,746,900)

TAX                              103,700                       0             (7,511,000)
                             ----------------------------------------------------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM               119,300                 (76,300)            (2,235,900)
                             ----------------------------------------------------------
EXTRAORDINARY ITEM
GAIN ON DISCHARGE OF 
PREPETITION LIABILITIES                0                       0             16,692,200

TAX                                    0                       0              7,511,000
                             ----------------------------------------------------------
EXTRAORDINARY GAIN, 
NET OF TAX                             0                       0              9,181,200
                             ----------------------------------------------------------
NET INCOME (LOSS)                119,300                 (76,300)             6,945,300
                             ==========================================================

</TABLE>

On July 10, 1997, the Company and MG agreed that no further payments shall be
payable to MG under the Note (SEE ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS) until the consummation of the Company's contemplated public
offering or at the scheduled maturity of the Note, whichever occurs earlier.  

RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1996 AND 1995

Sales for the years ended April 30, 1996 were $7,151,700, a decrease of
$25,381,400 or 78% from the previous fiscal year. The decrease was primarily due
to the discontinuation of a line of manual treadmills and ski machines. Sales of
this equipment alone accounted for approximately $15,580,000 during the fiscal
year ended April 30, 1995. During the fiscal year ended April 30, 1996, as a
result of the Company's bankruptcy proceedings, it was forced to reduce its
sales of other exercise equipment and of its sports bags/luggage products which
led to a decline in sales of $5,334,700 and $1,333,600, respectively, to
$5,615,600 and $4,701,800, respectively. Sales of exercise equipment and sports
bags/luggage products during this period were offset by credits of $3,210,900
issued to customers in connection with the discontinued line of manual
treadmills and ski machines.

In 1994, the Company added a new line of products consisting primarily of
treadmills and ski machines. Sales of the treadmills and ski machines began in
June 1994. The Company sold approximately $24,000,000 of these products from
June 1, 1994 to August 23, 1995. Approximately $17,600,000 or 73% of these
products were shipped directly to customers. Due to serious manufacturing
defects and poor construction of the Company's products delivered by the
Company's manufacturers, primarily located in the People's Republic of China,
the Company was forced to allow substantial chargebacks by its customers.
Although, pursuant to a written agreement, the manufacturers acknowledged the
defects and agreed to pay for returns and to provide replacement goods at no
cost, they breached this agreement soon thereafter. The significance of the
defective problem was evident in April 1995. During this month, the Company
issued credits to customers for approximately $5,000,000 of the $7,487,000 of
credits for the fiscal year ended April 30, 1995. The Company issued another
$3,211,000 in credits for defective merchandise during the fiscal year ended
April 30, 1996.

The following table sets forth the financial statement effect of the manual
treadmills and ski machines for the periods indicated:

<TABLE>
<CAPTION>                                                                              

                                    REORGANIZED        PREDECESSOR            PREDECESSOR              PREDECESSOR    
                                    COMPANY FOR        COMPANY FOR            COMPANY FOR              COMPANY FOR    
                                    THE NINE           THE THREE              THE FISCAL               THE FISCAL     
                                    MONTHS ENDED       MONTHS ENDED           YEAR ENDED               YEAR ENDED     
                                    April 30, 1997     JULY 31, 1996          April 30, 1996           April 30, 1995
                                    --------------     -------------          --------------           --------------
<S>                                 <C>                <C>                    <C>                       <C>           
   Sales                            $     ---          $   ---                 $  597,000                $23,255,000  
   Credits                                ---              ---                 (3,210,900)                (7,487,000) 
                                    --------------     -------------          ------------              ------------- 
   Net Sales                        $     ---          $   ---                ($2,613,900)               $15,768,000  
   Inventory Reserve                      ---              ---                     ---                    (1,320,000) 
   Cost of Sales                          ---              ---                    156,000                (18,604,000) 
                                    --------------     -------------          -----------               ------------- 
   Gross Loss                       $     ---          $   ---                ($2,457,900)              ($ 4,156,000) 
                                    ==============     =============          ============              ============= 
</TABLE>

The sale of these products was discontinued in August 1995 and all inventory was
disposed of by October 1995. Currently, the Company does not anticipate that
there will be additional returns of these products or that any claims remain
to be settled. 
                                      -10-
<PAGE>   11

In addition, the Company's operating expenses decreased by approximately
$1,083,300 to $6,683,200. As a result of the Company's reorganization, the
Company had decreases in the following expenses:

<TABLE>
<CAPTION>
             <S>                                <C>
             Officers' salaries                 $160,200
             Office salaries                     180,100
             Salesmen salaries                   316,300
             Payroll taxes                        73,500
             Fringe benefits                     145,400
             Travel & entertainment              236,600
</TABLE>

For the fiscal year ended April 30, 1996, after giving effect to an
extraordinary gain as a result of the discharge of pre-petition liabilities in
the amount of $16,692,200, the Company recorded net income of $6,945,300,
compared to a net loss of $11,227,300 during the previous fiscal year. The
Company would have recorded a net loss of $9,746,900 before the extraordinary
gain, or a decrease of $1,562,500 from the prior fiscal year. This decrease
primarily reflected a reduction in the Company's selling and administrative
expenses of approximately $1,083,300 and a reduction in interest expense of
$1,001,400 primarily as a result of the bankruptcy proceedings which for the
most part exempted the Company from making interest payments on outstanding
debt.
                                                                               
The extraordinary gain on debt discharge of pre-petition liabilities which is
recorded on the Company's books in fiscal year ended April 30, 1996 is taxable
in the subsequent fiscal period, as the actual distribution to discharge the
debt occurred in July, 1996. For tax purposes, without the gain on debt
discharge, the Company had an operating loss for the year ended April 30, 1996
which resulted in the Company not having any current income tax liability
(effective tax rate of 0%). The current operating losses and the prior year loss
carry-forwards totaled approximately $19,500,000. Based on ownership changes
resulting from the reorganization (see Note 2 to the Financial Statements),
approximately $16,700,000 will be utilized to offset the extraordinary gain on
debt discharge in its final tax return for the period May 1, 1996 to August 8,
1996. The balance of the net operating loss carry-forward is lost. The deferred
tax effect of $16,700,000 using a federal tax rate of 34% and state tax rate of
11% is approximately $7,511,000.                                   

LIQUIDITY AND CAPITAL RESOURCES

NINE MONTHS ENDED APRIL 30, 1997

During the nine months ended April 30, 1997, cash used by operating activities
amounted to $294,400. This was primarily the result of an increase in inventory
of $1,032,900, cash distributions to creditors of $515,600, and a decrease in
accounts payable and accrued expenses of $56,800, which were offset by net
income of $119,400 and decreases in accounts receivable and due from supplier,
prepaid expenses, miscellaneous receivables, prepaid and refundable income
taxes, and an increase in income taxes payable of $482,300, $122,000, $132,400,
$252,000, and $103,700, respectively.                                 

                                      -11-
<PAGE>   12
Financing activities provided cash of $333,000. Proceeds from notes payable of
$600,000 were offset by repayments of notes payable, repayments of capital
lease obligations, repayments of insurance note payable, and payment of
deferred offering costs of $145,000, $29,700, $62,000, and $30,000,
respectively. The Company had positive cash flow of $38,600 for the nine months
ended April 30, 1997.                                                          

THREE MONTHS ENDED JULY 31, 1996

During the three months ended July 31, 1996, cash used by operating activities
amounted to $64,800. This was the result of a net loss of $76,400, increases in
accounts receivable and due from supplier, and prepaid expenses of $221,300 and
$100,600, respectively, which were offset by a decrease in inventory and an
increase in accounts payable and accrued expenses of $115,600 and $155,800,
respectively.

Financing activities provided cash of $43,200. Proceeds from insurance notes
payable of $77,200 were offset by repayments of insurance notes payable, and
repayments of capital lease obligations of $15,200 and $18,800, respectively.
The Company had a negative cash flow of $21,600 for the three months ended July
31, 1996.

The Company believes that cash generated by operations and the availability of
Achim's credit line to finance the Company's purchase of inventory will be
sufficient to finance its operations for the next twelve months. In addition,
pursuant to an unwritten understanding, Achim makes its lines of credit
available to the Company which will enable it to finance the purchases of its
inventory from its overseas suppliers. Also, from time to time, Achim will
purchase the products directly from the manufacturer and resell them to the
Company without markup. Achim charges the Company interest on the unpaid
balance of the purchases. As of April 30, 1997, the Company owed an amount of
$2,590,400 in principal and interest under this arrangement. As of June 30,
1997, this sum had decreased to $1,871,000. See ITEM 1 BUSINESS "Management
Agreement with Achim Importing Co., Inc."

The Company owes an aggregate of approximately $1,060,000 to MG, which is wholly
owned by Marton Grossman, the Company's Chairman and President. The loan is
evidenced by a promissory note which accrues interest at the Citibank Prime
Rate plus one percent. As of April 30, 1997 the Comapny had accrued interest in
the amount of $37,219 in connection with this loan. The promissory note is to
be paid in 24 monthly installments commencing September 5, 1996. In July 1997,
the Company and MG agreed that no payments will be due until the consummation
of the public offering, for which the Company filed a registration statement
with the Securities and Exchange Commission, or the scheduled maturity of the
note, whichever occurs earlier. The Company intends to repay the note from the
proceeds of this offering.                       

The Company has filed with the Securities and Exchange Commission a
registration statement relating to an underwritten public offering of its
securities. It is anticipated that the net proceeds after deducting expenses in
connection with the offering will be in excess of $5 million. The Company
intends to use the proceeds from the offering to purchase inventory, repay the
note to MG and for advertising and marketing. There can be no assurance as
to if and when the registration statement will be declared effective.        

SEASONALITY AND INFLATION

The Company's business is highly seasonal with higher sales typically in the
second and third quarter of the fiscal year as a result of shipments of exercise
equipment and sports bags/luggage related to the holiday season.

Management does not believe that the effects of inflation will have a material
impact on the Company, nor is it aware of changes in prices of material or other
operating costs or in the selling price of its products and services that will
materially effect the registrant.                     

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are included herein commencing on page F-1.

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

On June 26, 1996, the Company dismissed Hoberman, Miller & Co., P.C. as its
independent accountants ("Hoberman"). This action had been approved by the
Company's Board of Directors. During the past two years Hoberman did not issue a
report on the Company's financial statements that either contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.

During the period of their engagement from June 30, 1973 until June 26, 1996,
there were no disagreements between the Company and Hoberman on any matter of
accounting principles or practices, financial statement disclosure, or audit
scope and procedure, which disagreement, if not resolved to the satisfaction of
Hoberman, would have caused them to make reference to the subject matter of the
disagreement in connection with any report that was to have been, or will be,
prepared for the Company.

On July 11, 1996 the Company's Board of Directors appointed Moore Stephens, P.C.
as its independent accountants.

                                      -12-
<PAGE>   13

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

OFFICERS AND DIRECTORS

The officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
         Name                                Age         Position
         ----                                ---         --------
         <S>                                 <C>         <C>
         Marton B. Grossman                  67          Chairman and President
         Isaac Grossman                      35          Vice Chairman, Treasurer and Secretary
         William P. Dolan                    44          Vice President--Finance
</TABLE>

MARTON B. GROSSMAN has been the Chairman and Chief Executive Officer of the
Company since July 29, 1996. For the past 34 years, he has been President of
Achim, a privately-held company engaged in the import and export of window
coverings and accessories. In addition, he is President of MG Holding Corp., a
privately-held financial holding company.

ISAAC GROSSMAN has been the Company's Vice Chairman, Treasurer and Secretary
since July 1996, and Vice President of Achim since 1989. He is the son of Marton
B. Grossman, the Company's Chairman and President.

WILLIAM P. DOLAN has been the Company's Vice President-Finance since July 1996.
Prior thereto, he had been the Company's Treasurer and Secretary since 1989. Mr.
Dolan graduated from the William Paterson College of New Jersey and is a
Certified Public Accountant.

BOARD OF DIRECTORS

Each director is elected at the Company's annual meeting of stockholders and
holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified. At present, the Company's bylaws require no
fewer than one director. Currently, there are two directors of the Company. The
bylaws permit the Board of Directors to fill any vacancy and the new director
may serve until the next annual meeting of stockholders or until his successor
is elected and qualified. Officers are elected by the Board of Directors and
their terms of office are, except to the extent governed by employment
contracts, at the discretion of the Board.

ITEM 11. EXECUTIVE COMPENSATION

         The following table sets forth the compensation paid or accrued by the
Company during the three fiscal years ended April 30, 1997 (i) to its Chief
Executive Officer, (ii) its other two Executive Officers and (iii) two
additional non-Executive Officers whose cash compensation exceeded $100,000
per year in any such year.


                                      -13-
<PAGE>   14

                       SUMMARY COMPENSATION TABLE (1) (2)

<TABLE>
<CAPTION>
Name/Principal                       Year Ended           Annual Compensation          All Other
Position                              April 30          Salary          Bonus        Compensation
-------------------------------------------------------------------------------------------------
<S>                                  <C>                <C>             <C>          <C>
Marton B. Grossman                       1997           $0
President & Director                     1996           $0
                                         1995           $0

Isaac Grossman                           1997           $0
Director, Treasurer                      1996           $0
                                         1995           $0

William P. Dolan                         1997           $100,000
Vice President-Finance                   1996           $100,000
                                         1995           $ 97,691


John Holodnicki (3)                      1997           $120,000
Vice President                           1996           $120,000
                                         1995           $ 97,046

Marvin Cooper (4)                        1997           $128,125
Executive Vice President                 1996           $182,876
                                         1995           $250,099
-------------------------------------------------------------------------------------------------
</TABLE>

         (1) The above compensation does not include the use of an automobile
         and other personal benefits, the total value of which does not exceed
         as to any named officer or director or group of executive officers the
         lesser of $50,000 or 10% of such person's or persons' cash
         compensation.                

         (2) Pursuant to the regulations promulgated by the Securities and
         Exchange Commission, the table omits columns reserved for types of
         compensation not applicable to the Company.

         (3) Not an executive officer

         (4) Mr. Cooper resigned his position in March 1997.    

None of the individuals listed in the table above receive any long-term
incentive plan awards during the fiscal year.

Marton B. Grossman, the Company's Chairman and President, does not have an
employment agreement and is not being paid a salary. However, in April 1997, the
Company entered into a Bonus Agreement with Mr. Grossman which provides for the
issuance to Mr. Grossman of an aggregate of 2,000,000 shares of Common Stock if
the Company reaches certain earnings milestones, as follows: If the Company's
earnings before taxes for the fiscal year ending April 30, 1998, are no less
than $500,000, he will be issued 400,000 shares. If the Company's earnings
before taxes for the fiscal year ending April 30, 1999, are no less than
$1,000,000, he

                                      -14-
<PAGE>   15

will be issued 600,000 shares. If the Company's earnings before taxes for the
fiscal year ending April 30, 2000, are no less than $1,500,000, he will be
issued 1,000,000 shares. The stated earnings criteria are cumulative so that in
the event of an earnings shortfall during a fiscal year, shares relating to two
fiscal years will be issued provided that the Company, during the succeeding
fiscal year, realizes earnings that in the aggregate are equal to two years of
earnings as set forth in the Agreement. The Agreement also provides for
piggyback registration rights with respect to the Common Stock to be issued.


The following table sets forth the number of shares of Common Stock to be
issued to Mr. Marton Grossman issued under the Bonus Agreement:

<TABLE>
<CAPTION>

                                        PERFORMANCE OR OTHER    
                    NUMBER OF SHARES,   PERIOD UNTIL              ESTIMATED FUTURE PAYMENTS
                    UNITS OR OTHER      MATURATION OR             UNDER NON-STOCK PRICE                             
   NAME             RIGHTS              PAYOUT                    BASED PLANS
   -----            ----------------    ---------------------     ---------------------------
                                                                  Threshold   Target  Maximum
                                                                  ----------------------------
<S>                 <C>                 <C>                       <C>         <C>     <C>

Marton Grossman     2,000,000           April 30, 2000                   *        *        *
-----------
</TABLE>

* The number of shares to be issued in aprticular fiscal year is based on the 
  criteria set forth above.


COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater-than-ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.

Based solely on review of the copies of such forms furnished to the Company, or
written representations that no Forms 5 were required, the Company believes that
during the period from May 1, 1996 through April 30, 1997 other than Forms 3
that were filed late with respect to Messrs. Marton and Isaac Grossman and
William Dolan and the Marton Grossman Annuity Trust, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten-percent
beneficial owners were complied with.                 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of July 28, 1997, information regarding the
beneficial ownership of the Company's Common Stock based upon the most recent
information available to the Company for (i) each person known by the Company to
own beneficially more than five (5%) percent of the Company's outstanding Common
Stock, (ii) each of the Company's officers and directors, and (iii) all officers
and directors of the Company as a group. Each stockholder's address is c/o the
Company, 58 Second Avenue, Brooklyn, New York 11215.        

<TABLE>
<CAPTION>
                                                                Shares Owned Beneficially
                                                                    and of Record (1)
         Name and Address                                     No. of Shares             % of Total
         ----------------                                     -------------             ----------
         <S>                                                  <C>                       <C>
         Marton B. Grossman (2)                                2,976,000                   93.0
         Isaac Grossman (3)                                    2,976,000                   93.0
         William P. Dolan                                            123                      *
         All Officers and Directors
              as a Group (3 persons)                           2,976,123                   93.0
---------------------------------------------------------------------------------------------------
</TABLE>

                                 * Less than 1%

         (1) Includes shares issuable within 60 days upon the exercise of all
         options and warrants. Shares issuable under options or warrants are
         owned beneficially but not of record.

         (2) Consists of shares of Common Stock held by a series of trusts
         (collectively, the "Grossman Trust") for the benefit of relatives of
         Mr. Grossman. Under its terms, the Grossman Trust will return to Mr.
         Grossman annually until August 1998, a portion of the shares held by
         the Grossman Trust. The number of shares to be returned to Mr. Grossman
         is based on the then current market price of the Common Stock and can
         therefore not be determined at the present time. Mr. Grossman disclaims
         beneficial ownership in the shares held by the Grossman Trust that will
         not be returned to him.

         (3) Consists of shares held by the Grossman Trust of which Mr. Isaac
         Grossman is currently a beneficiary as to 464,600 shares. The actual
         number of shares held by the Grossman Trust as to which Isaac Grossman
         is a beneficiary may be smaller since under the terms of the Grossman
         Trust, a portion of the shares may be returned to Marton Grossman as
         described in footnote (2). Mr. Grossman is a trustee of the Grossman
         Trust and in that capacity shares voting power as to the shares held by
         the Grossman Trust.

                                      -15-
<PAGE>   16

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with the plan of reorganization, MG purchased from the Company's
principal lender a note in the principal amount of approximately $6,822,530. MG
is wholly owned by Marton Grossman, the Company's Chairman and President. The
note was subsequently repaid by the Company through the issuance of 2,976,000
shares of Common Stock to MG. MG assigned the Common Stock to a trust for the
benefit of members of Mr. Grossman's family.

Also in connection with the plan of reorganization, MG loaned approximately
$1,205,000 to the Company to consummate the plan and other expenses. The Company
issued a promissory note to MG evidencing the loan and granted it a security
interest in all of the Company's assets. The promissory note is to be paid in 24
monthly installments commencing September 5, 1996. The note accrues interest at
the Citibank prime rate plus one percent. In July 1997, the Company and MG
agreed that no principal or interest payments under the note would be due until
the consummation of this offering or the scheduled maturity of the note,
whichever occurs earlier.

Pursuant to the Warehousing Agreement between the Company and Achim, Achim
performs certain administrative services on behalf of the Company. Under the
Warehousing Agreement, Achim assists, among other things, in the maintenance of
financial and accounting books and records, the preparation of monthly financial
accounts receivable aging schedules and other reports and credit checks on the
Company's customers. Achim also provides warehousing services consisting of
receiving, shipping and storing of the Company's merchandise. The Warehousing
Agreement has a term of two years and is automatically renewable for one year
periods unless written notice of termination shall have been given at least six
months prior to the commencement of a renewal period.

In consideration for the services performed under the Warehousing Agreement,
Achim receives an annual fee, payable monthly, calculated as a percentage of
the Company's invoiced sales ranging from 4% of invoiced sales under $30
million to 3% for sales of $60 million or more. In addition, Achim receives a
service fee in the amount of 1.5% of the Company's invoiced sales to customers
and accounts located in the United States if payment is made by letter of
credit and 1% if such customers and accounts are located outside the United
States, irrespective of manner of payment. The Company also pays a monthly fee
of 3% of the Company's invoiced sales in connection with the warehousing
services performed by Achim under the Warehousing Agreement. During the fiscal
year ended April 30, 1997, the Company accrued approximately $458,500 in fees
under the Warehousing Agreement.

Achim is controlled by Marton B. Grossman. The Company believes that the terms
of the Warehousing Agreement with Achim are at least as favorable as would have
been obtained from an unaffiliated third party.

In addition, pursuant to an unwritten understanding, Achim makes its lines of
credit available to the Company which will enable it to finance the purchases of
its inventory from its overseas suppliers. Also, from time to time, Achim will
purchase the products directly from the manufacturer and resell them to the
Company without markup. Achim charges the Company interest on the unpaid balance
of the purchases. As of April 30, 1997, the Company owed an amount of
$2,590,400 in principal and interest under this arrangement. As of June 30,
1997, this sum had decreased to $1,871,000.             

The Company occupies a warehouse consisting of approximately 54,400 square feet,
of which 4,500 square feet are dedicated to office space, located at 58 Second
Avenue, Brooklyn, New York. The property is owned by Sym Holding Corp. which is
owned by Isaac Grossman and one of his siblings. He is the Company's Vice
Chairman, Treasurer and Secretary. The property is leased to Achim which makes
the property available to the Company. Other than the service fees paid by the
Company under the Warehousing Agreement, the Company pays no rent for the
property. See ITEM 1. BUSINESS "Management Agreement with Achim Importing Co.,
Inc.".

                                      -16-
<PAGE>   17

                                     PART IV

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

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

         The financial statements are listed in the Index to Financial
         Statements on page F-1 and are filed as part of this annual report.

         3.                Exhibits

         The Index to Exhibits following the Signature Page indicates the
         exhibits which are being filed herewith and the exhibits which are
         incorporated herein by reference.

(b)                        Reports on Form 8-K

         No Reports on Form 8-K were filed during the last quarter of the fiscal
         year ended April 30, 1997.

                                      -17-
<PAGE>   18

                                   SIGNATURES



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

                                  DYNAMIC INTERNATIONAL, LTD.




                                  By: /s/ Marton B. Grossman
                                      -------------------------
                                      Marton B. Grossman
                                      Chairman and President


Dated:  29th day of July, 1997



Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below as of the 29th day of July, 1997 by the
following persons on behalf of Registrant and in the capacities indicated.






                                  By: /s/ Marton B. Grossman
                                      -------------------------
                                      Marton B. Grossman
                                      Chairman and President






                                  By: /s/ Isaac Grossman
                                      -------------------------
                                      Isaac Grossman
                                      Vice Chairman, Treasurer, and Secretary






                                  By: /s/ William P. Dolan
                                      -------------------------
                                      William P. Dolan
                                      Vice President-Finance
                                      (Chief Financial and Accounting Officer)

                                      -18-
<PAGE>   19

                                    EXHIBITS

1        Form of Underwriting Agreement(1)

2.01     Agreement of Merger dated July 19, 1996 between the Company and Dynamic
         Classics, Ltd. (2)

2.02     Second Amended and Modified Plan of Reorganization dated February 22,
         1996 (the "Plan") (3)

2.03     Errata Sheet and Correction Statement with respect to the Plan dated
         May 7, 1996 (3)

2.04     Order Confirming the Plan dated May 23, 1996 (3)

3.01     Certificate of Incorporation (2)

3.02     Bylaws (2)

4.02     Form of Common Stock Certificate (2)

10.01    License Agreement with Spalding Sports Worldwide dated April 1, 1994
         (4)

10.02    License Agreement dated January 8, 1993 with Chrysler Corporation (4)

10.03    Endorsement Agreement dated December 22, 1994 with Kathy Ireland (5)*

10.04    Warehousing and Service Agreement dated as of September 1, 1996 with
         Achim Importing Co., Inc.(5)

10.05    License Agreement dated November 1, 1996 by and between New Century
         Marketing & Distributors, Inc. and Dynamic Insulated Products,
         Inc.(1)*

10.06    Bonus Agreement with Marton Grossman (1)        

16.01    Letter from Hoberman Miller & Co. dated October 23, 1996 (6)
------------------------------------------------------------------------------
         *Subject to a request for confidential treatment from Securities and
         Exchange Commission. Specific portions of the document for which
         confidential treatment has been requested have been blacked out. Such
         portions have been filed separately with the Commission pursuant to the
         application for confidential treatment.

         (1)      Incorporated by reference from the Company's Registration
                  Statement on Form S-1 (Registration No. 333-25425).

         (2)      Incorporated by reference to the Company's Form 8-B filed
                  October 3, 1996.

         (3)      Incorporated by reference to the Company's Report on Form 8-K
                  filed October 3, 1996.

         (4)      Incorporated by reference to the Annual Report on Form 10-K
                  for 1994 for Dynamic Classics, Ltd. (File No. 0-8376).

         (5)      Incorporated by reference to the Annual Report on Form 10-K
                  for 1996.

         (6)      Incorporated by reference to the Current Report on Form 8-K/A
                  dated October 23, 1996.

              

                                      -19-
<PAGE>   20
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY


                                    CONTENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----

<S>                                                                        <C>
Independent Auditors' Reports                                              F-1 to F-2

Consolidated Financial Statements:

    Balance Sheets as of April 30, 1997 and 1996                           F-3 to F-4

    Statements of Operations for the nine months ended April 30, 1997,
       three months ended July 31, 1996
       and the years ended April 30, 1996 and 1995                            F-5

    Statements of Stockholders' Equity (Deficit) for the nine months
       ended April 30, 1997, three months ended
       July 31, 1996 and the years ended April 30, 1996 and 1995              F-6

    Statements of Cash Flows for the nine months ended April 30, 1997,
       three months ended July 31, 1996
       and the years ended April 30, 1996 and 1995                         F-7 to F-8

    Notes to Financial Statements                                          F-9 to F-23

Independent Auditor's Report on Supplemental Schedule                         F-24 

    Schedule II - Valuation and Qualifying Accounts                           F-25
</TABLE>
<PAGE>   21
                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Shareholders
Dynamic International, Ltd.


We have audited the accompanying consolidated balance sheet of Dynamic
International, Ltd. (formerly Dynamic Classics, Ltd., see Note 2) and its
subsidiary as of April 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
nine months ended April 30, 1997, the three months ended July 31, 1996, and the
year ended April 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dynamic
International, Ltd. (formerly Dynamic Classics, Ltd.) and its subsidiary as of
April 30, 1997 and 1996, and the results of their operations and their cash
flows for the nine months ended April 30, 1997, the three months ended July 31,
1996, and the year ended April 30, 1996, in conformity with generally accepted
accounting principles.

As discussed more fully in Note 2 to the consolidated financial statements, on
August 23, 1995, the Company filed a voluntary petition requesting relief under
Chapter 11 of the United States Bankruptcy Code. On May 23, 1996, the United
States Bankruptcy Court for the Southern District of New York confirmed the
Company's Amended and Modified Plan of Reorganization dated February 22, 1996.


                                                    Moore Stephens, P.C.
                                                    Certified Public Accountants

New York, New York
June 27, 1997, except as 
to Note 4, for which the
date is July 10, 1997.



                                       F-1
<PAGE>   22
                          INDEPENDENT AUDITOR'S REPORT


Board of Directors
Dynamic International, Ltd.


We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Dynamic International, Ltd.
(formerly Dynamic Classics, Ltd., see Note 2) and Subsidiary for the year ended
April 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. 

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Dynamic International, Ltd. (formerly Dynamic Classic, Ltd.) and
Subsidiary for the year ended April 30, 1995 in conformity with generally
accepted accounting principles.

As more fully discussed in Note 2 the Company, on August 23, 1995, filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Act.



/s/ HOBERMAN, MILLER & CO., P.C.
--------------------------------
New York, New York
June 26, 1996

                                       F-2
<PAGE>   23

                  DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                       REORGANIZED     PREDECESSOR
                                                                         COMPANY         COMPANY
                                                                         APRIL 30,       APRIL 30,
                                                                           1997            1996
                                                                           ----            ----
                                     ASSETS

<S>                                                                   <C>              <C>
CURRENT ASSETS
       Cash and cash equivalents                                      $    43,543      $    26,515
       Accounts receivable - trade (net of allowance for doubtful
          accounts of $167,000 in 1997 and 1996)                          887,089        1,036,927
       Due from suppliers                                                  65,273           26,760
       Inventory                                                        3,301,735        2,384,469
       Prepaid expenses                                                    60,272           81,693
       Miscellaneous receivables                                            2,658          135,039
       Prepaid and refundable income taxes                                 39,914          291,146
                                                                      -----------      -----------
                Total Current Assets                                    4,400,484        3,982,549
                                                                      -----------      -----------

PROPERTY AND EQUIPMENT
       Tools and dies                                                     707,939          707,939
       Furniture and equipment                                            102,205          102,205
       Capitalized equipment leases                                       576,071          576,071
                                                                      -----------      -----------
                                                                        1,386,215        1,386,215
       Accumulated depreciation                                        (1,260,924)      (1,156,160)
                                                                      -----------      -----------
                Total Property and Equipment, net                         125,291          230,055
                                                                      -----------      -----------

OTHER ASSETS
       Due from suppliers                                                  36,142           36,142
       Security deposits                                                    4,650            4,650
       Deferred stock offering costs                                      116,023               --
       Reorganization value in excess of amounts allocable to
          identifiable assets, net                                        124,472               --
                                                                      -----------      -----------
                Total Other Assets                                        281,287           40,792
                                                                      -----------      -----------
TOTAL ASSETS                                                          $ 4,807,062      $ 4,253,396
                                                                      ===========      ===========
</TABLE>




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

                                       F-3
<PAGE>   24
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                                   (Continued)

<TABLE>
<CAPTION>
                                                                         REORGANIZED       PREDECESSOR
                                                                           COMPANY           COMPANY
                                                                          APRIL 30,         APRIL 30,
                                                                             1997              1996
                                                                             ----              ----

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

<S>                                                                      <C>               <C>
CURRENT LIABILITIES
     Accounts payable and accrued expenses - non related                 $   846,234      $ 1,009,248
     Accounts payable and accrued expenses - related party                 2,627,580        2,129,893
     Capital lease obligations - current                                      24,228           48,731
     Income taxes payable                                                    103,700               --
     Loan payable - related party                                            844,531          557,000
     Other liabilities                                                            --          531,561
                                                                         -----------      -----------
            Total Current Liabilities                                      4,446,273        4,276,433
                                                                         -----------      -----------

OTHER LIABILITIES
     Capital lease obligations, net of current portion                            --           23,965
     Loan payable - related party                                            215,254               --
                                                                         -----------      -----------
            Total Other Liabilities                                          215,254           23,965
                                                                         -----------      -----------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)
     Common stock, par value $.01 per share; authorized
         5,000,000 shares; issued 1,744,396 shares                                --           17,444
     Common stock, par value $.001 per share; authorized
         50,000,000 shares; issued 3,198,798 shares                            3,199               --
     Additional paid in capital                                               22,940          590,291
     Accumulated deficit                                                          --         (637,237)
     Retained Earnings (since July 31, 1996, date of reorganization,
         total deficit eliminated was $713,601)                              119,399               --
                                                                         -----------      -----------
                                                                             145,538          (29,502)
     Less: Treasury stock, at cost, 15,000 shares                                 --          (17,500)
     Less: Treasury stock, at cost, 540 shares                                    (3)              --
                                                                         -----------      -----------
            Total Stockholders' Equity (Deficit)                             145,535          (47,002)
                                                                         -----------      -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $ 4,807,062      $ 4,253,396
                                                                         ===========      ===========
</TABLE>


All of the liabilities as stated above at April 30, 1996, the period during
which the Company was operating under reorganization proceedings, are
post-petition liabilities. The discharge of prepetition liabilities including
liabilities subject to compromise has been recorded and the gain on the debt
discharge is reflected in the consolidated statement of operations for the year
ended April 30, 1996.

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

                                       F-4
<PAGE>   25
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        REORGANIZED         PREDECESSOR
                                                         COMPANY              COMPANY
                                                       FOR THE NINE        FOR THE THREE              PREDECESSOR COMPANY
                                                       MONTHS ENDED         MONTHS ENDED               FOR THE YEARS ENDED
                                                         APRIL 30,            JULY 31,                     APRIL 30,
                                                           1997                 1996                1996                  1995
                                                           ----                 ----                ----                  ----
<S>                                                    <C>                 <C>                  <C>                   <C>
REVENUES
   Sales                                                $7,492,729         $ 1,983,164          $  7,151,715          $ 32,533,097
   Other income                                             54,642              10,201                98,272                70,638
                                                        ----------         -----------          ------------          ------------
                                                         7,547,371           1,993,365             7,249,987            32,603,735
COST OF SALES                                            4,850,002           1,454,637             9,480,484            34,761,846
                                                        ----------         -----------          ------------          ------------
GROSS PROFIT (LOSS)                                      2,697,369             538,728            (2,230,497)           (2,158,111)
                                                        ----------         -----------          ------------          ------------
OPERATING EXPENSES
   Research and development                                  4,042                  --               101,992                44,962
   Shipping expenses                                       452,093             116,894               738,681             1,198,563
   Selling expenses                                        686,214             198,993             1,254,006             2,455,493
   Advertising and promotion                               152,563               1,819               389,672               346,400
   General and administrative                              931,683             238,791             4,198,800             3,720,998
   Interest and bank charges - non related                  21,462               4,174               248,625             1,384,898
   Interest and bank charges - related party               177,339              53,096               134,928                    --
                                                        ----------         -----------          ------------          ------------
                                                         2,425,396             613,767             7,066,704             9,151,314
                                                        ----------         -----------          ------------          ------------
REORGANIZATION ITEMS:
   Bankruptcy administration costs                          48,874               1,325               449,693                    --
                                                        ----------         -----------          ------------          ------------

INCOME (LOSS) BEFORE
   PROVISION FOR INCOME TAXES                              223,099             (76,364)           (9,746,894)          (11,309,425)
                                                        ----------         -----------          ------------          ------------
INCOME TAX PROVISION (BENEFIT)
   Current                                                 103,700                  --                    --              (396,143)
   Deferred                                                     --                  --            (7,511,000)              314,053
                                                        ----------         -----------          ------------          ------------
                                                           103,700                  --            (7,511,000)              (82,090)
                                                        ----------         -----------          ------------          ------------
INCOME (LOSS) BEFORE
   EXTRAORDINARY ITEM                                      119,399             (76,364)           (2,235,894)          (11,227,335)
                                                        ----------         -----------          ------------          ------------

EXTRAORDINARY ITEM:
   Gain on discharge of prepetition liabilities                 --                  --            16,692,193                    --
   Income tax provision                                         --                  --             7,511,000                    --
                                                        ----------         -----------          ------------          ------------
       Extraordinary gain, net of income tax                    --                  --             9,181,193                    --
                                                        ----------         -----------          ------------          ------------
NET INCOME (LOSS)                                       $  119,399         $   (76,364)         $  6,945,299          $(11,227,335)
                                                        ==========         ===========          ============          ============

INCOME  PER SHARE OF COMMON
   SHARES                                               $     0.04

WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES                                         3,198,258
</TABLE>


The earnings per share as it relates to the predecessor company is not
meaningful due to the reorganization.

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

                                      F-5
<PAGE>   26
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)




<TABLE>
<CAPTION>
                                                                     Additional        Retained         Treasury     Stockholders'
                                                  Common              Paid in          Earnings          Stock          Equity
                                                   Stock              Capital         (Deficit)         at Cost        (Deficit)
                                               ------------       ------------       -----------       --------       -----------

<S>                                            <C>                <C>                <C>               <C>            <C>
Balance - May 1, 1994                          $     17,444       $    590,291       $ 3,644,799       $(17,500)      $ 4,235,034

Net Loss                                                                             (11,227,335)                     (11,227,335)
                                               ------------       ------------       -----------       --------       -----------

Balance - April 30, 1995                             17,444            590,291        (7,582,536)       (17,500)       (6,992,301)

Net Income                                                                             6,945,299                        6,945,299
                                               ------------       ------------       -----------       --------       -----------

Balance - April 30, 1996                             17,444            590,291          (637,237)       (17,500)          (47,002)

Net Loss for the Three Months Ended
   July 31, 1996                                                                         (76,364)                         (76,364)
                                               ------------       ------------       -----------       --------       -----------

Balance - July 31, 1996                              17,444            590,291          (713,601)       (17,500)         (123,366)

Eliminate predecessor equity accounts and
   to reflect new issuance of shares in
   connection with fresh start                       (1,450)          (580,146)          713,601         17,497           149,502
                                               ------------       ------------       -----------       --------       -----------

                                                     15,994             10,145                --             (3)           26,136

To reflect 1 for 5 reverse stock split              (12,795)            12,795                                                 --
                                               ------------       ------------       -----------       --------       -----------

Balance - July 31, 1996                               3,199             22,940                --             (3)           26,136

Net income for the Nine Months Ended
   April 30, 1997                                                                        119,399                          119,399
                                               ------------       ------------       -----------       --------       -----------

Balance - April 30, 1997                       $      3,199       $     22,940       $   119,399       $     (3)      $   145,535
                                               ============       ============       ===========       ========       ===========
</TABLE>



The par value of the common stock prior to July 31, 1996 was $.01 per share. The
par value of the common stock of the reorganized company commencing July 31,
1996 is $.001 per share.




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

                                       F-6
<PAGE>   27
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              REORGANIZED        PREDECESSOR
                                                               COMPANY             COMPANY
                                                             FOR THE NINE       FOR THE THREE              PREDECESSOR COMPANY
                                                             MONTHS ENDED       MONTHS ENDED               FOR THE YEARS ENDED
                                                               APRIL 30,           JULY 31,                     APRIL 30,
                                                                 1997                1996              1996                1995
                                                                 ----                ----              ----                ----

<S>                                                          <C>                <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net Income (loss)                                         $   119,399        $   (76,364)       $ 6,945,299        $(11,227,335)
   Adjustments to reconcile net income (loss) to
     net cash provided (used) by operating activities:
       Depreciation and amortization                              87,681             26,191            220,400             268,148
       Amortization of deferred interest under
         capital leases                                               --                 --                 --              17,979
       Reserve for bad debts                                          --                 --            167,000                  --
       Loss on disposal of property
          and equipment                                               --                 --             71,030                  --
       Deferred income taxes                                          --                 --         (7,511,000)            313,039
       Income on partial discharge of
         capital lease obligations                                    --                 --            (77,403)                 --
       Interest converted to principal                            11,439             36,670
       Reorganization item:
         Gain on discharge of debt, net
          of income tax                                               --                 --         (9,181,193)                 --
         Cash distribution                                      (515,638)                --                 --                  --
       Changes in operating assets and liabilities:
       (Increase) Decrease in operating assets:
          Accounts receivable and due
            from suppliers                                       482,254           (221,255)           220,882           6,843,636
          Inventory                                           (1,032,882)           115,616          1,065,821           3,260,017
          Prepaid expenses                                       122,017           (100,596)           168,856            (183,186)
          Miscellaneous receivables                              132,379                 --           (108,179)             51,352
          Prepaid and refundable income taxes                    252,046               (812)                --            (291,146)
          Security deposits                                           --                 --             86,858              (3,537)
         Increase (Decrease) in operating liabilities:
          Prepetition liabilities                                     --                 --          8,614,728
          Accounts payable and accrued expenses                  (56,766)           155,784         (1,828,715)          1,951,001
          Income taxes payable                                   103,700                 --                 --            (200,770)
                                                             -----------        -----------        -----------        ------------
       Net Cash Provided (Used) by
         Operating Activities                                   (294,371)           (64,766)        (1,145,616)            799,198
                                                             -----------        -----------        -----------        ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of property and equipment                                 --                 --            (47,933)           (143,995)
                                                             -----------        -----------        -----------        ------------

       Net Cash Used by Investing Activities                 $        --        $        --        $   (47,933)       $   (143,995)
                                                             -----------        -----------        -----------        ------------
</TABLE>



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

                                       F-7
<PAGE>   28
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Continued)

<TABLE>
<CAPTION>
                                                     REORGANIZED       PREDECESSOR
                                                       COMPANY           COMPANY
                                                      FOR THE NINE    FOR THE THREE             PREDECESSOR COMPANY
                                                      MONTHS ENDED     MONTHS ENDED             FOR THE YEARS ENDED
                                                       APRIL 30,          JULY 31,                   APRIL 30,
                                                        1997               1996              1996                1995
                                                        ----               ----              ----                ----

<S>                                                  <C>              <C>                <C>                <C>
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from notes payable                       $      --        $        --        $ 3,393,628        $ 24,250,741
   Repayment of notes payable                               --                 --                 --         (26,460,130)
   Proceeds from notes payable-related party           600,000                 --                 --                  --
   Repayment of notes payable-related party           (145,324)                --                 --                  --
   Proceeds from loan payable-related party                 --                 --            557,000                  --
   Proceeds from bankers acceptances                        --                 --          1,118,556           9,321,558
   Repayment of bankers acceptances                         --                 --         (4,127,139)         (7,876,394)
   Repayment of officer's loans payable                     --                 --                 --              (2,373)
   Repayment of capital lease obligations              (29,656)           (18,812)           (64,552)           (109,308)
   Proceeds from insurance note payable                     --             77,225                 --                  --
   Repayment of insurance note payable                 (62,020)           (15,205)                --                  --
   Payment of deferred offering costs                  (30,043)                --                 --                  --
                                                     ---------        -----------        -----------        ------------

       Net Cash Provided (Used) by
         Financing Activities                          332,957             43,208            877,493            (875,906)
                                                     ---------        -----------        -----------        ------------

Net Increase (Decrease) in Cash and
   Cash Equivalents                                     38,586            (21,558)          (316,056)           (220,703)

Cash and Cash Equivalents, beginning of period           4,957             26,515            342,571             563,274
                                                     ---------        -----------        -----------        ------------

Cash and Cash Equivalents, end of period             $  43,543        $     4,957        $    26,515        $    342,571
                                                     =========        ===========        ===========        ============



SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid during the periods for:
     Interest                                        $  25,451        $     1,553        $   203,964        $  1,196,322
     Income tax                                      $      --        $        --        $        --        $    116,319
</TABLE>


SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

During the year ended April 30, 1995 the Company incurred capital lease
obligations of $143,855 in connection with lease agreements to acquire
equipment.

In July 1996, pursuant to a Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code, the Company discharged approximately $17.2
million of allowed claims including a secured loan in the amount of $ 6.8
million owed to one creditor. The claims were discharged by a cash payment of
$515,638 and the issuance of 3,198,798 shares of common stock. Of this amount,
2,976,000 shares were issued to one creditor which also satisfied $15,923 of
loans made by the chief executive officer of the Company to the Company.

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

                                       F-8
<PAGE>   29
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         a.       The Company

                  Dynamic International, Ltd. (the "Company") is engaged in the
                  sale and distribution of a diverse line of hand exercise and
                  light exercise equipment, sports bags/luggage and gift
                  products which are distributed throughout the United States.

         b.       Revenue

                  Revenue is recognized when the goods are shipped to the
                  customer.

         c.       Fresh Start Reporting

                  Financial accounting during a Chapter 11 proceeding is
                  prescribed in "Statement of Position 90-7 of the American
                  Institute of Certified Public Accountants," titled "Financial
                  Reporting by Entities in Reorganization Under the Bankruptcy
                  Code" ("SOP 90-7"), which the Company adopted effective July
                  31, 1996. The emergence from the Chapter 11 proceeding
                  resulted in the creation of a new reporting entity without any
                  accumulated deficit and with the Company's assets and
                  liabilities restated at their estimated fair values (also see
                  Note 2 Reorganization and Management Plan). Because of the
                  application of fresh start reporting, the financial statements
                  for periods after reorganization are not comparable in all
                  respects to the financial statements for periods prior to
                  reorganization.

         d.       Principles of Consolidation

                  The consolidated financial statements include the accounts of
                  the Company and the wholly owned inactive subsidiary. All
                  significant intercompany accounts and transactions have been
                  eliminated.

         e.       Cash and Cash Equivalents

                  The Company considers all highly liquid investments with a
                  maturity of three months or less when purchased to be cash
                  equivalents.

         f.       Inventories

                  Inventories consist principally of finished goods and are
                  stated at the lower of cost; last-in, first-out method, (LIFO)
                  or market.

         g.       Property, Equipment and Depreciation

                  Property and equipment are stated at cost. Depreciation is
                  provided generally by accelerated methods over the estimated
                  useful lives of the assets. Expenditures for maintenance and
                  repairs are charged against income. Estimated useful lives
                  used in calculating depreciation are as follows:

                      Tools and dies                     5 years
                      Furniture and equipment            5 years to 7 years


                                       F-9
<PAGE>   30
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

         h.       Deferred Offering Costs

                  Legal and accounting costs incurred in connection with the
                  proposed public offering of the Company's common stock will be
                  charged to additional paid-in capital upon completion of the
                  proposed public offering. If the offering is not consummated,
                  these costs will be expensed.

         i.       Advertising and Promotion

                  Advertising and promotion expense, primarily comprised of
                  print media distributed to current and potential customers, is
                  expensed as incurred.

         j.       Earnings Per Share

                  Earnings (loss) per share are based on the weighted average
                  number of shares outstanding as adjusted for the 1 for 5
                  reverse split. Common stock equivalents are included in the
                  calculation if they are dilutive. Amounts for the predecessor
                  company (see Note 2) are not presented as they are not
                  meaningful.

         k.       Use of Estimates

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

         l.       Stock Options and Similar Equity Instruments

                  On January 1, 1996, the Company adopted the disclosure
                  requirements of Statement of Financial Accounting Standards
                  ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
                  for stock options and similar equity instruments
                  (collectively, "Options") issued to employees; however, the
                  Company will continue to apply the intrinsic value based
                  method of accounting for options issued to employees
                  prescribed by Accounting Principles Board ("APB") Opinion No.
                  25, "Accounting for Stock Issues to Employees," rather than
                  the fair value based method of accounting prescribed by SFAS
                  No. 123. SFAS No. 123 also applies to transactions in which an
                  entity issues its equity instruments to acquire goods or
                  services from non-employees. Those transactions must be
                  accounted for based on the fair value of the consideration
                  received or the fair value of the equity instruments issued,
                  whichever is more reliably measurable.

         m.       Reorganization value in excess of amounts allocable to 
                  identifiable assets
          
                  The excess reorganization value is amortized over a period of 
                  eleven years on the straight line basis (see Note 2).
                  Management re-evaluates the periods of amortization to
                  determine whether subsequent events and circmustances warrant
                  revised estimates of useful lives. If impairment is deemed to
                  exist, the excess reorganization value will be written down
                  to fair value or projected discounted cash flows from related
                  operations. As of April 30, 1997, management expects the
                  asset to be fully recoverable.


                                      F-10
<PAGE>   31
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


2.       REORGANIZATION AND MANAGEMENT'S PLAN

         In 1994, the Company added a new line of products consisting primarily
         of treadmills and ski machines. Initially, the Company was successful
         in marketing these products. However, due to defective products
         delivered by the Company's manufacturers, primarily located in the
         People's Republic of China, the Company was forced to allow substantial
         returns by its customers. Although pursuant to a written agreement, the
         manufacturers acknowledged the defects and agreed to pay for returns
         and to provide replacement goods at no cost, they breached this
         agreement soon thereafter. For the year ended April 30, 1996, the
         Company suffered significant losses in the amount of approximately
         $3,700,000 from its venture into this line of business.

         At April 30, 1995, the Company was not in compliance with certain of
         the financial covenants which enabled the bank to declare the
         outstanding balances of all amounts due the bank to be immediately due
         and payable. In July 1995, the lender bank effectively terminated its
         relationship with the Company as it experienced difficulty in complying
         with the terms of the loans. As a result, certain collateral was
         liquidated by the lender bank. On August 22, 1995, the lender bank sold
         and assigned the loan balance of $6.8 million. The assigned loan was
         secured by a security interest in substantially all of the Company's
         assets. As discussed below, the assignor was issued 2,976,000 shares of
         new common stock in consideration of forgiving the $6.8 million
         outstanding loan.

         On August 23, 1995, the Company filed a voluntary petition for relief
         under Chapter 11 of the United States Bankruptcy Code. A Plan of
         Reorganization was filed by the Company on October 30, 1995 and
         subsequently amended and modified on February 22, 1996. On April 5,
         1996, the creditors voted to accept the amended and modified Plan (the
         "Plan"),and on May 23, 1996, the court confirmed the Plan. The Plan was
         substantially consummated in August 1996. For accounting purposes, the
         Company assumed that the Plan was consummated on July 31, 1996.

         As contemplated by the Plan, a new company, Dynamic International, Ltd.
         was formed on July 29, 1996. On August 8, 1996, the Company merged into
         Dynamic International, Ltd. The capital structure and the balance sheet
         of the combined entity, immediately after the merger, were
         substantially the same as those of the Company prior to the merger. The
         "new common stock" is referred to below as the common stock of Dynamic
         International, Ltd.

         Chapter 11 claims filed against the Company and subsequently allowed in
         the bankruptcy proceeding totaled approximately $17.2 million. The Plan
         discharged such claims through distributions of cash of approximately
         $515,000 and issuance of shares of new common stock. The cash
         distributions were paid in August 1996. A total of 3,198,798 shares of
         new common stock were issued on July 25, 1996 out of which 2,976,000
         shares were issued to one secured creditor (see Note 4); 160,000 shares
         were issued to unsecured creditors, and 62,798 shares were issued to
         the reconfirmation common stock equity interest holders.


                                      F-11
<PAGE>   32
                  DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (continued)


2.       REORGANIZATION AND MANAGEMENT'S PLAN(cont'd)

         The discharge of claims was reflected in the April 30, 1996 financial
         statements. The stock distribution value is based on the reorganization
         value of the Company determined by projecting cash flows over an eleven
         year period and discounting such cash flows at a cost of capital rate
         of 15% and the statutory federal, state and local tax rates currently
         in effect. The discounted residual value at the end of the forecast
         period is based on the capitalized cash flows for the last year of that
         period. Cash distributions and the estimated stock distribution value
         totaling $531,561 has been recorded as other liabilities as of April
         30, 1996. The gain of approximately $16.7 million resulting from the
         excess of the allowed claims over the total value of the cash and the
         common stock distributed to the secured and unsecured creditors has
         been recorded as an extraordinary gain for the year ended April 30,
         1996.

         The eleven year cash flow projection was based on estimates and
         assumptions about circumstances and events that have not yet taken
         place. Such estimates and assumptions are inherently subject to
         significant economic and competitive uncertainties and contingencies
         beyond the control of the Company, including, but not limited to those
         with respect to the future courses of the Company's business activity.
         Accordingly, there will usually be differences between projections and
         actual results because events and circumstances frequently do not occur
         as expected, and those differences may be material.

         As part of the reorganization, the Company will continue to sell hand
         exercise, light exercise equipment and luggage and sports bags, all of
         which have a proven market acceptance. Management believes it can
         increase revenues by increasing its focus on direct response marketing.
         Therefore, it intends to develop plans to use infomercials to market
         these products. Management believes these increased marketing efforts,
         adequate financing through its related entity, Achim Importing,
         discontinuance of the unprofitable products, and sustainable gross
         profit percentages, can be effectively implemented within the next
         twelve months. The Company adopted "fresh-start reporting" in
         accordance with Statement of Position ("SOP") 90-7 issued by the
         American Institute of Certified Public Accountants on July 31, 1996.
         SOP 90-7 calls for the adoption of "fresh-start reporting" if the
         reorganization value of the emerging entity immediately before the date
         of confirmation is less than the total of all postpetition and allowed
         claims, and if holders of existing voting shares immediately before
         confirmation receive less than 50 percent of the voting shares of the
         emerging entity, both conditions of which were satisfied by the
         Company. Although the confirmation date was May 23, 1996, fresh-start
         reporting was adopted on July 31, 1996. There were no material
         fresh-start related adjustments during the period May 23, 1996 to July
         31, 1996.

         Under fresh start accounting, all assets and liabilities are restated
         to reflect their reorganization value, which approximates book value at
         date of reorganization. Therefore, no reorganization value has been
         allocated to the assets and liabilities. In addition, the accumulated
         deficit of the predecessor company at July 31, 1996 totaling $713,601
         was eliminated, and at August 1, 1996, the reorganized company's
         financial statements reflected no beginning retained earnings or
         deficit. The reorganization value in excess of amounts allocable to
         identifiable assets is being amortized over an eleven year period on
         the straight line method. Amortization expense for the nine months
         ended April 30, 1997 was $9,108.


                                      F-12
<PAGE>   33
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


2.       REORGANIZATION AND MANAGEMENT'S PLAN (cont'd)

         The following is a proforma balance sheet of the reorganized Company
         based on the discounted cash flows as discussed above.

<TABLE>
<CAPTION>
                                       Balance                                                  Reorganized
                                        Sheet               Stock              Fresh              Company
                                    July 31, 1996          Exchange            Start           July 31, 1996
                                     ------------         -----------        -----------        -----------

<S>                                  <C>                  <C>               <C>                 <C>
Current Assets:
    Cash                             $      4,957                                               $     4,957
    Accounts receivable, net            1,258,182                                                 1,258,182
    Inventory                           2,268,853                                                 2,268,853
    Prepaid & refundable
      income taxes                        291,960                                                   291,960
    Other assets                          328,030                                                   328,030
                                     ------------                                               -----------
        Total Current Assets            4,151,982                                                 4,151,982

    Fixed assets, net                     203,863                                                   203,863
    Other Assets                           56,848                                                    56,848
    Reorganization value in
      excess of amounts allo-
      cable to identifiable assets                                               133,580            133,580
                                     ------------                           -------------       -----------
        Total Assets                 $  4,412,693                             $  133,580        $ 4,546,273
                                     ============                               ========        ===========

Current Liabilities:
    Loans payable - MG               $    593,670                                               $   593,670
    Loans payable - Trade                  62,020                                                    62,020
    Accounts payable and
      accrued expenses                  3,294,925                                                 3,294,925
    Capital lease obligations              32,226                                                    32,226
    Other current liabilities             531,561             (15,923)                              515,638
                                     ------------         -----------        -----------        -----------
        Total Current Liabilities       4,514,402             (15,923)                 0          4,498,479

Other liabilities                          21,658                                                    21,658
                                     ------------         -----------        -----------        -----------
        Total Liabilities               4,536,060             (15,923)                 0          4,520,137
                                     ------------         -----------        -----------        -----------
Common stock par value                     17,444             (17,444)                               15,994
                                                               15,994
Additional paid in capital                590,290            (590,291)          (580,021)            10,145
                                                              590,167
Accumulated deficit                      (713,601)                               713,601                  0
                                     ------------         -----------        -----------        -----------
                                         (105,867)             (1,574)           133,580             26,139
Less: treasury stock                      (17,500)             17,497                                   (3)
                                     ------------         -----------        -----------        -----------
        Total Equity                     (123,367)             15,923            133,580             26,136
                                     ------------         -----------        -----------        -----------
Total Liabilities and Equity         $  4,412,693         $         0        $   133,580        $ 4,546,273
                                     ============         ===========        ===========        ===========
</TABLE>


                                      F-13
<PAGE>   34
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


2.       REORGANIZATION AND MANAGEMENT'S PLAN (cont'd)

         The other current liabilities adjustment is all comprised of loans from
         MG Holding Corp. to pay creditors pursuant to the reorganization plan.
         The liability to the reorganized company is $515,638.

3.       INVENTORIES

         If the first-in, first-out (FIFO) method of accounting had been used by
         the Company, reported net income would have been decreased by $294,000
         in fiscal 1997. Net income would have been increased by $263,000 in
         fiscal 1996, and the net loss would have been increased by $246,000 in
         fiscal 1995. On a FIFO basis, reported year end inventories would have
         increased by $24,000 in 1997, $318,000 in 1996 and $55,000 in 1995.

4.       RELATED PARTY TRANSACTIONS

         The Company has an agreement with an entity ("Related Party") owned by
         the major shareholder, whereby the entity agreed to provide warehousing
         and general administrative services to the Company. The agreement is
         for a period of two years with automatic year to year renewals.

         The monthly fee for the warehousing services is 3% of monthly sales.
         The fee for general administrative services is payable monthly and is
         based on annual sales in percentages ranging from 3% to 4% of invoiced
         sales. Total warehousing and administrative expenses charged to
         operations for the nine months ended April 30, 1997 were approximately
         $364,000, for the three months ended July 31, 1996 were approximately
         $95,000 and for the year ended April 30, 1996 were approximately
         $164,000.

         The Related Party also purchases inventory for the Company and charges
         the Company for the invoiced amount of the inventory.

         The loan payable to the related party totaled $1,059,785 at April 30,
         1997.  Such note is secured by all of the Company's assets. On August
         30, 1996, loans and other payables, including accrued interest
         totaling $1,205,109, were converted into the note payable. Interest is
         charged at the Citibank prime rate plus 1%. This note is payable in 24
         equal installments of principal and interest through August 5, 1998.
         At April 30, 1997, the Company was in arrears in the amount of
         $274,273 consisting of principal and interest. On July 10, 1997, the
         note was amended to allow the arrears and note payments to be deferred
         until the consummation of the Company's contemplated public offering
         (see Note 10) or the scheduled maturity of the note, whichever is
         earlier. Annual maturities of the note at 9.25% interest per annum is
         as follows:

<TABLE>
<CAPTION>
             For the Year Ending
                April 30,
<S>                                                    <C>
                1997 (in arrears)                      $    237,053
                1998                                        607,478
                1999                                        215,254
                                                       ------------
                                                       $  1,059,785
                                                       ============
</TABLE>

                                      F-14
<PAGE>   35
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


4.       RELATED PARTY TRANSACTIONS (cont'd)

         Interest expense charged to operations for the nine months ended April 
         30, 1997 was $67,898, for the three months ended July 31, 1996 was
         $16,746 and $19,924 for the year ended April 30, 1996.

         Other amounts payable to the related party totaled $2,627,580 and
         $2,129,893, respectively, at April 30, 1997 and 1996. Such amounts
         represent unpaid inventory purchases and various fees due to the
         related party. The amounts payable for the purchase of inventory bears
         interest at the Citibank prime rate plus 1% from September 1996 to
         April, 1997 and the Citibank prime rate plus 3% prior to September
         1996. The prime rate used was 8.25% for the period September 1996 to
         April 1997 and 8.5% for the period prior to September 1996 . Interest
         expense charged to operations was $111,411 for the nine months ended
         April 30, 1997, $34,380 for the three months ended July 31, 1996 and
         $115,004 for the year ended April 30, 1996. The weighted average
         interest rate at April 30, 1997 and 1996 was 9.25% and 11.5%,
         respectively.

5.       INCOME TAXES

         The Company utilizes an asset and liability approach to determine the
         extent of any deferred income taxes, as described in Statement No. 109,
         "Accounting for Income Taxes" of the Financial Accounting Standards
         Board. This method gives consideration to the future tax consequences
         associated with differences between financial statement and tax bases
         of assets and liabilities.

         There were no income tax liabilities at April 30, 1996. Income tax
         liabilities at April 30, 1997 included in income taxes payable consist
         of the following :

<TABLE>
<CAPTION>
                                                                    1997
                                                                    ----

<S>                                                              <C>
         Current taxes                                           $  103,700

         Deferred taxes:
             Federal                                                   -
             Other income and franchise taxes                          -
                                                                 ----------
             Total Income Tax Liability                          $  103,700
                                                                 ==========
</TABLE>

         At April 30, 1997, there are no temporaty differences that would
result in deferred tax asset on liability. The deferred income tax assets and
liabilities at April 30, 1996 consist of the following:

<TABLE>
<CAPTION>
                                                                        1996
                                                                        ----
<S>                                                               <C>
         DEFERRED TAX ASSETS:
             Bad debt reserves                                    $     75,000
             Difference in book and tax treatment
                for advertising costs                                   16,000
             Net operating loss carryforwards                        8,783,000
             Other deferred tax assets                                  50,000
                                                                  ------------
                TOTAL DEFERRED TAX ASSETS                            8,924,000
                                                                  ------------
</TABLE>


                                      F-15
<PAGE>   36
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


5.       INCOME TAXES (cont'd)

         DEFERRED TAX LIABILITY (ALLOCATED TO EXTRAORDINARY GAIN):

<TABLE>
<S>                                                   <C>
             Gain on discharge of prepetition
                liabilities                                 7,511,000
                                                      ---------------
                                                            7,511,000
                                                      ---------------
             Valuation allowance for deferred
                tax assets                                 (1,413,000)
                                                      ---------------
                                                      $        -0-
                                                      ===============
</TABLE>

         The valuation allowance decreased by $1,094,000 in 1996.


         A summary of the provision (credit) for income taxes is as follows:

<TABLE>
<CAPTION>
                          Reorganized                    Predecessor
                            Company                        Company
                          -----------          --------------------------------
                          Nine Months
                             Ended             Year  Ended           Year Ended
                         April 30, 1997       April 30, 1996       April 30, 1995
                          -----------          -----------          -----------

<S>                       <C>                  <C>                  <C>
Current:
  Federal                 $    59,000          $        --          $  (401,529)
  State and Local              44,700                   --                5,386
                          -----------          -----------          -----------
                              103,700                   --             (396,143)
                          -----------          -----------          -----------

Deferred:
  Federal                          --           (5,675,000)             313,039
  State and Local                  --           (1,836,000)               1,014
                          -----------          -----------          -----------
                                   --           (7,511,000)             314,053
                          -----------          -----------          -----------
                          $   103,700          $(7,511,000)         $   (82,090)
                          ===========          ===========          ===========
</TABLE>




                                      F-16
<PAGE>   37
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


5.       INCOME TAXES (cont'd)

         The reconciliation of the federal statutory income tax expense (credit)
         to the Company's actual income tax (credit) is as follows:

<TABLE>
<CAPTION>
                                      Reorganized                  Predecessor
                                        Company                      Company
                                      -----------         -------------------------------
                                      Nine Months
                                         Ended            Year Ended           Year Ended
                                     April 30, 1997     April 30, 1996       April 30, 1995
                                      -----------         -----------         -----------

<S>                                   <C>                 <C>                 <C>
   U.S. federal income taxes
       at statutory rate              $    75,900         $ 2,361,000         $(3,845,205)
   Losses for which no benefit
       was provided                            --                  --             982,371
   Change in valuation
       allowance                               --          (1,094,000)          2,506,820
   Reversal of previously
        established tax asset                  --                  --             313,039
   Tax effect of permanent
       differences                          5,400               8,000              17,035
   State income taxes, net of
        federal benefit                    25,000             764,000                  --
   Benefit of unused net
        operating losses                       --          (1,412,000)                 --
  Differences due to change in
        rate                                   --            (627,000)                 --
  Other                                    (2,600)                 --          (   56,150)
                                      -----------         -----------         -----------
                                      $   103,700         $   -0-             $   (82,090)
                                      ===========         ===========         ===========
</TABLE>

         The Company had a net loss for the three months ended July 31, 1996 and
         accordingly, the Company has no income tax provision or liability for
         the period.

         The Company has a net operating loss for the year ended April 30, 1995
         of approximately $8,400,000 of which $1,200,000 was carried back to
         prior years. The Company has filed prior year amended returns to claim
         the net operating loss carryback which results in refundable income
         taxes of approximately $287,000. As of April 30, 1997, the Company
         received $251,000 of the refundable income taxes. The balance of
         $36,000 is included in prepaid and refundable income taxes at April 30,
         1997.

         At April 30, 1996, the net operating loss carryforward totaled
         approximately $19,500,000 of which approximately $16,700,000 will be
         utilized by the Company in its final tax return for the period May 1,
         1996 to August 8, 1996 (see Note 2 re: merger into Dynamic
         International, Ltd.). Based on ownership changes resulting from the
         reorganization (see Note 2), the balance of the net operating loss
         carryforward is expected to be limited by the current provision of
         Section 382 of the Internal Revenue Code.



                                      F-17
<PAGE>   38
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


6.       COMMITMENTS AND CONTINGENCIES

         a.       Capital Leases

                  The Company is the lessee of equipment under capital leases
                  expiring in various years through 1998.

                  In September 1995, the lessor of the Company's capital leases
                  agreed to forgive the balance of the unpaid lease payments
                  through September 1995 and to accept 60% of the remaining
                  balance of the lease payments. As a result, the Company
                  recognized $77,403 of income on the adjustment of the lease
                  term. Such income is included in other income.

         b.       Operating Leases

                  Prior to August, 1995 the Company occupied space for its
                  sales, executive offices, assembly and storage facilities
                  under long term operating leases expiring August 1998. The
                  leases provided for additional payments for insurance, taxes
                  and other charges related to the premises. As part of the
                  bankruptcy proceeding, the Company was discharged of the
                  obligations of the leases. In October 1995 the Company
                  relocated its premises, where the Company is charged
                  warehousing fees and administration fees based on sales volume
                  (see Note 4).

                  Rent expense for the years ended April 30, 1996 and 1995 was
                  $341,427 and $583,596, respectively.

         c.       Royalty Obligations

                  The Company has entered into various royalty, licensing, and
                  commission agreements for products sold by the Company. These
                  agreements provide for minimum payments and a percentage of
                  specific product sales, over a period of one to eight years.
                  Royalty expense for the nine months ended April 30, 1997 was
                  approximately $353,000, for the three months ended July 31,
                  1996 was $94,000 and for the years ended April 30, 1996 and
                  1995 was approximately $275,000 and $779,000, respectively.

         d.       Defined Benefit Pension Plan

                  On September 26, 1996, the Defined Benefit Employees
                  Retirement Plan was terminated under a distress termination
                  approved by the United States Bankruptcy Court. The defined
                  benefit pension obligation prior to the termination was
                  $860,945. As part of the bankruptcy proceeding, the obligation
                  was settled for $38,743 resulting in a gain of $822,202 which
                  is reflected in the extraordinary gain on discharge of
                  prepetition liabilities for the year ended April 30, 1996.






                                      F-18
<PAGE>   39
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


6.       COMMITMENTS AND CONTINGENCIES (cont'd)

         e.       401(k) Plan

                  On January 1, 1990, the Company adopted a 401(k) plan. The
                  plan covers all eligible employees. Eligible employees may
                  contribute from 1% to 15% of their salaries subject to the
                  statutory maximum of $9,240 for the 1995 and 1994 calendar
                  years. The plan also provided matching contributions by the
                  Company of 25% of the employees' contributions to a maximum
                  contribution of 1% of the employees' salaries. On May 31,
                  1996, the plan's summary plan description was modified to make
                  matching contributions discretionary. No matching
                  contributions were made by the Company for the 1996 calendar
                  year nor will any be made by the 1997 calendar year.

                  The 401(k) expense amounted to $0 for the period May 1, 1996
                  to April 30, 1997 and $2,600 and $9,460 for the years ended
                  April 30, 1996 and 1995, respectively.

         f.       Union Pension Plan

                  Certain union employees participate in a multiemployer
                  retirement plan sponsored by their union. The Company is
                  required to pay seven cents ($.07) per hour per employee to
                  the plan. The data available from administrators of the multi-
                  employer plan is not sufficient to determine the accumulated
                  benefit obligation, nor the net assets attributable to the
                  multiemployer plan in which Company employees participate. As
                  of October 1995, the Company no longer has any union
                  employees. For the years ended April 30, 1996 and 1995 pension
                  expenses for the union employees were $3,745 and $1,680,
                  respectively.

         g.       Litigation

                  In the normal course of its operations, the Company has been
                  named as a defendant in several product liability lawsuits
                  that in the opinion of management are not material to the
                  financial statements taken as a whole and are substantially
                  covered by the Company's product liability insurance.

7.       MAJOR CUSTOMERS

         During the year ended April 30, 1996, sales to three major customers
         were approximately 19%, 18%, and 14% ($1,359,000, $1,287,000 and
         $1,001,000, respectively) of the Company's net sales. At April 30,
         1996, accounts receivable from these customers totaled $465,506. During
         the year ended April 30, 1995, sales to two major customers were
         approximately 26% and 14% ($8,459,000 and $4,555,000, respectively) of
         the Company's net sales. At April 30, 1995, there were no accounts
         receivable from these customers. The Company sells a limited amount
         to foreign customers. There were no material receivables subject to
         foreign currency fluctuations.

         During the nine months ended April 30, 1997 sales to major customers
         were approximately $3,080,180 . At April 30, 1997 accounts receivable
         from these customers totaled $379,902. During the three months ended
         July 31, 1996, sales to major customers were approximately $837,450.
         At July 31, 1996, accounts receivable from these customers totaled
         $548,726.



                                      F-19
<PAGE>   40
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


8.       CREDIT RISK/FINANCIAL INSTRUMENTS

         Due to the nature of its business and the volume of sales activity, the
         Company's cash balance occasionally exceeds the $100,000 protection of
         FDIC insurance. At April 30, 1997 there was no such excess balance.
         At April 30, 1996 such excess balances totaled approximately $207,000.
         The Company has not experienced any losses and believes it is not
         exposed to any significant credit risk from cash and cash equivalents.

         The Company routinely assesses the financial strength of its customers
         and, based upon factors surrounding the credit risk of its customers,
         establishes an allowance for uncollectible accounts and, as a
         consequence, believes that it does not have an accounts receivable
         credit risk exposure beyond the allowance provided. The Company does
         not require collateral or other security to support financial
         instruments subject to credit risk.

         The carrying amounts of short-term debt reported in the balance sheets
         approximate fair value. The fair value of the Company's long-term debt
         (including the current portion) also approximates its carrying amount
         in the balance sheets based on the rates currently available to the
         Company for similar debt with similar terms.

9.       SIGNIFICANT RISKS AND UNCERTAINTIES

         a.       The Company's exercise products compete with products marketed
                  and sold by a number of companies. The Company's main
                  competitors in this area possess far greater financial and
                  other resources, including sales forces, than the Company.
                  However, the Company believes that as a result of its ability
                  to use trademark names for which it pays royalties, it will be
                  able to retain its share of the market. Nevertheless, there
                  can be no assurance that the Company will be able to
                  effectively compete with these companies as well as with other
                  smaller entities.

                  The Company's luggage products compete with products designed
                  by a number of the largest companies in the industry. The
                  Company believes that because of its concentration on the
                  upscale lifestyle and more specialized leisure market that are
                  associated with its use of trademark names, the Company will
                  be able to continue to grow its luggage business.
                  Nevertheless, there can be no assurance that the Company will
                  be able to effectively compete with these companies as well as
                  with other smaller entities.

         b.       Most of the Company's exercise products are purchased from
                  Phillippines, Korea, and Taiwan. The Company believes that, if
                  necessary, it will be able to obtain its products from firms
                  located in other countries at little, if any, additional
                  expense. As a consequence, the Company believes that an
                  interruption in deliveries by a manufacturer located in a
                  particular country will not have a material adverse impact on
                  the business of the Company. Nevertheless, because of
                  political instability in a number of the supply countries,
                  occasional import quotas and other restrictions on trade or
                  otherwise, there can be no assurance that the Company will at
                  all times have access to a sufficient supply of merchandise.





                                      F-20
<PAGE>   41
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)


10.      OTHER ITEMS

         a.       Public Offering

                  The Company is offering for public sale 1,200,000 units, each
                  consisting of one share of common stock, one Class A Warrant
                  and one Class B Warrant at $5.00 per unit. Although no
                  assurance can be given that the sale will be successful, the
                  Company intends to utilize the net proceeds of approximately
                  $5,100,000 for the repayment of current debt, purchase of
                  inventory, general corporate services, and working capital.

                  Simultaneous with the public offering, the Company intends to
                  declare a one for five reverse stock split. All share data for
                  the reorganized Company has been adjusted for the split.

                  The following supplementary earnings per share reflect the
                  repayment of indebtedness of $1,300,000 and the resulting
                  reduction of interest expense and increase in net income as if
                  it had taken place at the beginning of the reorganization
                  period.

<TABLE>
<CAPTION>
                                                           For the Nine Months
                                                          Ended April 30, 1997
                                                          --------------------
<S>                                                       <C>
                  Net Income                                     155,738
                  Earnings Per Share                                 .05
                  Number of Shares                             3,458,258
</TABLE>


         b.       Earn Out Agreement

                  In March 1997, the Company entered into an agreement with
                  Marton Grossman, the Company's chairman and president, which
                  provides for the issuance to Mr. Grossman an aggregate
                  2,000,000 shares of common stock if the Company reaches
                  certain earnings criteria as follows:

<TABLE>
<CAPTION>
                                                  Earnings Before                 Shares to
                    Year Ending                      Income Tax                   Be Issued
                    -----------                      ----------                   ---------

<S>                 <C>                           <C>                             <C>
                    April 30, 1998                 $   500,000                      400,000
                    April 30, 1999                 $ 1,000,000                      600,000
                    April 30, 2000                 $ 1,500,000                    1,000,000
</TABLE>

                  If the earning criteria is not met in any one of the above
                  years, but is cumulatively met in the subsequent year, then
                  the number of shares to be issued will be the cumulative
                  number of shares at that year end. Issuance of the shares will
                  result in compensation expense to the Company. Compensation
                  expense will be measured based on the fair value of the shares
                  at the time the performance conditions are achieved.
                  Determination will be based on the best estimate of the
                  outcome of the performance condition. Compensation will be
                  recognized in the periods in which the performance conditions
                  are achieved.



                                      F-21
<PAGE>   42
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS
                                   (continued)


10.      OTHER ITEMS (cont'd)

         c.       Consulting Agreement

                  The Company anticipates entering into a three year consulting
                  agreement with the underwriter to provide financial consulting
                  services for a fee of $20,000.

         d.       Underwriter's Purchase Warrants

                  As part of the consideration of its services in connection
                  with the registration statement, the Company has agreed to
                  issue to the underwriter, for nominal consideration, warrants
                  to purchase up to 120,000 units at an exercise price of $8.25
                  per unit for a period of five years. The Class A Warrants and
                  Class B Warrants underlying the units included in the
                  underwriter's warrants will be exercisable at a price of $9.90
                  and $16.50 per share, respectively, or 165% of the then
                  exercise price of the warrants offered to the public for a
                  period of five years commencing with the closing of the
                  registration statement. The non-cash cost of such warrants,
                  representing a cost of raising capital, will be recorded as a
                  charge and credit to additional paid-in capital when the
                  warrants are issued. As capital in nature, they are not
                  compensatory.

         e.       Underwriter Option

                  The Company has granted the underwriter an option exercisable
                  for 45 days from the effective date of the registration 
                  statement to purchase up to 180,000 units at the public
                  offering price less the underwriting discounts.

11.      AUTHORITATIVE PRONOUNCEMENTS

         a.       The FASB issued SFAS No. 125, "Accounting for Transfer and
                  Servicing of Financial Assets and Extinguishment of
                  Liabilities" in June of 1996. SFAS No. 125 provides accounting
                  and reporting standards for transfers and servicing of
                  financial assets and extinguishment of liabilities. SFAS No.
                  125 is effective for financial statements issued for fiscal
                  years occurring after December 31, 1996 and is to be applied
                  prospectively. The Company does not have transactions which
                  come under the general heading of "Transfers of Servicing of
                  Financial Assets," and the added refinements for
                  "Extinguishment of Debt" are not expected to be significant.
                  Therefore, SFAS 125 is not expected to have any effect on the
                  Company.

         b.       The FASB has issued SFAS No. 128, "Earnings Per Share" and
                  FASB No. 129, "Disclosure of Information About Capital
                  Structure." Both are effective for financial statements issued
                  for periods ending after December 15, 1997. SFAS No. 128
                  simplifies the computation of earning per share by replacing
                  the presentation of primary earnings per share with a
                  presentation of basic earnings per share. The statement
                  requires dual presentation of basic and diluted earnings per
                  share by entities with complex capital structures. Basic
                  earnings per share include no dilution and is computed by
                  dividing income available to common stockholders by the
                  weighted average number of shares outstanding for the period.
                  Diluted earnings per share reflect the potential dilution of
                  securities that could share in the earnings of an entity
                  similar to fully diluted earnings per share.



                                      F-22
<PAGE>   43
                   DYNAMIC INTERNATIONAL, LTD. AND SUBSIDIARY
                          NOTES TO FINANCIAL STATEMENTS
                                   (continued)


11.      AUTHORITATIVE PRONOUNCEMENTS (cont'd)

         b.       While the Company has not analyzed SFAS No. 128 sufficiently
                  to determine its long-term impact on per share reported
                  amounts, SFAS No. 128 should not have a significant effect on
                  historically reported per share loss amounts.

                  SFAS No. 129 does not change any previous disclosure
                  requirements but, rather, consolidates existing disclosure
                  requirements for ease of retrieval.

         c.       In June 1997, the FASB issued SFAS 130, "Reporting
                  Comprehensive Income" and SFAS 131, "Disclosures About
                  Segments of an Enterprise and Related Information". Both are
                  effective for financial statements for fiscal years beginning
                  after December 15, 1997. The Company will adopt both
                  statements on May 1, 1998. Adoption is not expected to have a
                  material impact on the financial position and results of
                  operations.









                                      F-23
<PAGE>   44






              INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE



To the Board of Directors and Shareholders
Dynamic International, Ltd.

Our report on the consolidated financial statements of Dynamic International,
Ltd. and its subsidiary as of April 30, 1997 and 1996 and for the nine months
ended April 30, 1997 and three months ended July 31, 1996, is included on page
F-1  of this Form 10-K. In connection with our audit of such financial
statements, we have also audited the related accompanying financial statement,
Schedule II - Valuation and Qualifying Accounts for the nine months ended April
30, 1997, the three months ended July 31, 1996 and the year ended April 30,
1996. 

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.




                                                    Moore Stephens, P.C.
                                                    Certified Public Accountants


New York, New York
June 27, 1997





                                      F-24
<PAGE>   45
                      DYNAMIC CLASSICS, LTD. AND SUBSIDIARY
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS



<TABLE>
<CAPTION>
                                                        REORGANIZED      PREDECESSOR
                                                          COMPANY          COMPANY
                                                        FOR THE NINE     FOR THE THREE       PREDECESSOR COMPANY
                                                        MONTHS ENDED     MONTHS ENDED        FOR THE YEARS ENDED
                                                          APRIL 30,        JULY 31,               APRIL 30,
                                                             1997            1996                  1996       
                                                          ---------       ---------              ---------    


<S>                                                       <C>             <C>                 <C>          
Allowance for doubtful accounts balance - beginning       $ 167,000       $ 167,000           $      --    
Additions charged to income                                      --              --             167,000    
Recovery of uncollectible accounts - net                         --              --                  --    
Writeoffs of uncollectible amounts                               --              --                  --    
                                                          ---------       ---------           ---------    
Allowance for doubtful accounts balance - ending          $ 167,000       $ 167,000           $ 167,000    
                                                          =========       =========           =========    
</TABLE>



                                      F-25