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================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X]     Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
        Act of 1934 for the fiscal year ended December 31, 1998 or

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

                             DAW TECHNOLOGIES, INC.
              -----------------------------------------------------
             (Exact name of registrant as specified in its charter)

           UTAH                            0-21818               87-0464280
----------------------------        ---------------------    -------------------
(State or other jurisdiction        (Commission File No.)      (IRS Employer
     of incorporation)                                       Identification No.)

                               2700 SOUTH 900 WEST
                           SALT LAKE CITY, UTAH 84119
              -----------------------------------------------------
          (Address of principal executive offices, including zip code)

       Registrant's telephone number, including area code: (801) 977-3100

           Securities registered pursuant to Section 12(b) of the Act:

                                      None

           Securities registered pursuant to Section 12(g) of the Act:

                                 Title of Class
                          Common Stock, $0.01 Par Value

        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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

        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 best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

        The aggregate market value of the Common Stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on the
NASDAQ National Market System on March 25, 1999, was approximately $16,554,533.
Shares of Common Stock held by each officer and director and by each person who
may be deemed to be an affiliate have been excluded.

        As of March 31, 1999, the Registrant had 12,479,711 shares of Common
Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

        The Registrant's definitive Proxy Statement relating to the Annual
Meeting of Shareholders scheduled for June 1, 1999 is incorporated by reference
in Part III of this report.

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                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
<S>                                                                                         <C>
PART I ....................................................................................  1

Item 1. Business...........................................................................  1

Item 2. Properties.........................................................................  8

Item 3. Legal Proceedings..................................................................  9

Item 4. Submission of Matters to a Vote of Security Holders................................  9

PART II ................................................................................... 10

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.............. 10

Item 6. Selected Financial Data............................................................ 11

Item 7. Management's Discussion and Analysis of Financial Condition and Results of 
        Operations......................................................................... 12

Item 8. Financial Statements and Supplementary Data........................................ 19

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 
        Disclosure......................................................................... 19

PART III................................................................................... 20

Item 10, 11, 12 and 13..................................................................... 20

PART IV ................................................................................... 21

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8BK .................. 21

SIGNATURES................................................................................. 23

FINANCIAL STATEMENTS....................................................................... F-1
</TABLE>


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Information contained in this Report contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
which can be identified by the use of forward-looking terminology such as "may,"
"will," "should," "expect," "anticipate," "estimate," or "continue," or the
negative thereof or other variations thereon or comparable terminology. These
forward-looking statements are subject to risks and uncertainties that include,
but are not limited to, those identified in this report, described from time to
time in the Company's other Securities and Exchange Commission filings, or
discussed in the Company's press releases. Actual results may vary materially
from expectations.

                                     PART I

ITEM 1. BUSINESS.

INTRODUCTION

        Daw Technologies, Inc. (the "Company") is a leading supplier of
ultra-clean manufacturing environments, or cleanrooms, to the semiconductor
industry. The Company designs, engineers, manufactures, installs and services
all principal component systems for advanced cleanrooms. The Company is a
single-source provider of the entire cleanroom, providing make-up and
recirculating air handling systems, ceiling systems, wall systems and floor
systems. The Company also provides its customers with services to integrate the
design, installation and servicing of cleanrooms, including architectural
engineering and design, installation, testing, certification, tool fit-up, and
continuing on-site service and support. The Company believes its integrated
approach enables customers to benefit from accelerated cleanroom design and
installation, simplified project control, single-source performance
certification and cost effectiveness.

        Cleanrooms are critical to the semiconductor manufacturing process.
Process yields are highly dependent upon controlling contamination levels and
other environmental variables. These variables include the number of particles,
humidity, gasses, vibration, temperature and electro-magnetic fields. To be
competitive, semiconductor manufacturers must meet increasingly stringent
standards for cleanliness and environmental control in their fabrication
facilities ("fabs"). Moreover, because of shorter product life cycles and
competitive pressures, semiconductor manufacturers are demanding that new
cleanrooms be operational more quickly. The Company believes its advanced
systems and integrated solution allow it to effectively address the requirements
of efficient cleanroom design and installation.

        The Company markets its cleanrooms through a direct sales force to
customers building new fabs or renovating existing facilities. The majority of
its business comes from repeat sales to these customers.

INDUSTRY BACKGROUND

        The rapid pace of advances in semiconductor technology has led to
shorter semiconductor product and facility life cycles. To bring new
semiconductor products to market more rapidly, semiconductor manufacturers seek
to compress design and construction lead times for new fabs. As feature sizes
shrink and as wafer size, chip densities and the number of process steps
increase, environmental variables must be more stringently controlled. Even
slight deviations in key environmental parameters, most of which are controlled
within the cleanroom, can negatively affect yields. Achieving higher yields is
the motivating force behind many of the progressively more rigorous cleanroom
standards for semiconductor fabs.

        To meet the functional specifications required for these cleanrooms,
each part of the cleanroom must meet stringent technical requirements, and all
systems must be precisely integrated. In addition to the basic requirements for
contamination control, semiconductor cleanrooms must function seamlessly as part
of the overall production process. The cleanroom envelope might be viewed as a
process tool in the same manner as the lithography tools, deposition tools,
etching tools and other equipment inside the cleanroom.

        Because of shorter product life cycles and the need to ramp new products
up quickly, manufacturers are demanding that cleanrooms be designed and
installed more rapidly. Historically, semiconductor manufacturers have


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purchased cleanroom component systems and related services from multiple
vendors. Under this "traditional" approach, vendors are selected through an
iterative process where requests for quotation ("RFQ") are issued, initial
designs are prepared, and revised bids are submitted. This evaluation and
redesign may occur repeatedly until final vendor selections are made. Following
this process, final designs are prepared and the project is initiated. Component
systems purchased in this fashion may be installed by the original vendor, or by
non-affiliated installers.

        Historically, the semiconductor industry has been very cyclical in
nature and has seen sudden and dramatic changes in demand for its products.
Capital spending by semiconductor manufacturers closely follows the trend in the
sale of chips. As chip sales rise, so too does capital spending. From 1988 to
1996, chip sales increased from roughly $50 billion per year to almost $150
billion. In response to this tremendous growth in sales, chip manufacturers
increased capital spending in new equipment and fab facilities from around $12
billion to almost $45 billion during the same time period. Since their peak in
1995 chip sales have dropped to around $122 billion in 1998, thus causing a
dramatic decrease in capital expenditures by the industry over that period of
time.

INTEGRATED SOLUTION

        The Company's integrated solution incorporates design, engineering,
manufacturing, installation, testing, product development and on-going customer
support and services. In contrast to the traditional approach, the Company
believes that its integrated cleanroom approach provides customers with greater
project control by reducing the number of vendors, subcontractors and suppliers
and simplifying coordination of the project. The advantages of the Company's
integrated solution include:

        Accelerated Design and Installation. The integrated approach facilitates
improved coordination of the installation process thus allowing the Company to
meet the increasingly demanding schedules for the design and construction of new
fabs. Delays from scheduling conflicts are minimized, since the Company
manufactures and installs its own systems. Problems with system integration are
minimized, since the Company designs its systems for compatibility. Components
for newly-developed systems can be pre-assembled at the factory to test
tolerances and new designs prior to installation. As a single source supplier,
the Company can readily adapt to changes in scheduling or design of any
cleanroom system.

        Simplified Project Control. The Company's approach offers customers a
single point of contact for the cleanroom, avoiding the need for the customer to
coordinate the activities of multiple vendors. The Company believes that having
one company design, manufacture and install the entire cleanroom facilitates
coordination of the total construction.

        Single-Source Performance Guarantee. The Company certifies that the
cleanroom will meet the agreed upon performance specifications. The Company's
approach provides the customer a single point of accountability for the entire
cleanroom envelope. Although component manufacturers can design their individual
cleanroom components to meet the technical specifications provided by the fab
designer, they cannot effectively guarantee the as-built performance of the
entire cleanroom after their components have been integrated with other
manufacturer's components by a non-affiliated installer.

        Cost Effectiveness. Having a single vendor responsible for the design,
manufacture and installation of the entire cleanroom allows for significant
on-site overhead savings over the traditional multi-vendor approach. A portion
of these savings result from reduced administrative costs. By designing,
manufacturing and installing all major cleanroom system components, the Company
is able to avoid the redundancy that typically occurs with large, complex,
multiple supplier projects. In addition, the Company's customers benefit from
increased revenues resulting from bringing a new fab into operation in a shorter
time period.

COMPANY STRATEGY

        The Company's stated mission is to be the leading worldwide provider of
ultraclean manufacturing environments by providing totally integrated system
solutions. The Company's strategy for achieving this goal includes the following
elements:


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        Expand Market Acceptance of Integrated Solution. The Company believes
its integrated solution best addresses semiconductor manufacturers' needs to
increase yields and expand or develop fabs as quickly as possible at a lower
total cost. A number of leading semiconductor companies have adopted the
Company's integrated solution, and the Company is focusing its marketing efforts
on encouraging broader market acceptance of this approach.

        Build Long-Term Customer Relationships with Industry Leaders. The
semiconductor industry is highly concentrated, with the top 10 semiconductor
manufacturers accounting for approximately 65% of capital expenditures. Most of
the Company's revenue is derived from sales to leading semiconductor
manufacturers. The Company's marketing strategy is focused on building long-term
relationships with the industry leaders, their architectural and engineering
firms and other parties involved in the cleanroom project. By building such
relationships, the Company is positioned to work with those advanced
semiconductor manufacturers that most benefit from its integrated approach.

        Expand Local Service Network. In order to provide timely and efficient
local customer service and support, the Company has established project
management, design and sales offices near major semiconductor manufacturing
centers. By expanding the Company's project management network and locating new
offices in major semiconductor manufacturing centers, the Company believes it is
in a better position to compete for service contracts. In addition, the Company
believes a local service network enables it to strengthen customer
relationships, expand sales leads and receive more direct customer feedback.

        Expand International Business. Although the majority of the Company's
revenues have been generated from projects in North America, revenues from
international operations have increased over the last several years. The Company
will continue to seek to increase revenues from international projects by
expanding marketing efforts and bidding activities in the Asia/Pacific Rim
region and Europe. To support its international expansion strategy, the Company
has established design and engineering offices in Hsin-Chu, Taiwan, Livingston,
Scotland and Aix-en-Provence, Southern France. Information concerning revenues
summarized by geographical area is set forth in Note C of the footnotes to the
financial statements.

        Maintain Technological Leadership. The Company believes technological
capability is a significant factor in the sale of cleanroom solutions. The
Company seeks to develop technologically advanced solutions to its customers'
evolving needs. Many major new cleanrooms designed by the Company are customized
in some way to meet the manufacturer's needs. This customer-driven innovation
allows the Company to regularly improve its systems to respond to evolving
industry requirements. In addition, the Company seeks to expand its business
through strategic relationships, joint ventures and acquisitions and to extend
its business to related industry segments if appropriate.

        Diversification of Revenue Base. As a result of the past three year down
turn in the semiconductor industry, the Company's revenue base from cleanroom
sales has been severely impacted by reduced capital spending by semiconductor
companies. To counter this drop in sales and reduce the Company's dependence on
this highly cyclical industry, the Company has recently begun to diversify its
operations and secure revenue sources from other products and industries. It is
the Company's objective to obtain 40% of its revenues from non-cleanroom sources
by applying its product and engineering expertise in custom metal fabrication,
airflow systems, and high tech panel production to similar type products used by
other businesses in other industries.

        During the first quarter of 1998, the Company announced its entrance to
the transportation industry where it is now producing sleeper cabs for
heavy-duty trucks. By applying similar wall panel systems technology used in
cleanrooms, the Company is able to produce a stronger and lighter weight product
than conventional sleeper cabs used by truck manufacturers. The Company
anticipates this will become a significant division of the Company within a few
years. Additionally, the Company has announced its entrance into the commercial
and industrial air handling industry, and the development of its new air
entrance system for large national retail centers. The Company has also recently
entered into various contract manufacturing agreements whereby the Company
manufactures products owned and marketed by third parties. To date, all of the
Company's diversification initiatives have utilized existing design and
engineering resources as well as manufacturing equipment at its Salt Lake City
facility, thus requiring minimal capital resources and more fully utilizing
existing equipment and facilities.


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CLEANROOM SYSTEMS AND SERVICES

        Each component of the cleanroom plays an important role. The cleanroom
consists of special high-performance air handling systems, ceiling modules and
highly efficient filters, wall partitions, raised-access flooring and state of
the art control systems. These systems provide a continuous flow of
ultrafiltered air from the ceiling to the floor to flush out particles and other
contaminants. The room is maintained at a slightly higher air pressure than
surrounding rooms so leaks, open doors, or other temporary openings cause clean
air to escape, rather than allow contaminated air to enter. Several important
measures must be considered in cleanroom design. They are: The "room class"
which defines the allowed number of particles per cubic foot of air, the number
of "air changes" which is the number of times per minute the air in the room is
completely replaced and the room "recovery rate" which is the amount of time it
takes for the room to become clean following contamination. It is also essential
that airflow through the cleanroom is unidirectional, where air flows through
all areas in essentially straight vertical paths, avoiding vortices and eddies
that could trap particles. The cleanroom must be designed to accommodate process
manufacturing equipment including piping and wiring, and permit the movement of
materials and personnel without compromising cleanliness. Cleanrooms are
designed to control humidity, gasses, noise, vibrations, temperature,
electro-magnetic fields, and other environmental variables.

        A typical eight-inch wafer production line includes 60,000-150,000
square feet of Class 1 or better cleanroom. Cleanrooms are rated according to
their "Class," the maximum number of particles greater than 0.12 microns found
in any cubic foot of cleanroom space. Leading edge cleanrooms for advanced
semiconductor fabrication are Class 1 or better. Virtually all of the Company's
contracts involve Class 100 or better cleanrooms.

        Component Systems.

        The Company manufactures all principal component systems which comprise
an integrated cleanroom, including make-up and recirculating air handlers,
fan-filter units, filtered ceiling systems, wall systems, and floor systems.
These components may be sold either as part of a fully integrated cleanroom or
as individual components for integration by non-affiliated installers.
Components are manufactured of non-shedding materials to mitigate microscopic
particles in the air stream that may have deleterious effects on the cleanroom.

        The Company's cleanroom component systems include the following:

        STRATUS(R) Air Handlers. Stratus(R) Air Handling Systems deliver quiet,
efficient and conditioned prefiltered air to clean manufacturing facilities. The
Company manufactures and installs recirculating air handling systems, make-up
air handling systems and localized fan filter units. The Company's air handlers
are designed to reduce noise, vibration and power consumption and meet stringent
standards defined by the industry. The moving elements in a STRATUS(R)
recirculating air handler are balanced to less than 25 milli-inches per second
of vibration and meet stringent noise standards. Fan and motor bearings are
rated in excess of the industry standards for continuous, uninterrupted service.
The Company offers digitally controlled systems that instruct the air handler to
adapt to changes in temperature, relative humidity, pressure drop and other
environmental factors using feedback from an array of specialty sensors.

        AIR-FRAME(TM) Ceiling Systems. AIR-FRAME(TM) Ceiling Systems are
designed to provide ultra-clean air filtration and unidirectional airflow for
cleanroom application. Each system fully integrates lighting, ionization and
fire suppression into the ceiling modules for single point connection in the
field. Modules can be fully welded or stick-built in sizes ranging from 1' x 1'
to 10' x 24' and each are capable of supporting air handlers in excess of
4,000lbs. Individual modules can be configured as tunnels or as large ballrooms
to form cleanrooms of virtually unlimited size and shape. The Company offers
seven different ceiling schemes. Each is tailored to a particular cleanroom
application to create optimal performance while maintaining absolute
flexibility, facilitating rapid modifications to evolving cleanrooms. Precision
modules (tolerance +0", -1/8") are custom-made of light weight
precision-extruded aluminum (tolerance +/- .003") and finished with a
nonshedding baked-on powder coat epoxy. Each module is carefully designed with
all appropriate column notches and structural hanging points to match existing
field conditions. Each module is taken directly off the powder coat line and
placed in an on-site Class 10,000 clean packaging area where they are prewired,
prelighted and clean packaged.


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        The Company's lightweight aluminum modules permit installation by two
men and yet are strong enough to support a 4000lb. hanging load from any point
below the grid and a 250 lb. man-rating above the grid. Ceiling modules can be
designed with each filter individually ducted or as a pressure plenum. Plenum
sides can be closed or open to share airflow with adjacent plenums. Optional
filter dampers can be provided for finite airflow control.

        The Company has developed, tested and refined the Flushlight(TM) and
Flow Thru(TM) systems using a sophisticated computer airflow model. The airflow
through the grid and light cavity eliminates the vortex created by the grid. A
vortex caused by typical cleanroom ceiling systems is a turbulent zone below the
ceiling grid members that captures particulate and permits particulate migration
throughout the cleanroom.

        NETWORK(R) Wall Systems. NetWork(TM) Wall Systems separate cleanrooms
into distinct airflow zones. Network(TM) offers five different wall systems: 2"
studless self-supporting panels, 1/2" panel on aluminum stud, 1/4" batten panels
on steel stud, 1/4" furring panels, and 1 3/4" 3 in 1 wall. The 1 3/4" wall can
be: A. 1 3/4" studless, self-supporting panels; B. 1 3/4" panel on aluminum
stud; or C. 1/4" panel on aluminum stud all fully compatible with one another.
Each of these wall systems has been developed to permit any or all systems to be
interfaced together maintaining a uniform appearance. A typical installation
might use 1/4" panels furred over existing walls, 2" panels in the large
ballroom areas and 1/2" panels on structural studs to support AIR-FRAME(TM)
ceiling modules and Stratus(R) air handlers. Each panel is constructed of .032"
aluminum skins laminated to an aluminum honeycomb core and finished with a
nonshedding baked-on powder coat epoxy. Panels are held to strict dimensional
and structural tolerances with surface flatness varying less than +/- .032",
panel length and width accurate to +/- .040" and deflection less than L/240 at 5
lbs. per square foot. The panel edge is gasketed to provide a seal between
varying cleanroom zones. Their lightweight construction permits ease of
installation and field modification for equipment penetrations and bulkheading.
Walls are demountable and non-progressive, meaning individual panels may be
removed or replaced without affecting surrounding panels.

        MATRIX(R) Raised Access Flooring. MATRIX(TM) Raised Access Floors have
been designed to meet the exacting air flow, structural and cleanliness
requirements of Class 0.1 to Class 1000 cleanrooms. MATRIX(R) floors provide
maximum structural capability utilizing easily removable panels which meet the
special material and airflow requirements of cleanrooms. MATRIX(R) panels are
available in a variety of finishes for corrosion resistance and conductivity
requirements. The Company recently introduced the Vari-Span structural system,
which reduces the number of pedestals needed to support the floor, allowing
design freedom for an open waffle slab and frees under-floor space for
additional process piping and conduits.

        Cleanroom Services

        As part of its integrated cleanroom solution, the Company provides its
customers with the services necessary to integrate the design, installation and
ongoing servicing of cleanrooms including:

        Design and Engineering. The Company seeks to become involved in
cleanroom design at an early stage of the semiconductor fab design process. The
Company has a design team of in-house architects, engineers and designers to
provide cleanroom systems which meet customers' specific requirements. The
principal component systems of the Company's cleanroom are designed for rapid
modification and quick expansion, providing flexibility in cleanroom
configuration to meet the changing facilities needs of its customers. Being
involved in the design of a new fabrication facility allows the Company to
provide information early on to its manufacturing teams regarding systems needs,
which further allows the Company to better plan its systems production schedule
and accelerate the delivery of finished product to its customers.

        Installation and Certification. The Company provides on-site
installation, testing and certification services. Cleanroom installation is
enhanced and expedited as Company personnel are cross-trained in all aspects of
cleanroom construction. This enables them to quickly recognize and correct
conflicts which arise during installation. Each cleanroom installation project
is headed by a project manager who is responsible for logistics and coordination
of the entire cleanroom project. The project manager is the primary contact with
the customer during the entire process.

        Continuing Service and Support. The Company offers its installation
customers ongoing service


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and support at the project site, as well as after market component sales. The
Company intends to place further emphasis on service and support contracts in
the future. Customers often desire to have rooms modified or to have tools
substituted or moved. Ongoing service personnel working at the project site
perform equipment bulkheading, facilitate movement of process equipment and
perform maintenance. The Company's support teams have a portable
aluminum-working shop on-site which allows them to remove, modify, adapt and
re-install wall panels, flooring and other components without shutting down the
facility. Since they are generally the personnel who originally installed the
cleanroom, they are familiar with the design and layout of the cleanroom and
therefore are qualified to expedite layout changes and prevent downtime. Several
customers have had Company personnel on-site performing these services for
periods longer than one year. The Company's ongoing support program is a key
component in the Company's strategy. On-site personnel provide detailed feedback
on customers' ongoing design needs.

        For customers who do not elect to have the Company provide on-site
service, the Company provides service and spare parts on demand. Upon completion
of a project, the customer support representative develops customer profiles and
spare parts catalogues which are given to the customer.

CUSTOMERS

        The Company's principal customers are microelectronics manufacturers.
The Company has sold its component systems and cleanrooms to many of the world's
leading semiconductor, disk drive, and flat panel display manufacturers. A major
component of the Company's strategy is to develop long-term strategic
relationships with such manufacturers. In addition, the Company sells component
systems and cleanrooms to other manufacturers requiring ultra-clean
environments.

        Because of the nature of the Company's business and the size of
contracts it enters into with its customers, the Company typically has had one
to three customers in each year which accounted for more than 10% each of
revenues. Customers that account for a significant amount of revenues in one
year, however, do not necessarily remain significant in subsequent years. In its
strategy to diversify into businesses utilizing its core competencies and
technologies, the Company has established one significant customer for its
sleeper cabs, the loss of which would have a material adverse effect on that
business.

SALES AND MARKETING

        The Company's marketing program is focused on expanding market
acceptance of the Company's integrated cleanroom approach and on building long
term strategic relationships. By offering its customers a full array of
cleanroom services, the Company is able to provide customers a single point of
contact for design, component procurement, installation and ongoing service.

        The Company sells its products utilizing a direct sales force in North
America and Europe. The Company uses independent sales representatives as well
as its direct sales force in the Asia/Pacific Rim region. The Company has design
and engineering offices in Livingston, Scotland and Aix-en-Provence, Southern
France which serve the European market. In addition the Company has an office in
Hsin-Chu, Taiwan, which serves the Asia/Pacific Rim region. Sales are generally
accomplished by building working relationships with microelectronics
manufacturers as well as architectural and engineering firms, industry
consultants, construction management companies and general contractors
specializing in the industry.

        Leads for new work are generated from a number of sources, including the
Company's in-house salespeople, sales representatives, project managers, and
field personnel who are in regular contact with present and prospective
customers. The Company also participates in industry trade shows. Typically the
Company, as well as the rest of the industry, is aware of the size, end use and
basic design of major projects during the earliest planning phases.


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PRODUCT DEVELOPMENT

        The Company's product development effort focuses on enhancing existing
products and developing new products to meet customer requirements. The Company
seeks to develop innovative products, be on the cutting edge of new
semiconductor technology including the 300mm manufacturing facility, and modify
existing products to make them less expensive to produce and easier to install.
This is partially accomplished by analyzing feedback from sales and service
personnel on industry needs and developments. The Company regularly tests new
ideas and techniques and measures the performance of new and existing products
using a new AMCA-certifiable semi-reverberant testing laboratory adjacent to its
manufacturing plant. The Company believes that its significant and growing
experience base in designing, installing and servicing cleanrooms and
manufacturing cleanroom components is a competitive advantage. The Company has
also incurred product development expenses related to its effort to diversify
its business which has resulted in its sleeper cab and commercial air handling
products. The Company incurred approximately $293,000, $246,000 and $282,000 in
non-project related research and development costs in 1998, 1997 and 1996,
respectively.

INTELLECTUAL PROPERTY

        The Company currently holds seven United States patents with respect to
various aspects of its cleanroom wall systems, floor systems and air handling
systems. The patents expire at various times from May 2007 through January 2010.
The Company also has one patent application on file with the U.S. Patent and
Trademark Office and certain foreign offices. The Company may file patent
applications where appropriate to protect its proprietary technologies. Although
the Company's patents have value, the Company believes that the success of its
business depends more on innovation, technical expertise, and know-how of its
personnel and other factors. In addition, no assurance can be given that any
patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights thereunder will provide competitive advantages
to the Company.

        The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to the Company's trade secrets or
disclose such technology or that the Company can meaningfully protect its trade
secrets.

MANUFACTURING

        The Company's Salt Lake facility processes raw materials received in the
form of die-cast panels, extruded aluminum members, sheet metal, honeycomb and
various coverings and fasteners. These materials are modified and assembled into
pre-fabricated modules through a series of automated and manual steps which may
include cutting, milling, welding, perforating, measuring, assembling and
finishing. Each individual module is made in accordance with customized
fabrication drawings prepared by the Company's design staff.

        The Company's components are finished in a dry powder applied and baked
hybrid polyester-epoxy coating. After baking, this coating forms a monolithic,
non-particulating seal over the surface of the component. This finish is
available in many colors and is corrosion resistant. This finish outperforms
nickel chrome and other finishes by substantial margins in chemical resistance
and durability tests. This finish is normally conductive, but can be modified to
meet any desired static dissipative or electrical isolation properties.

        The Company's production staff is divided into self-directed working
teams. The team manufacturing components for a project interacts directly with
the project manager and the team installing the cleanroom. The close
relationship between the Company's manufacturing teams and installation teams
allows components to be altered rapidly in response to design changes initiated
by the customer's facility management team. The Company believes this
relationship and the accountability of the manufacturing team to site personnel
enhances the Company's quality control.

        The Company's installation teams are capable of modifying most
components to accommodate last-second changes and still meet specifications for
final fit and seal. The Company establishes a small shop at major project sites
to support bulkheading, tooling changes and other modifications requested by the
customer.


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COMPETITION

        The Company believes it is the largest supplier of integrated cleanroom
solutions providing design, engineering, manufacturing, installation, testing,
certification, and ongoing customer support. The Company competes with a number
of companies providing cleanroom products or services, many of which may have
significantly greater financial and capital resources than the Company. The
Company competes with architectural and engineering firms for the provision of
design and engineering services. Where appropriate, the Company attempts to work
with these companies as a subcontractor rather than as a direct competitor. The
Company faces competition from component manufacturers which include CleanPak
International and HuntAir for air handlers and ceilings, Clestra for ceilings,
Plascore and Unistrut for walls, and Hitachi, Hae Kwang and Tate for aluminum
raised flooring. The Company competes with specialized cleanroom integrators,
such as Meissner & Wurst, Takasago, and PCI for installation/on-site management
services.

        The Company believes the principal competitive factors in the cleanroom
industry are quality, time to completion, reliability, responsiveness for design
and installation, product performance and price. The order of importance of
these factors vary from year to year. The Company believes it competes favorably
with respect to such factors, although there can be no assurance that it will
continue to do so in the future. If the Company experiences success in marketing
its integrated approach, there can be no assurance that its competitors will not
duplicate such approach, through acquisitions, affiliations, internal
development or otherwise.

BACKLOG

        The Company's backlog consists of future revenue that the Company
expects to realize from work to be performed on uncompleted contracts, including
new contractual arrangements on which work has not begun. At December 31, 1998,
the Company's backlog was $12.8 million compared to $15.7 million at December
31, 1997. The Company's contracts, however, frequently allow the customer to
terminate the project at any time. If a customer terminates a project, the
Company would typically be entitled to progress payments earned to the date of
termination, plus reimbursement of certain costs associated with the contract.
Accordingly, the Company's backlog could be reduced if a customer terminates a
contract, and there can be no assurance that a customer will not terminate a
contract.


EMPLOYEES

        The Company employed approximately 311 full-time employees and 46
part-time employees on December 31, 1998, compared to 366 full-time employees
and 4 part-time employees on December 31, 1997. The Company's employees at its
Salt Lake City, Utah facility are not represented by a labor union. The Company
believes that its relationship with its employees is good. Where required by
local practice or customer contract, the Company utilizes union members for
on-site installation. In those instances, the Company has agreed to be bound by
collective bargaining agreements and has agreed to contribute to union sponsored
pension plans, including multi-employer pension plans. Under the Employee
Retirement Income Security Act of 1974, as amended, the Company may be liable to
a multi-employer plan upon its withdrawal from the plan for the Company's share
of the unfunded liabilities of the plan.


ITEM 2. PROPERTIES.

        The Company leases approximately 221,000 square feet in two buildings at
its headquarters in Salt Lake City, Utah, of which approximately 163,000 square
feet are used for manufacturing, 46,000 square feet are used for administrative
functions, and 12,000 square feet are used for testing and research and
development. The Company's principal offices and manufacturing facility are
leased through 2005, with renewal options for four five-year terms.


        The Company also leases administrative office space totaling
approximately 9,100 square feet in Austin, Texas; Hsin-Chu, Taiwan; Livingston,
Scotland; and Aix-en-Provence, Southern France with various lease expiration


                                       8


<PAGE>   11
dates ranging from 2000 through 2006. The Company believes that its facilities
are adequate for its current needs and it could obtain additional space on
commercially reasonable terms, if needed.

ITEM 3. LEGAL PROCEEDINGS.

        From time to time, the Company is subject to routine, non-material
litigation relating to claims made by or against the Company. The Company
believes it has made adequate provisions for these matters, and is not aware of
any material threatened or outstanding litigation against it.


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

        No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.


                                       9


<PAGE>   12
                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

        The Company's Common Stock is listed and traded on the NASDAQ Stock
Market (National Market System) under the symbol "DAWK." The following table
sets forth, for the periods indicated, the high and low sale prices for the
Company's Common Stock, as reported on the NASDAQ Stock Market for the years
ended December 31, 1998 and 1997, respectively.


<TABLE>
<CAPTION>
                                                     HIGH                  LOW
                                                    ------                ------
<S>                                                 <C>                   <C>   
YEAR ENDED DECEMBER 31, 1998:
     First Quarter ........................         $1.906                $1.219
     Second Quarter .......................          2.938                 1.375
     Third Quarter ........................          2.313                 1.219
     Fourth Quarter .......................          1.219                 0.656

YEAR ENDED DECEMBER 31, 1997:
     First Quarter ........................         $3.625                $2.500
     Second Quarter .......................          3.125                 2.094
     Third Quarter ........................          2.500                 1.750
     Fourth Quarter .......................          2.500                 1.594
</TABLE>


        The Company did not pay or declare dividends on its Common Stock during
the years ended December 31, 1998, 1997 and 1996. The Company currently
anticipates that it will retain all available funds to finance its future growth
and business expansion. The Company does not presently intend to pay cash
dividends in the foreseeable future. Under the terms of the Company's revolving
line of credit agreement, the Company has agreed not to pay any dividends during
the term of this agreement.

        As of March 30, 1999, the Company had 12,479,711 shares of its Common
Stock outstanding, held by 132 shareholders of record, which does not include
shareholders whose shares are held in securities position listings.


                                       10

<PAGE>   13
ITEM 6. SELECTED FINANCIAL DATA.

        The following table sets forth selected financial data of the Company.
The summary financial data in the table is derived from the financial statements
of the Company. The data should be read in conjunction with the financial
statements, related notes and other financial information included therein (in
thousands, except per share data).


<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                         -------------------------------------------------------
                                           1998       1997       1996       1995        1994
                                         --------- ---------- ---------- ----------- -----------
<S>                                      <C>       <C>        <C>        <C>         <C>       
STATEMENT OF OPERATIONS DATA:
Revenues.........................        $ 53,078  $  52,541  $ 112,826  $   70,635  $   47,732
Cost of goods sold...............          51,223     47,272     97,364      63,484      39,579
                                         --------- ---------- ---------- ----------- -----------
Gross profit.....................           1,855      5,269     15,462       7,151       8,153
                                         --------- ---------- ---------- ----------- -----------
Selling, general and                                                                  
administrative expenses..........           6,513     8,373      10,274       6,333       3,584
Research and development.........             293       246         282         255         157
Depreciation and amortization....             563        431        400         219         156
                                         --------- ---------- ---------- ----------- -----------
                                            7,369      9,050     10,956       6,807       3,897
                                         --------- ---------- ---------- ----------- -----------
Earnings (loss) from operations..          (5,514)    (3,781)     4,506         344       4,256
Other income (expense), net......            (483)      (344)       352         119         359
                                         --------- ---------- ---------- ----------- -----------
Earnings (loss) before income              (5,997)    (4,125)     4,858         463       4,615 
taxes............................
Income taxes (benefit)...........          (2,075)    (1,866)     1,548         176       1,753
                                         ========= ========== ========== =========== ===========
NET EARNINGS (LOSS) .............        $ (3,922)  $ (2,259) $   3,310  $       287 $     2,862
                                         ========= ========== ========== =========== ===========
Earnings (loss) per common share                             
    Basic........................        $ (0.32)     $(0.18)      $0.27       $0.02       $0.26
    Diluted......................        $ (0.32)     $(0.18)      $0.27       $0.02       $0.25
Weighted-average common and
dilutive common equivalent
shares outstanding
    Basic........................          12,440      12,416     12,350      12,148      11,182
    Diluted......................          12,440      12,416     12,393      12,365      11,370
</TABLE>


<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                ------------------------------------------------
                                1998       1997       1996      1995        1994
                                ----       ----       ----      ----        ----
<S>                           <C>        <C>        <C>        <C>        <C>    
BALANCE SHEET DATA:
Cash and cash equivalents     $ 2,140    $ 5,802    $ 3,258    $ 5,885    $2,7111
Working capital ..........     10,674     15,248     17,112     15,431    14,1555
Total assets .............     30,841     32,364     49,495     40,072    23,6088
Total liabilities ........     12,714     11,664     26,557     20,633     7,3555
Total shareholders' equity     18,127     20,700     22,938     19,409     16,253
</TABLE>



                                       11
<PAGE>   14


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
financial statements and notes thereto included elsewhere herein. All data in
the tables are in thousands, except for percentages and per-share data.

        The Company's principal line of business is an integrated systems
solution provider of cleanrooms and cleanroom component systems for the
semiconductor industry. In recent years, the Company has typically had one to
three significant customers, each of which accounted for more than 10% of the
Company's annual revenues; these customers do not necessarily remain significant
in subsequent years. The semiconductor industry has been historically cyclical
in nature and continues to be adversely affected by the industry downturn that
began in the latter part of 1996. Capital spending by semiconductor
manufacturers has always closely followed chip sales. As chip sales increased
from around $50 billion per year in the late 1980's to a peak of $150 billion in
1995, capital spending on equipment and facilities by the chip manufactures
surged to $45 billion from about $12 billion during the same period of time. As
chip sales have declined over the past three years to about $122 billion in
1998, capital spending on new equipment and facilities plunged to less than $30
billion in 1998.

        The Company's operating results have been severely impacted by the
reduced capital spending of the semiconductor industry. While the industry has
shown several signs of recovery over the past two years, it has been
consistently disappointed by continued declines. Management believes the
downturn is nearing its end but may continue through the first and second
quarters of 1999. How quickly any recovery will take place is still subject to
significant uncertainty. The downturn has resulted in fewer contracts available
to bid, a significant increase in price competition on contracts that were
awarded, and reduced margins on such contracts. During 1998, the Company
experienced fewer new contract awards resulting in a decrease in the Company's
backlog from $15.7 million at December 31, 1997 to $12.8 million at December 31,
1998.

        Although there is uncertainty surrounding the timing of a recovery in
the semiconductor industry, management continues to believe that changes taking
place in the industry should result in expanded semiconductor industry capital
expenditures in the long-term. Delays in the ramp-up of 300mm technology have
delayed the expected construction of a whole series of 300mm fabs worldwide.
Due, in part, to the lack of 300mm process tools, weaker than expected demand,
and the current focus on lowering process geometries from .25m to .18m, the
300mm effort appears to have been delayed indefinitely. In response to the
current downturn, management has taken steps to reduce the Company's cost
structure including a reduction in the Company's work force of more than fifty
percent during the fourth quarter of 1998. During 1999, management will closely
monitor the Company's cost structure and take appropriate actions as considered
necessary, but will continue to develop state of the art cleanroom technology
and provide world-class support to the Company's customers.

        In response to reduced revenue generated by the sale of cleanrooms, the
Company has recently undertaken several initiatives to expand its revenue base
beyond the semiconductor industry and to reduce its reliance on this
historically cyclical business. During the first quarter of 1998, the Company
announced its entrance into the transportation industry where it is producing
sleeper cabs for heavy-duty trucks. By applying similar wall panel systems
technology used in cleanrooms the Company produces a stronger, more durable, and
lighter weight product than traditional sleeper cabs. During 1998, this new
product accounted for almost 13% of total revenues and is expected to make an
even greater contribution in 1999. Additionally, the Company has developed a
line of commercial and industrial air handling systems for the commercial
construction industry. While development was begun during 1998 significant
interest has been shown by the market in this product. The Company has also
developed an air door system used by large national retail chains in their new
"superstores". The air entrance is a recirculating air handling system using an
overhead plenum to deliver high volume low velocity airflow across the open
doorway, thus eliminating the need for physical doors. This product also shows
great promise of providing significant gross profit over the next two years.
Additionally, the Company has entered into several contract manufacturing
agreements whereby the Company manufactures products owned and marketed by third
parties. It is the Company's objective to develop and maintain 40% of its
revenues from sources outside of the semiconductor industry by applying its
product and engineering expertise in custom metal fabrication, airflow systems
and panel production to similar type products used in other industries.



                                       12
<PAGE>   15

        The Company's revenue and operating results fluctuate substantially from
quarter to quarter depending on such factors as the timing of significant
customer orders, the timing of revenue and cost recognition, variations in
contract mix, changes in customer buying patterns, fluctuations in the
semiconductor equipment market, utilization of capacity, manufacturing
productivity and efficiency, availability of key components and trends in the
economies of the geographical regions in which the Company operates.

        The Company uses the percentage-of-completion method of accounting for
its long-term contracts. The Company recognizes revenue in proportion to the
costs incurred to date in relation to the total anticipated costs. Revenue
recognized may not be the same as progress billings to the customer.
Underbillings are reflected in an asset account (costs and estimated earnings in
excess of billings on contracts in progress), and overbillings are reflected in
a liability account (billings in excess of costs and estimated earnings on
contracts in progress).

        The Company generates revenue in three geographic regions; North
America, Asia/Pacific Rim and Europe. Contracts in the Asia/Pacific Rim region
are generally denominated in United States dollars. Although risk of
fluctuations in currency value does not affect such dollar-denominated
contracts, changes in the relative value of the dollar could make the Company
less competitive in this region. Contracts to be performed in Europe may be
denominated in local currency, and the Company bears the risk of changes in the
relative value of the dollar and the local currencies. Devaluation of world
currencies against the U.S. dollar has created extreme price competitiveness
from Korean, Japanese, and German manufacturers and integrators of systems. The
collapse of the Korean marketplace in particular, has forced Korean suppliers to
look outside their historical business relationships for new markets. The
Company has in the past and may in the future attempt to hedge against currency
fluctuations on contracts denominated in local currencies. There can be no
assurance, however, that such hedging will fully insulate the Company from
fluctuations or will not expose the Company to additional risks of loss.
        The Company's business and operations have not been materially affected
by inflation during the periods for which financial information is presented.

RESULTS OF OPERATIONS

Revenue from operations
<TABLE>
<CAPTION>
                                        1998            Change      1997          Change        1996
                                        ----            ------      ----          ------        ----
<S>                                   <C>               <C>       <C>             <C>         <C>     
Cleanrooms and Related Products       $ 46,298          11.9 %    $ 52,541        (53.4)%     $112,826
Other Products ................          6,789          100.0%          --           --             --
Total Revenue .................       $ 53,078            1.0%    $ 52,541           --       $112,826
</TABLE>


        Revenue from cleanrooms and related products decreased 11.9% in 1998 to
$46.3 million from $52.5 million in 1997. The decrease was due to the continued
downturn in the semiconductor industry's capital expenditures for new equipment
and fab facilities as more fully discussed above. During 1997, contract revenue
decreased by 53.4% to $52.5 million from $112.8 million in 1996. This decrease
is directly related to the beginning of the sudden and dramatic downturn in the
semiconductor industry as more fully discussed above.

        Revenue from other products increased to $6.8 million in 1998 from $0.0
in 1997. The increase is due to the start-up of new lines of business including
the Company's new line of sleeper cabs, contract manufacturing, and other
product sales that were non-existent in 1997.

        North America - Cleanroom revenue for the year ended December 31, 1998
decreased by 25.2% to $23.5 million from $31.4 million for the year ended
December 31, 1997. As a percentage of total cleanroom revenue, North America
decreased to 50.8% in 1998 compared to 59.8% in 1997. The decrease in contract
revenue is attributed to the semiconductor industry downturn resulting in fewer
and smaller contracts available during 1998 than in 1997.



                                       13
<PAGE>   16

        Revenue from other products of $6.8 million was primarily attributable
to sales of sleeper cabs sold only in North America in 1998.

        Cleanroom revenue for the year ended December 31, 1997 decreased by
57.8% to $31.4 million from $74.4 million for the year ended December 31, 1996.
As a percentage of total revenue North America decreased to 59.8% in 1997
compared to 66.0% in 1996. The decrease is the result of fewer contracts
received in North America due to the precipitous decline in capital spending by
the semiconductor industry.

        Asia/Pacific Rim - Cleanroom revenue for the year ended December 31,
1998 increased by 2.7% to $9.8 million from $9.6 million for the year ended
December 31, 1997. As a percentage of total cleanroom revenue Asia/Pacific
revenue increased to 21.2% in 1998 compared to 18.2% in 1997. The increase in
revenue and percentage was due to the award of a significant project in China.
The contract was subsequently placed on indefinite suspension due to the
uncertainty of the Asian market.

        Cleanroom revenue for 1997 decreased by 38.9% to $9.6 million from $15.6
million for the year ended December 31, 1996. As a percentage of total cleanroom
revenue Asia/Pacific increased to 20.6% in 1997 compared to 13.9% in 1996. Two
factors contributed to the decrease in Asia/Pacific revenue. First, during 1996
the Company recognized revenue for two significantly large contracts in Taiwan.
These contracts were substantially completed during 1996. Second, the
semiconductor industry downturn impacted Taiwan and other Asian countries to the
extent that the Company did not have the same opportunity to bid on contracts in
1997 that it had during 1996.

        Europe - Cleanroom revenue for the year ended December 31, 1998
increased by 12.0% to $13.0 million from $11.6 million for the year ended
December 31, 1997. As a percentage of total cleanroom revenue European revenue
increased to 28.0% in 1998 compared to 22.0% in 1997. While the semiconductor
industry has experienced a worldwide downturn, it has not appeared to have
affected the European segment as dramatically as the Asian and North American
markets. Additionally, the Company has been able to win contracts in new
countries that it has not done business in previously.

        Cleanroom revenue for 1997 decreased by 49.1% to $11.6 million from
$22.8 million for the year ended December 31, 1996. As a percentage of total
cleanroom revenue Europe increased to 22.0% in 1997 compared to 20.2% in 1996.
The decrease in volume is attributed to two factors. First, the worldwide
semiconductor industry downturn has delayed the investment into the European
community by most major semiconductor manufacturers resulting in fewer contracts
available during 1997 compared to 1996. Second, during 1996 the Company was
involved in an unusually large project in France that generated a significant
amount of revenue during 1996 that was not available to the Company during 1997.


Gross Profit
<TABLE>
<CAPTION>
                                        1998      Change    1997     Change    1996
                                        ----      ------    ----     ------    ----
<S>                                    <C>       <C>        <C>      <C>       <C>    
Gross profit                           $1,855    (64.8)%    $5,269   (65.9)%   $15,462
Percentage of revenues                   3.5%                10.0%               13.7%
</TABLE>

        Gross profit for the year ended December 31, 1998 decreased by 64.8% to
$1.9 million from $5.3 million for the year ended December 31, 1997. Gross
profit decreased as a percentage of revenue to 3.5% for 1998 compared to 10.0%
for 1997. The decrease in gross margin is the direct result of the semiconductor
industry downturn. The downturn has resulted in fewer contracts awarded and
those that were awarded were done so after a highly competitive bidding process
placing significant downward pressure on pricing and thus resulting in lower
margins.

        Gross profit for 1997 increased by 65.9% to $5.3 million from $15.5
million in 1996 and decreased as a percentage of contract revenue to 10.0% in
1997 from 13.7% in 1996. The decrease in gross profit was the direct result of
the massive reductions in contracts awarded form 1996 to 1997 as the
semiconductor industry entered its first full year of its downturn. During 1996
the Company geared up and increased its production capacity in 



                                       14
<PAGE>   17

anticipation of continued significant increases in demand for its products. As
the downturn gained momentum throughout 1997, the Company had fewer contracts to
which it could allocate its increased fixed manufacturing overhead costs.
Additionally, the contracts that were awarded were done so at lower margins.

Selling, General and Administrative Expenses

<TABLE>
<CAPTION>
                                          1998     Change      1997    Change    1996
                                          ----     ------      ----    ------    ----
<S>                                     <C>        <C>         <C>     <C>       <C>
Selling, general and
  administrative expenses               $6,513     (22.2)%     8,373   (18.5)%   $10,274
Percentage of revenues                   12.3%                 15.9%                9.1%
</TABLE>

        Selling, general and administrative expenses for 1998 decreased 22.2% to
$6.5 million, from $8.4 million, and decreased as a percentage of revenue to
12.3% for the year ended December 31, 1998 compared to 15.9% for the year ended
December 31, 1997. The decrease in selling, general and administrative expenses
in 1998 compared with 1997 was the result of an aggressive cost reduction
program as well as significant headcount reductions completed during the fourth
quarter of 1998 where approximately 300 employees were laid off, thus reducing
payroll and related expenses in excess of $5.5 million.

        Selling, general and administrative expenses for 1997 decreased 18.5% to
$8.4 million, or 15.9% of contract revenue, from $10.3 million, or 9.1% of
revenue, in 1996. The decrease in selling, general and administrative expenses
was the result of a reduction in general and administrative headcount during the
first and second quarters of 1997 in response to the significant reduction in
cleanroom activity during the first half of 1997.

Research and Development
<TABLE>
<CAPTION>
                                         1998       Change     1997    Change     1996
                                         ----       ------     ----    ------     ----
<S>                                      <C>        <C>        <C>     <C>        <C>
Research and
  Development expense                    $293        19.1%     $246    (12.8)%    $282
Percentage of revenues                    0.6%                  0.5%               0.2%
</TABLE>

        Research and development expense increased slightly in actual dollars
spent from 1997 to 1998. This increase was not material. Management believes
that the Company will increase its research and development expenses during
1999, both in actual dollars spent and as a percentage of revenue in order to
develop innovative products, to be on the cutting edge of the 300mm
manufacturing facility technology and to modify existing products to be less
expensive to produce and easier to install.

        Research and development expense decreased slightly from 1996 to 1997.
This decrease was the result of fewer research and development projects that
were based on specific customers and contracts.


Depreciation and Amortization
<TABLE>
<CAPTION>
                                         1998      Change      1997      Change   1996
                                         ----      ------      ----      ------   ----
<S>                                      <C>       <C>         <C>       <C>      <C>
Depreciation and
  amortization expense                   $563       30.6%      $431       7.8%    $400
Percentage of revenues                    1.1%                  0.8%               0.4%
</TABLE>

        Depreciation and amortization expense during 1998 increased by 30.6% to
$563,000, or 1.1% of revenue, from $431,000, or 0.8% of revenues, in 1997. This
increase was the result of a full years depreciation expense on leasehold
improvements, furniture, fixtures, computer equipment and software purchased
during 1997.

        Depreciation and amortization expense in 1997 increased by 7.8% to
$431,000, or 0.8% of revenues, from $400,000, or 0.4% of revenues, in 1996. This
increase was the result of the purchase of leasehold improvements, furniture,
fixtures, computer equipment and software required for the increased sales,
marketing and administrative activities during 1997.



                                       15
<PAGE>   18

Other Income (Expense), net
<TABLE>
<CAPTION>
                                         1998      Change     1997     Change    1996
                                         ----      ------     ----     ------    ----
<S>                                     <C>        <C>       <C>      <C>         <C> 
Other income (expense)                  $(483)     (40.4)%   $(344)   (197.7)%    $352
Percentage of revenues                   (0.9)%               (0.7)%               0.3%
</TABLE>

        Other income (expense) increased in 1998 to $(483,000) from $(344,000)
in 1997. This increase was largely due to an increase in interest expense in
1998 resulting from an increase in the average outstanding balance on the
Company's revolving line of credit over 1997

        Other income (expense) decreased in 1997 to $(344,000) from $352,000 in
1996. The decrease was the result of foreign currency losses recognized during
1997 from the decline in Taiwan dollars throughout 1997 and a litigation
settlement included as part of other income during 1996.


Income Taxes (Benefit)
<TABLE>
<CAPTION>
                                         1998      Change     1997      Change     1996
                                         ----      ------     ----      ------     ----
<S>                                   <C>          <C>      <C>        <C>        <C>   
Income taxes (benefit)                $(2,075)      11.2%   $(1,866)   (220.5)%   $1,548
Percentage of revenues                   (3.9)%                (3.6)%                1.4%
</TABLE>
 
        The effective tax rate (benefit) for 1998 was approximately (35)%
compared to (45)% for 1997 and 32% for 1996. The decrease in the effective tax
rate from 1997 to 1998 was primarily the result of a tax benefit resulting from
the loss before taxes, calculated at the statutory federal rate (see Note I of
Notes To Financial Statements).

The decrease from 1996 to 1997 was primarily the result of tax benefits the
Company was able to utilize during 1997 on foreign sales which were taxed in the
Company's foreign sales corporation.


LIQUIDITY AND CAPITAL RESOURCES

        Working capital at December 31, 1998 was $10.7 million compared to $15.2
million at December 31, 1997. This included cash and cash equivalents of $2.1
million and $5.8 million at December 31, 1998 and 1997 respectively.
Receivables, including retentions, (see Note D of Notes to Financial Statements)
decreased to $8.9 million at December 31, 1998 compared to $12.5 million at
December 31, 1997. This decrease was the result of lower revenues from fewer
contracts during 1998 compared to 1997. Days sales outstanding (the ratio
between receivables, excluding retention, and average daily revenue taken over
the year) decreased to 61 days at December 31, 1998, from 87 days at December
31, 1997.

        The Company's operations used $6.9 million of cash during 1998, compared
to providing $7.9 million of cash in 1997. During 1998, the Company experienced
a decrease in receivables of $3.5 million as a result of the decline in revenues
and a decrease in accounts payable and accrued expenses of approximately $1
million.

        The Company maintained a revolving line of credit with a domestic bank
for the lesser of $6 million or the available borrowing base for the period
ended December 31, 1998 and $8 million for the period ended December 31, 1997.
The interest rate is computed at the bank's prime rate (8.75 percent at December
31, 1998) and requires monthly payments of interest. The line of credit expired
June 30, 1998 and was extended to December 31, 1998. The line of credit is
collateralized by certain domestic receivables and inventories. The line of
credit agreement contains restrictive covenants imposing limitations on payments
of cash dividends, purchases or redemptions of capital stock, indebtedness and
other matters. At December 31, 1998, the Company was out of compliance on
certain indebtedness covenants for which they signed a forbearance agreement
with the lender where the lender has agreed to forbear exercise of its remedies
against the Company. Subsequent to year end the Company signed an extension of
the line of credit through March 31, 1999. The Company is currently reviewing
several financing alternatives.



                                       16
<PAGE>   19

        During 1998, the Company used $167,000 for the purchase of property and
equipment. The Company anticipates that its capital expenditures in 1998 for
routine additions and replacements of property, and equipment will be less than
$250,000. These purchases will be financed through long-term debt or capital
leases.

        Management believes that existing cash balances, borrowings available
under the line of credit, and cash generated from operations will be adequate to
meet the Company's anticipated cash requirements through December 31, 1998.
However, in the event the Company experiences adverse operating performance,
above-anticipated capital expenditure requirements, or is unable to renew its
existing line of credit, additional financing may be required. There can be no
assurance that such additional financing, if required, would be available on
favorable terms if at all.

YEAR 2000 ISSUES

        The Company has developed a comprehensive plan to address year 2000
issues. The areas of focus are as follows: i) the Company's information
technology systems; ii) the Company's non-information technology systems (i.e.
machinery, equipment and devices which utilize built in or embedded technology);
and iii) third party suppliers and customers. The Company is undertaking its
year 2000 review in the following phases: awareness (education and potential
impact of year 2000 issue), identification (identifying processes or systems
which are exposed to the year 2000 issue), assessment (identifying the potential
impact of year 2000 on the equipment, processes and systems identified during
the previous phase), testing and verification (testing to determine if an item
is compliant or the degree to which it is not), and implementation (carrying out
necessary remedial efforts to address year 2000 readiness, including validation
of upgrades, patches or other year 2000 fixes).

        During 1998, the Company completed the installation of Oracle
application software, a comprehensive enterprise-wide business system. This
system affects nearly every aspect of the Company's operations, including:
financial accounting, purchasing and accounts payable, raw material inventory
control, production planning and scheduling, and invoicing and accounts
receivable. All Oracle application software utilized by the Company is fully
year 2000 compliant. In conjunction with the installation of the Oracle
software, the Company installed new HP computer hardware to run the application
software. While the HP hardware is not yet fully year 2000 compliant, the
Company has in its possession the necessary software to make the hardware's
operating systems fully year 2000 compliant and will so by late spring. The
Company expects to test these hardware, operating systems and software
applications in early 1999 to confirm year 2000 readiness. The Company has
identified other hardware, operating systems and software applications used in
its process control and other information systems and is in the process of
obtaining year 2000 compliance information from the providers of such hardware,
operating systems and applications software. The Company expects to work with
vendors to test the year 2000 readiness of such hardware, operating systems and
software application systems. The Company has no internally developed software
applications.

        The Company has substantially completed inventorying its non-information
technology systems and is assessing the year 2000 issues to determine
appropriate testing and remediation. The Company has completed its assessment of
its major non-information technology systems and is currently implementing
patches to make all such systems fully year 2000 compliant.

The Company has significant relationships with various third parties, and the
failure of any of these third parties to achieve year 2000 compliance could have
a material adverse impact on the Company. The Company expects to survey each
major third party supplier to confirm their year 2000 readiness. This review
process will continue into the second quarter of 1999.

        The Company is in the process of preparing contingency plans for
critical areas to address year 2000 failures if remedial efforts are not fully
successful. The Company's contingency plans are expected to target the Company's
most reasonably likely worst case scenarios. The Company's contingency plans
will be based in part on the results of third-party supplier surveys and thus
are not fully developed at this time. Completion of initial contingency plans is
targeted for the summer of 1999.



                                       17
<PAGE>   20

        No assurance can be given that the Company will not be materially
adversely affected by year 2000 issues. The Company may experience material
unanticipated problems and costs caused by undetected errors or defects in its
information and non-information technology systems. In addition, the failure of
third-parties to timely address their year 2000 issues could have a material
adverse impact on the Company's business, operations, and financial condition.

        The installation of the Oracle application software and related hardware
and operating systems was done to improve information processing capabilities
and efficiencies and was done irrespective of the year 2000 issue. The Company
regularly upgrades its computer hardware and software components on a regular
basis and believes it will not incur any additional material expense to modify
its systems due to the year 2000 issue.

        The foregoing discussion of the Company's year 2000 readiness includes
forward-looking statements, including estimates of the timeframes and costs for
addressing this issue and is based on management's current estimates which were
derived using numerous assumptions. There can be no assurance that these
estimates will be achieved, and actual events and results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability of
personnel with required remediation skill, the ability of the Company to
identify and correct or replace all relevant computer code and the success of
third parties with whom the Company does business in addressing their year 2000
issues.

IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS

        None.



FACTORS AFFECTING FUTURE RESULTS

        The Company's future operations will be impacted by, among other
factors, the length and severity of the current economic downturn in the
semiconductor industry as more fully discussed above. The length and severity of
the current economic downturn in the semiconductor industry remains subject to a
high degree of uncertainty. The Company's operations are also subject to
additional risks and uncertainties that could result in actual operating results
differing materially from anticipated operating results and past operating
results and trends. These risks and uncertainties include pricing pressures,
cancellations of existing contracts, timing of significant customer orders,
increased competition, and changes in semiconductor and cleanroom technology.




                                       18
<PAGE>   21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        The Company's financial statements and notes are included herein
beginning on page F-1. The supplementary data is included herein immediately
following the signature page of this report on Form 10-K.



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

        There has been no Form 8-K filed reporting a change of accountants or
reporting disagreements on any matter of accounting principle, practice,
financial statement disclosure or auditing scope or procedure during the years
covered by this report.






                                       19
<PAGE>   22

                                    PART III


ITEM 10, 11, 12 AND 13.

        These items are incorporated by reference to the Company's definitive
Proxy Statement relating to the Annual Meeting of Shareholders scheduled for
June 1, 1999. The definitive Proxy Statement will be filed with the Commission
not later than 120 days after December 31, 1998, pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended.




                                       20
<PAGE>   23

                                     PART IV


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

        (a)     Documents Filed as Part of this Report:

                (1)     Financial Statements. The following financial statements
                        are filed with this report beginning on page F-1:

                -       Report of Independent Certified Public Accountants

                -       Balance Sheets as of December 31, 1998 and 1997

                -       Statements of Operations for the Years Ended December
                        31, 1998, 1997 and 1996

                -       Statements of Shareholders' Equity for the Years Ended
                        December 31, 1998, 1997 and 1996

                -       Statements of Cash Flows for the Years Ended December
                        31, 1998, 1997 and 1996

                -       Notes to Financial Statements

        (2)     Financial Statement Schedule. The following financial statement
                schedules for the years ended December 31, 1998, 1997 and 1996
                are included herein beginning on page S-1:

                -       Report of Independent Certified Public Accountants on
                        Schedule

                -       Schedule II - Valuation and Qualifying Accounts

        All other schedules have been omitted because the information is not
required, or if required the information required therein is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the financial statements or notes thereto.

        (b)     Reports on Form 8-K:

                None.

        (c)     Exhibits:

                The following exhibits required by Item 601 of Regulation S-K
        are filed herewith or have been filed previously with the Commission as
        indicated below:




                                       21
<PAGE>   24

                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
 REGULATION
S-K EXHIBIT                       
    NO.                           DESCRIPTION                           SEQUENTIAL PAGE NO.
------------    -------------------------------------------------   -------------------------
<S>             <C>                                                 <C>             
         3.1    Restated Articles of Incorporation*                 [Form 10-KSB for the
                                                                    year ended December 31,
                                                                    1994, Exhibit No. 3.1]
         3.2    Bylaws of the Company*                              [Form 10-KSB for the
                                                                    year ended December 31,
                                                                    1992, Exhibit No. 3.2]
        10.1    Agreement and Plan of Merger*                       [Form 8-K dated October
                                                                    1992, Exhibit 10.1]
        10.2    1993 Stock Option Plan*                             [Form 10-KSB for the
                                                                    year ended December 31,
                                                                    1993, Exhibit 10.4]
        10.3    Amendment No. 1 to 1993 Stock Option Plan*          [Form 10-Q for quarter
                                                                    ended June 30, 1997,
                                                                    Exhibit 10.1]
        10.4    Amendment No. 2 to 1993 Stock Option Plan*          [Form 10-K for the year
                                                                    ended December 31,
                                                                    1997, Exhibit 10.4]
        10.5    Revolving Domestic Line of Credit Agreement         Filed herewith.
                as Amended by the Second Extension Agreement

        10.6    Lease Agreement for Salt Lake City facility*        [Form 10-KSB for the
                                                                    year ended December 31,
                                                                    1993, Exhibit 10.6]

        10.7    Amendment to Lease Agreement*                       [Form 10-K for the year
                                                                    ended December 31,
                                                                    1996, Exhibit 10.5]

        23.1    Consent of Independent Certified Public             Filed herewith.
                Accountants.

          27    Financial Data Schedule                             Filed herewith.
</TABLE>


-------------------------

*  These exhibits are incorporated herein by reference.

        (d)    Financial Statement Schedules:

               See Item 14(a)(2) of this report.





                                       22
<PAGE>   25

                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 31, 1999.

                                  DAW TECHNOLOGIES, INC.

                                  By: /s/ Ronald W. Daw
                                     -------------------------------------------
                                          Ronald W. Daw
                                          Chairman of the Board, President and
                                          Chief Executive Officer


        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 31, 1999.

<TABLE>
<CAPTION>
                  SIGNATURE                                CAPACITY IN WHICH SIGNED
                  ---------                                ------------------------



<S>                                            <C>
/s/ Ronald W. Daw                                    Chairman of the Board, President, Chief
-------------------------------------          Executive Officer and Director (Principal
Ronald W. Daw                                                 executive officer)


/s/ Michael J. Schifsky                             Senior Vice President, Chief Financial
-------------------------------------                  Officer (Principal financial and
Michael J. Schifsky                                          accounting officer)


/s/ Robert G. Chamberlain                                          Director
-------------------------------------
Robert G. Chamberlain


/s/ Charles L. Bates, Jr.                                          Director
-------------------------------------
Charles L. Bates, Jr.


/s/ James S. Jardine                                               Director
-------------------------------------
James S. Jardine


/s/ Robert J. Frankenberg                                          Director
-------------------------------------
Robert J. Frankenberg
</TABLE>




                                       23
<PAGE>   26


                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
Daw Technologies, Inc.


We have audited the accompanying balance sheets of Daw Technologies, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Daw Technologies, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.



                                                  Grant Thornton LLP


Salt Lake City, Utah
February 26, 1999


                                      F-1

<PAGE>   27




                             Daw Technologies, Inc.

                                 BALANCE SHEETS
                        (in thousands, except share data)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                --------------------
                                                                 1998         1997
                                                                -------      -------
<S>                                                             <C>          <C>    
CURRENT ASSETS
     Cash and cash equivalents                                  $ 2,140      $ 5,802
     Accounts receivable, net                                     8,904       12,472
     Costs and estimated earnings in excess
        of billings on contracts in progress                      7,546        3,702
     Inventories, net                                             1,233        1,363
     Deferred income taxes                                          655          352
     Other current assets                                         2,391        2,144
                                                                -------      -------
               Total current assets                              22,869       25,835

PROPERTY AND EQUIPMENT - NET, AT COST                             4,859        6,304
DEFERRED INCOME TAXES                                             1,921          135
OTHER ASSETS                                                      1,192           90
                                                                -------      -------

                                                                $30,841      $32,364
                                                                =======      =======

              LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
     Accounts payable and accrued liabilities                   $ 4,749      $ 5,700
     Billings in excess of costs and estimated
        earnings on contracts in progress                         1,635        3,005
     Lines of credit                                              5,254        1,230
     Current portion of long-term obligations                       557          652
                                                                -------      -------

               Total current liabilities                         12,195       10,587

LONG-TERM OBLIGATIONS, less current portion                         519        1,077
COMMITMENTS AND CONTINGENCIES                                        --           --
SHAREHOLDERS' EQUITY
     Preferred stock, authorized 10,000,000 shares of
        $0.01 par value; none issued and outstanding                 --           --
     Common stock, authorized 50,000,000 shares of
        $0.01 par value; issued and outstanding 12,479,711
        shares in 1998 and 12,407,977 shares in 1997                125          124
     Additional paid-in capital                                  16,557       15,209
     Retained earnings                                            1,445        5,367
                                                                -------      -------

               Total shareholders' equity                        18,127       20,700
                                                                -------      -------

                                                                $30,841      $32,364
                                                                =======      =======
</TABLE>


        The accompanying notes are an integral part of these statements.


                                      F-2
<PAGE>   28


                             Daw Technologies, Inc.

                            STATEMENTS OF OPERATIONS

                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                     Year ended December 31,
                                                        --------------------------------------------------
                                                            1998               1997               1996
                                                        ------------       ------------       ------------
<S>                                                     <C>                <C>                <C>         
Revenues                                                $     53,078       $     52,541       $    112,826
Cost of goods sold                                            51,223             47,272             97,364
                                                        ------------       ------------       ------------
               Gross profit                                    1,855              5,269             15,462
Operating expenses
     Selling, general and administrative                       6,513              8,373             10,274
     Research and development                                    293                246                282
     Depreciation and amortization                               563                431                400
                                                        ------------       ------------       ------------

                                                               7,369              9,050             10,956
                                                        ------------       ------------       ------------

               Earnings (loss) from operations                (5,514)            (3,781)             4,506
Other income (expense)
     Interest                                                   (459)              (295)              (663)
     Other, net                                                  (24)               (49)             1,015
                                                        ------------       ------------       ------------
                                                                (483)              (344)               352
                                                        ------------       ------------       ------------

               Earnings (loss) before income taxes            (5,997)            (4,125)             4,858
Income taxes (benefit)                                        (2,075)            (1,866)             1,548
                                                        ------------       ------------       ------------

               NET EARNINGS (LOSS)                      $     (3,922)      $     (2,259)      $      3,310
                                                        ============       ============       ============

Earnings (loss) per common share
     Basic                                              $      (0.32)      $      (0.18)      $       0.27
     Diluted                                                   (0.32)             (0.18)              0.27
Weighted-average common and dilutive
   common equivalent shares outstanding
     Basic                                                12,440,121         12,415,957         12,350,172
     Diluted                                              12,440,121         12,415,957         12,393,356

</TABLE>


        The accompanying notes are an integral part of these statements.


                                      F-3
<PAGE>   29


                             Daw Technologies, Inc.

                       STATEMENTS OF SHAREHOLDERS' EQUITY

                        (in thousands, except share data)

                  Years ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                                                                 Addi-
                                                                                                tional
                                                                                      Common    paid-in     Retained
                                                                                      stock     capital     earnings       Total
                                                                                     --------   --------    --------     --------
<S>                                                                                  <C>        <C>         <C>          <C>

Balances as of January 1, 1996                                                       $    123   $ 14,970    $  4,316     $ 19,409

Common stock issued pursuant to exercise of 900 warrants and 46,500 options and
   purchase of 22,889 shares pursuant to employee stock purchase plan
                                                                                            1        195          --          196

Tax benefit from exercise of stock options                                                 --         23          --           23

Net earnings for 1996                                                                      --         --       3,310        3,310
                                                                                     --------   --------    --------     --------

Balances as of December 31, 1996                                                          124     15,188       7,626       22,938

Common stock issued pursuant to the purchase of 43,738 shares pursuant to
   employee stock purchase plan                                                            --         84          --           84

Common stock purchased and retired of 36,304 shares                                        --        (63)         --          (63)

Net loss for 1997                                                                          --         --      (2,259)      (2,259)
                                                                                     --------   --------    --------     --------

Balances as of December 31, 1997                                                          124     15,209       5,367       20,700

Common stock issued pursuant to the purchase of 44,711 shares pursuant to
   employee stock purchase plan and 27,023 shares issued pursuant to the
   acquisition of another company                                                           1      1,348          --        1,349

Net loss for 1998                                                                          --         --      (3,922)      (3,922)
                                                                                     --------   --------    --------     --------

Balances as of December 31, 1998                                                     $    125   $ 16,557    $  1,445     $ 18,127
                                                                                     ========   ========    ========     ========
</TABLE>


        The accompanying notes are an integral part of these statements.



                                      F-4
<PAGE>   30

                             Daw Technologies, Inc.

                            STATEMENTS OF CASH FLOWS

                        (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                                  --------------------------------------
                                                                    1998           1997           1996
                                                                  --------       --------       --------
<S>                                                               <C>            <C>            <C>     

Increase (decrease) in cash and cash equivalents
     Cash flows from operating activities
         Net earnings (loss)                                      $ (3,922)      $ (2,259)      $  3,310
         Adjustments to reconcile net earnings (loss) to net
         cash provided by (used in) operating activities
               Depreciation and amortization                         1,808          1,724          1,649
               (Gain) loss on disposition of property
                  and equipment                                         --             (7)             6
               Provision for losses on accounts receivable             100            180            330
               Deferred income taxes                                (2,089)          (390)          (145)
               Changes in assets and liabilities
                  Account receivables                                3,468         14,742        (13,010)
                  Costs and estimated earnings in excess
                     of billings on contracts in progress           (3,844)         3,467          3,761
                  Inventories                                          190            220           (105)
                  Other current assets                                (224)          (148)        (1,555)
                  Accounts payable
                     and accrued liabilities                        (1,042)        (5,082)        (1,490)
                  Billings in excess of costs and estimated
                     earnings on contracts in progress              (1,370)        (4,500)         3,806
                  Other assets                                          10             (6)            (2)
                                                                  --------       --------       --------

                        Net cash provided by (used in)
                           operating activities                     (6,915)         7,941         (3,445)
                                                                  --------       --------       --------

     Cash flows from investing activities
         Payments for purchase of property
            and equipment                                             (167)          (349)        (2,929)
         Proceeds from disposition of property
            and equipment                                               --             21             31
                                                                  --------       --------       --------

                        Net cash used in
                           investing activities                       (167)          (328)        (2,898)
                                                                  --------       --------       --------
</TABLE>


                                   (continued)


                                      F-5
<PAGE>   31


                             Daw Technologies, Inc.

                      STATEMENTS OF CASH FLOWS - CONTINUED

                        (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                                  -----------------------------------
                                                                   1998          1997          1996
                                                                  -------       -------       -------
<S>                                                               <C>          <C>            <C>  

     Cash flows from financing activities
         Net change in lines of credit                              4,024        (4,466)        4,196
         Payments for purchase and retirement of
            common stock                                               --           (63)           --
         Proceeds from issuance of stock                               49            84           219
         Payments on obligations under long-term obligations         (653)         (624)         (699)
                                                                  -------       -------       -------

                        Net cash provided by (used in)
                           financing activities                     3,420        (5,069)        3,716
                                                                  -------       -------       -------

                        Net increase (decrease) in cash
                           and cash equivalents                    (3,662)        2,544        (2,627)

Cash and cash equivalents at beginning of year                      5,802         3,258         5,885
                                                                  -------       -------       -------

Cash and cash equivalents at end of year                          $ 2,140       $ 5,802       $ 3,258
                                                                  =======       =======       =======


Supplemental disclosures of cash flow information

Cash paid during the year for
     Interest                                                     $   459       $   295       $   663
     Income taxes                                                      11           438         1,055
</TABLE>


Noncash investing and financing activities

During 1998, the Company issued 27,023 shares of common stock in connection with
the acquisition of the net assets of another company (Note S). This transaction
resulted in an increase to the following balance sheet accounts:

<TABLE>
<S>                                                           <C>         
     Inventories                                              $         60
     Other current assets                                               23
     Property and equipment                                             50
     Other assets                                                    1,258
     Accounts payable                                                  (91)
     Common stock                                                       (1)
     Additional paid-in capital                                     (1,299)
                                                               -----------
                                                               $         -
                                                               ===========
</TABLE>

Capital lease obligations of $173 for property and equipment acquisitions were
incurred during 1996.


        The accompanying notes are an integral part of these statements.


                                      F-6
<PAGE>   32

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows.

         1.     Business activity

         Daw Technologies, Inc. (the Company) is a supplier of ultra-clean
         manufacturing environments, or cleanrooms, to the semiconductor
         industry. The Company designs, engineers, manufactures, installs and
         services all principal component systems for advanced cleanrooms. The
         Company also manufactures and sells other products that are
         manufactured similar to cleanrooms.

         2.     Method of accounting for long-term contracts

         Revenue recorded for contracts in the accompanying financial statements
         is recognized using the percentage-of-completion method and, therefore,
         take into account the costs, estimated earnings and revenue to date on
         contracts not yet completed. The revenue recognized is that portion of
         the total contract price that cost incurred to date bears to
         anticipated final total cost, based on current estimates of cost to
         complete. Revenue from cost-plus-fixed-fee contracts is recognized on
         the basis of costs incurred during the period plus the fee earned,
         measured by the cost-to-cost method.

         Contract costs include all direct and allocable indirect labor,
         benefits, materials unique to or installed in the project,
         subcontractor cost allocations, including employee benefits and
         equipment expense. At the time a loss on a contract becomes known, the
         entire amount of the estimated ultimate loss is recognized in the
         financial statements. As long-term contracts extend over one year,
         revisions in cost and earnings estimates during the course of the work
         are reflected in the accounting period in which the facts which require
         the revision become known. Costs attributable to contract claims or
         disputes are carried in the accompanying balance sheets only when
         realization is probable. These costs are recorded at the lesser of
         actual costs incurred or the amount expected to be realized. It is
         reasonably possible that estimates by management related to contracts
         can change in the future.

         The current asset, "costs and estimated earnings in excess of billings
         on contracts in progress," represents revenues recognized in excess of
         amounts billed (under-billings), and the current liability, "billings
         in excess of costs and estimated earnings on contracts in progress,"
         represents billings in excess of revenues recognized (over-billings).
         The amount of revenue recognized is not related to the progress
         billings to customers.



                                      F-7
<PAGE>   33

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

         3.     Other revenue recognition

         The Company recognizes revenues on its other product sales when the
         product is shipped and title passes to the customer.

         4.     Depreciation and amortization

         Property and equipment are stated at cost. Depreciation and
         amortization are provided for in amounts sufficient to relate the cost
         of depreciable assets to operations over their estimated service lives.
         Leased property under capital leases and leasehold improvements are
         amortized over the shorter of the lives of the respective leases or
         over the service lives of the asset. The straight-line method of
         depreciation is followed for financial reporting purposes. Accelerated
         methods of depreciation are used for tax purposes.

         5.     Income taxes

         The Company utilizes the liability method of accounting for income
         taxes. Under the liability method, deferred tax assets and liabilities
         are determined based on differences between financial reporting and tax
         bases of assets and liabilities and are measured using the enacted tax
         rates and laws that will be in effect when the differences are expected
         to reverse. An allowance against deferred tax assets is recorded when
         it is more likely than not that such tax benefits will not be realized.
         Research tax credits are recognized as utilized.

         6.     Cash and cash equivalents

         The Company considers all highly liquid debt instruments with an
         original maturity of three months or less when purchased to be cash
         equivalents.

         7.     Inventories

         Inventories consist of raw materials and are stated at the lower of
         cost or market. Cost is determined principally by the first-in,
         first-out method.



                                      F-8
<PAGE>   34

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

         8.     Net earnings (loss) per share

         Basic earnings (loss) per common share (BEPS) is based on the weighted
         average number of common shares outstanding during each period. Diluted
         earnings (loss) per common share are based on shares outstanding
         (computed as under BEPS) and dilutive potential common shares.
         Potential common shares included in the dilutive earnings (loss) per
         share calculation include stock options awarded.

         9.     Research and development costs

         The Company conducts research and development to develop new products
         or product improvements not directly related to a specific project.
         Research and development costs have been charged to expense as
         incurred.

         10.    Concentrations

         The Company's financial instruments that are exposed to concentration
         of credit risk consist primarily of cash and cash equivalents and
         receivables. The Company provides credit according to the terms of the
         individual project contracts, in the normal course of business,
         primarily to semi-conductor manufacturers.

         Approximately 41 percent (31 percent in 1997) of receivables are with
         three different customers. In addition, approximately 25 percent (42
         percent in 1997) of receivables are due from entities located outside
         of North America, primarily Europe and Asia. Of the total receivables,
         approximately 5 percent are denominated in foreign currencies (6
         percent at December 31, 1997). The Company routinely evaluates the
         financial strength of its customers and monitors each account to
         minimize the risk of loss.

         The Company maintains cash and cash equivalents at several financial
         institutions. Accounts at each domestic institution are insured by the
         FDIC up to $100. Uninsured domestic balances are approximately $2,125
         at December 31, 1998 ($229 in 1997). The Company also maintains cash
         and cash equivalents in foreign accounts. These uninsured balances are
         approximately $1,494 at December 31, 1998 ($5,709 in 1997).



                                      F-9
<PAGE>   35

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

         11.    Retentions receivable

         Many of the Company's contracts require retentions, typically 5-10
         percent of the amount billed, to be withheld from each progress payment
         by the customer until the project reaches substantial completion.

         12.    Intangible assets

         Intangible assets are amortized on the straight-line method over the
         useful life or the terms of the respective agreement or patent,
         whichever is shorter. The original estimated useful lives range from
         2-15 years. On an ongoing basis, management reviews the valuation and
         amortization of intangible assets to determine possible impairment by
         comparing the carrying value to the undiscounted estimated future cash
         flows of the related assets and necessary adjustments, if any, are
         recorded.

         13.    Estimates and assumptions

         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.

         14.    Fair value of financial instruments

         The carrying value of the Company's cash and cash equivalents,
         contracts receivable and accounts payable, accrued liabilities and
         lines of credit approximate their fair values due to their short-term
         nature.

         15.    Reclassifications

         Certain reclassifications have been made to the 1997 and 1996 financial
         statements to conform with the 1998 presentation.





                                      F-10
<PAGE>   36

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE B - CAPITAL TRANSACTIONS

         During 1998, the Company received $49 from the issuance of 44,711
         shares of common stock. The Company also issued 27,023 shares of common
         stock to acquire the net assets of Intelligent Enclosures Corporation
         (Note S).

         During 1997, the Company received $84 from the issuance of 43,738
         shares of common stock. The Company purchased and retired 36,304 shares
         of common stock.

         During 1996, the shareholders of the Company approved an employee stock
         purchase plan. The maximum number of shares of common stock that may be
         issued under the plan is 750,000 shares. Employees are eligible upon
         completion of 90 days employment. Eligible employees may designate 2
         percent to 15 percent (up to $25) of eligible compensation to be
         withheld for the purchase of stock. Price per share is 85 percent of
         the lower closing trading price of the stock on the applicable offering
         commencement date or offering termination date. Offering periods are
         six months in length beginning on May 1 and November 1 of each year.
         Employees purchased 44,711, 43,738 and 22,889 shares under the plan in
         1998, 1997 and 1996, respectively.


NOTE C - INTERNATIONAL OPERATIONS

         Financial information summarized by geographic area for the years ended
         December 31, 1998, 1997, and 1996, is as follows.


<TABLE>
<CAPTION>
                   1998                          North America          Europe             Asia/Pacific           Consolidated
 ---------------------------------------        ---------------     ---------------     -----------------     -------------------
<S>                                             <C>                 <C>                 <C>                   <C>                
 Net revenues - unaffiliated customers          $        30,507     $        12,965     $          9,606      $            53,078
 Loss from operations                                    (4,316)                (42)              (1,156)                  (5,514)
 Identifiable assets                                     21,352               6,453                3,036                   30,841

                   1998                          North America          Europe             Asia/Pacific           Consolidated
 ---------------------------------------        ---------------     ---------------     -----------------     -------------------
 Net revenues - unaffiliated customers          $        31,413     $        11,574     $          9,554      $            52,541
 Loss from operations                                      (283)             (2,668)                (830)                  (3,781)
 Identifiable assets                                     18,655               8,262                5,447                   32,364

                   1998                          North America          Europe             Asia/Pacific           Consolidated
 ---------------------------------------        ---------------     ---------------     -----------------     -------------------
 Net revenues - unaffiliated customers          $        74,429     $        22,764     $         15,633      $           112,826
 Earnings (loss) from operations                          5,341                (794)                 (41)                   4,506
 Identifiable assets                                     30,202              10,389                8,904                   49,495
</TABLE>




                                      F-11
<PAGE>   37

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE C - INTERNATIONAL OPERATIONS - CONTINUED

         Foreign currency transaction losses totaling approximately $203 for
         1998 ($225 for 1997) are included in other income. Foreign currency
         transactions for 1996 were not significant.


NOTE D - ACCOUNTS RECEIVABLE

         Accounts receivable consist of the following:

<TABLE>
<CAPTION>
                                                        1998             1997
                                                      --------         --------
<S>                                                   <C>              <C>     
Trade accounts receivable                             $  1,397         $     --
Contract receivables                                     7,140            9,666
Retentions receivable                                      982            3,209
                                                      --------         --------
                                                         9,519           12,875
Less allowance for doubtful accounts                      (615)            (403)
                                                      --------         --------

Accounts receivable                                   $  8,904         $ 12,472
                                                      ========         ========
</TABLE>


NOTE E - OTHER CURRENT ASSETS

         Other current assets consist of the following:

<TABLE>
<CAPTION>
                                                         1998             1997
                                                        ------           ------
<S>                                                     <C>              <C>   
Income taxes receivable                                 $  360           $1,358
Refundable foreign taxes                                 1,666              172
Miscellaneous receivables and deposits                     188              278
Prepaid expenses                                           177              336
                                                        ------           ------

                                                        $2,391           $2,144
                                                        ======           ======
</TABLE>


                                      F-12
<PAGE>   38

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE F - PROPERTY AND EQUIPMENT

         Property and equipment and estimated useful lives consist of the
following:

<TABLE>
<CAPTION>
                                                             Years            1998           1997
                                                         -------------      --------       --------
<S>                                                      <C>                <C>            <C>     
Equipment                                                    5-10           $  4,221       $  4,150
Furniture and fixtures                                        3-5              2,734          2,588
Leasehold improvements                                   life of lease         2,605          2,605
Equipment under capital leases                               5-10              4,067          4,067
Vehicles                                                      3-5                317            317
                                                                            --------       --------
                                                                              13,944         13,727
Less accumulated depreciation and amortization
   including $3,002 and $2,332 for equipment
   under capital leases at 1998 and 1997,
   respectively                                                               (9,085)        (7,423)
                                                                            --------       --------
                                                                            $  4,859       $  6,304
                                                                            ========       ========
</TABLE>


NOTE G - CONTRACTS IN PROGRESS

         Costs incurred to date and estimated earnings and the related progress
         billings to date on contracts in progress are as follows:

<TABLE>
<CAPTION>
                                                        1998              1997
                                                      --------          --------
<S>                                                   <C>               <C>     
Total costs and estimated earnings                    $118,265          $108,215
Progress billings to date                              112,354           107,518
                                                      --------          --------

                                                      $  5,911          $    697
                                                      ========          ========
</TABLE>

         The above are included in the balance sheets under the following
captions:

<TABLE>
<CAPTION>
                                                          1998            1997
                                                        -------         -------
<S>                                                     <C>             <C>    
Costs and estimated earnings in excess
   of billings on contracts in progress                 $ 7,546         $ 3,702
Billings in excess of costs and estimated
   earnings on contracts in progress                     (1,635)         (3,005)
                                                        -------         -------

                                                        $ 5,911         $   697
                                                        =======         =======
</TABLE>


                                      F-13
<PAGE>   39

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)


NOTE H - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

         Accounts payable and accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                             1998          1997
                                                            ------        ------
<S>                                                         <C>           <C>   
Trade accounts payable                                      $2,847        $2,729
Other accrued liabilities                                      219         1,340
Employees salaries, incentive pay,
   vacation and payroll taxes                                1,017         1,265
Reserve for contract estimates and warranties                  666           366
                                                            ------        ------
                                                            $4,749        $5,700
                                                            ======        ======
</TABLE>


NOTE I - INCOME TAXES

         Components of income taxes (benefit) are as follows:

<TABLE>
<CAPTION>
                                        1998             1997             1996
                                      -------          -------          -------
<S>                                   <C>              <C>              <C>    
Current
     Federal                          $    12          $(1,171)         $ 1,288
     State                                  2             (305)             330
     Foreign                               --               --               75
                                      -------          -------          -------
                                           14           (1,476)           1,693
Deferred
     Federal                           (1,809)            (379)            (119)
     State                               (280)             (11)             (26)
                                      -------          -------          -------
                                       (2,089)            (390)            (145)
                                      -------          -------          -------
Income taxes (benefit)                $(2,075)         $(1,866)         $ 1,548
                                      =======          =======          =======
</TABLE>



                                      F-14
<PAGE>   40

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE I - INCOME TAXES - CONTINUED

         The income tax expense (benefit) reconciled to the tax computed at the
statutory Federal rate of 34 percent is as follows:

<TABLE>
<CAPTION>
                                               1998          1997          1996
                                             -------       -------       -------
<S>                                          <C>           <C>           <C>    
Tax (benefit) at federal statutory rate      $(2,039)      $(1,403)      $ 1,652
Nondeductible expenses                            12            11            41
State income taxes, net of federal
   income tax benefit                           (198)         (234)          234
Foreign sales corporation exemption               --          (167)         (333)
All other                                        150           (73)          (46)
                                             -------       -------       -------
                                             $(2,075)      $(1,866)      $ 1,548
                                             =======       =======       =======
</TABLE>

         Deferred income taxes related to the following:

<TABLE>
<CAPTION>
                                                        1998          1997
                                                       -------       -------
<S>                                                    <C>           <C>    
Current deferred tax assets
     Allowance for doubtful accounts                   $   230       $   150
     Accrued expenses and reserves                         425           202
                                                       -------       -------
                                                       $   655       $   352
                                                       =======       =======
Long-term deferred tax assets (liabilities)
     Excess book depreciation and amortization         $   (79)      $  (226)
     Foreign tax credit carryforwards                      162           162
     Alternative minimum tax credit carryforwards          199           199
     Net operating loss carryforward                     1,639            --
                                                       -------       -------
                                                       $ 1,921       $   135
                                                       =======       =======
</TABLE>

         The foreign tax credit carry forward of $162 expires during 2001.
         Management believes it is more likely than not that the Company will
         have sufficient foreign and domestic income to utilize the credits
         before expiration.


                                      F-15
<PAGE>   41

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE I - INCOME TAXES - CONTINUED

         The Company sustained a net operating loss for tax reporting purposes
         of $4,533 in 1998. Management believes that it is more likely than not
         that the Company will have sufficient income to utilize the net
         operating loss carryforward before it expires in 2018.


NOTE J - LINES OF CREDIT

         During 1998 and 1997, the Company maintained a revolving line of credit
         with a domestic bank for the lesser of $6,000 ($8,000 during 1997) or
         the available borrowing base. The interest rate is computed at the
         bank's prime rate plus 1.0 percent (8.75 percent at December 31, 1998)
         and requires monthly payments of interest. The Company had $5,254 in
         borrowings against the line at December 31, 1998 ($1,230 at December
         31, 1997). The line of credit expired June 30, 1998 and was extended to
         December 31, 1998. The line of credit is collateralized by certain
         domestic receivables and inventories. The line of credit agreement
         contains restrictive covenants imposing limitations on payments of cash
         dividends, purchases or redemptions of capital stock, indebtedness and
         other matters. At December 31, 1998, the Company was out of compliance
         on certain indebtedness covenants for which they signed a forbearance
         agreement with the lender where the lender has agreed to forbear
         exercise of its remedies against the Company. Subsequent to year end
         the Company signed an extension of the line of credit through March 31,
         1999. The Company is currently reviewing several financing
         alternatives.


NOTE K - LONG-TERM OBLIGATIONS

         The Company has entered into capital leases with various financial
         institutions and leasing organizations that carry interest rates
         ranging from 4 percent to 11.5 percent. The leases are collateralized
         by equipment. Payments approximate $65 monthly including interest.


                                      F-16

<PAGE>   42


                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE K - LONG-TERM OBLIGATIONS - CONTINUED

         The following is a schedule by year of future minimum lease payments
         under capital leases, together with the present value of the net lease
         payments as of December 31, 1998:

<TABLE>
<CAPTION>
                     Year ending December 31,
                     ------------------------
<S>                                                               <C>
                          1999                                    $       632
                          2000                                            539
                          2001                                             10
                                                                   -----------
                     Total minimum leases payments                      1,181
                     Less amount representing interest                    105
                                                                   -----------
                     Present value of net minimum lease payments        1,076
                     Less current portion                                 557
                                                                   -----------
                     Long-term portion                            $       519
                                                                   ===========
</TABLE>


NOTE L - OPERATING LEASES

         The Company leases buildings, machinery and equipment under operating
         leases. The building leases expire in 2000 and 2005. The machinery and
         equipment leases expire through 2000. The following is a schedule, by
         year, of future minimum rental payments as of December 31, 1998:

<TABLE>
<CAPTION>
                     Year ending December 31,
                     ------------------------
<S>                                                 <C>        
                          1999                      $     1,778
                          2000                              989
                          2001                              640
                          2002                              583
                          2003                              583
                          Thereafter                        651
                                                     -----------
                                                    $     5,224
                                                     ===========
</TABLE>


                                      F-17
<PAGE>   43

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)




NOTE L - OPERATING LEASES - CONTINUED

         The building leases provide for payment of property taxes, insurance,
         and maintenance costs by the Company. Rental expense for operating
         leases totaled $2,212, $1,670 and $737 for 1998, 1997 and 1996
         respectively.

         The Company has an option to renew one building lease for four
         additional five year periods upon expiration of the current term in
         2005.


NOTE M - BENEFIT PLANS

         1.     Savings Plan

         The Company has established a 401(k) savings plan covering all
         non-union employees 21 years of age and older. The Company, at its
         discretion, matches 50 percent of employee contributions up to a
         maximum matching contribution of 3 percent of the employee's annual
         salary. Contributions are made at the discretion of the Board of
         Directors. The Company's contributions to the plan were $189, $176 and
         $184 for the years ended December 31, 1998, 1997 and 1996,
         respectively.

         2.     Multi-Employer Pension Plans

         The Company contributes to several multi-employer pension plans for
         employees covered by collective bargaining agreements. Employees
         covered by these plans are engaged solely in on-site installation of
         cleanrooms. These plans are not administered by the Company and
         contributions are determined in accordance with provisions of
         negotiated labor contracts. The Company's contributions to the
         multi-employer pension plans totaled approximately $269, $303 and $484,
         respectively, for the years ended December 31, 1998, 1997 and 1996.
         Information with respect to the Company's proportionate share of the
         excess, if any, of the actuarially computed value of vested benefits
         over the total pension plans' net assets is not available from the
         plans' administrators.

         The Multi-Employer Pension Plan Amendments Act of 1980 (The "Act")
         significantly increased the pension responsibilities of participating
         employers. Under the provision of the Act, if the plans terminate or
         the Company withdraws, the Company could be subject to a withdrawal
         liability. Management has no intention of undertaking any action which
         could subject the Company to any withdrawal liability which would have
         a material effect on the Company's financial condition.



                                      F-18
<PAGE>   44

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)


NOTE N - LEGAL PROCEEDINGS AND CLAIMS

         The Company is engaged in various lawsuits and claims, either as
         plaintiff or defendant, in the normal course of business. In the
         opinion of management, based upon advice of counsel, the ultimate
         outcome of these lawsuits will not have a material impact on the
         Company's financial position or results of operations.


NOTE O - PRIMARY CUSTOMERS

         The Company has typically had one to three customers in each year which
         accounted for more than 10 percent each of revenues; these customers do
         not necessarily remain significant in subsequent years. These major
         customers are typically general contractors of fabrication facilities.

         The Company's major customers and revenue received therefrom are as
         follows:

<TABLE>
<CAPTION>
                                  1998                 1997                1996
                                 -------           -----------           -------
<S>                              <C>               <C>                   <C>    
Company A                        $ 7,912           $        --           $    --
Company B                          6,580                    --                --
Company C                             --                 7,241                --
Company D                             --                    --            21,371
Company E                             --                    --            17,916
Company F                             --                    --            16,247
</TABLE>


NOTE P - RELATED PARTY TRANSACTIONS

         Daw Incorporated is a regional interior specialties contracting company
         based in Utah. Certain stockholders of Daw Incorporated own
         approximately 34 percent of the Company's common stock.

         The Company purchased goods and services from Daw Incorporated totaling
         $447, $223, and $1,118 in 1998, 1997, and 1996, respectively.

         A member of the board of directors works for a law firm which provided
         legal services to the Company approximating $171, $138 and $137 in
         1998, 1997 and 1996, respectively.



                                      F-19
<PAGE>   45

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)


NOTE Q - WARRANTS AND OPTIONS

         During 1996, the Board of Directors and the shareholders amended the
         Company's 1993 Stock Option Plan (Plan) to increase the number of
         shares reserved for issuance by 250,000. In addition, the amendment
         extended the life of the Plan for one year, and eliminated the limit on
         the number of options that can be granted in any given year. Also, the
         amendment limits to 100,000 the number of options that can be granted
         to any one individual in any given year. The Plan is a non-qualified
         plan, and the options granted thereunder are non-qualified stock
         options.

         Under the amended Plan, 1,250,000 shares of common stock were reserved
         for issuance upon exercise of options. The Plan provides that options
         to purchase a maximum of 1,075,000 shares may be granted to eligible
         employees (including employees who are directors or officers) and
         options to purchase a maximum of 175,000 shares may be granted to
         non-employee directors.

         The exercise price for stock options granted under the Plan may not be
         less than 100 percent of the fair market value of a share of common
         stock on the date the option is granted. Options granted under the Plan
         after October 24, 1996 expire through 2008. Options granted prior to or
         on October 24, 1996 expire through 2011.

         The Company granted options to purchase 311,500 shares, 55,000 shares
         and 272,000 shares in 1998, 1997, and 1996, respectively, of the
         Company's common stock. The options were granted to the following:

<TABLE>
<CAPTION>
                                            1998           1997           1996
                                           -------        -------        -------
<S>                                        <C>            <C>            <C>   
Directors                                   20,000         20,000         40,000

Executive officers, including
   officers who are directors               60,000         30,000        111,500

Other employees                            231,500          5,000        120,500
                                           -------        -------        -------

                                           311,500         55,000        272,000
                                           =======        =======        =======
</TABLE>

         On October 24, 1996 all options with an exercise price greater than
         $3.50 were re-priced to $3.50, which was the market price of the
         Company stock on that date. On February 24, 1998, all options with an
         exercise price greater than $1.40 were re-priced to $1.40, which was
         the market price of the Company stock on that date. At that date,
         vesting was increased by one year for those stocks repriced.



                                      F-20
<PAGE>   46

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)


NOTE Q - WARRANTS AND OPTIONS - CONTINUED

         The Company has adopted only the disclosure provisions of Financial
         Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
         (FAS123). Therefore, the Company continues to account for stock based
         compensation under Accounting Principles Board Opinion No. 25, under
         which no compensation cost has been recognized. Had compensation cost
         for the stock based compensation been determined based upon the fair
         value of the awards at the grant date consistent with the methodology
         prescribed by FAS123, the Company's net earnings (loss) and earnings
         (loss) per share would have been reduced (or increased) to the
         following pro forma amounts:

<TABLE>
<CAPTION>
                                                                    1998           1997            1996
                                                                 ---------       ---------       ---------
<S>                                             <C>              <C>             <C>            <C>      
Net earnings (loss)                             As reported      $  (3,922)      $ (2,259)      $   3,310
                                                Pro forma           (4,074)        (2,458)          2,976
Earnings (loss) per share-basic
                                                As reported          (0.32)         (0.18)           0.27
                                                Pro forma            (0.33)         (0.20)           0.24
Earnings (loss) per share-assuming
   dilution
                                                As reported          (0.32)         (0.18)           0.27
                                                Pro forma            (0.33)         (0.20)           0.24
</TABLE>

         These pro forma amounts may not be representative of future disclosures
         because they do not take into effect pro forma compensation cost
         related to grants made before 1995. The fair value of these options was
         estimated at the date of grant using the modified Black-Scholes
         American option-pricing model with the following weighted-average
         assumptions for 1998, 1997 and 1996: expected volatility of 101 percent
         (53 percent for 1997 and 1996); risk-free interest rate of 5.51 percent
         (6.05 percent for 1997 and 1996); and expected life of 10 years (9.6
         for 1997 and 1996). The weighted-average fair value of options granted
         was $1.17 and $1.60 in 1998 and 1997, respectively.

         Option pricing models require the input of highly subjective
         assumptions including the expected stock price volatility. Also, the
         Company's employee stock options have characteristics significantly
         different from those of traded options, and changes in the subjective
         input assumptions can materially affect the fair value estimate.
         Management believes the best input assumptions available were used to
         value the options and that the resulting option values are reasonable.



                                      F-21
<PAGE>   47

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE Q - WARRANTS AND OPTIONS - CONTINUED

         Changes in the Company's stock options and warrants are as follows:

<TABLE>
<CAPTION>
                                                                                       Weighted-
                                                                                       average
                                                      Stock           Exercise         exercise
                                      Warrants       options            price           price
                                      --------       --------       -------------      --------
<S>                                   <C>            <C>            <C>                <C>     
Outstanding at January 1, 1996           7,500        537,500        $2.50 - 8.58      $   5.50
     Granted                                --        272,000         3.00 - 5.88          3.68
     Exercised                            (900)       (46,500)        2.50 - 5.75          2.87
     Canceled or expired                    --        (26,500)        3.56 - 6.63          6.06
                                      --------       --------
Outstanding at December 31, 1996         6,600        736,500         2.50 - 3.50          3.41
     Granted                                --         55,000         1.94 - 3.00          2.24
     Exercised                              --             --                  --            --
     Canceled or expired                (6,600)       (98,500)        2.50 - 3.50          3.30
                                      --------       --------
Outstanding at December 31, 1997            --        693,000         1.94 - 3.50          3.32
     Granted                                --        311,500         0.84 - 2.66          2.28
     Exercised                              --             --                  --            --
     Canceled or expired                    --       (135,500)        1.38 - 3.50          3.05
                                      --------       --------
Outstanding at December 31, 1998            --        869,000         0.84 - 2.66          1.66
                                      ========       ========

Exercisable at December 31, 1998            --             --        $         --      $     --
                                      ========       ========
</TABLE>

         A summary of the status of the options outstanding under the Company's
stock option plan at December 31, 1998 is presented below:

<TABLE>
<CAPTION>
                                                   Weighted-
                                                    average            Weighted-                           Weighted-
                                                   remaining            average                            average
                                Number          contractual life       exercise            Number          exercise
Range of exercise prices      outstanding           (years)              price           exercisable       price
                           ---------------      ----------------     -------------     --------------     ----------
<S>                        <C>                  <C>                   <C>              <C>                <C>

$ 0.84 - $ 1.25                     40,000           5.82               $ 0.97                    -        $    -
$ 1.26 - $ 1.50                    628,500           2.98                 1.40                    -             -
$ 1.51 - $ 2.00                     11,000           5.67                 1.97                    -             -
$ 2.01 - $ 2.66                    189,500           5.41                 2.66                    -             -
                           ---------------                                            -------------

$ 0.84 - $ 2.66                    869,000           3.68               $ 1.66                    -        $    -
                           ===============                                            =============
</TABLE>


                                      F-22
<PAGE>   48

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE R - EARNINGS (LOSS) PER COMMON SHARE

         Options to purchase 869,000 shares of common stock (693,000 in 1997) at
         $0.84 to $2.66 ($1.94 to $3.00 in 1997) per share were outstanding at
         December 31, 1998. They were not included in the computation of loss
         per share because they would have had an anti-dilutive effect on the
         1998 and 1997 loss per share.

         The following data show the shares used in computing earnings (loss)
per common share including dilutive potential common stock:

<TABLE>
<CAPTION>
                                                 1998            1997            1996 
                                              ----------      ----------      ----------
<S>                                           <C>             <C>             <C>       

Common shares outstanding
    entire period                             12,407,977      12,400,543      12,330,254

Net weighted average common shares
    issued during period                          32,144          15,414          19,918
                                              ----------      ----------      ----------

Weighted average number of common
    shares used in basic EPS                  12,440,121      12,415,957      12,350,172

Dilutive effect of stock options                      --              --          40,455

Dilutive effect of warrants                           --              --           2,729
                                              ----------      ----------      ----------

Weighted average number of common
    shares and dilutive potential common
    shares used in diluted EPS                12,440,121      12,415,957      12,393,356
                                              ==========      ==========      ==========
</TABLE>


NOTE S - BUSINESS ACQUISITION

         On April 22, 1998, the first closing date, the Company acquired the net
         assets of Intelligent Enclosures Corporation. The transaction was
         accounted for as a purchase and the transaction is to be completed on
         April 22, 2000, the second closing date. At the first closing date, the
         Company delivered 27,023 shares of common stock. At the second closing
         date, the Company will issue additional shares of common stock at the
         average per share closing price for the 20 consecutive trading days
         prior to the second closing date, which in addition to the original
         27,023 shares will equal $1,300.


                                      F-23
<PAGE>   49

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE T - SEGMENT INFORMATION

         The Company has two reportable segments for the year ended December 31,
         1998, namely 1) cleanrooms and related products and 2) other
         manufactured goods. Prior to 1998, the Company operated in one segment.
         The accounting policies of the segments are the same as those described
         in the summary of significant accounting policies. The Company
         evaluates performance of each segment based on earnings or loss from
         operations. The Companies reportable segments are similar in
         manufacturing processes and are tracked similarly in the accounting
         system. The manufacturing process for each segment uses the same
         manufacturing facilities and overhead is allocated similarly to each
         segment. It is not practical to determine the total assets per segment
         and depreciation by segment because each segment uses the same
         manufacturing facility. Identifiable assets by segment are reported
         below. The Company allocates certain general and administrative
         expenses, consisting primarily of facilities expenses, utilities, and
         manufacturing overhead.

         Segment information for the cleanrooms and related products and other
         manufactured goods are as follows:

<TABLE>
<CAPTION>
                                                                  1998                1997              1996
                                                            -------------      -------------     -------------- 
<S>                                                         <C>                <C>               <C>           
              Revenues
                   Cleanrooms and related products          $      46,298      $      52,541     $      112,826
                   Other products                                   6,780                  -                  -
                                                            -------------      -------------     --------------

                       Totals                               $      53,078      $      52,541     $      112,826
                                                            =============      =============     ==============

              Operating profit (loss)
                   Cleanrooms and related products          $      (6,005)     $      (3,781)    $        4,506
                   Other products                                     491                  -                  -
                                                            -------------      -------------     --------------

                       Totals                               $      (5,514)     $      (3,781)    $        4,506
                                                            =============      =============     ==============



              Total assets
                   Cleanrooms and related products          $      15,053             16,174
                   Other products                                   1,397                  -
                   Manufacturing and corporate assets              14,391             16,190
                                                            -------------      -------------  

                       Totals                               $      30,841      $      32,364
                                                            =============      =============
</TABLE>



                                      F-24
<PAGE>   50

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)



NOTE U - REVENUES

         Revenues by country are based on the location of the project for
         long-term projects and by the location of the customer for other
         manufactured products and are as follows:

<TABLE>
<CAPTION>
                                                                1998                1997               1996
                                                           --------------     --------------     -------------
<S>                                                       <C>                <C>                <C>           
                  Canada                                  $        6,666     $           -      $            -
                  United Kingdom                                   6,692             2,068               7,730
                  Peoples Republic of China                        7,092             2,389               6,193
                  Italy                                            3,568                 -                 250
                  Taiwan                                           2,319             3,910               8,636
                  Malaysia                                             -             2,669                   -
                  Israel                                           2,058             4,449                 937
                  France                                             644             4,999              13,847
                  All others                                         198               644                 804
                                                           --------------     --------------     -------------

                           Total export revenues                  29,237            21,128              38,397
                                                           --------------     --------------     -------------

                  United States                                   23,841            31,413              74,429
                                                           --------------     --------------     -------------

                           Total revenues                 $       53,078     $      52,541      $      112,826
                                                           ==============     ==============     =============
</TABLE>



                                      F-25
<PAGE>   51

                             Daw Technologies, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

                        (in thousands, except share data)


NOTE V - QUARTERLY FINANCIAL RESULTS (UNAUDITED)

         Quarterly financial results for the years ended December 31, 1998,
         1997, and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                                                                       Net
                                                                                                                    earnings
                                                                       Earnings                   Net              (loss) per
                                                     Gross           (loss) from               earnings              common
      1998                   Revenues            profit (loss)        operations                (loss)             share-basic
 -----------------------   -------------     -----------------     ----------------      -----------------    -----------------
<S>                       <C>                <C>                   <C>                   <C>                  <C>             
 First quarter            $       11,441     $             486     $         (1,298)     $            (831)   $         (0.07)
 Second quarter                   12,888                (1,768)              (3,719)                (2,403)             (0.19)
 Third quarter                    14,332                   952                 (878)                  (748)             (0.06)
 Fourth quarter                   14,417                 2,185                  381                     60                   -
                           -------------     -----------------     ----------------      -----------------    ----------------
                          $       53,078     $           1,855     $         (5,514)     $          (3,922)   $         (0.32)
                           =============     =================     ================      =================    ================

      1997
 -----------------------
 First quarter            $       16,795     $           2,583     $            327      $             182    $          0.02
 Second quarter                   16,463                 2,398                   97                     15                  -
 Third quarter                    11,453                 2,036                   46                     48                  -
 Fourth quarter                    7,830                (1,748)              (4,251)                (2,504)             (0.20)
                           -------------     -----------------     ----------------      -----------------    ----------------
                          $       52,541     $           5,269     $         (3,781)     $          (2,259)   $         (0.18)
                           =============     =================     ================      =================    ================

      1996
 -----------------------
 First quarter            $       23,383     $           3,341     $            986      $             618    $          0.05
 Second quarter                   27,049                 3,242                  575                    654               0.05
 Third quarter                    30,009                 4,478                1,713                  1,015               0.08
 Fourth quarter                   32,385                 4,401                1,232                  1,023               0.09
                           -------------     -----------------     ----------------      -----------------    ----------------
                          $      112,826     $          15,462     $          4,506      $           3,310    $          0.27
                           =============     =================     ================      =================    ================
</TABLE>


                                      F-26
<PAGE>   52


                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS
                                   ON SCHEDULE



Board of Directors
Daw Technologies, Inc.



In connection with our audit of the financial statements of Daw Technologies,
Inc. referred to in our report dated February 26, 1999, which is included in the
annual report to shareholders and Form 10-K, we have also audited Schedule II -
valuation and qualifying accounts for each of the three years in the period
ended December 31, 1998. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.


                                       Grant Thornton LLP


Salt Lake City, Utah
February 26, 1999

                                      S-1

<PAGE>   53


                             DAW TECHNOLOGIES, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
              COLUMN A                     COLUMN B                COLUMN C               COLUMN D         COLUMN E
-------------------------------------    ------------    -----------------------------   -----------      ----------
                                                                  ADDITIONS
                                                         -----------------------------
                                                            (1)            (2)
                                         BALANCE AT      CHARGED TO      CHARGED TO                       BALANCE AT
                                         BEGINNING OF    COSTS AND      OTHER ACCOUNTS   DEDUCTIONS-       END OF
            DESCRIPTION                     PERIOD        EXPENSES        DESCRIBE       WRITE-OFFS        PERIOD
-------------------------------------    ------------    ----------     --------------   -----------      ----------
<S>                                      <C>             <C>            <C>              <C>              <C>  

Allowance for doubtful accounts
     Year ended December 31, 1998            $ 403         $ 100          $ 150(A)          $ (38)         $ 615
     Year ended December 31, 1997              376           180             --              (153)           403
     Year ended December 31, 1996              140           330             --               (94)           376

Allowance for contract estimates
     Year ended December 31, 1998            $ 366         $  --          $ 300(A)          $  --          $ 666
     Year ended December 31, 1997              575           654             --              (863)           366
     Year ended December 31, 1996              438           940             --              (803)           575

Allowance for inventory obsolescence
     Year ended December 31, 1998            $  --         $  --          $ 300(A)          $  --          $ 300
     Year ended December 31, 1997               --            --             --                --             --
     Year ended December 31, 1996               --            --             --                --             --

Allowance for contract repayment
     Year ended December 31, 1998            $ 803         $  --          $(750)(A)         $  --          $  53
     Year ended December 31, 1997              803            --             --                --            803
     Year ended December 31, 1996              461           342             --                --            803

(A) Reclassification

</TABLE>



                                      S-2