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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB


(Mark One)
[X]     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF 1934
                                        For the fiscal year ended June 30, 2008.

[ ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934
                      For the transition period from __________ to ____________.

                         Commission file number 0-12697

                             DYNATRONICS CORPORATION
                 (Name of small business issuer in its charter)

                Utah                                         87-0398434
   -------------------------------                        -------------------
   (State or other jurisdiction of                         (I.R.S. Employer
   incorporation or organization)                         Identification No.)

                             7030 Park Centre Drive
                         Salt Lake City, Utah 84121-6618
               --------------------------------------------------
               (Address of principal executive offices, Zip Code)

Issuer's telephone number  (801) 568-7000

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

Securities registered under Section 12(g) of the Exchange Act: Common Stock, no
par value

Check whether the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act. Yes     No X
                                            ----   ----

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

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

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes      No X
                                    ----    ----

The issuer's  revenues for the fiscal year ended June 30, 2008 were $32,592,507.
The  aggregate  market value of the voting and  non-voting  common stock held by
non-affiliates of the issuer was approximately  $6.6 million as of September 18,
2008, based on the average bid and asked price on that date.

As of September 18, 2008,  there were 13.7 million shares of the issuer's common
stock outstanding.

                      Documents Incorporated by Reference

The issuer hereby incorporates information required by Part III (Items 9, 10, 11
and 14) of this report by reference to the issuer's  definitive  proxy statement
to be filed pursuant to Regulation 14A and provided to  shareholders  subsequent
to the filing of this report.

Transitional Small Business Disclosure Format (Check one):  Yes     No  X
                                                               ----   ----

                                        i
<PAGE>

The  purpose  of this  filing is to  correctly  identify  the form on which this
report is filed as Form 10-KSB. Due to a clerical error, the original filing was
made on Form  10-KSB/A.  No changes have been made to this report other than the
reference to the form on which it is filed.


                                TABLE OF CONTENTS

                                     PART I

Item 1.       Description of Business.........................................1
Item 2.       Description of Property.........................................8
Item 3.       Legal Proceedings...............................................9
Item 4.       Submission of Matters to a Vote of Security Holders.............9

                                     PART II

Item 5.       Market for Common Equity and Related Stockholder Matters
              and Small Business Issuer Purchases of Equity Securities........9
Item 6.       Management's Discussion and Analysis or Plan of
              Operation......................................................11
Item 7.       Financial Statements...........................................22
Item 8.       Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure............................22
Item 8A.      Controls and Procedures........................................22
Item 8B.      Other Information..............................................23

                                    PART III

Item 9.       Directors, Executive Officers, Promoters, Control
              Persons and Corporate Governance; Compliance with
              Section 16(a) of the Exchange Act..............................23
Item 10.      Executive Compensation.........................................23
Item 11.      Security Ownership of Certain Beneficial Owners
              and Management and Related Stockholder Matters.................23
Item 12.      Certain Relationships and Related Transactions, and
              Director Independence..........................................23
Item 13.      Exhibits.......................................................24
Item 14.      Principal Accountant Fees and Services.........................25
Signatures    ...............................................................26
Certifications  .............................................................

Unless the context  otherwise  requires,  all references in this report to "we,"
"us," "our," "Dynatronics" or the "Company" include Dynatronics  Corporation,  a
Utah corporation.

                                       ii

<PAGE>
                                     PART I

Item 1. Description of Business

         When used in this report, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements within the statutory safe harbor provisions of Section 27A of the
Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"). These statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those described in the forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.

         All references to the financials statements herein refer to the
consolidated financial statements of Dynatronics Corporation, its affiliates and
subsidiaries.

         Dynatronics was organized as a Utah corporation on April 29, 1983. The
principal business of the Company is the design, manufacture, marketing and
distribution of physical medicine products and aesthetic products.

Recent Developments

         Significant consolidation within the physical medicine market is
changing the dynamics of our industry. In order to compete more effectively
within the changing marketplace, we moved aggressively to create a direct
channel of distribution. On June 30, 2007, we acquired our largest independent
distributor, Rajala Therapy Sales Associates of Pleasanton, California
("Rajala"). On July 2, 2007, we acquired five additional independent
distributors: Responsive Providers, Inc. of Houston, Texas ("RPI"); Therapy and
Health Care Products, Inc. of Girard, Ohio ("THCP"); Cyman Therapy, Inc. of
Detroit, Michigan ("Cyman"); Al Rice and Associates, Inc. of Jeffersonville,
Indiana ("Al Rice"); and Theratech, Inc. of Minneapolis, Minnesota
("Theratech"). The vertical integration of these distributors is a key strategic
step toward strengthening and preserving our distribution channels. We believe
that when fully integrated, these acquisitions will provide Dynatronics with
more effective direct distribution of our products

         Subsequent to these acquisitions, we added new direct sales
representatives in Southern California, Louisiana, Kansas, Oklahoma, Wisconsin,
Missouri, North Carolina, South Carolina, Virginia, West Virginia, and Maryland.
We now cover 29 states with 36 direct sales representatives. This network of
direct sales representatives significantly strengthens and complements the
existing distribution of the Company through independent distributors and
catalog companies.

         During fiscal year 2008, Dynatronics introduced four new products to
the market. At the beginning of the fiscal year, the Company began shipping the
new T3 treatment table. We believe this three-section table is unique due to its
features and the tremendous value it provides for practitioners. The metal
frames of the T3 tables are manufactured in Asia for optimal cost savings.

         In April 2008, Dynatronics announced the introduction of the DynaPro
Spinal Health System, a non-surgical treatment for back and neck pain. This
system combines the benefits of decompression and light therapy with
core-stabilization exercises and nutrition, to form an effective tool for
reducing back and neck pain.

         Another new product introduced in April 2008 was the Dynatron X5
"Turbo" soft-tissue oscillation therapy unit. The new X5 "Turbo" is three times
more powerful than the original X5 device and we believe it is a highly
effective treatment for acute and chronic pain.

         In April 2008, we also began shipments of the new "Synergie Elite" line
of aesthetic treatment devices. This new line is comprised of cellulite
treatment devices, microdermabrasion units and bio-stimulation light therapy
equipment. These new products represent the first time in 10 years that the
Synergie line of products has been updated. Initial response to the new Synergie
Elite equipment at trade shows has been promising. We believe the new updated
design and additional features make the Synergie Elite products both more
visually attractive and functionally enhanced to enable us to better compete in
the aesthetic markets.



                                       1
<PAGE>

Description of Products Manufactured and/or Distributed by Dynatronics

         Dynatronics manufactures and distributes a broad line of medical
equipment including therapy devices, medical supplies and soft goods, treatment
tables and rehabilitation equipment. In addition, we manufacture and distribute
a line of aesthetic equipment including aesthetic massage and microdermabrasion
devices, as well as skin care products. Our products are used primarily by
physical therapists, chiropractors, sports medicine practitioners, podiatrists,
plastic surgeons, dermatologists, aestheticians and other aesthetic services
providers.

Physical Medicine Products
--------------------------

         Electrotherapy - The therapeutic effects of electrical energy have
occupied an important position in physical medicine for over four decades. There
has been an evolution through the years to use the most effective and painless
waveforms and frequencies for patient comfort and for success in the treatment
of pain and related physical ailments. Medium frequency alternating currents,
which are used primarily in the Company's electrotherapy devices, are believed
to be the most effective and comfortable for patients. Electrotherapy can be
effective in treating chronic intractable pain and/or acute post-traumatic pain,
increasing local blood circulation, relaxation of muscle spasms, prevention or
retardation of disuse atrophy, and muscle re-education.

         Therapeutic Ultrasound - Ultrasound therapy provides therapeutic deep
heat to soft tissues through the introduction of sound waves into the body. It
is one of the most common modalities used in physical therapy today for treating
pain, muscle spasms and joint contractures.

         Dynatronics markets 15 devices that include electrotherapy, ultrasound
or a combination of both modalities in a single device. The Dynatron 125
ultrasound device and the Dynatron 525 electrotherapy device target the
low-priced segment of the market. The "50 Series Plus" products offer
combinations of electrotherapy and ultrasound modalities at a reasonable cost to
the practitioner. The Dynatron Solaris(TM) products provide our most advanced
technology in combination therapy devices by adding infrared light therapy
capabilities to enhanced electrotherapy and ultrasound combination devices. (See
"Schedule of Therapy Products" below.) Dynatronics intends to continue
development of its electrotherapy and ultrasound technology and remain a leader
in the design, manufacture and sale of therapy devices.

         Infrared Light Therapy - The Company's five Dynatron Solaris units, as
well as the Dynatron 702 and the Dynatron X3 and DX2 devices, feature infrared
light therapy technology. These units are capable of powering various cluster
probes at different wavelengths for treating a variety of medical conditions
including pain and stiffness associated with arthritis, as well as muscle and
joint pain. In fiscal year 2006, the Company introduced the Dynatron Xp light
pad for treating larger areas of the body via unattended infrared light therapy.
This light pad can be powered by several of the Company's devices including the
Dynatron 702, Dynatron X3 and Dynatron DX2. The benefits of light therapy have
been documented by thousands of research studies published over the past four
decades.

         Oscillation Therapy - Soft tissue oscillation therapy has been used in
Europe for over 15 years, yet is relatively new to the United States market. The
Dynatron X5 Oscillation Therapy device creates an electrostatic field within the
patient, resulting in a highly effective treatment for reducing minor muscle
aches and pains.

         Iontophoresis - Iontophoresis uses electrical current to deliver drugs
such as lidocaine for localized treatment of inflammation transdermally (through
the skin) without the use of needles. In fiscal year 2006, the Company developed
its own proprietary iontophoresis device - the Dynatron iBox - which is capable
of delivering two treatments simultaneously. In addition, the Company began
distribution in September 2006 of a line of proprietary iontophoresis electrodes
with the brand name of Dynatron Ion electrodes. These electrodes replace the
line of electrodes the Company previously distributed for Life-Tech and Naimco.

         The following chart lists the therapy device products manufactured
and/or distributed by the Company.


                                       2
<PAGE>
                          Schedule of Therapy Products
                 Manufactured and/or Distributed by Dynatronics

       Product Name                       Description
       ------------                       -----------

     Dynatron(R) 125                      Ultrasound
     Dynatron(R) 525                      Electrotherapy
     Dynatron(R) 150 Plus**               Ultrasound
     Dynatron(R) 550 Plus**               Multi-modality Electrotherapy
     Dynatron(R) 650 Plus**               Multi-modality Electrotherapy
     Dynatron(R) 850 Plus**               Combination Electrotherapy/Ultrasound
     Dynatron(R) 950 Plus**               Combination Electrotherapy/Ultrasound
     Dynatron(R) STS                      Electrotherapy for Chronic Pain
     Dynatron(R) STS Rx                   Electrotherapy for Chronic Pain
     Dynatron(R) STSi                     Multi-modality Electrotherapy for
                                          Chronic Pain
     Dynatron Solaris(R) 701              Ultrasound with Infrared Light Therapy
     Dynatron(R) 702                      Infrared Light Therapy
     Dynatron Solaris(R) 705              Electrotherapy with Infrared Light
                                          Therapy
     Dynatron Solaris(R) 706              Electrotherapy with Infrared Light
                                          Therapy
     Dynatron Solaris(R) 708              Combination Electrotherapy/Ultrasound
                                          with Infrared Light Therapy
     Dynatron Solaris(R) 709              Combination Electrotherapy/Ultrasound
                                          with Infrared Light Therapy
     Dynatron Solaris(R) 880              Accessory Infrared Light Probe
     Dynatron Solaris(R) 890              Accessory Infrared Laser Light Probe
     Dynatron(R) X3                       Infrared Light Therapy
     DX2 and DynaPro Spinal
       Health System                      Combination Traction with Infrared
                                          Light Therapy
     Dynatron(R) X5 Turbo                 Oscillation Therapy
     Dynatron(R) iBox                     Iontophoresis
     Dynatron(R) TX900                    Traction Therapy
---------------------

Dynatron(R)  is a registered  trademark  (#1280629)  owned by Dynatronics
** "50 Series Plus" Product Line

         Medical Supplies and Soft Goods - We currently manufacture over 700
medical supply and soft good products including: hot packs, cold packs, therapy
wraps, wrist splints, ankle weights, lumbar supports, cervical collars, slings,
cervical pillows, back cushions, weight racks, and parallel bars. We also
distribute products such as: hot and cold therapy products, exercise balls,
lotions and gels, paper products, athletic tape, canes and crutches, reflex
hammers, stethoscopes, splints, elastic wraps, exercise weights, Thera-Band(R)
(a registered mark of Hygenic Corp.) tubing, walkers, treadmills, stair
climbers, heating units for hot packs, whirlpools, gloves, electrodes,
Transcutaneous Electrical Nerve Stimulation or "TENS" devices, and traction
equipment.

         As a result of the acquisition of six independent distributors in June
and July, 2007, the Company significantly expanded the number of products it now
distributes to include more capital exercise equipment, massage therapy
products, chiropractic tables, hand therapy products, pilates and yoga
equipment, nutritional supplements, emergency care products and portable
electrotherapy products. A new, 450 page full-line catalog was introduced to the
market in September 2008, containing over 12,000 rehab products. This new
catalog is a major step in presenting our Company's new image to the market
following the assimilation of these dealers. It represents a more consolidated
approach to selling not only our high-quality manufactured products, but the
hundreds of lines of distributed products we now represent as a result of the
dealer acquisitions.

         Dynatronics markets its products through direct sales representatives,
independent dealers and through the new product catalog. We continually seek to
update our line of manufactured and distributed medical supplies and soft goods.

         Treatment Tables and Rehabilitation Equipment - Dynatronics
manufactures and distributes motorized and manually operated physical therapy
treatment tables, rehabilitation parallel bars, and other specialty
rehabilitation products.


                                       3
<PAGE>

Aesthetic Products
------------------

         Dynatronics manufactures and markets a line of aesthetic products under
the brand name of Synergie. The new Synergie Elite Aesthetic Massage System
(AMS) applies therapeutic vacuum massage to skin and subcutaneous tissues to
achieve a temporary reduction in the appearance of cellulite as well as reducing
the circumferential body measurements of the treated areas.

         The results of a Company-sponsored research study show that 91% of
Synergie participants experienced a reduction in the appearance of cellulite. In
addition, participants on average reported a cumulative reduction of six-inches
in girth around the hips, thighs, and waist.

         The Company also manufactures and markets the Synergie Elite
microdermabrasion device (MDA) as a companion to the AMS device. The MDA device
gently exfoliates the upper layers of skin, exposing softer, smoother skin. In
conjunction with the microdermabrasion devices, the Company offers a unique line
of skin care products under the trade name: Calisse(TM) which is designed to
enhance the effects of the MDA treatments.

         As part of the aesthetics line of products, the Company markets the
Synergie Elite LT device which provides light therapy for aesthetic
applications. Light therapy is becoming popular in spas and health clubs for
improving skin tone and appearance. Combining elements of the AMS vacuum massage
techniques with microdermabrasion and Synergie Elite LT for light therapy has
provided aestheticians with the ability to provide an enhanced "ultimate facial"
available only with the use of Synergie devices.

Allocation of Sales Among Key Products

         No product accounted for more than 10% of the Company's revenues during
fiscal years 2008 and 2007.

Patents and Trademarks

         Dynatronics holds a patent on the multi-frequency ultrasound technology
that will remain in effect until June 2013, and a patent on the
microdermabrasion device that will remain in effect until February 2020. In
addition, we hold a patent on the STS technology for treating chronic pain that
will remain in effect until July 17, 2021 and a patent on the combination of our
aesthetic massage and microdermabrasion technologies that will remain in effect
until May 11, 2019. We also hold two design patents on the microdermabrasion
device that will remain in effect until November 2015. We hold a patent on our
light therapy technology that will remain in effect until August 2025. Two
additional patent applications pertaining to the Company's infrared light
therapy technology and combination traction/light therapy technology have been
filed with the U.S. Patent and Trademark Office and are currently pending.
Dynatronics owns the exclusive, worldwide rights (under a license agreement) to
a second existing patent on the STS technology for the treatment of chronic
pain.

         The trademark "Dynatron" has been registered with the United States
Patent and Trademark Office. In addition, U.S. trademark registrations have been
obtained for the trademarks: "Synergie," "Synergie Peel," "Sympathetic Therapy,"
and "Dynatron Solaris," and trademark registration has been obtained or is now
pending for various other product trademarks. Company materials are also
protected under copyright laws, both in the United States and internationally.

Warranty Service

         The Company warrants all products it manufactures for time periods
ranging in length from 90 days to five years from the date of sale. Warranty
service is provided from the Company's Salt Lake City, Utah and Chattanooga,
Tennessee facilities according to the service required. These warranty policies
are comparable to warranties generally available in the industry. Warranty
claims as a percentage of gross sales were not material in fiscal years 2008 and
2007.

         Products distributed by Dynatronics carry warranties provided by the
manufacturers of those products. We do not generally supplement these warranties
or provide warranty services for distributed products. We also sell accessory
items for our manufactured products that are supplied by other manufacturers.
These accessory products carry warranties from their original manufacturers
without supplement from Dynatronics.



                                       4
<PAGE>

Customers and Markets

         Dynatronics' products are sold primarily to licensed practitioners or
institutions such as physical therapists, chiropractors, podiatrists, sports
medicine specialists, medical doctors, hospitals, plastic surgeons,
dermatologists and aestheticians. As a result of the acquisition of six dealers
and the appointment or hiring of other sales representatives, Dynatronics now
has 36 direct sales representatives selling our products in 29 states.
Additionally, Dynatronics works through a network of over 275 independent
dealers throughout the United States and internationally. The dealers purchase
and take title to the products, which they then sell to the licensed
practitioners mentioned above.

         The Company has entered into direct sales relationships with a few
national and regional chains of physical therapy clinics and hospitals. We sell
our products directly to these clinics and hospitals pursuant to preferred
pricing arrangements. We also have preferred pricing arrangements with key
dealers who commit to purchase certain volumes and varieties of products. No
single dealer or national account or group of related accounts was responsible
for 10% or more of total sales in fiscal years 2008 or 2007.

         Dynatronics exports products to approximately 30 different countries.
International sales (i.e., sales outside North America) totaled $772,500 in
fiscal year 2008 compared to $711,500 in fiscal year 2007. The Company is
working to establish effective distribution for its products in international
markets. Our Salt Lake City facility is certified to the ISO 13485 quality
standard for medical device manufacturing. Many of the Company's therapy devices
carry the CE Mark, a designation required for marketing products in the European
community that signifies the device or product was manufactured pursuant to a
certified quality system. The Company has no foreign manufacturing operations.
However, we do purchase certain products and components from foreign
manufacturers.

Competition

         Despite significant competition, Dynatronics has distinguished key
products by using the latest technology, many of which are protected by patents.
We believe that the integration of advanced technology in the design of each
product, has distinguished Dynatronics' products in a competitive market.
Dynatronics was the first company to integrate infrared light therapy as part of
a combination therapy device. The Company holds one patent on its light therapy
technology and has applied for two additional patents on its light therapy
technology. In addition, by manufacturing many of the medical supplies, soft
goods and tables it sells, the Company can focus on quality manufacturing at
competitive prices. We believe these factors give Dynatronics an edge over many
competitors who are solely distributors of such products. Furthermore, the
acquisition of six key distributors in June and July 2007 and the addition of
direct sales representatives provide Dynatronics with direct distribution of
products into 29 states. This vertical integration allows us to exercise better
control over the sale and distribution of our products.

         A discussion of the competition by category follows. However, it should
be noted that by virtue of the acquisition of the six dealers in June and July,
2007, Dynatronics now is a distributor of many of these competitive products
such as Mettler, MedX, and some DJO products as well as many manufacturers of
treatment tables, medical supplies and soft goods.

         Electrotherapy/Ultrasound Competition. Competition in the clinical
market for electrotherapy and ultrasound devices comes from both domestic and
foreign companies. Approximately one dozen companies produce electrotherapy
and/or ultrasound devices. Some of these competitors are larger and better
established, and have greater resources than the Company. Other than
Dynatronics, few companies, domestic or foreign, provide multiple-modality
devices, which is one important distinction between Dynatronics and our
competition. Furthermore, we believe no competitor offers three frequencies on
multiple-sized soundheads for which Dynatronics holds a patent. The Company's
primary domestic competitors in the sale of electrotherapy and ultrasound
products include: DJO (Chattanooga Group division), Naimco (Rich-Mar division)
and Mettler Electronics.

         Light Therapy. Competitors that manufacture and market light therapy
devices include: DJO, Erchonia, Anodyne and MedX, among others. These
competitors offer units that are not as powerful as our units. We are aware of
only one competitor, DJO, that offers a combination light therapy device that
includes electrotherapy and ultrasound capabilities.

         Medical Supplies & Soft Goods. The Company competes against various
manufacturers and distributors of medical supplies and soft goods, some of which
are larger, more established and have greater resources than Dynatronics.
Excellent customer service along with providing value to customers is of key
importance in this market. While there are many specialized manufacturers in
this area such as DJO and Fabrication Enterprises, most competitors are
primarily distributors such as North Coast Medical, Sammons Preston (a division
of Patterson Medical), and Meyer Distributing. Dynatronics enjoys cost
advantages on the products it manufactures and directly distributes compared to
companies that only distribute similar products.


                                       5
<PAGE>

         Iontophoresis. Competition in the iontophoresis market includes DJO
(EMPI and Iomed divisions), Birch Point Medical, Vyteris and Naimco. DJO enjoys
the largest market share. We believe that our strong distribution network is
important to our continued ability to compete in this increasingly competitive
market. In addition, our products target a lower selling price than the products
of DJO and Birch Point. Our Dynatron iBox iontophoresis device is helping expand
our presence in this market.

         Treatment Tables. The primary competition in the treatment table market
is from domestic manufacturers including Hill Laboratories Company, Hausmann
Industries, Sammons Preston, Bailey Manufacturing, Tri-W-G, DJO, Armedica, and
Clinton Industries. We believe we compete based on our industry experience and
product quality. In addition, certain components of the treatment tables are
manufactured overseas, which we believe allows for pricing advantages over
competitors.

         Aesthetic Products. The Company's two primary competitors in the
therapeutic massage industry are LPG Systems, and Silhouette Tone. Other
competitors include Cynosure, Inc., Diamond Systems, Palomar Medical Eleme
Medical, Syneron, and Durmafirm. The Synergie Elite AMS device utilizes
proprietary technology that has been proven effective in a research study. In
addition, we provide a comprehensive training and certification program for
aestheticians and medical practitioners. Dynatronics' aesthetic massage
equipment is priced lower than competitor's units, providing a significant
advantage in the marketplace. Dynatronics is developing a network of domestic
and international distributors and national accounts, which is expected to
provide another competitive advantage in the marketplace for these products.

         There are a number of competitors in the microdermabrasion market
including: Mega Peel, Diamond Peel, DermaGenesis, DermaMed, E-Med, Integremed,
Medical Alliance, Palomar, Slimtone USA and Soundskin Corp. The Synergie MDA
device incorporates a patented anti-clogging design for the crystals, which sets
it apart from competitors' units. In addition, the system has an innovative
disposable system for the abrasive material, which prevents unwanted contact
with the spent crystals following treatment. Powered by the Synergie Elite AMS
device, the Synergie Elite MDA is one of the most powerful units on the market.

         Competitors in the light therapy segment of the aesthetic market
include Revitalite, Silhouette Tone, Photo Actif, and DermaPulse. We believe the
Synergie Elite LT device is the most powerful of all the units on the market. It
features a computerized dosage calculation system and is competitively priced.

         Information necessary to determine or reasonably estimate the market
share of Dynatronics or any competitor in any of these markets is not readily
available.

Manufacturing and Quality Assurance

         Dynatronics manufactures therapy devices, soft goods and other medical
products at its facilities in Salt Lake City, Utah and Chattanooga, Tennessee.
The Company purchases some components for its manufactured products from
third-party suppliers. All parts and components purchased from these suppliers
meet specifications set by Dynatronics. Trained staff performs all sub-assembly,
final assembly and quality assurance procedures. Every effort is made to design
Dynatronics' products to incorporate component parts and raw materials that are
readily available from suppliers.

         The development and manufacture of many of our products is subject to
rigorous and extensive regulation by the United States Food and Drug
Administration ("FDA") and other regulatory agencies and authorities in the
United States and abroad. In compliance with the FDA's Good Manufacturing
Practices ("GMP"), we have developed a comprehensive program for processing
customer feedback and analyzing product performance trends. By insuring prompt
processing of timely information, we are better able to respond to customer
needs and insure proper operation of the products.

         The Company established the Quality First Program, a concept for total
quality management designed to involve each employee in the quality assurance
process. Under this program, employees are not only expected to inspect for
quality, but they are empowered to stop any process and make any changes
necessary to insure that quality is not compromised. An incentive program is
established to insure the continual flow of ideas and to reward those who show
extraordinary commitment to the Quality First concept. Quality First has not
only become the Company motto, but it is the standard by which all decisions are
made. We believe the Quality First Program reinforces employee pride, increases
customer satisfaction, and improves overall operations of Dynatronics.


                                       6
<PAGE>

         Our Salt Lake facility is certified to ISO 13485 standards for medical
products. ISO 13485 is an internationally recognized standard for quality
systems and manufacturing processes adopted by over 90 countries. In addition,
the Company has qualified for the CE Mark Certification on its electrotherapy,
ultrasound, light therapy and Synergie products. With the CE Mark Certification,
we are qualified to market these products throughout the European Union and in
other countries where CE Mark Certification and ISO 13485 certification are
recognized.

Research and Development (R&D)

         In fiscal year 2008, Dynatronics continued its aggressive R&D campaign,
developing four new products during the year including the Dynatron X5 Turbo
Oscillation Therapy device, the DynaPro Spinal Health System, the T3 treatment
table and the Synergie Elite AMS/MDA/light therapy system. Total R&D
expenditures for 2008 were $1,354,743, compared to $1,492,774 in 2007. R&D
expenses represented approximately 4.2% and 8.4% of the revenues of the Company
in 2008 and 2007, respectively

Regulatory Matters

         The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products are subject to regulation by numerous
national and local governmental agencies in the United States and other
countries. In the United States, the FDA regulates our products pursuant to the
Medical Device Amendment of the Food, Drug, and Cosmetic Act ("FDC Act") and
regulations promulgated thereunder. Advertising and other forms of promotion and
methods of marketing of the products are subject to regulation by the Federal
Trade Commission ("FTC") under the Federal Trade Commission Act ("FTC Act").

         As a device manufacturer, we are required to register with the FDA and
once registered we are subject to inspection for compliance with the FDA's
Quality Systems regulations. These regulations require us to manufacture our
products and maintain our documents in a prescribed manner with respect to
manufacturing, testing, and control activities. Further, we are required to
comply with various FDA requirements for reporting. The FDC Act and medical
device reporting regulations require us to provide information to the FDA on
deaths or serious injuries alleged to have been caused or contributed to by the
use of our products, as well as product malfunctions that would likely cause or
contribute to death or serious injury if the malfunction were to occur. The FDA
also prohibits an approved device from being marketed for unapproved uses. All
of our therapeutic and aesthetic treatment devices as currently designed are
cleared for marketing under section 510(k) of the Medical Device Amendment to
the FDC Act ("510(k)") or are considered 510(k) exempt. If a device is subject
to section 510(k), the FDA must receive premarket notification from the
manufacturer of its intent to market the device. The FDA must find that the
device is substantially equivalent to a legally marketed predicate device before
the agency will clear the new device for marketing. We intend to continuously
improve our products after they have been introduced to the market. Certain
modifications to the Company's marketed devices may require a premarket
notification and clearance under section 510(k) before the changed device may be
marketed, if the change or modification could significantly affect safety or
effectiveness. As appropriate, we may therefore submit future 510(k)
notifications, Pre-Market Approval ("PMA") or PMA supplement applications to the
FDA. No assurance can be given that clearance or approval of such new
applications will be granted by the FDA on a timely basis, or at all.
Furthermore, we may be required to submit extensive preclinical and clinical
data depending on the nature of the product changes. All of the Company's
devices, unless specifically exempted by regulation, are subject to the FDC
Act's general controls, which include, among other things, registration and
listing, adherence to the Quality System Regulation requirements for
manufacturing, Medical Device Reporting and the potential for voluntary and
mandatory recalls described above.

         During fiscal year 2003, Congress enacted the Medical Device User Fee
and Modernization Act (MDUFMA). Among other things, this act imposes for the
first time a user fee on medical device manufacturers. Under the provisions of
MDUFMA, manufacturers seeking clearance to market a new device must pay a fee to
the FDA in order to have their applications reviewed. Dynatronics submits new
products for clearance primarily under section 510(k) of the Medical Device
Amendment of the FDC Act. The fee per 510(k) submission in fiscal year 2008 was
$3,066. Beginning October 1, 2008, FDA modified their fee structure pursuant to
MDUFMA II which was a reauthorization of user fees to impose annual registration
fees of approximately $1,851 per manufacturing site, with submission fees for
510(k) applications of approximately $1,847.

         Failure to comply with applicable FDA regulatory requirements may
result in, among other things, injunctions, product withdrawals, recalls,
product seizures, fines, and criminal prosecutions. Any such action by the FDA
could materially adversely affect the Company's ability to successfully market
its products. Our Salt Lake City facility is inspected periodically by both the
FDA and state agencies for compliance with the FDA's GMP and other requirements,
including appropriate reporting regulations and various requirements for


                                       7
<PAGE>

labeling and promotion. The FDA Quality Systems Regulations are now based in
large part on the ISO 13485 Quality Standard. The GMP regulation requires, among
other things, that (i) the manufacturing process be regulated and controlled by
the use of written procedures, and (ii) the ability to produce devices that meet
the manufacturer's specifications be validated by extensive and detailed testing
of every aspect of the process.

         Advertising of our products is subject to regulation by the FTC under
the FTC Act. Section 5 of the FTC Act prohibits unfair methods of competition
and unfair or deceptive acts or practices in or affecting commerce. Section 12
of the FTC Act provides that the dissemination or the causing to be disseminated
of any false advertisement pertaining to, among other things, drugs, cosmetics,
devices or foods, is an unfair or deceptive act or practice. Pursuant to this
FTC requirement, the Company is required to have adequate substantiation for all
advertising claims made about its products. The type of substantiation required
depends upon the product claims made.

         If the FTC has reason to believe the law is being violated (e.g., the
manufacturer or distributor does not possess adequate substantiation for product
claims), it can initiate an enforcement action. The FTC has a variety of
processes and remedies available to it for enforcement, both administratively
and judicially, including compulsory process authority, cease and desist orders,
and injunctions. FTC enforcement could result in orders requiring, among other
things, limits on advertising, consumer redress, divestiture of assets,
rescission of contracts, and such other relief as may be deemed necessary.
Violation of such orders could result in substantial financial or other
penalties. Any such action by the FTC could materially adversely affect the
Company's ability to successfully market its products.

         From time to time, legislation is introduced in the Congress of the
United States or in State Legislatures that could significantly change the
statutory provisions governing the approval, manufacturing, and marketing of
medical devices and products like those manufactured by Dynatronics. In
addition, FDA regulations and guidance are often revised or reinterpreted by the
agency in ways that may significantly affect our business and our products. It
is impossible to predict whether legislative changes will be enacted, or FDA
regulations, guidance, or interpretations will be changed, and what the impact
of such changes, if any, may be on the Company's business and the results of its
operations. We cannot predict the nature of any future laws, regulations,
interpretations, or applications, nor can we determine what effect additional
governmental regulations or administrative orders, when and if promulgated,
domestically or internationally, would have on our business in the future. They
could include, however, requirements for the reformulation of certain products
to meet new standards, the recall or discontinuance of certain products,
additional record keeping, expanded documentation of the properties of certain
products, expanded or different labeling, and additional scientific
substantiation. Any or all such requirements could have a material adverse
effect on the Company.

         We believe all of our present products are in compliance in all
material respects with all applicable performance standards as well as GMP,
record keeping and reporting requirements in the production and distribution of
the products.

Environment

         Environmental regulations are not material to our business. Dynatronics
does not discharge into the environment any pollutants that are regulated by a
governmental agency with the exception of the requirement to provide proper
filtering of discharges into the air from the painting processes at our
Tennessee location.

Employees

         On June 30, 2008, we had a total of 165 full-time employees and 18
part-time employees, compared to 144 full-time employees and 7 part-time
employees at June 30, 2007.

Item 2.   Description of Property
          -----------------------

         The Company's headquarters and principal place of business are located
at 7030 Park Centre Drive, Salt Lake City, Utah. The headquarters consist of a
single facility housing administrative offices and manufacturing space totaling
approximately 36,000 square feet. The Company owns the land and building,
subject to mortgages requiring a monthly payments totaling approximately
$27,429. The mortgages mature in 2008, 2013 and 2017. The Company also owns a
53,200 sq. ft. manufacturing facility in Ooltewah, Tennessee, and accompanying
undeveloped acreage for future expansion subject to a mortgage requiring monthly
payments of $13,278 and maturing in 2021. The Company rents office and/or
warehouse space for its newly acquired dealers in Pleasanton, California;
Houston, Texas; Detroit, Michigan; and Girard, Ohio.


                                       8
<PAGE>

         We believe the manufacturing facilities described above are adequate
and able to accommodate presently expected growth and needs of the Company for
its operations. As Dynatronics continues to grow, additional facilities or the
expansion of existing facilities will likely be required.

         The Company owns equipment used in the manufacture and assembly of its
products. The nature of this equipment is not specialized and replacements may
be readily obtained from any of a number of suppliers. The Company also owns
computer equipment and engineering and design equipment used in its research and
development programs.

Item 3.   Legal Proceedings
          -----------------

         There are no pending legal proceedings of a material nature to which
Dynatronics is a party or of which any of its property is the subject.

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

         No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report. The Company's annual meeting of shareholders will
be held in November 2008.

                                     PART II

Item 5.   Market for Common Equity and Related Stockholder Matters and Small
          ------------------------------------------------------------------
          Business Issuer Purchases of Equity Securities
          ----------------------------------------------

         Market Information. As of September 17, 2008, there were 13.7 million
shares of common stock of Dynatronics issued and outstanding. The common stock
of the Company is listed on the Nasdaq Capital Market (symbol: DYNT). The
following table shows the range of high and low sale prices for the common stock
as quoted on the NASDAQ system for the quarterly periods indicated.


                                                Year Ended June 30,
                                            2008                  2007
                                            ----                  ----
                                       High       Low        High      Low
                                       -------------------------------------

1st Quarter (July-September)           $2.00     $ .95      $1.36      $1.13
2nd Quarter (October-December)         $1.55     $1.01      $1.45      $1.11
3rd Quarter (January-March)            $1.20     $ .97      $1.27      $1.02
4th Quarter (April-June)               $1.07     $ .60      $1.22      $ .97

         Holders. As of September 17, 2008, the approximate number of common
stock shareholders of record was 454. This number does not include beneficial
owners of shares held in "nominee" or "street" name. Including beneficial
owners, we estimate that the total number of shareholders exceeds 2,000.

         Dividends. The Company has never paid cash dividends on its common
stock. Our anticipated capital requirements are such that we intend to follow a
policy of retaining earnings in order to finance the development of the
business.

         NASDAQ Deficiency Notice. On June 25, 2008, Dynatronics received a
Deficiency Letter from the NASDAQ Stock Market, indicating that the Company had
failed to comply with the minimum bid requirement for continued inclusion under
Marketplace Rule 4310(c)(4). In accordance with Marketplace Rule 4310(c)(8)(D),
the Company is provided 180 days, or until December 22, 2008, to regain
compliance with the bid price deficiency rule.

         The management of Dynatronics intend to use their best efforts to
regain compliance with NASDAQ's minimum bid requirement. However, there can be
no assurance that compliance with the minimum bid requirement will be achieved
given recent historical performance of the Company and the overall current
condition of financial and stock markets in the United States. If compliance is
not achieved, the Company's stock will likely be delisted from NASDAQ and begin
trading on the OTC bulletin board.


                                       9
<PAGE>

       Securities Authorized for Issuance Under Equity Compensation Plans

         The following table shows information related to our equity
compensation plans as of June 30, 2008:

<TABLE>
<CAPTION>

                     Plan Category                                 Number of     Weighted-average     Number of
                                                                 securities to   exercise price       securities
                                                                   be issued           of             remaining
                                                                      upon         outstanding      available for
                                                                  exercise of       options,       future issuance
                                                                  outstanding       warrants         under equity
                                                                    options,       and rights        compensation
                                                                    warrants                            plans
                                                                   and rights                         (excluding
                                                                                                      securities
                                                                                                     reflected in
                                                                                                      column (a))
                                                                      (a)              (b)               (c)
--------------------------------------------------------------- ---------------- ---------------- -----------------
 <S>                                                            <C>                 <C>                <C>
 Equity compensation plans approved by security holders          1,101,603          $1.41              908,180
 Equity compensation plans not approved by security holders         40,000          $3.50                    0
          Total                                                   1,141,603                            908,180
</TABLE>

         Recent sales of unregistered securities; use of proceeds.
         ---------------------------------------------------------

         On June 30, 2007, the Company entered into a merger agreement with
Rajala. On July 2, 2007, the Company entered into separately negotiated merger
agreements with RPI, THCP, Cyman, Al Rice, and Theratech. Pursuant to these
several agreements, each of these entities was merged with and into a
wholly-owned subsidiary of the Company, Dynatronics Distribution Company. In
connection with these mergers, the Company paid cash and issued shares of common
stock to the shareholders of Rajala, RPI, THCP, Cyman, Al Rice, and Theratech in
exchange for all of the issued and outstanding stock of the target companies.
The total number of shares of common stock issued in these transactions was
4,561,593 restricted shares of Dynatronics Corporation common stock at an
exchange price of $1.13 per share. Prior to the merger transactions, none of
Rajala, RPI, THCP, Cyman, Al Rice or Theratech was affiliated with or related to
the Company or any of its subsidiaries or affiliates. Prior to the merger
transactions, each of these entities was an independent vendor or distributor of
the Company's products.

         In each of these transactions the securities were issued without
registration under the Securities Act, in reliance upon exemptions from
registration applicable to limited or non-public offers and sales of securities
afforded by Section 4(2) and Rule 506 of Regulation D under the Securities Act.
The Company filed a Form D reporting each such transaction with the Securities
and Exchange Commission and with state securities regulators.

         Stock Options. In fiscal year 2008, Dynatronics granted 648,370 options
to employees and officers pursuant to stock option plans. The total number of
shares of common stock issuable under such options is 648,370 shares with an
average exercise price of $1.07 per share. In fiscal year 2007, Dynatronics
granted 40,959 stock options for shares of common stock at an average exercise
price of $1.22 per share.

         Stock  Repurchase.  On September 3, 2003, the Company announced a stock
repurchase program.  The Board of Directors  authorized the expenditure of up to
$500,000 to purchase the Company's  common stock on the open market  pursuant to
regulatory restrictions governing such repurchases. During fiscal year 2004, the
Company  purchased  77,400  shares for  approximately  $89,000.  No shares  were
repurchased  during  fiscal  year 2005.  During  fiscal  year 2006,  the Company
purchased  46,393  shares for  $59,449.  During  fiscal  year 2007,  the Company
purchased 208,793 shares for $244,682.  In December 2008, the Board of Directors
authorized an additional  $250,000 to purchase the Company's common stock on the
open market.  During fiscal year 2008, the Company  purchased 258,569 shares for
$280,440, leaving $76,429 of authorized funds for future stock repurchases.  The
stock repurchase  program is conducted pursuant to safe harbor regulations under
Rule  10b-18  of the  Exchange  Act for the  repurchase  by an issuer of its own
shares.  The following table  summarizes  purchases of equity  securities by the
Company  under the  repurchase  program  during the last  quarter of fiscal year
2008:


                                       10
<PAGE>

              Small Business Issuer Purchases of Equity Securities

---------------------------- ------------- ----------- ------------ ----------
     Period                     (a)          (b)          (c)           (d)
                               Total        Average      Total        Maximum
                               number       price        number        number
                                of          paid per       of          (or
                               shares        share       shares     approximate
                              (or units)    (or unit)   (or units)    dollar
                              purchased                 purchased    value) of
                                                        as part      shares (or
                                                           of        units) that
                                                        publicly     may yet be
                                                        announced    purchased
                                                         plans       under the
                                                           or         plans
                                                         programs       or
                                                                      programs
---------------------------- ------------- ----------- ------------ ----------
April 1 to April 30, 2008        38,555       $.99       38,555       106,572
---------------------------- ------------- ----------- ------------ ----------
May 1 to May 31, 2008            13,300       $1.02      13,300       93,026
---------------------------- ------------- ----------- ------------ ----------
June 1 to June 30, 2008          22,074       $.75       22,074       76,429
---------------------------- ------------- ----------- ------------ ----------
Total                            73,929                  73,929
---------------------------- ------------- ----------- ------------ ----------

Item 6.   Management's Discussion and Analysis or Plan of Operation
          ---------------------------------------------------------

Overview
--------

         Our principal business is the design, manufacture, marketing,
distribution and sales of physical medicine products and aesthetic products.
With the acquisition of six key distributors in June and July 2007, we expanded
the number of products we sell from approximately 2,000 to over 5,000 physical
medicine and aesthetic products through a combination of direct sales
representatives, a network of national and international independent dealers,
direct relationships with certain national accounts, and a full-line catalog

         Sales of manufactured physical medicine products in fiscal years 2008
and 2007 represented approximately 49% and 76% of the Company's physical
medicine product sales, respectively, with the balance each year sold by the
Company as a distributor of non-manufactured products. As a result of the
acquisition of six of our distributors who represented not only Dynatronics'
products, but many other lines of products, there was a shift in the mix of
sales that began to be more heavily weighted toward distributed products.

         Sales of manufactured aesthetic products in fiscal years 2008 and 2007
represented approximately 87% of the Company's aesthetic product sales each
year, with the balance sold by the Company as a distributor of non-manufactured
products.

         Sales of all physical medicine products represented 89.1% and 87.2% of
total  revenues  in fiscal  years 2008 and 2007,  respectively;  while  sales of
aesthetic  products  accounted  for 4.2% and 6.5% of total  revenues in 2008 and
2007,  respectively.  Chargeable  repairs,  billable  freight  revenue and other
miscellaneous  revenue  accounted  for  approximately  6.7%  and  6.3% of  total
revenues in 2008 and 2007, respectively.

         The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products are regulated by both national and local
governmental agencies in the United States and other countries, including the
FDA. In addition, the FTC regulates our advertising and other forms of product
promotion and marketing. Failure to comply with applicable FDA, FTC or other
domestic or international regulatory requirements may result in, among other
things, injunctions, product withdrawals, recalls, product seizures, fines,
criminal prosecutions, limits on advertising, consumer redress, divestiture of
assets, and rescission of contracts.

Selected Financial Data
-----------------------

         All references to the financials statements herein refer to the
consolidated financial statements of Dynatronics Corporation, its affiliates and
subsidiaries.


                                       11
<PAGE>

         The table below summarizes selected financial data contained in the
Company's audited financial statements for the past six fiscal years. The
audited financial statements for the fiscal years ended June 30, 2008 and 2007
are included with this report.

<TABLE>
<CAPTION>
                                           Selected Financial Data
                                          Fiscal Year Ended June 30

                             2008           2007          2006          2005         2004           2003
                         ----------------------------------------------------------------------------------
<S>                      <C>           <C>           <C>           <C>           <C>           <C>
Net Sales                $ 32,592,507  $ 17,837,104  $ 19,513,136  $ 20,404,368  $ 20,587,273  $ 16,896,992
Net Income (loss)        $ (8,443,771) $    (85,042) $    194,031  $    728,816  $    883,300  $     24,799
Net Income (loss)
 per share (diluted)     $       (.62) $       (.01) $        .02  $        .08  $        .10  $        .00
Working Capital          $  4,320,883  $  8,116,391  $  7,390,147  $  7,043,854  $  6,300,582  $  5,516,720
Total Assets             $ 18,427,819  $ 18,567,616  $ 14,523,655  $ 13,459,723  $ 14,272,579  $ 12,713,029
Long-term Obligations    $  3,501,377  $  3,961,436  $  2,637,263  $  1,914,490  $  2,034,854  $  2,203,779

</TABLE>

Fiscal Year 2008 Compared to Fiscal Year 2007
---------------------------------------------

         The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Audited Financial
Statements and Notes thereto appearing elsewhere in this report.

Net Sales

         Total net sales for the year ended June 30, 2008 increased 83% to
$32,592,507, compared to $17,837,104 during fiscal year 2007. The increase in
sales is the result of the addition of revenues from the Company's acquisition
of six of its distributors of physical medicine products completed on June 30,
2007 and July 2, 2007. The vertical integration of these distributors is a key
strategic step toward strengthening our distribution channels. We believe that
these acquisitions provide Dynatronics with more effective direct distribution
of our products and generate better margins on each product sold at the retail
level compared to the wholesale level. Subsequent to these acquisitions, we
added twelve new direct sales persons in other territories including Southern
California, Louisiana, Kansas, Oklahoma, and Missouri, North Carolina, South
Carolina, Virginia, West Virginia and Maryland expanding our direct sales force
to 36 sales representatives covering 29 states.

         The acquired distributors sell products from many manufacturers,
including Dynatronics. As a result of the transactions described above, the mix
between Company sales of manufactured and distributed rehab products during 2008
shifted toward distributed products with 51% of sales attributed to sales of
distributed products and the remaining 49% being manufactured products. By
comparison, during 2007, the mix between distributed and manufactured products
was 24% and 76%, respectively. We anticipate the mix between manufactured and
distributed products in future periods will be similar to the mix experienced
during fiscal year 2008.

Gross Profit

         During fiscal year 2008, gross profit increased $5,230,149 or 75.7% to
$12,141,937 or 37.3% of net sales compared to 6,911,788 or 38.7% of net sales in
2007. The increase in gross profit was primarily a result of the sales added by
the recent acquisitions. For the year ended June 30, 2008, gross profit as a
percent of sales decreased 1.4 percentage points to 37.3%, compared to the prior
year. Most of this decrease (approximately 1.2 percentage points) was related to
$417,000 of inventories of Dynatronics manufactured products acquired from the
six independent dealers which had a higher cost basis because they were held in
the dealer inventory at wholesale cost instead of manufactured cost. Until that
inventory was depleted, the Company recognized higher Cost of Goods Sold than it
would have based on manufactured cost. Additionally, many distributed items
carry lower margins than manufactured items. The shift toward more sales of
distributed items would create downward pressure on overall gross margin
percentages.


                                       12
<PAGE>

Selling, general and administrative expenses

         Selling, general and administrative ("SG&A") expenses for the year
ended June 30, 2008 increased $7,931,330 to $13,473,190, or 41.3% of net sales,
compared to $5,541,860, or 31.1% of net sales in the prior year. Substantially
all of the increase in SG&A expenses for the year ended June 30, 2008 is related
to the recent acquisitions and includes the following:

         o    $4,247,000 in higher selling expenses primarily related to the new
              direct sales force
         o    $2,230,000 in higher labor and operating costs to support the
              higher sales volume
         o    $1,454,000 in higher general and administrative expenses
              associated with the acquired companies

         With the assimilation of the six acquisitions now substantially
completed, management implemented measures in March 2008 and July 2008 designed
to reduce annual operating expenses by more than $2.1 million. These cost
savings include a reduction of approximately 20 percent of the Company's
workforce and the elimination of duplicative overhead expense. In addition, we
consolidated operations from eight distribution points to three. Many of these
reductions had been contemplated as part of the planning for the acquisition and
assimilation of the distributors in 2007. We believe these reductions in
expenses will not negatively impact the Company's sales or operations as they
represent primarily the elimination of unnecessary duplicate costs associated
with the acquisitions.

Research and Development

         Research and Development ("R&D") expense during fiscal year 2008 was
$1,354,743, compared to $1,492,774 in 2007. During fiscal 2008, we developed and
introduced the DynaPro Spinal Health System, the Dynatron X5 Turbo Oscillation
Therapy device, the new Synergie Elite AMS/MDA/Light Therapy line of products
and the T3 treatment table. R&D expense represented approximately 4.2% and 8.4%
of the net sales of the Company in 2008 and 2007, respectively. R&D expenditures
as a percentage of sales were lower due to the additional sales coming from the
acquisitions, compared to the prior year which predated the acquisitions. R&D
costs are expensed as incurred. Dynatronics intends to continue its commitment
to developing innovative products for the physical medicine market in fiscal
year 2009 and beyond in order to position the Company for growth.

Goodwill Impairment

         At the end of fiscal year 2008, the Company performed an evaluation of
goodwill in accordance with Statement of Financial Accounting Standard ("SFAS")
No. 142. As a result of a decrease in the market value of the Company as
reflected in the Company's lower stock price, an impairment of goodwill was
indicated and the goodwill stated on the books was written off. This resulted in
a $6.6 million write off of goodwill during the fourth quarter of fiscal year
2008. Most of that goodwill was associated with the acquisition of dealers at
the first of the year, as well as the 1996 acquisition of our Tennessee
operations. This write-off exhausts all goodwill assets on the books of the
Company.

Pre-tax Loss

         Pre-tax loss for fiscal year 2008 was $9,915,555 compared to a pre-tax
loss of $271,243 in 2007. The pre-tax loss in 2008 was comprised of
approximately $6.6 million of goodwill impairment, $2 million in
acquisition-related expenses, including exhausting acquired dealer inventories
at higher costs than Dynatronics' cost of manufacturing, reducing personnel and
the associated severance costs, stock option expense, and duplicate SG&A
overhead costs, and approximately $768,000 in increased reserves for bad debts
and inventory during the year. The increase in reserves was associated with
increased receivables and inventories associated with higher sales.

Income Tax Benefit

         Income tax benefit for fiscal year 2008 was $1,471,784 compared to
income tax benefit of $186,201 in 2007. The effective tax rate for 2008 was
14.8% compared to 68.6% in 2007. The lower effective tax rate for 2008 reflects
the non-deductibility of significant portions of the goodwill impairment charges
for tax purposes. The higher tax accrual rate in 2007 is a result of research
and development tax credits and certain other items.


                                       13
<PAGE>

Net Loss

         Net loss for year ended June 30, 2008 was $8,443,771 ($.62 per share),
compared to net loss of $85,042 ($.01 per share) in 2007. Major components
contributing to the increased net loss in 2008 were the $6.6 million goodwill
impairment, $2 million of acquisition related expenses and increases in reserves
for bad debts and inventory.

Liquidity and Capital Resources
-------------------------------

         The Company has financed its operations through available cash reserves
and borrowings under its line of credit. The Company had working capital of
$4,320,883 at June 30, 2008, inclusive of the current portion of long-term
obligations and credit facilities, compared to working capital of $8,116,391 at
June 30, 2007. The $3.8 million decrease in working capital is a direct result
of a $5,568,320 increase in the line of credit that was required in part to
finance a $2.4 million increase in accounts receivable and inventory, to finance
a portion of the $3.2 million in cash expended in the acquisitions in June and
July 2007 and to finance operating losses incurred during the fiscal year. Other
factors affecting working capital included increased accounts payable and
accrued expenses as well as lower cash balances and other receivables.

Accounts Receivable

         Trade accounts receivable, net of allowance for doubtful accounts,
increased $1,393,751 to $5,151,235 at June 30, 2008, compared to $3,757,484 at
June 30, 2007. The increase in receivables is roughly equivalent to 30 days
worth of new sales through the direct sales reps. Many of the new retail
customers acquired through the dealers are not extended credit terms but instead
pay COD or by credit card. Conversely, some of the larger retail institutions
will sometimes require extended terms to collect. On average the new retail
sales attributable to our direct sales force are averaging 30 - 45 days to
collect.

         Trade accounts receivable represent amounts due from the Company's
dealer network, from medical practitioners and clinics. We estimate that the
allowance for doubtful accounts is adequate based on our historical knowledge
and relationship with these customers. During the reporting period the reserve
for accounts receivable was increased by $480,000 with an ending reserve balance
of $411,000 compared to an ending reserve balance on June 30, 2007 of $330,857.
Accounts receivable are generally collected within 30 days of the agreed terms.
However, as a result of the recent acquisitions, the character of the accounts
receivable and collection patterns have changed and will be carefully monitored
over the coming year to ensure the allowance estimates are adequate. Allowances
for the retail accounts assumed in the acquisitions are currently calculated
based on the historical experience of the acquired companies.

Inventories

         Inventories, net of reserves, at June 30, 2008 increased $969,084 to
$6,283,068 compared to $5,313,984 at June 30, 2007. This increase is primarily a
result of required adjustments in inventory levels to accommodate higher sales
and the expansion of the number of stocked items. Inventories are expected to
reduce modestly now that we have consolidated eight distribution points to three
central distribution facilities. Inventory reserves were increased during the
year by $288,000 to make allowance for increased inventory levels and unexpected
losses associated with the increased volume of distributed goods.

Goodwill

         In compliance with SFAS No. 142, the Company was required to conduct an
assessment of the Company's goodwill as of June 30, 2008. The SFAS No. 142
goodwill impairment model is a two-step process. First, it requires a comparison
of the book value of net assets to the fair value of the Company. As of June 30,
2008, the book value of the Company exceeded the fair value of the Company as
determined by the market capitalization of the Company indicating an impairment
of goodwill was likely.

         Because the fair value is determined to be less than book value, a
second step was performed to compute the amount of the impairment. To ascertain
this impairment, the Company retained an independent appraiser to determine the
extent of the impairment. The determination of the appraiser was the Company's
goodwill was 100% impaired. This resulted in a $6.6 million write-off of
goodwill during the fourth quarter of fiscal year 2008. Most of that goodwill
was associated with the acquisition of dealers at the first of the year, as well
as the 1996 acquisition of our Tennessee operations.


                                       14
<PAGE>

Accounts Payable

         Accounts payable increased $182,809 to $1,423,839 at June 30, 2008,
compared to $1,241,030 at June 30, 2007, primarily as a result of the recent
acquisitions and the increased level of sales associated with those
acquisitions. Accounts payable are generally within term. We strive to take
advantage of available early payment discounts when offered.

Accrued Expenses and Acquisition Cash Obligation

         Accrued expenses increased $212,372 to $500,145 at June 30, 2008,
compared to $287,773 at June 30, 2007, primarily as a result of increased sales
at the retail level which generate higher sales tax liabilities in the 30 states
where we now sell on a direct basis.

         Acquisition cash obligations decreased to $0 at June 30, 2008, compared
to $1,000,000 at June 30, 2007. This obligation at June 30 reflected the cash
amount that was placed into escrow in conjunction with the acquisition made on
June 30, 2007, which was paid subsequently.

Accrued Payroll and Benefit Expenses

         Accrued payroll & benefit expenses increased $135,164 to $411,918 at
June 30, 2008, compared to $276,754 at June 30, 2007. The increase in accrued
payroll and benefit expenses is related to timing differences as well as the
increased number of employees resulting in higher accrued payroll at June 30,
2008 compared to June 30, 2007.

Cash

         The Company's cash position at June 30, 2008 decreased to $288,481,
compared to $1,301,105 at June 30, 2007, as a result of payments related to the
acquisitions made on June 30, 2007 and July 2, 2007. The Company had deposited
the financing proceeds in anticipation of the acquisitions, which temporarily
increased cash balances at June 30, 2007. The Company believes that improved
cash flow from operations through improving management of accounts receivable,
maintaining current inventory levels and the reductions in expenses implemented
during the year will further minimize operating losses and expedite a return to
profitability. This improved cash flow combined with balances under available
lines of credit is expected to be sufficient to cover operating needs in the
ordinary course of business for the next twelve months. If we experience an
adverse operating environment or unusual capital expenditure requirements,
additional financing may be required. However, no assurance can be given that
additional financing, if required, would be available on favorable terms.

Line of Credit

         During fiscal year 2008, the Company increased its revolving line of
credit with a commercial bank from $6,500,000 to $8,000,000. At June 30, 2008,
the Company owed $5,818,320 compared to $250,000 at June 30, 2007. The increase
in the line of credit was the result of the following factors:

         o    The Company used approximately $3.2 million under the line of
              credit to finance the acquisitions after June 30, 2007.
         o    Receivables and inventory increased $2,400,000, while payables
              increased approximately $182,800. This imbalance of higher
              receivables while maintaining payables more current required
              additional financing demands on the line of credit.
         o    Operating losses and capital expenditures, mostly associated with
              the acquisitions, required additional financing provided by the
              line of credit.

         Interest on the line of credit is based on the bank's prime rate plus
1%, which at June 30, 2008, equaled 6%. The line of credit is collateralized
by accounts receivable and inventories of the Company as well as a security
interest in the Company's headquarters facility in Salt Lake City, Utah.
Borrowing limitations are based on approximately 45% of eligible inventory and
up to 80% of eligible accounts receivable. Interest payments on the line are due
monthly. The line of credit is renewable biennially on December 15th and
includes covenants requiring the Company to maintain certain financial ratios.
As of June 30, 2008, the Company was in compliance with its loan covenants or
had received waivers for any noncompliance.

         The current ratio was 1.5 to 1 at June 30, 2008 compared to 3.3 to 1 at
June 30, 2007. Current assets represented 70% of total assets at June 30, 2008,
compared to 63% at June 30, 2007.


                                       15
<PAGE>

Debt

         Long-term debt excluding current installments totaled $3,046,000 at
June 30, 2008, compared to $3,251,631 at June 30, 2007. In June 2007, a $1.5
million long-term mortgage loan was obtained to partially finance our
acquisitions in June and July 2007. The funding of this loan temporarily
increased our cash balances at the end of June 2007. Long-term debt is comprised
primarily of the mortgage loans on our office and manufacturing facilities in
Utah and Tennessee. The principal balance on the mortgage loans is approximately
$3.3 million with monthly principal and interest payments of $40,708. For a more
complete explanation of the long term debt, please see Note 6 in the audited
financial statements.

Inflation and Seasonality

         The Company's revenues and net income from continuing operations have
not been unusually affected by inflation or price increases for raw materials
and parts from vendors.

         The Company's business operations are not materially affected by
seasonality factors.

Critical Accounting Policies
----------------------------

         We have identified the policies below as critical to our business
operations and an understanding of our results of operations. The impact and
risks related to these policies on our business operations are discussed where
such policies affect our reported and expected financial results. In all
material respects, management believes that the accounting principles that are
utilized conform to accounting principles generally accepted in the United
States of America.

         The preparation of this annual report requires us to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses reported in our audited financial statements. By their
nature, these judgments are subject to an inherent degree of uncertainty. On an
on-going basis, we evaluate these estimates, including those related to bad
debts, inventories, and revenue recognition. We base our estimates on historical
experience and other facts and circumstances that are believed to be reasonable,
and the results form the basis for making judgments about the carrying value of
assets and liabilities. The actual results may differ from these estimates under
different assumptions or conditions.

Inventory Reserves

         The nature of our business requires that we maintain sufficient
inventory on hand at all times to meet the requirements of our customers. We
record finished goods inventory at the lower of standard cost, which
approximates actual costs (first-in, first-out) or market. Raw materials are
recorded at the lower of cost (first-in, first-out) or market. Inventory
valuation reserves are maintained for the estimated impairment of the inventory.
Impairment may be a result of slow moving or excess inventory, product
obsolescence or changes in the valuation of the inventory. In determining the
adequacy of reserves, we analyze the following, among other things:

         o    Current inventory quantities on hand.
         o    Product acceptance in the marketplace.
         o    Customer demand.
         o    Historical sales.
         o    Forecast sales.
         o    Product obsolescence.
         o    Technological innovations.
         o    Character of the inventory as either a distributed item, finished
              manufactured item or raw material.

         Any modifications to estimates of inventory valuation reserves are
reflected in the cost of goods sold within the statements of income during the
period in which such modifications are determined necessary by management. At
June 30, 2008 and June 30, 2007, our inventory valuation reserve balance, which
established a new cost basis, was $337,718 and $293,810, respectively, and our
inventory balance was $6,283,068 and $5,313,984 net of reserves, respectively.

Revenue Recognition

         Historically, the majority of our product sales were to customers who
were independent distributors. In fiscal 2008, as a result of acquiring six of
our top distributors, a significant portion of our sales were generated through
our new direct sales force. Our sales force and distributors sell our products
to end users, including physical therapists, professional trainers, athletic


                                       16
<PAGE>

trainers, chiropractors, medical doctors and aestheticians. With the acquisition
of the key distributors, we effectively reduced our dependence on sales by
independent distributors. Sales revenues are recorded when products are shipped
FOB shipping point under an agreement with a customer, risk of loss and title
have passed to the customer, and collection of any resulting receivable is
reasonably assured. Amounts billed for shipping and handling of products are
recorded as sales revenue. Costs for shipping and handling of products to
customers are recorded as cost of sales.

Allowance for Doubtful Accounts

         We must make estimates of the collectability of accounts receivable. In
doing so, we analyze historical bad debt trends, customer credit worthiness,
current economic trends and changes in customer payment patterns when evaluating
the adequacy of the allowance for doubtful accounts. Our accounts receivable
balance was $5,151,235 and $3,757,484, net of allowance for doubtful accounts of
$411,057 and $330,857, at June 30, 2008 and June 30, 2007, respectively. The
expansion of our customer base associated with more direct sales will spread bad
debt risk over a broader base of customers and reduce the concentration of large
dealer balances. At the same time, the management of more customer accounts
presents a higher risk. These risks will be evaluated over the coming year to
determine if current estimate policies are still applicable. In the meantime,
allowance for doubtful accounts associated with these acquired customers is
being based on the historical experience of the dealers acquired as well as the
one year of experience since the acquisition of these dealers.

Business Plan and Outlook

         During fiscal year 2009, we will focus on a strategy to improve overall
operations and sales that include the following elements: (1) strengthening
distribution channels; (2) developing new, state-of-the-art products for future
growth; (3) refining operations associated with the acquired companies and
reducing overhead costs; and (4) enhancing product profit margins through
improved manufacturing processes. Our goal in implementing this four-fold
strategy is to enable the Company to address short-term profitability without
jeopardizing long-term growth.

         Our primary market, the physical medicine marketplace, has experienced
significant change over the past few years, most notably with consolidation
among manufacturers and distributors. The main challenge presented by this
consolidation was the loss of independent dealers and the narrowing of
distribution channels. In order to compete more favorably and effectively, we
moved aggressively to strengthen our channels of distribution by acquiring key
distributors. We identified six key distributors with operations in 20 states.
On June 30, 2007, we acquired our largest independent distributor headquartered
in California. On July 2, 2007, we acquired five additional key independent
distributors headquartered in Texas, Ohio, Michigan, Indiana and Minnesota. We
also began hiring direct sales representatives in key locations around the
country resulting in direct sales representatives now in 29 states. The creation
of a direct distribution channel through these key acquisitions and hiring
direct sales representatives provides Dynatronics with expanded ability to sell
at the retail level, which we believe will improve gross profit margins and
enhance the Company's control over the distribution process.

         The September 2008 introduction of our first consolidated catalog and
pricing schedule provides a powerful sales tool that will help strengthen sales
efforts by direct sales reps. It will also be an effective tool for many
independent dealers who use either a private labeled version or the proprietary
version of the catalog. This tool will further enhance efforts to strengthen
distribution channels. Specific efforts will be focused on recruiting additional
independent dealers and seasoned direct sales reps in geographical areas where
distribution has been lost or diminished due to consolidation efforts within the
industry. With the broad line of products the company now offers, efforts will
be undertaken to develop relationships with Group Purchasing Organizations
(GPO's) and large chains of hospitals and clinics that purchase only on
contract. This is a segment of business the Company has not heretofore pursued
but represents a large segment of business from which it has previously been
foreclosed due to lack certification as an approved vendor with the various
GPO's and national or regional chains of care facilities.

         The Company's Synergie brand line of aesthetic products received a
boost this past year with the introduction of the Elite Synergie line, the first
redesign of the popular aesthetic products since their original introduction
almost 10 years ago. This new line of products remains the best value on the
market. With the new product line in place, the Company intends to leverage its
stable of direct sales representatives to further promote the sale of Synergie
brand products. With no mature distribution channels in the aesthetics market,
the availability of these direct sales reps provides an advantage for enhancing
the distribution of these products. To assist in that effort, a unique catalog
is contemplated to include many products that are already offered in the
Company's proprietary rehab products catalog. In addition, the Company will seek
strategic partnerships, both domestic and international, to help maintain the
sales momentum that is being initiated by the introduction of this revised
product line. The broadening of the aesthetics distribution channel could
provide an exciting boost to the Company's line of high margin aesthetic
products.


                                       17
<PAGE>

         We have long believed that international sales present an untapped
potential for growth and expansion, particularly given the current exchange
rates which favor foreign currencies over the dollar. Adding new distributors in
several countries will be the key to this expansion effort. Our past efforts to
improve international marketing have yielded only marginal improvements. We
remain committed, however, to finding the most cost effective ways to expand our
markets internationally. Our Salt Lake City facilities, where all
electrotherapy, ultrasound, traction, light therapy and Synergie products are
manufactured, are certified to ISO 13485, an internationally recognized standard
of excellence in medical device manufacturing. This designation is an important
requirement in obtaining the CE Mark certification, which allows us to market
our products in the European Union and other foreign countries.

         Strengthening our distribution channels domestically and
internationally for both the rehab and aesthetic lines is our top priority for
this new fiscal year. A second priority not far behind strengthening
distribution channels is the focus on introducing new products.

         During fiscal year 2007 and 2008, significant investments were made in
research and development to bring important new products to market. In April
2008, Dynatronics introduced the DynaPro Spinal Health System, a non-surgical
treatment for back and neck pain. This innovative system combines the benefits
of decompression and light therapy with core-stabilization exercises and
nutrition forming a very effective tool for reducing pain. Decompression therapy
has been shown effective in relieving pain associated with a host of back
problems including herniated discs, degenerative disc disease, sciatica and
pinched nerves. In addition to offering the most comprehensive approach to the
effective treatment of many of the most common causes of back and neck pain, the
DynaPro Spinal Health System features the Company's Dynatron DX2, T4 treatment
table and other packaged accessories incorporating a state-of-the-art marketing
and patient-awareness program to help practitioners promote this proven,
non-surgical pain relief treatment.

         Another new product introduced in April 2008 was the new Dynatron X5
"Turbo" soft-tissue oscillation therapy unit. The new X5 "Turbo" is three times
more powerful than the original X5 device and is a highly effective treatment
for various orthopedic and sports injuries, and is gaining popularity in sports
medicine.

         Also introduced in April 2008 was the new "Synergie Elite" product
line. The new "Synergie Elite" line of aesthetic treatment devices is comprised
of cellulite treatment devices, microdermabrasion units and bio-stimulation
light therapy equipment. These new products represent the first major redesign
of the Synergie AMS cellulite reduction device and MDA microdermabrasion device
since their introduction almost a decade ago. The market's response to the new
Synergie Elite equipment has been promising. The new updated design and
additional features make the Synergie Elite products not only visually
attractive, but functionally enhanced positioning us to better compete in the
aesthetic markets.

         During fiscal year 2008, the Company began shipping the new T3
treatment table to customers. We believe this three-section table is unique due
to its features and the tremendous value it provides for practitioners. The
metal frames of the T3 tables are manufactured in Asia for optimal cost savings.

         This commitment to product innovation will continue through the coming
fiscal year. Many new products are under design some of which are scheduled for
introduction in the latter half of the current fiscal year with others scheduled
for introduction in the first half of the following fiscal year. The commitment
to innovation of high quality products has been a hallmark of Dynatronics and
will continue to be throughout the coming year.

         Since the acquisitions were completed in July 2007, Dynatronics has
consolidated operations from eight distribution points to three facilities
including our existing facilities in Tennessee and Utah as well as a new
facility established in California that was formerly associated with Rajala, one
of the acquired companies. The ability to timely service west coast customers
was deemed a critical point of service and warranted the continuance of the
Rajala operations. We believe that other areas of the country can be adequately
served from these three warehouse operations.

         With the assimilation of the six acquisitions now substantially
completed, management has taken measures designed to reduce expenses by more
than $2 million annually. The cost savings include a reduction of approximately
20 percent of the Company's workforce and the elimination of duplicative
overhead expense. Many of these reductions had been contemplated as part of the
assimilation of the acquired distributors; however, implementation of the
planned reductions took longer to realize than expected. The implementation of
these cost reductions and further refinements that should be achieved over the
coming months is expected to contribute significantly to our profitability
objectives in the coming quarters.


                                       18
<PAGE>

         Refining the best model for supporting sales reps and dealers will be a
high priority during fiscal year 2009. We will continue to evaluate the most
efficient ways to maintain the satellite sales offices and warehouses. The
ongoing refinement of this model is expected to yield further efficiencies that
will better achieve sales goals while at the same time reducing expenses.

         While sales have shifted more to distributed products, the sale of the
Company's manufactured products remains the largest contributor to margin
generation. Therefore, renewed emphasis is being placed on improving
manufacturing operations including considering more offshore manufacturing of
components as well as streamlining manufacturing operations in Utah and
Tennessee.

         Fiscal year 2008 was a year of transformation. Dynatronics changed its
business model from being primarily a manufacturer of products distributed
through a network of independent dealers to a manufacturer and distributor of
products through a direct sales force as well as through key independent
dealers. This change in our business model comes in response to the changes
occurring in our industry. Consolidation efforts have resulted in a more
competitive environment. These consolidation efforts are occurring in both
manufacturing and distribution. The consolidation in manufacturing is being led
by DJO, Inc. (formerly ReAble or Encore Medical). Over the past few years DJO,
Inc. has acquired such companies as Chattanooga Group, Saunders, Iomed, Empi,
and Rehabilicare. In addition it has acquired distributors, including
Performance Modalities and Endeavor Medical. The consolidation in distribution
is being led primarily by Patterson Medical. During the same period of time,
Patterson Medical has acquired distributors including Sammons-Preston,
Theraquip, Dale Surgical, W.S. Medical and Goldsmith Medical. These
consolidation efforts have created both challenges and opportunities for
Dynatronics.

         In order to strategically protect distribution channels, Dynatronics
acquired the six independent distributors previously discussed. Since that time,
Dynatronics has continued to add direct sales personnel as well as strengthen
relationships with key independent distributors. We believe that through these
direct sales reps and independent distributor relationships, we have the premier
distribution network of seasoned and trained equipment sales personnel in the
industry. The consolidation efforts in manufacturing by DJO and in distribution
by Patterson are having a polarizing effect and compelling independent
distributors and sales reps to choose an affiliation. We believe many of the
best of these have become affiliated with Dynatronics because of our innovative
quality products and proven history of strong customer service and loyalty to
our distribution network. The quality of our products, the breadth of our
product line, and the strength of our distribution channel we believe enable us
to effectively compete in servicing our core market of private clinical
practitioners and professional, collegiate, and other athletic teams.

         As a manufacturer of many of the products we sell, we also have the
ability to be competitive in our pricing schemes - particularly when compared to
large consolidated or independent distributors. The recent introduction of our
new catalog and revised pricing schedule has refreshed our margins for products
where we experienced increasing costs from vendors.

         Dynatronics' management acknowledges that the transition in our
business model has taken longer than anticipated and the losses incurred have
been higher than expected. Nevertheless, the strategic decisions to change our
business model were mandated by our desire to be responsive to the
consolidations occurring within our industry. While it has been a more expensive
proposition than originally projected, we believe the strategy was appropriate
and provides a platform for the Company to now be competitive in a new market
environment. With the reduction in expenses already implemented, the new
products recently introduced, the new product catalog, and ongoing efforts to
further streamline operations, we believe our goal of returning to profitability
is achievable in the coming quarters.

         Based on our defined strategic initiatives, we are focusing our
resources in the following areas:

         o    Reinforcing our position in the domestic physical medicine market
              by securing channels of distribution through a strategy of
              recruiting direct sales representatives and working closely with
              the most successful dealers of capital equipment in areas where
              distribution has been lost or significantly diminished through
              consolidation. .

         o    Improving sales by focusing on development of new sales strategies
              and promotional programs including the introduction of the most
              comprehensive catalog in our history and leveraging that tool in
              achieving the goals of strengthening our distribution channels.

         o    Expanding distribution of our redesigned Synergie product line
              through leveraging our current direct sales force, seeking
              additional independent distributors and creating new sales tools
              such as a catalog of products targeted just for aesthetics.


                                       19
<PAGE>

         o    Renewing emphasis of international sales by identifying key
              distributors who could represent the product line particularly in
              Europe.

         o    Continuing development of new, state-of-the-art products, both
              high-tech and commodity, in fiscal year 2009, for both the
              rehabilitation and aesthetic markets.

         o    Examining ways to reduce costs of manufacturing including
              exploring more overseas manufacturing of components.

         o    Further refining the operational model for supporting field sales
              and satellite operations.

         o    Exploring strategic business alliances that will leverage and
              complement the Company's competitive strengths, increase market
              reach and supplement capital resources.

Forward-Looking Statements
--------------------------

         This Report on Form 10-KSB contains certain statements that are
"forward-looking" within the meaning of the statutory safe harbor provisions of
Section 27A of the Securities Act and Section 21E of the Exchange Act. These
forward-looking statements and other information are based on our beliefs as
well as assumptions made by us using information currently available.

         The words "anticipate," "believe," "estimate," "expect,' "intend,"
"will," "should" and similar expressions, as they relate to us, are intended to
identify forward-looking statements. Such statements reflect our current views
with respect to future events and are subject to certain risks, uncertainties
and assumptions. Should one or more of these risks and uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected, intended or using other similar expressions.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated
events. Risks and circumstances that may cause actual results to vary from the
Company's expectations include, among others, the following:

         Assimilation of Acquired Companies and Migration of our Business Model.
Prior to the acquisition of its dealers at the end of fiscal year 2007,
Dynatronics had operated primarily as a manufacturer of medical products sold
through a network of specialty and general line distributors. Due to
consolidation in our market place and the threat from that consolidation to the
channels of distribution available to Dynatronics, the Company acquired six of
its distributors and has continued to add direct sales reps around the country.
This represents a significant change in our business model. Going forward,
Dynatronics will be distributing many more products than it manufactures.
Additionally, Dynatronics will be much more vertically integrated in the
distribution chain working with a staff of direct sales representatives instead
of the traditional model of working through dealers. There can be no assurance
that Dynatronics will be successful in migrating to the new business model
without incurring significant unanticipated costs or experiencing unexpected
operational problems. Some of the risks include:

         o    Many sales representatives not being contractually obligated to
              stay with the Company
         o    Management of an expanded inventory base
         o    Controlling operations that are more geographically diverse
         o    Collecting accounts receivable from thousands of smaller customers
              instead of hundreds of larger dealers
         o    Securing adequate working capital
         o    Ability to reduce overhead costs and streamline operations
         o    Conflicts distributing products from manufacturers who were
              previously a competitor
         o    Availability of trained support personnel
         o    Achieving sales expansion sufficient to return to profitability.

         Technological Obsolescence. The business of designing and manufacturing
medical and aesthetic products is characterized by rapid technological change.
Although Dynatronics has obtained patents on certain aspects of its technology,
there can be no assurance that our competitors will not develop or manufacture
products technologically superior to those of the Company.


                                       20
<PAGE>

         Extensive Government Regulation. The manufacture, packaging, labeling,
advertising, promotion, distribution and sale of our products are subject to
regulation by numerous national and local governmental agencies in the United
States and other countries, which adds to the expense of doing business and, if
violated, could adversely affect the Company's financial condition and results
of operations.

         Health Care Reform. Governments are continually reviewing and
considering expansive legislation that may lead to significant reforms in health
care delivery systems. The pressure for reform stems largely from the rising
cost of health care in recent years. We cannot predict whether or when new or
proposed legislation will be enacted and there can be no assurance that such
legislation, when enacted, will not impose additional restrictions on part or
all of the Company's business or its intended business, which might adversely
affect such business.

         Product Liability. Manufacturers and distributors of products used in
the medical device, aesthetics and related industries are from time to time
subject to lawsuits alleging product liability, negligence or related theories
of recovery, which have become an increasingly frequent risk of doing business
in these industries. Although from time to time lawsuits may arise or claims
asserted based on product liability matters, all such actions have been insured
against. Although we maintain product liability insurance coverage which we deem
to be adequate based on historical experience, there can be no assurance that
such coverage will be available for such risks in the future or that, if
available, it would prove sufficient to cover potential claims or that the
present amount of insurance can be maintained in force at an acceptable cost.
Furthermore, the assertion of such claims, regardless of their merit or eventual
outcome, also may have a material adverse effect on the Company, its business
reputation and its operations.

         Risks Associated with Manufacturing. The Company's results of
operations are dependent upon the continued operation of its manufacturing
facilities in Utah and Tennessee. The operation of a manufacturing facility
involves many risks, including power failures, the breakdown, failure or
substandard performance of equipment, failure to perform by key suppliers, the
improper installation or operation of equipment, natural or other disasters and
the need to comply with the requirements or directives of government agencies,
including the FDA. There can be no assurance that the occurrence of these or any
other operational problems at our facilities would not have a material adverse
effect on the Company's business, financial condition and results of operations.

         Reliance on Information Technology. The Company's success is dependent
in large part on the accuracy, reliability and proper use of sophisticated and
dependable information processing systems and management information technology.
Our information technology systems are designed and selected in order to
facilitate order entry and customer billing, maintain records, accurately track
purchases, accounts receivable and accounts payable, manage accounting, finance
and manufacturing operations, generate reports and provide customer service and
technical support. Any interruption in these systems could have a material
adverse effect on the Company's business, financial condition and results of
operations.

         Competition. Our industry is highly competitive. Numerous
manufacturers, distributors and retailers compete actively for consumers and
customers. The Company competes directly with other entities that manufacture,
market and distribute products in each of its product lines. The consolidation
that has occurred in the physical medicine market has resulted in two large
competitors, DJO, Inc. and Sammons Preston, Inc., a division of Patterson
Companies, where competitors of such magnitude had not existed before. Many of
these competitors are substantially larger than the Company and have greater
financial resources and broader brand name recognition. The market is highly
sensitive to the introduction of new products that may rapidly capture a
significant share of the market. There can be no assurance that the Company will
be able to compete in this intensely competitive environment.

         Dependence on Patents and Proprietary Rights. The Company has seven
patents issued and two patents pending relating to its products. In addition, we
have obtained by license the worldwide rights to the STS patent. The Company's
trademarks have also been registered in the United States and in other
countries. There can be no assurance that patents owned by or licensed to us
will not be challenged or circumvented or will provide us with any competitive
advantages or that a patent will issue from any pending patent application. In
addition, each patent owned by the Company expires after approximately 20 years
from its filing date. We also rely upon copyright protection for our proprietary
software and other property. There can be no assurance that any copyright
obtained will not be circumvented or challenged. In addition, we rely on trade
secrets that we seek to protect, in part, through confidentiality agreements
with employees and other parties. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach or that our trade secrets will not otherwise become known to or
independently developed by competitors. The Company may become involved from
time to time in litigation to determine the enforceability, scope and validity
of proprietary rights. Any such litigation could result in substantial cost to
the Company and divert the efforts of its management and technical personnel.


                                       21
<PAGE>

         Foreign Duties and Import Restrictions. Some of the Company's products
are exported to the countries in which they ultimately are sold. The countries
in which we sell products may impose various legal restrictions on imports,
impose duties of varying amounts, or enact regulatory requirements, adverse to
the Company's products. There can be no assurance that changes in legal
restrictions, increased duties or taxes, or stricter health and safety
requirements would not have a material adverse effect in the Company's ability
to market its products in a given country.

         Effect of Exchange Rate Fluctuations. Exchange rate fluctuations may
have a significant effect on the Company's sales and gross margins in a given
foreign country. If exchange rates fluctuate dramatically, it may become
uneconomical for the Company to establish or continue activities in certain
countries. Differences in the exchange rates may also create a marketing
advantage for foreign competitors, making the purchase price of their products
lower than prices originally denominated in U.S. dollars. As the Company's
business expands outside the United States, an increasing share of its revenues
and expenses will be transacted in currencies other than the U.S. dollar.
Consequently, the reported earnings of the Company in future periods may be
significantly affected by fluctuations in currency exchange rates, with earnings
generally increasing with a weaker U.S. dollar and decreasing with a
strengthening U.S. dollar.

         General Economic Conditions. The general economic conditions in the
United States including the current credit crises could lead to loss of consumer
confidence resulting in postponement of purchases of capital equipment, in
particular. The company relies on the sale of its capital equipment to maintain
sales and margins. A serious recession or worse could have a serious adverse
affect on the operations of the Company.

         Reductions in Reimbursements. The Company sells to practitioners who
are dependent on reimbursements from insurance companies, including Medicare and
Medicaid. Reductions in reimbursement rates could lead to lower cash flow for
practitioners stemming the purchases of supplies and new capital equipment or
completing expansion plans that would require new equipment.

         Effect of Common Stock being Delisted from NASDAQ. On June 25, 2008,
Dynatronics received a Deficiency Letter from the NASDAQ Stock Market indicating
that the Company failed to comply with the minimum bid requirement for continued
inclusion under Marketplace Rule 4310(c)(4). In accordance with Marketplace Rule
4310(c)(8)(D), the Company is provided 180 days, or until December 22, 2008, to
regain compliance with the bid price deficiency rule. The leaders of Dynatronics
intend to use their best efforts to regain compliance with NASDAQ's minimum bid
requirement. However, there can be no assurance that compliance with the minimum
bid requirement will be achieved given the current market environment. If
compliance is not achieved, the Company's stock will likely be delisted from
NASDAQ and begin trading on the OTC bulletin board. Such delisting could have a
negative effect on the price and liquidity of the Company's stock.

Item 7.   Financial Statements
          --------------------

         The consolidated financial statements and accompanying report of the
Company's auditors follow immediately and form a part of this report.

Item 8.   Changes in and Disagreements with Accountants on Accounting and
          ---------------------------------------------------------------
          Financial Disclosure
          --------------------

         None.

Item 8A.  Controls and Procedures
          -----------------------

         Our Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934), as of the end of the
period covered by this Report. Based upon that evaluation, management has
concluded that for the reason noted below our disclosure controls and procedures
are not effective to reasonably ensure that information we are required to
disclose in reports filed by the Company under the Exchange Act (i) is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms, and (ii) is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosures. There have
been no significant changes in internal controls over financial reporting during
the fourth quarter or fiscal year 2008, or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses except as explained below.


                                       22
<PAGE>

Management's Report on Internal Control Over Financial Reporting.
-----------------------------------------------------------------

         Management's Report on Internal Control Over Financial Reporting. Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act, as amended. Our management assessed the effectiveness
of our internal control over financial reporting as of June 30, 2008. In making
this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
company's annual or interim financial statements will not be prevented or
detected on a timely basis.

         As of June 30, 2008, management performed an analysis of goodwill and
determined based on that analysis that no impairment was required for goodwill.
Subsequently, at the request of our auditors, we employed an independent third
party appraiser to perform an assessment of any goodwill impairment. The report
of the appraiser resulted in management reconsidering their prior impairment
analysis and resulted in a material adjustment to our financial statements.
Based on that assessment we have concluded that a material weakness existed in
our procedure for evaluating goodwill impairment. As a result of this evaluation
we have modified our procedures and controls for properly assessing long lived
assets.

Item 8B.  Other Information
          -----------------

         None.

                                    PART III

Item 9.   Directors, Executive Officers, Promoters, Control Persons and
          -------------------------------------------------------------
          Corporate Governance; Compliance With Section 16(a) of the Exchange
          -------------------------------------------------------------------
          Act
          ---

         The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the headings
"Executive Officers and Directors," "Compliance with Section 16(a) of the
Securities Exchange Act of 1934," "Committees and Meetings of the Board of
Directors," "Audit Committee Financial Expert" and "Code of Ethics" contained in
the Company's definitive proxy statement for its 2008 Annual Meeting of
Shareholders, to be sent to shareholders of the Company subsequent to the filing
of this report on Form 10-KSB.

Item 10.  Executive Compensation
          ----------------------

         The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the heading
"Executive Compensation and other Matters" and "Director Compensation" contained
in the Company's definitive proxy statement for its 2008 Annual Meeting of
Shareholders, to be sent to shareholders of the Company subsequent to the filing
of this report on Form 10-KSB.

Item 11.  Security Ownership of Certain Beneficial Owners and Management and
          ------------------------------------------------------------------
          Related Stockholder Matters
          ---------------------------

         The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the heading "Voting
Securities and Principal Shareholders" and "Equity Compensation Plan
Information" contained in the Company's definitive proxy statement for its 2008
Annual Meeting of Shareholders, to be sent to shareholders of the Company
subsequent to the filing of this report on Form 10-KSB.

Item 12.  Certain Relationships and Related Transactions, and Related
          -----------------------------------------------------------
          Transactions
          ------------

         The Company rents office and/or warehouse space for its newly acquired
dealers in Pleasanton, California; Detroit, Michigan; and Girard, Ohio. These
buildings are owned by the Rajala Family Trust, Tony Trolio and Steve Cyman who
are the former owners of three of the dealerships acquired on June 30 and July
2, 2007. As part of the purchase price for their distribution companies, The
Rajala Family Trust, Tony Trolio and Steve Cyman were paid with shares of
Dynatronics stock and are currently 5% or greater shareholders of the Company.
The rental payments for each facility are comparable to or below market rates
for similar properties.


                                       23
<PAGE>

         During the two years ended June 30, 2008, there were no other parties
to any transaction in which any director, executive officer or shareholder
holding more than 5% of the Company's issued and outstanding common stock had a
direct or indirect material interest.

Item 13.  Exhibits
          --------

         (a) Exhibits and documents required by Item 601 of Regulation S-B:

         1.   Financial Statements (included in Part II, Item 7):

              Report of Independent Registered Public Accounting Firm.......F-1

              Consolidated Balance Sheets at June 30, 2008 and 2007.........F-2

              Consolidate Statements of Operations for years ended
              June 30, 2008 and 2007........................................F-3

              Consolidated Statements of Stockholders'
              Equity for years ended June 30, 2008
              and 2007......................................................F-4

              Consolidated Statements of Cash Flows for
              years ended June 30, 2008 and 2007 ...........................F-5

              Notes to Consolidated Financial Statements....................F-6


       Exhibits:
       ---------

            Reg. S-B
           Exhibit No.            Description
           -----------            -----------

              3.1             Articles of Incorporation and Bylaws of
                              Dynatronics Laser Corporation. Incorporated by
                              reference to a Registration Statement on Form S-1
                              (No. 2-85045) filed with the Securities and
                              Exchange Commission and effective November 2,
                              1984.

              3.2             Articles of Amendment dated November 21, 1988
                              (previously filed)

              3.3             Articles of Amendment dated November 18, 1993
                              (previously filed)

              4.1             Form of certificate representing Dynatronics Laser
                              Corporation common shares, no par value.
                              Incorporated by reference to a Registration
                              Statement on Form S-1 (No. 2-85045) filed with the
                              Securities and Exchange Commission and effective
                              November 2, 1984.

              4.2             Amended and Restated 1992 Stock Option Plan,
                              effective November 28, 1996 (previously filed)

              10.2            Employment contract with Kelvyn H. Cullimore, Jr.
                              (filed as Exhibit to June 30, 2007 Annual Report
                              on Form 10-KSB)

              10.2            Employment contract with Larry K. Beardall (filed
                              as Exhibit to June 30, 2007 Annual Report on Form
                              10-KSB)

              10.3            Loan Agreement with Zion Bank (filed as Exhibit to
                              June 30, 2007 Annual Report on Form 10-KSB)

              10.4            Settlement Agreement dated March 29, 2000 with
                              Kelvyn Cullimore, Sr. (previously filed)


                                       24
<PAGE>

              10.7            Dynatronics Corporation 2005 Equity Incentive
                              Award Plan (previously filed as Annex A to the
                              Company's Definitive Proxy Statement on Schedule
                              14A filed on October 27, 2005)

              10.8            Form of Option Agreement for the 2005 Equity
                              Incentive Award Plan for incentive stock options
                              (filed as Exhibit to June 30, 2007 Annual Report
                              on Form 10-KSB)

              10.9            Form of Option Agreement for the 2005 Equity
                              Incentive Award Plan for non-qualified options
                              (filed as Exhibit to June 30, 2007 Annual Report
                              on Form 10-KSB)

              23.1            Consent of Tanner LC (filed herewith)

              31              Certification under Rule 13a-14(a)/15d-14(a) of
                              principal executive officer and principal
                              financial officer (filed herewith)

              32              Certification under Section 906 of the
                              Sarbanes-Oxley Act of 2002 (18 U.S.C. SECTION
                              1350) (filed herewith)


Item 14.  Principal Accountant Fees and Services
          --------------------------------------

         The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the heading "Auditor
Fees" contained in the Company's definitive proxy statement for its 2008 Annual
Meeting of Shareholders, to be sent to shareholders of the Company subsequent to
the filing of this report on Form 10-KSB.



                                       25
<PAGE>

                                   SIGNATURES


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

                                          DYNATRONICS CORPORATION


                                          By  /s/ Kelvyn H. Cullimore, Jr.
                                            -----------------------------------
                                          Kelvyn H. Cullimore, Jr.
                                          Chief Executive Officer and President

Date:  September 29, 2008

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



/s/ Kelvyn H. Cullimore, Jr.    Chairman, President,          September 29, 2008
----------------------------    CEO (Principal Executive
Kelvyn H. Cullimore, Jr.        Officer)


/s/ Terry M. Atkinson           Chief Financial Officer       September 29, 2008
----------------------------    (Principal Financial
Terry M. Atkinson, CPA          Officer and Principal
                                Accounting Officer)

/s/ Larry K. Beardall           Director, Executive           September 29, 2008
----------------------------    Vice President
Larry K. Beardall


/s/ Kelvyn H. Cullimore         Vice Chairman                 September 29, 2008
----------------------------
Kelvyn H. Cullimore


/s/ Howard L. Edwards           Director                      September 29, 2008
----------------------------
Howard L. Edwards


/s/ Val J. Christensen          Director                      September 29, 2008
----------------------------
Val J. Christensen


/s/ Joseph H. Barton            Director                      September 29, 2008
----------------------------
Joseph H. Barton


/s/ Mark A. Crockett            Director                      September 29, 2008
----------------------------
Mark A. Crockett


                                       26
<PAGE>

                                                REPORT OF INDEPENDENT REGISTERED
                                                          PUBLIC ACCOUNTING FIRM





To the Board of Directors of
Dynatronics Corporation


We have audited the consolidated  balance sheets of Dynatronics  Corporation and
subsidiary as of June 30, 2008 and 2007, and the related consolidated statements
of operations,  stockholders'  equity,  and cash flows for the years then ended.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial statements are free of material  misstatement.  We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included  consideration of internal control over financial  reporting as a
basis for designing audit procedures that are appropriate in the  circumstances,
but not for the purpose of  expressing  an opinion on the  effectiveness  of the
Company's internal control over financial reporting.  Accordingly, we express no
such opinion. 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 consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Dynatronics  Corporation  and  subsidiary as of June 30, 2008 and 2007,  and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting  principles generally accepted in the United
States of America.



/s/  Tanner LC



Salt Lake City, Utah
September 29, 2008



                                      F-1
<PAGE>

                             DYNATRONICS CORPORATION
                           Consolidated Balance Sheets
                             June 30, 2008 and 2007


                 Assets                             2008              2007
                                                --------------   ---------------

Current assets:
 Cash                                           $      288,481        1,301,105
 Trade accounts receivable, less allowance
   for doubtful accounts of $411,057 at
   June 30, 2008 and $330,857 at June 30,
   2007                                              5,151,235        3,757,484
 Other receivables                                      63,487          282,741
 Inventories, net                                    6,283,068        5,313,984
 Prepaid expenses                                      619,471          507,755
 Prepaid income taxes                                   98,644           92,702
 Deferred tax asset - current                          477,300          396,156
                                                --------------   ---------------
          Total current assets                      12,981,686       11,651,927

Property and equipment, net                          3,527,153        3,453,495
Goodwill, net                                               -         2,758,572
Intangible asset, net                                  631,181          356,792
Other assets                                           359,748          346,830
Deferred tax asset - noncurrent                        928,051               -
                                                --------------   ---------------
                                                $   18,427,819       18,567,616
                                                ==============  ================


    Liabilities and Stockholders' Equity

Current liabilities:
 Current installments of long-term debt         $      297,413          271,979
 Line of credit                                      5,818,320          250,000
 Warranty reserve                                      209,168          208,000
 Accounts payable                                    1,423,839        1,241,030
 Accrued expenses                                      500,145          287,773
 Accrued payroll and benefit expenses                  411,918          276,754
 Acquisition cash obligation                                -         1,000,000
                                                --------------   ---------------
          Total current liabilities                  8,660,803        3,535,536

Long-term debt, excluding current installments       3,046,000        3,251,631
Deferred compensation                                  455,377          420,470
Deferred tax liability - noncurrent                          -          289,335
                                                --------------   ---------------
          Total liabilities                         12,162,180        7,496,972
                                                --------------   ---------------
Commitments and contingencies

Stockholders' equity:
 Common stock, no par value.  Authorized
   50,000,000 shares; issued 13,670,807
   shares at June 30, 2008 and 10,308,522
   shares at June 30, 2007                           7,865,913        4,227,147
 Retained earnings deficit)                         (1,600,274)       6,843,497
                                                --------------   ---------------

          Total stockholders' equity                 6,265,639       11,070,644
                                                --------------   ---------------
                                                $   18,427,819       18,567,616
                                                ==============   ===============


See accompanying notes to financial statements.

                                      F-2
<PAGE>

                             DYNATRONICS CORPORATION
                      Consolidated Statements of Operations
                       Years Ended June 30, 2008 and 2007



                                                     2008              2007
                                                --------------   ---------------

Net sales                                       $   32,592,507       17,837,104
Cost of sales                                       20,450,570       10,925,316
                                                --------------   ---------------
          Gross profit                              12,141,937        6,911,788

Selling, general, and administrative expenses       13,473,190        5,541,860
Research and development expenses                    1,354,743        1,492,774
Goodwill impairment                                  6,636,466                -
                                                --------------   ---------------
          Operating loss                            (9,322,462)        (122,846)
                                                --------------   ---------------

Other income (expense):
   Interest income                                       9,610           28,330
   Interest expense                                   (620,473)        (209,292)
   Other income, net                                    17,770           32,565
                                                --------------   ---------------
          Total other income (expense)                (593,093)        (148,397)
                                                --------------   ---------------

          Loss before income taxes                  (9,915,555)        (271,243)

Income tax benefit                                  (1,471,784)        (186,201)
                                                --------------   ---------------

          Net loss                              $   (8,443,771)         (85,042)
                                                ==============   ===============

          Basic net income (loss) per common
            share                               $        (0.62)           (0.01)

          Diluted net income (loss) per common
            share                               $        (0.62)           (0.01)


Weighted average basic and diluted common
  shares outstanding:

          Basic                                     13,609,880        8,916,317
          Diluted                                   13,609,880        8,916,317





See accompanying notes to financial statements.


                                      F-3
<PAGE>

                                      DYNATRONICS CORPORATION
                          Consolidated Statements of Stockholders' Equity
                                 Years Ended June 30, 2008 and 2007

<TABLE>
<CAPTION>
                                                                                       Total
                                   Number           Common          Retained        stockholders'
                                  of shares          stock          earnings           equity
                                -------------   --------------   ---------------   ---------------
<S>                             <C>             <C>              <C>               <C>
Balances at June 30, 2006           8,988,173   $    2,742,503         6,928,539        9,671,042

Issuance of common stock
  upon exercise of employee
  stock options                         1,664            1,697                 -            1,697

Redemption of common stock           (208,793)        (244,682)                -         (244,682)

Issuance of common stock
  upon exercise of non
  employee stock options               20,000           21,600                 -           21,600

Stock based compensation                7,476           11,027                 -           11,027

Issuance of common stock
  in business acquisition           1,500,002        1,695,002                 -        1,695,002

Net loss                                    -                -           (85,042)         (85,042)
                                -------------   --------------   ---------------   ---------------

Balances at June 30, 2007          10,308,522        4,227,147         6,843,497       11,070,644

Issuance of common stock
  upon exercise of employee
  stock options                       251,499          208,345                 -          208,345

Redemption of common stock           (258,569)        (280,440)                -         (280,440)

Stock based compensation              307,764          312,495                 -          312,495

Issuance of common stock
  in business acquisitions          3,061,591        3,398,366                 -        3,398,366

Net loss                                    -                -        (8,443,771)      (8,443,771)
                                -------------   --------------   ---------------   ---------------

Balances at June 30, 2008          13,670,807   $    7,865,913        (1,600,274)       6,265,639
                                =============   ==============   ===============   ===============

</TABLE>
See accompanying notes to financial statements.


                                                F-4
<PAGE>

                             DYNATRONICS CORPORATION
                      Consolidated Statements of Cash Flows
                       Years Ended June 30, 2008 and 2007


                                                     2008             2007
                                                --------------   ---------------
Cash flows from operating activities:
  Net income (loss)                             $   (8,443,771)         (85,042)
  Adjustments to reconcile net income
     (loss) to net cash provided
     by (used in) operating activities:
       Depreciation and amortization of
         property and equipment                        375,005          366,047
       Amortization of intangible asset                 92,011            7,324
       Stock based compensation expense                308,300            9,217
       Goodwill impairment                           6,636,466                -
       Deferred tax asset, net                      (1,473,718)         (37,010)
       Provision for doubtful accounts                 480,000          141,401
       Provision for inventory obsolescence            288,000           38,599
       Provision for warranty reserve                  270,124          270,124
       Provision for deferred compensation              34,907           32,220
       Change in operating assets and
        liabilities:
         Receivables                                  (285,958)         (41,466)
         Inventories                                   (64,445)         203,763
         Prepaid expenses and other assets            (119,852)         120,833
         Accounts payable and accrued
           expenses                                 (1,235,410)        (759,411)
         Prepaid income taxes                           (1,748)         (25,022)
                                                --------------   ---------------

           Net cash provided by (used in)
             operating activities                   (3,140,089)         241,577
                                                --------------   ---------------

Cash flows from investing activities:
  Capital expenditures                                (335,899)        (128,560)
  Business acquisitions                             (2,852,664)          67,839
                                                --------------   ---------------

           Net cash used in investing
             activities                             (3,188,563)         (60,721)
                                                --------------   ---------------

Cash flows from financing activities:
  Proceeds from issuance of long-term debt             104,401        1,500,000
  Principal payments on long-term debt                (284,598)        (254,318)
  Net change in line of credit                       5,568,320         (327,232)
  Proceeds from issuance of common stock               208,345           23,297
  Redemption of common stock                          (280,440)        (244,682)
                                                --------------   ---------------

           Net cash provided by financing
             activities                              5,316,028          697,065
                                                --------------   ---------------

           Net change in cash                       (1,012,624)         877,921

Cash at beginning of year                            1,301,105          423,184
                                                --------------   ---------------

Cash at end of year                             $      288,481        1,301,105
                                                ==============   ===============

Supplemental disclosures of cash flow
 information:
  Cash paid for interest                        $      598,239          209,139
  Cash paid for income taxes                            16,461           13,049
Supplemental disclosure of non-cash
 investing and financing activities:
  Common stock issued for directors fees                 8,000            8,000
  Income tax benefit from non-employee
    exercise of stock options                                -            1,810
  Stock based compensation - see note 1(n)
    for details
  Business acquisitions disclosure see
    note 14 for details

See accompanying notes to financial statements.


                                      F-5
<PAGE>
                             DYNATRONICS CORPORATION

                   Notes to Consolidated Financial Statements

                             June 30, 2008 and 2007



(1)    Basis of Presentation and Summary of Significant Accounting Policies

       (a)    Basis of Presentation

              Dynatronics  Corporation  (the  Company)  manufactures,   markets,
              distributes and sells a broad line of therapeutic, diagnostic, and
              rehabilitation   equipment,   medical  supplies  and  soft  goods,
              treatment  tables and  aesthetic  medical  devices to an expanding
              market  of   physical   therapists,   podiatrists,   orthopedists,
              chiropractors, plastic surgeons, dermatologists, and other medical
              professionals.  The  products  are sold  primarily  in the  United
              States and Canada, with additional sales in foreign countries.

       (b)    Principles of Consolidation

              The  consolidated  financial  statements  include the accounts and
              operations  of  Dynatronics   Corporation  and  its  wholly  owned
              subsidiary, Dynatronics Distribution Company, LLC. All significant
              intercompany   account   balances  and   transactions   have  been
              eliminated in consolidation.

       (c)    Cash Equivalents

              For purposes of the combined  statements of cash flows, all highly
              liquid  investments  with  maturities  of three months or less are
              considered to be cash equivalents.  There were no significant cash
              equivalents as of June 30, 2008 and 2007.

       (d)    Inventories

              Finished  goods  inventories  are stated at the lower of  standard
              cost, which  approximates  actual cost (first-in,  first-out),  or
              market.  Raw materials are stated at the lower of cost  (first-in,
              first-out), or market.

       (e)    Trade Accounts Receivable

              Trade accounts  receivable are recorded at the invoiced amount and
              do not bear interest.  The allowance for doubtful  accounts is the
              Company's best estimate of the amount of probable credit losses in
              the Company's existing accounts receivable. The Company determines
              the allowance  based on a  combination  of  statistical  analysis,
              historical collections,  a client's current creditworthiness,  age
              of the receivable  balance both  individually and in the aggregate
              and  general  economic  conditions  that may  affect a  customer's
              ability to pay. All account balances are reviewed on an individual
              basis.  Account  balances  are charged  off against the  allowance
              after  all  means  of  collection  have  been  exhausted  and  the
              potential for recovery is considered  remote. The Company does not
              have  any   off-balance-sheet   credit  exposure  related  to  its
              customers.

       (f)    Property and Equipment

              Property  and  equipment  are  stated at cost and are  depreciated
              using the straight-line  method over the estimated useful lives of
              related  assets.  The building and its  component  parts are being
              depreciated over their estimated useful lives that range from 5 to
              31.5 years. Estimated lives for all other depreciable assets range
              from 3 to 7 years.


                                      F-6
<PAGE>

       (g)    Goodwill and Long-Lived Assets

              Goodwill  represents the excess of costs over fair value of assets
              of businesses acquired. Goodwill and intangible assets acquired in
              business  combinations and determined to have an indefinite useful
              life are not amortized, but instead tested for impairment at least
              annually  per  SFAS  No.  142  Goodwill  and  Other   Intangibles.
              Management   is   primarily    responsible   for   the   valuation
              determination.   Management   utilizes   standard   principles  of
              financial  analysis and valuation  including:  transaction  value,
              market  value,  and income value methods to arrive at a reasonable
              estimate  of the fair value of the  Company in  comparison  to its
              book value. The Company has determined it has one reporting unit.

              The  Company   performed  the  initial  phase  of  its  impairment
              evaluation  by  comparing  the fair  market  value  of its  single
              reporting  entity to its carrying  value as of June 30, 2008.  The
              primary  factor in arriving at a fair market  value was the market
              capitalization of the Company. As the carrying amount exceeded the
              fair  value,  the  Company  performed  the  second  phase  of  its
              impairment  evaluation  to calculate  impairment  and as a result,
              recorded a pre-tax  goodwill  impairment  charge of  approximately
              $6.6 million. The primary reason for the impairment charge was the
              sustained  decline of the Company's  stock price during the fourth
              quarter  of  fiscal  2008.   Management  retained  an  independent
              appraiser to assist in determining the goodwill impairment.

              At June 30, 2007 the Company performed its annual  evaluation,  it
              was  determined  that  the  fair  value  of its  reporting  entity
              exceeded the carrying amount resulting in no impairment.

              Long-lived  assets,  such as property,  plant, and equipment,  and
              purchased  intangibles  subject to amortization,  are reviewed for
              impairment  whenever events or changes in  circumstances  indicate
              that  the  carrying  amount  of an asset  may not be  recoverable.
              Recoverability  of  assets  to be held and used is  measured  by a
              comparison  of  the  carrying  amount  of an  asset  to  estimated
              undiscounted  future cash flows  expected to be  generated  by the
              asset.  If the carrying  amount of an asset  exceeds its estimated
              future cash  flows,  an  impairment  charge is  recognized  by the
              amount by which the carrying  amount of the asset exceeds the fair
              value of the asset.  Assets to be disposed of would be  separately
              presented  in the balance  sheet and  reported at the lower of the
              carrying  amount  or fair  value  less  costs to sell,  and are no
              longer depreciated. The assets and liabilities of a disposed group
              classified  as held for sale would be presented  separately in the
              appropriate asset and liability sections of the balance sheet.

       (h)    Intangible asset

              Intangible  assets  are  amortized  over  their  useful  life on a
              straight line method. The estimated lives for the intangible asset
              range from 3 months to 15 years.

       (i)    Revenue Recognition

              Sales  are  generally  recorded  when  products  are  shipped  FOB
              shipping  point under an agreement  with a customer,  risk of loss
              and title  have  passed to the  customer,  and  collection  of any
              resulting  receivable is reasonably  assured.  Amounts  billed for
              shipping and  handling of products are recorded as sales  revenue.
              Costs for  shipping  and  handling of products  to  customers  are
              recorded as cost of sales.

       (j)    Research and Development Costs

              Research and development costs are expensed as incurred.


                                      F-7
<PAGE>

       (k)    Product Warranty Reserve

              Costs  estimated to be incurred in  connection  with the Company's
              product  warranty  programs are charged to expense as products are
              sold based on historical warranty rates.

       (l)    Earnings per Common Share

              Basic earnings per common share  represents the amount of earnings
              for the period available to each share of common stock outstanding
              during the reporting period.  Diluted earnings per common share is
              the amount of earnings  for the period  available to each share of
              common stock  outstanding  during the reporting period and to each
              share that would have been  outstanding  assuming  the issuance of
              common shares for all dilutive potential common shares outstanding
              during the period.

              The reconciliation  between the basic and diluted weighted average
              number  of  common  shares  for  2008 and  2007 is  summarized  as
              follows:

                                                    2008               2007
                                                --------------   ---------------
              Basic weighted average number
              of common shares outstanding
              during the year                       13,609,880        8,916,317
              Weighted average number of
              dilutive common stock options
              outstanding during the year                  -0-              -0-
                                                --------------   ---------------

              Diluted weighted average
              number of common and common
              equivalent shares outstanding
              during the year                       13,609,880        8,916,317
                                                ==============   ===============

              Outstanding options not included in the computation of diluted net
              income per share total 719,698 and 797,042 as of June 30, 2008 and
              2007, respectively, because to do so would have been antidilutive.

       (m)    Income Taxes

              The  Company  accounts  for  income  taxes  using  the  asset  and
              liability  method in accordance with SFAS No. 109,  Accounting for
              Income Taxes.  Under the asset and liability method,  deferred tax
              assets and deferred tax  liabilities are recognized for the future
              tax consequences attributable to differences between the financial
              statement  carrying amounts of existing assets and liabilities and
              their  respective tax bases.  Deferred tax assets and deferred tax
              liabilities are measured using enacted tax rates expected to apply
              to  taxable   income  in  the  years  in  which  those   temporary
              differences are expected to be recovered or settled. The effect on
              deferred tax assets and deferred  tax  liabilities  of a change in
              tax rates is  recognized in income in the period that includes the
              enactment date.

              During the quarter ended  September 30, 2007, the Company  adopted
              FASB  Interpretation  (FIN) No. 48,  Accounting for Uncertainty in
              Income Taxes - An Interpretation of FASB No. 109, which contains a
              two-step  approach to  recognizing  and  measuring  uncertain  tax
              positions  taken or  expected  to be taken  in a tax  return.  The
              adoption of this standard had no material  impact on the Company's
              financial statements.

              The Company performed an in-depth  valuation analysis based on the
              outcome of fiscal year 2008 to determine if a valuation  allowance
              was  required  under  FAS  109.  Using  a"more  likely  than  not"
              criteria,  management  determined that no valuation  allowance was
              required for the fiscal year ended June 30, 2008.


                                      F-8
<PAGE>

       (n)    Stock Based Compensation

              Stock-based  compensation cost is measured at grant date, based on
              the fair value of the award,  and is recognized  over the employee
              requisite  service  period.  The Company  recognized  $312,495 and
              $11,027 in  stock-based  compensation  during for the years  ended
              June 30, 2008 and 2007,  respectively,  as selling,  general,  and
              administrative   expenses  in  the   consolidated   statements  of
              operations. The stock-based compensation includes amounts for both
              restricted stock and stock options under SFAS No. 123(R).

              Restricted Stock
              ----------------

              On July 1, 2007,  the  Company  granted  220,000  shares of common
              stock to  employees  with an  estimated  value of $1.08 per share.
              This stock had a ninety day vesting  period.  On July 1, 2007, the
              Company  also  granted  80,000  shares  of  common  stock  with an
              estimated value of $1.08 per share,  which vested over a four-year
              period in annual  installments  of 20,000  shares per year.  As of
              June 30, 2008,  $41,400 in unrecognized  stock-based  compensation
              from the  unvested  shares is expected to be  recognized  over the
              remainder of the four-year period.

              Stock Options
              -------------

              In December 2004, the Financial  Accounting Standards Board issued
              Statement of Financial  Accounting  Standards  (SFAS) No.  123(R),
              "Share-Based Payment", which amended SFAS No. 123, "Accounting for
              Stock Based  Compensation",  which the Company  adopted on July 1,
              2006.  This  amendment   requires  the  Company  to  recognize  as
              compensation  expense the fair value of stock options  granted for
              compensation  to  employees  (fair  value  method).  Prior to this
              amendment and in  accordance  with SFAS No. 123, the Company opted
              to recognize as compensation  expense the intrinsic value of stock
              options  granted as  compensation  to employees  (intrinsic  value
              method),  and to disclose as pro forma compensation the fair value
              of those stock  options.  The Company  recognizes as  compensation
              expense the fair value of stock options granted as compensation to
              non-employees.  The expense for SFAS No. 123(R) is included in the
              restricted stock section of this note.

       (o)    Concentration of Risk

              In the normal course of business,  the Company provides  unsecured
              credit terms to its customers. Most of the Company's customers are
              involved in the medical  industry.  The Company  performs  ongoing
              credit  evaluations of its customers and maintains  allowances for
              possible losses which,  when realized,  have been within the range
              of management's  expectations.  The Company  maintains its cash in
              bank deposit accounts which at times may exceed federally  insured
              limits.  The  Company  has  not  experienced  any  losses  in such
              accounts.   The  Company   believes  it  is  not  exposed  to  any
              significant credit risks on cash or cash equivalents.

       (p)    Operating Segments

              The Company  operates in one line of  business,  the  development,
              marketing,  and  distribution of a broad line of medical  products
              for the physical  therapy and  aesthetics  markets.  As such,  the
              Company has only one  reportable  operating  segment as defined by
              SFAS No. 131,  Disclosures  about  Segments of an  Enterprise  and
              Related Information.

              The Company groups their sales into physical medicine products and
              aesthetic  products.  Physical medicine products  consisted of 89%
              and 87% of net sales for the years  ended June 30,  2008 and 2007,
              respectively.  Aesthetics  products  consisted of 4% and 7% of net
              sales for the years  ended June 30,  2008 and 2007,  respectively.
              Chargeable  repairs,  billable  freight  and  other  miscellaneous
              revenue  account for the remaining 7% and 6% of total  revenues in
              the years ended June 30, 2008 and 2007, respectively.


                                      F-9
<PAGE>

       (q)    Use of Estimates

              Management  of the  Company  has made a number  of  estimates  and
              assumptions  relating  to the  reporting  of assets,  liabilities,
              revenues and expenses and the disclosure of contingent  assets and
              liabilities  to prepare these  financial  statements in conformity
              with accounting principles generally accepted in the United States
              of  America.  Significant  items  subject  to such  estimates  and
              assumptions  include the carrying amount of property,  plant,  and
              equipment; valuation allowances for receivables, income taxes, and
              inventories;  accrued  product  warranty  reserve;  and  estimated
              recoverability of goodwill. Actual results could differ from those
              estimates.

       (r)    Advertising Cost

              Advertising  costs are expensed as incurred.  Advertising  expense
              for the  years  ended  June 30,  2008  and 2007 was  approximately
              $286,700 and $177,000, respectively.

(2)    Inventories

       Inventories consist of the following:

                                                     2008             2007
                                                --------------   ---------------

             Raw materials                      $    2,984,189        2,961,653
             Finished goods                          3,636,597        2,646,141
             Inventory reserve                        (337,718)        (293,810)
                                                --------------   ---------------
                                                $    6,283,068        5,313,984
                                                ==============   ===============

(3)    Property and Equipment

       Property and equipment consist of the following:

                                                     2008             2007
                                                --------------   ---------------

             Land                               $      354,743          354,743
             Buildings                               3,682,504        3,603,380
             Machinery and equipment                 1,661,962        1,521,601
             Office equipment                        1,283,821        1,147,667
             Vehicles                                  188,148           95,124
                                                --------------   ---------------
                                                     7,171,178        6,722,515
             Less accumulated depreciation
             and amortization                        3,644,025        3,269,020
                                                --------------   ---------------
                                                $    3,527,153        3,453,495
                                                ==============   ===============

(4)    Product Warranty Reserve

       A reconciliation  of the changes in the product warranty reserve consists
of the following:

                                                     2008             2007
                                                --------------   ---------------
             Beginning product warranty
              reserve balance                   $      208,000          208,000
             Warranty repairs                         (280,746)        (270,124)
             Warranties issued                         232,077          256,027
             Changes in estimated
              warranty costs                            49,837           14,097
                                                --------------   ---------------
                 Ending product warranty
                  reserve balance               $      209,168          208,000
                                                ==============   ===============


                                      F-10
<PAGE>

(5)    Line of Credit

       The Company has a revolving  line of credit  facility  with a  commercial
       bank in the amount of $8 million.  Borrowing limitations are based on 45%
       of eligible inventory and up to 80% of eligible accounts  receivable.  At
       June 30, 2008 and 2007, the outstanding  balance was  approximately  $5.8
       million and $-0-,  respectively.  The line of credit is collateralized by
       inventory and accounts  receivable  and bears interest at a rate based on
       the bank's  "prime  rate." The interest rate was 6% and 8.75% at June 30,
       2008 and 2007,  respectively.  This line is subject to bi-annual  renewal
       and matures on December 15, 2008. Accrued interest is payable monthly.

       The  Company's  revolving  line of credit  agreement  includes  covenants
       requiring the Company to maintain certain  financial  ratios.  As of June
       30, 2008,  the Company was in compliance  with its loan  covenants or had
       received waivers from the commercial lender.

       The acquisition of Rajala Therapy Sales Associates, Inc on June 30, 2007,
       included a line of credit  with a balance  due of $250,000 as of June 30,
       2007. The Rajala line of credit was subsequently paid off and canceled in
       July 2007.

(6)    Long-Term Debt

       Long-term debt consists of the following:

                                                     2008             2007
                                                --------------   ---------------

           9.11% promissory note secured
           by building, maturing December
           2017, payable in monthly
           installments beginning at $11,388    $    1,453,372        1,500,000

           6.44% promissory note secured
           by trust deed on real property,
           maturing January 2021, payable
           in monthly installments of $13,278        1,371,479        1,440,070

           6.21% promissory note secured
           by a trust deed on real property,
           maturing November 2013, payable
           in decreasing installments
           currently at $7,373                         383,911          442,803

           12.17% promissory note secured
           by fixed assets, payable in
           monthly installments of $2,009
           through September 2012                       79,692                -

           5.84% promissory note secured
           by a trust deed on real
           property, payable in monthly
           installments of $8,669
           through November 2008                        42,425          140,737

           16.35% promissory note secured
           by fixed assets, payable in
           monthly installments of $409
           through October 2011                         12,534                -

                                                --------------   ---------------
             Total long-term debt                    3,343,413        3,523,610

       Less current installments                       297,413          271,979
                                                --------------   ---------------

             Long-term debt, excluding
             current installments               $    3,046,000        3,251,631
                                                ==============   ===============

       The  aggregate  maturities  of  long-term  debt  for  each  of the  years
       subsequent to 2008 are as follow: 2009, $297,413;  2010, $275,933;  2011,
       $298,708; 2012, $320,066; 2013, $325,759 and thereafter $1,825,534.


                                      F-11
<PAGE>

(7)    Leases

       The  Company  leases   vehicles  under   noncancelable   operating  lease
       agreements.  Lease expense for the years ended June 30, 2008 and 2007 was
       $30,489  and  $28,736,  respectively.   Future  minimum  rental  payments
       required  under  noncancelable  operating  leases  that have  initial  or
       remaining  lease  terms in excess of one year as of 2008 are as  follows:
       2009,  $23,608;  2010,  $15,906;  2011,  $15,231;  2012, $7,809 and 2013,
       $6,507.

       The Company rents office,  warehouse,  storage space and office equipment
       under agreements which run one year or less in duration. The rent expense
       for the years  ended  June 30,  2008 and 2007 was  $259,816  and  $7,361,
       respectively.

       The office and warehouse spaces in Girard,  Ohio,  Detroit,  Michigan and
       Pleasanton,   California   are   leased   on   an   annual   basis   from
       employees/shareholders,  or entities controlled by shareholders, who were
       previously principals of the dealers acquired in June and July, 2007. The
       leases    create    a    related    party    transaction    with    three
       employee/shareholders,  however the lease  agreements have been conducted
       on an arms-length basis and the terms are equal to or more favorable than
       would be available to other third parties.

(8)    Goodwill and Other Intangible Assets

       Goodwill.  The cost of acquired  companies in excess of the fair value of
       the net assets and purchased  intangible  assets at  acquisition  date is
       recorded as goodwill.  As of June 30, 2002,  the Company had net goodwill
       of  $789,422  arising  from  the  acquisition  of  Superior   Orthopaedic
       Supplies,  Inc.  on May 1, 1996 and the  exchange  of  Dynatronics  Laser
       Corporation common stock for a minority interest in Dynatronics Marketing
       Corporation  on June 30,  1983.  On June 30,  2007 the  Company  recorded
       goodwill in the amount of $1,969,150 in conjunction  with the acquisition
       of Rajala Therapy Sales Associates,  Inc. and on July 2, 2007 the Company
       recorded  additional  goodwill  of  $3,877,894  in  conjunction  with the
       acquisitions  of  Responsive  Providers,  Inc.,  Therapy  and Health Care
       Products,  Inc.,  Cyman Therapy,  Inc., Al Rice and Associates,  Inc. and
       Theratech Inc.

       As  described  in note  1(g),  the  Company  determined  that a  goodwill
       impairment  charge of  approximately  $6.6 million was  indicated for the
       period ended June 30, 2008 effectively eliminating all booked goodwill as
       of June 30, 2008.

       Identifiable  Intangibles.  Identifiable  intangibles assets, included in
       other assets, consists of the following:

                                                    As of             As of
                                                June 30, 2008     June 30, 2007
                                                --------------   ---------------

       Trade name - 15 years                    $      339,400          118,000
       Domain name - 15 years                            5,400            1,200
       Non-compete covenant - 4 years                  149,400          114,000
       Customer relationships - 7 years                120,000           89,000
       Trademark licensing agreement - 20 years         45,000              -0-
       Backlog of orders - 3 months                      2,700            2,700
       Customer database - 7 years                      38,100            8,700
       License agreement - 10 years                     73,240           73,240
                                                --------------   ---------------
          Total identifiable intangibles               773,240          406,840
       Less accumulated amortization                   142,059           50,048
                                                --------------   ---------------
                  Net carrying amount           $      631,181          356,792
                                                ==============   ===============



                                      F-12
<PAGE>

       Amortization  expense  associated with the license  agreement was $92,011
       and  $7,324  for  2008 and  2007,  respectively.  Estimated  amortization
       expense for the  identifiable  intangibles  is expected to be as follows:
       2009, $89,311; 2010, $89,311; 2011, $83,207; 2012, $44,637; 2013, $44,637
       and thereafter $280,078.

(9)    Income Taxes

       Income tax expense (benefit) for the years ended June 30 consists of:

                                   Current         Deferred           Total
                                -------------   --------------   ---------------
       2008:
           U.S. federal         $      (9,082)      (1,201,989)      (1,211,071)
           State and local             11,016         (271,729)        (260,713)
                                -------------   --------------   ---------------
                                $       1,934       (1,473,718)      (1,471,784)
                                =============   ==============   ===============
       2007:
           U.S. federal         $    (134,760)         (32,576)        (167,336)
           State and local            (14,430)          (4,435)         (18,865)
                                -------------   --------------   ---------------
                                $    (149,190)         (37,011)        (186,201)
                                =============   ==============   ===============

       Actual  income tax expense  (benefit)  differs  from the  "expected"  tax
       expense (benefit) (computed by applying the U.S. federal corporate income
       tax rate of 34% to income before income taxes) as follows:

                                                     2008              2007
                                                --------------   ---------------

      Expected tax expense (benefit)            $   (3,371,289)         (92,223)
      State taxes, net of federal tax
      benefit                                         (172,071)         (12,450)
      Officers' life insurance                          (3,916)          (3,479)
      Non-deductible portion of goodwill
      impairment charge                              2,035,542              -0-
      Other, net                                        39,950          (78,049)
                                                --------------   ---------------
                                                $   (1,471,784)        (186,201)
                                                ==============   ===============

       Deferred income tax assets and liabilities  related to the tax effects of
temporary differences are as follows:

                                                     2008              2007
                                                --------------   ---------------
       Net deferred tax asset - current:
          Inventory capitalization for
          income tax purposes                   $       84,285           62,447
          Inventory reserve                            139,820          117,348
          Warranty reserve                              81,576           77,584
          Accrued product liability                      7,126           12,521
          Charitable contribution                        4,181            2,846
          Allowance for doubtful accounts              160,312          123,410
                                                --------------   ---------------
              Total deferred tax asset -
              current                           $      477,300          396,156
                                                ==============   ===============


                                      F-13
<PAGE>

       Net deferred tax asset (liability)
         - non-current:
         Deferred compensation                  $      177,597          156,835
         Property and equipment, principally
         due to differences in
         depreciation                                 (246,853)        (488,896)
         R&D credit carryover                          120,269           40,752
         Restricted stock                                6,004              -0-
         Other intangibles                            (239,972)             -0-
         Non-compete and goodwill                        1,375            1,974
         Other                                          (7,087)             -0-
         Operating loss carry forwards               1,116,718              -0-
                                                --------------   ---------------
              Total deferred tax asset
              (liability) - non-current         $      928,051         (289,335)
                                                ==============   ===============

       In  assessing  the  realizability  of  deferred  tax  assets,  management
       considers  whether it is more likely than not that some portion or all of
       the deferred tax assets will not be realized. The ultimate realization of
       deferred tax assets is dependent  upon the  generation of future  taxable
       income  during the periods in which those  temporary  differences  become
       deductible.  Management  considers the scheduled reversal of deferred tax
       liabilities, projected future taxable income, and tax planning strategies
       in making this  assessment.  Based upon the level of  historical  taxable
       income and  projections  for future taxable income over the periods which
       the deferred tax assets are  deductible,  management  believes it is more
       likely  than not that the  Company  will  realize  the  benefits of these
       deductible differences.

(10)   Major Customers and Sales by Geographic Location

       During the fiscal years ended June 30, 2008 and 2007, sales to any single
       customer did not exceed 10% of total net sales.

       Sales in the United  States and other  countries  were  approximately  98
       percent  and 2  percent  for the  fiscal  year  ended  June 30,  2008 and
       approximately 95 percent and 5 percent for the fiscal year ended June 30,
       2007.

 (11)  Common Stock and Stock Equivalents

       On July 15, 2003, the Company  approved an open-market  share  repurchase
       program for up to $500,000 of the Company's common stock. On November 27,
       2007 the board approved an additional  $250,000 for the open-market share
       repurchase program after the original $500,000 was exhausted.  During the
       year ended June 30, 2008,  the Company  acquired and retired  $280,440 of
       common stock.  During the year ended June 30, 2007, the Company  acquired
       and retired $244,682 of common stock.

       During the years ended June 30, 2008 and 2007, the Company  granted 7,764
       and 7,476 shares of restricted common stock to directors as compensation,
       respectively.

       The Company  maintains a 2005  equity  incentive  plan for the benefit of
       employees.  Incentive and nonqualified  stock options,  restricted common
       stock,  stock  appreciation  rights,  and other share-based awards may be
       granted   under  the  Plan.   Awards   granted  under  the  Plan  may  be
       performance-based.  Effective  November  27, 2007 the plan was amended to
       increase the number of shares available by one million shares as approved
       by the  shareholders  votes.  At June 30, 2008,  908,180 shares of common
       stock were  authorized  and reserved for  issuance,  but were not granted
       under the terms of the 2005 equity incentive plan as amended.

       The Company granted options to acquire common stock under its 2005 equity
       incentive  plan for fiscal 2008 and 2007.  The options are granted at not
       less  than  100% of the  market  price of the stock at the date of grant.
       Option terms are determined by the board of directors, and exercise dates
       may range from six months to ten years from the date of grant.



                                      F-14
<PAGE>

       The fair value of each  option  grant is  estimated  on the date of grant
       using  the   Black-Scholes   option-pricing   model  with  the  following
       assumptions:

                                                     2008              2007
                                                --------------   ---------------

             Expected dividend yield                        0%               0%
             Expected stock price volatility            55-57%           55-58%
             Risk-free interest rate              3.51 - 4.03%     4.50 - 5.03%
             Expected life of options                 10 years          7 years


       The weighted  average fair value of options  granted during 2008 and 2007
       was $.74 and $.75, respectively.

       The following table summarizes the Company's stock option activity during
       the years ended June 30, 2008 and 2007:
<TABLE>
<CAPTION>
                                            2008                               2007
                                ------------------------------   ---------------------------------
                                                   Weighted                           Weighted
                                   Number           average          Number            average
                                  of shares     exercise price     of shares        exercise price
                                -------------   --------------   ---------------   ---------------
       <S>                      <C>             <C>              <C>               <C>
       Options outstanding at
         beginning of year          1,048,192   $         1.40         1,129,858   $         1.42
       Options granted                648,370             1.07            40,959             1.22
       Options exercised             (251,499)             .83            (1,664)            1.02
       Options canceled or
         expired                     (343,460)            1.14          (120,961)            1.54
                                -------------                    ---------------
       Options outstanding at
         end of year                1,101,603             1.41         1,048,192             1.40
                                =============                    ===============
       Options exercisable at
         end of year                  679,523             1.62         1,041,816             1.39
                                =============                    ===============
       Range of exercise
         prices at end of year                  $  0.73 - 3.00                     $  0.66 - 3.00
</TABLE>

       On August 16, 2000 the Company issued 80,000 options that were outside of
       its stock option plan,  as of June 30, 2008 and 2007 there are 40,000 and
       60,000  options  outstanding  respectively.  The  exercise  price  of the
       options ranges from $2.00 to $4.00. The options expire during fiscal 2009
       through fiscal 2010.

       The  aggregate  intrinsic  value  on the  date  of  exercise  of  options
       exercised  during the years  ended June 30, 2008 and 2007 was $16,757 and
       $383, respectively.

(12)   Employee Benefit Plan

       During  1991,  the  Company  established  a deferred  savings  plan which
       qualifies under Internal Revenue Code Section 401(k). The plan covers all
       employees  of the Company who have at least six months of service and who
       are age 20 or  older.  For 2008  and  2007,  the  Company  made  matching
       contributions of 25% of the first $2,000 of each employee's contribution.
       The  Company's  contributions  to the plan for 2008 and 2007 were $50,212
       and $31,212,  respectively.  Company  matching  contributions  for future
       years are at the discretion of the board of directors.


                                      F-15
<PAGE>

(13)   Salary Continuation Agreements

       As of June 30, 2008 the Company had salary  continuation  agreements with
       two  key  employees.  The  agreements  provide  a  pre-retirement  salary
       continuation income to the employee's designated beneficiary in the event
       that the employee dies before  reaching age 65. This death benefit amount
       is the lesser of $75,000 per year or 50% of the employee's  salary at the
       time of death,  and continues  until the employee  would have reached age
       65. The agreements also provide the employee with a 15-year  supplemental
       retirement  benefit  if the  employee  remains in the  employment  of the
       Company until age 65.  Estimated  amounts to be paid under the agreements
       are being accrued over the period of the employees' active employment. As
       of 2008  and  2007,  the  Company  has  accrued  $455,377  and  $420,470,
       respectively, of deferred compensation under the terms of the agreements.

(14)   Acquisition and Non-Cash Disclosure

       On July  2,  2007,  the  Company  completed  the  acquisitions  of a 100%
       interest  in  five  of  its  key  independent  distributors,   Responsive
       Providers, Inc. of Houston, Texas, Therapy and Health Care Products, Inc.
       of Youngstown,  Ohio, Cyman Therapy,  Inc. of Detroit,  Michigan, Al Rice
       and  Associates,  Inc. of  Jeffersonville,  Indiana and Theratech Inc. of
       Minneapolis,  Minnesota.  The  total  consideration  paid  for  the  five
       separately-negotiated   acquisitions  was   approximately   $5.7  million
       comprised of  approximately  $2.4 million in cash and 3,061,591 shares of
       common stock.

       On June 30, 2007, the Company had completed the 100% interest acquisition
       of its largest independent  distributor,  Rajala Therapy Sales Associates
       of Pleasanton,  California (Rajala).  The Rajala purchase was $2,695,002,
       paid through a $1 million cash obligation and the issuance of 1.5 million
       shares of the Company's common stock.

       The acquisition value of the dealers acquired was accounted for using the
       purchase  method  of  accounting.  Accordingly,  the  purchase  price was
       assigned to the assets acquired and the liabilities assumed based on fair
       market  values at the purchase  date.  The following  table  reflects the
       estimated fair values of the assets acquired and the liabilities  assumed
       as of the acquisition dates:

                                                 July 2, 2007     June 30, 2007
                                                 Acquisitions      Acquisition
                                                --------------   ---------------

       Cash                                     $      651,828           67,839
       Trade accounts receivable                     1,160,976          900,322
       Inventories                                   1,192,639          573,356
       Prepaid expenses                                  4,782           42,629
       Property and equipment                          112,764           19,766
       Intangible assets - weighted
         average 9 years                               366,400          333,600
       Cash surrender value of life insurance          207,563              -0-
       Goodwill                                      3,512,779        1,876,734
                                                --------------   ---------------
       Total assets acquired                         7,209,731        3,814,246
       Line of credit                                      -0-         (250,000)
       Accounts payable and accrued expenses        (1,496,800)        (869,244)
                                                --------------   ---------------
       Net assets acquired                           5,712,931        2,695,002
                                                ==============   ===============


                                      F-16
<PAGE>

       The July 2, 2007 acquisitions  resulted in a $175,188 deferred income tax
       liability  and a  corresponding  increase to goodwill of $175,188 for the
       fiscal year ended June 30, 2008. The June 30, 2007  acquisition  resulted
       in a $7,757 current income tax benefit and a $100,173 deferred income tax
       liability,  the net amount of which was recognized as a $92,416  increase
       to goodwill in the fiscal year ended June 30, 2007.

       Unaudited pro forma  results of  operations  for the years ended June 30,
       2008 and 2007, as though the six acquired dealers had been acquired as of
       July 1, 2006, are as follows:

                                                     2008             2007
                                                --------------   ---------------

       Net sales                                $   32,592,507       26,531,492
       Net income (loss)                            (8,443,771)         (85,402)
       Basic and diluted net income (loss)
         per common share                                 (.62)            (.01)

(15)   Recent Accounting Pronouncements

       In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
       SFAS 157 defines fair value,  establishes a framework for measuring  fair
       value,  and  expands   disclosure   requirements   regarding  fair  value
       measurement.  Where  applicable,  this statement  simplifies and codifies
       fair value  related  guidance  previously  issued within United States of
       America generally accepted accounting  principles.  SFAS 157 is effective
       for financial statements issued for fiscal years beginning after November
       15, 2007, and interim  periods within those fiscal years.  The Company is
       currently  reviewing  SFAS 157 and has not yet determined the impact that
       the  adoption  of SFAS 157 will  have on its  results  of  operations  or
       financial condition.

       In December 2007, the FASB Statement 141R, "Business Combinations" ("SFAS
       141R") was issued.  SFAS 141R  replaces  SFAS 141. SFAS 141R requires the
       acquirer of a business to recognize and measure the  identifiable  assets
       acquired,  the liabilities assumed,  and any non-controlling  interest of
       the acquired company at fair value.  SFAS 141R also requires  transaction
       costs  related to the  business  combination  to be expensed as incurred.
       SFAS 141R applies  prospectively  to business  combinations for which the
       acquisition  date  is on or  after  the  beginning  of the  first  annual
       reporting  period  beginning on or after December 15, 2008. The effective
       date for the Company will be January 1, 2009. We have not yet  determined
       the impact of SFAS 141R  related to future  acquisitions,  if any, on our
       consolidated financial statements.

       In  December  2007,  the  FASB  issued  SFAS  No.  160,  "Non-controlling
       Interests in Consolidated  Financial Statements - An Amendment of ARB No.
       51," which establishes  accounting and reporting standards to improve the
       relevance,  comparability,  and transparency of financial  information in
       its consolidated financial statements.  This is accomplished by requiring
       all  entities,   except   not-for-profit   organizations,   that  prepare
       consolidated  financial  statements to (a) clearly  identify,  label, and
       present  ownership  interests in subsidiaries  held by parties other than
       the parent in the  consolidated  statement of financial  position  within
       equity,  but separate from the parent's equity,  (b) clearly identify and
       present both the parent's and the non-controlling's interest attributable
       consolidated  net  income on the face of the  consolidated  statement  of
       income,  (c)  consistently  account  for  changes in  parent's  ownership
       interest while the parent retains it  controlling  financial  interest in
       subsidiary and for all transactions  that are economically  similar to be
       accounted  for  similarly,  (d)  measure  of any gain,  loss or  retained
       non-controlling   equity   at   fair   value   after  a   subsidiary   is
       deconsolidated,  and (e)  provide  sufficient  disclosures  that  clearly
       identify  and  distinguish  between the  interests  of the parent and the
       interests of the  non-controlling  owners.  This Statement also clarifies
       that a non-controlling  interest in a subsidiary is an ownership interest
       in the  consolidated  entity  that  should be  reported  as equity in the
       consolidated  financial statements.  SFAS No. 160 is effective for fiscal
       years,  and interim periods on or after December 15, 2008. The management
       of the Company does not expect the adoption of this pronouncement to have
       a material impact on its financial statements.



                                      F-17
<PAGE>

       In June 2007, the FASB ratified  Emerging  Issues Task Force (EITF) Issue
       No.  06-11,   "Accounting   for  Income  Tax  Benefits  of  Dividends  on
       Share-Based  Payment Awards."  EITF06-11  requires companies to recognize
       the income tax benefit  realized from  dividends or dividend  equivalents
       that  are  charged  to  retained  earnings  and  paid  to  employees  for
       non-vested  equity-classified  employee  share-based payment awards as an
       increase to  additional  paid-in  capital.  EITF 06-11 is  effective  for
       fiscal years  beginning  after  September 15, 2007.  The Company does not
       expect  EITF  06-11  will  have  a  material   impact  on  its  financial
       statements.

       In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
       Instruments  and Hedging  Activities - an amendment of FASB Statement No.
       133,  ("SFAS No. 161"),  which requires  companies to provide  additional
       disclosures  about its objectives  and  strategies  for using  derivative
       instruments,  how the derivative instruments and related hedged items are
       accounted for under SFAS No. 133,  Accounting for Derivative  Instruments
       and  Hedging  Activities  , and  related  interpretations,  and  how  the
       derivative  instruments  and related  hedged items  affect the  Company's
       financial  statements.  SFAS No. 161 also requires  companies to disclose
       information about credit risk-related contingent features in their hedged
       positions. SFAS No. 161 is effective for fiscal years and interim periods
       beginning after November 15, 2008.  Although the Company will continue to
       evaluate the  application of SFAS No. 161,  management does not currently
       believe  adoption will have a material impact on the Company's  financial
       condition or operating results.

       In April  2008,  the FASB  issued  FSP FAS 142-3,  "Determination  of the
       Useful Life of Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends
       the factors that should be considered in developing  renewal or extension
       assumptions used to determine the useful life of a recognized  intangible
       asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.
       FSP  FAS  142-3  also  requires  expanded   disclosure   related  to  the
       determination  of  intangible  asset  useful  lives.  FSP  FAS  142-3  is
       effective  for  financial  statements  issued for fiscal years  beginning
       after December 15, 2008,  and interim  periods within those fiscal years.
       The Company is currently  evaluating  the impact that the adoption of FSP
       FAS 142-3 will have on its consolidated results of operation,  cash flows
       or financial condition.

       In May 2008,  the FASB issued SFAS No. 162,  The  Hierarchy  of Generally
       Accepted Accounting  Principles.  The new standard is intended to improve
       financial reporting by identifying a consistent framework,  or hierarchy,
       for selecting  accounting  principles  to be used in preparing  financial
       statements  that are  presented in  conformity  with  generally  accepted
       accounting principles for nongovernmental  entities in the United States.
       SFAS No. 162 is  effective 60 days  following  SEC approval of the Public
       Company Accounting Oversight Board Auditing amendments to AU Section 411,
       "The Meaning of Present  Fairly in  Conformity  with  Generally  Accepted
       Accounting  Principles." The Company does not expect adoption of SFAS No.
       162 will have a material impact on the Company's  consolidated  financial
       statements.






                                      F-18





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