<PAGE>
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[ X ]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

For the fiscal year ended: December 31, 1999                  or

[  ]    Transition Report Pursuant to Section 13 or 15 (d) of the Securities
        Exchange Act of 1934

For the transition period from       to
                               -----    -----

Commission File Number:    0-12806

                           DYNATEC INTERNATIONAL, INC.
               (Exact name of registrant specified in its charter)

             UTAH                                      87-0367267
----------------------------------          ---------------------------------
(State or other jurisdiction of             (IRS employer identification no.)
incorporation or organization)

      3820 Great Lakes Drive
       Salt Lake City, Utah                              84120
----------------------------------          ---------------------------------
(Address of principal executive offices)               (Zip Code)

                                 (801) 973-9500
              (Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $0.01 per share)

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

         Check if  disclosure  of  delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosures  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]

         Registrant's revenues for the year ended December 31, 1999 were
$14,770,244

         The aggregate  market value of the voting stock held by  non-affiliates
of the Registrant,  based upon the average bid and ask price of the Common Stock
on March 13, 2000 as reported on The Nasdaq Stock Market (R), was $ 13,527,387.

         The Company had 5,038,679  shares of common stock  outstanding at March
13, 2000.

         Transitional small business disclosure format.              Yes   X  No
                                                              ------      ---



                                       1
<PAGE>



                                TABLE OF CONTENTS

PART I.

Item 1.   Description of Business .............................................3

Item 2.   Description of Property ............................................13

Item 3.   Legal Proceedings...................................................13

Item 4.   Submission of Matters to a Vote of Security Holders.................15

PART II.

Item 5.   Market for Common Equity and Related Stockholder Matters............16

Item 6.   Management's Discussion and Analysis or Plan of Operations..........17

Item 7.   Financial Statements................................................25

Item 8.   Changes In and Disagreements With Accountants on Accounting and
          Financial Disclosure................................................52


PART III.

Item 9.   Directors and Executive Officers; Compliance With Section 16(a) of
          the Exchange Act....................................................53

Item 10.  Executive Compensation..............................................56

Item 11.  Security Ownership of Certain Beneficial Owners and Management......58

Item 12.  Certain Relationships and Related Transactions......................60

Item 13.  Exhibits and Reports on Form 8-K....................................61



                                       2
<PAGE>



                                     PART I

Item 1.   Description of Business

General

         Dynatec International, Inc., a Utah corporation ("Dynatec" or the
"Company"), is a Salt Lake City, Utah based manufacturer and distributor of
consumer products. The Company has four wholly owned subsidiaries: Softalk,
Inc., Arnco Marketing, Inc., Nordic Technologies, Inc. and SofTalk
Communications, Inc. During the year ended December 31, 1999 the Company
conducted most of its operations through its subsidiaries.

         The Company is engaged primarily in the manufacture and distribution of
the following consumer product lines:  telecommunication headsets and amplifiers
and other  telephone  accessories,  home  storage and  organization  and premium
flashlights.  The Company also from time to time distributes other miscellaneous
products sold to mass market merchandisers.  For information about the Company's
industry segments and operations in different geographical areas, see Note 12 to
the Company's  consolidated  financial  statements,  entitled  "Business Segment
Information."

Seasonality

         The Company's business is seasonal.  The Company typically  experiences
its highest  sales volume in the fourth  quarter of each year as a result of the
retail environment in which most of its customers conduct business.  Because the
Company sells its products  primarily to major  retailers,  the Company's  sales
performance is  significantly  dependent on the performance of those  retailers.
Accordingly,  the fourth quarter is a key  determinate to overall  profitability
for the year.

Telecommunication Headsets and Amplifiers and Telephone Accessories

         Historically, the manufacture and distribution of telephone accessories
have been the principal  source of revenues for the Company.  The Company's lead
product in this line has been a group of soft  plastic  shoulder  rests that are
attached  to a  telephone  handset  by  use  of  a  proprietary  adhesive  strip
manufactured  for the Company by 3M.  These  products  are designed to ease neck
strain  suffered by people who,  needing  both hands free while they talk on the
telephone, hold the handset between their ear and shoulder by bending their neck
toward their  shoulder.  These  telephone  shoulder  rest products are currently
manufactured  and  distributed  by the Company under the trade names of "Softalk
(TM) ",  "Mini-Softalk (TM) ", "Softalk II (R)" and "Universal Phones Rest (R)",
and are available in a variety of colors,  sizes and styles. The Company owns or
licenses the patent rights used in the  manufacture  of the  telephone  shoulder
rest product line, and  manufactures  these products at its Salt Lake City, Utah
headquarters.

         The Company's telephone accessory product line also includes "Twisstop"
and "Cord Manager(R)" products. The Twisstop product is a plastic connector that
plugs into a telephone handset and allows the telephone cord to twist around the
axis of the  connector  to the effect  that the  telephone  cord does not become
tangled.  The  Company  licenses  the  patents  used in the  manufacture  of the
Twisstop  product from a third party.  The Cord Manager product is a disk-shaped
device approximately two inches in diameter that plugs into a telephone handset.
Coiled  inside the Cord Manager is telephone  cord of  approximately  25 feet in
length.  The product is designed to allow the telephone user to have the benefit
of a relatively  long telephone  cord, but avoid the hassles  associated  with a
normal cord of such length.

         The Company's  line of telephone and computer  headset  amplifiers  and
headset telephones are designed to supplement or replace  traditional  telephone
handsets allowing increased flexibility for the user, particularly users who can
benefit from having their hands free while they use the telephone. Such products
currently  are  distributed  by the Company  under the trade names of "Tele-Link
(TM)", "Computer-Link (TM)", "Power-Link (TM)", and "Power Phone(TM)".

         For  the   year   ended   December   31,   1999,   revenues   from  the
telecommunication headsets and amplifiers and telephone accessories product line
accounted for 49.6% of the Company's  total revenues and 46.1% of total revenues
for the year ended  December 31,  1998.  Major  customers  for this product line


                                       3
<PAGE>

include  United  Stationers,  SP Richards,  Boise  Cascade,  Staples,  Corporate
Express, and Lucent Technologies.  In addition, the Company sells these products
through several catalogs of major office products providers.

Home Storage and Organization

         The Company's home storage and  organization  product line includes the
following products:

         >>       "Expand-A-Shelf"               >>       "The Wedge"
         >>       "Mini Expand-A-Shelf"          >>       "Super Wedge"
         >>       "Mega Expand-A-Shelf"          >>       "Medicine Cabinet
                                                           Organizer"
         >>       "Expandable Book Shelf"        >>       "Drawer Organizer"
         >>       "Sofstop"                      >>       "Cover-Up"
         >>       "Expand-A-Drawer"              >>       "Easy Reach Roll-Out"
                                                           shelves
         >>       "Hide It"
         >>       "Expanding-Roll-Out"

         These products are designed to promote  convenience  and comfort in the
home by helping  people take better  advantage  of limited  space by  organizing
drawers,  closets and shelves and  providing  other useful home products such as
door stops.  The products in this line are  typically  custom  manufactured  for
Dynatec by Norco  Injection  molding,  a  California  company,  and by offshore,
nonaffiliated  manufacturers  using  proprietary  third party  designs  that the
Company licenses.

         For the year ended December 31, 1999, the home storage and organization
product line accounted for 31.5% of the Company's  total  revenues,  compared to
28.4% of Company  revenues for the year ended December 31, 1998.  These products
generally are distributed directly to retail stores, distributors,  and catalogs
including Bed Bath & Beyond, Wal-Mart,  National Manufacturing, Container Store,
Linens N Things, Lechters, Lowe's Companies Inc. and others.

Flashlights

         Through  its  Nordic  Technologies,   Inc.   subsidiary,   the  Company
manufactures  and markets a broad  range of  specialty  and  premium  flashlight
products and  accessories  under the trademark  "Nordic  Lites." These  products
include water and impact  resistant  aluminum  flashlights that operate on "AA",
"C"  and "D"  batteries,  specialty  flashlights  that  have  such  features  as
focusable beams and flexible handles, and ordinary plastic flashlights. In 1998,
the Company began offering flashlight  packages containing multiple  flashlights
and related  accessories  bundled  together in a convenient  storage and display
container.  The Company's  flashlight product line, including such package units
is presently marketed to major retailers and warehouse shopping customers. Major
customers  for  the  flashlight  products  include  Lowe's  Companies,   Aladdin
Industries, Radio Shack, Barjan L.P. Products, and The Home Depot.

         The Company entered the flashlight business in December 1996, when it's
subsidiary  acquired  substantially all of the assets of Nordic Lights,  Inc., a
Texas  corporation.  In July 1997,  the Company  sold the assets it had acquired
from  Nordic  Lights  that  were  located  in Ft.  Worth,  Texas,  and moved the
manufacturing of the Company's core line of aluminum flashlights entirely to the
offshore  facilities of an  unaffiliated  party,  which  continues to supply the
Company's  flashlights.  The Company believes that it was able to take advantage
of more economical and efficient manufacturing relationships with Asian sources.
Presently,  although the Company does some packaging of its flashlight products,
all  manufacturing  is sourced  from such  third  parties.  Sales of  flashlight
products for the year ended December 31, 1999 were  $1,809,777,  or 12.3% of the
Company's  total  revenues and 6.0% of revenues for the year ended  December 31,
1998.



                                       4
<PAGE>

         Miscellaneous/Mass Market

         In  addition  to its  telecommunication  accessory,  home  storage  and
flashlight  product  lines,  the Company  also has been  involved in what it has
identified as a "Miscellaneous/Mass Market" product line that included commodity
type products sold to national  mass-market  merchandisers,  such as Dolgencorp,
Inc. Among the specific  products sold by the Company in  conjunction  with this
product  line  were  single-use  cameras,   audiocassette   tapes,  three  piece
flashlights,  and disposable lighters, all of which products were distributed to
Dolgencorp.  Sales for these types of products  accounted  for 6.7% and 19.6% of
the  Company's  revenues  for the  years  ended  December  31,  1999  and  1998,
respectively.  On  December  24,  1998 the  Company  entered an  agreement  with
Grandway China ("Grandway"),  a Hong Kong enterprise. The agreement provided for
the transfer of  inventory,  distribution  and sales rights of products that the
Company was then supplying to Dolgencorp.  Upon  execution,  Grandway  agreed to
purchase  the  approximately  $1,800,000  of  inventory  earmarked  for  sale to
Dolgencorp.  During the year ended  December  31, 1999  Grandway  purchased  the
entire  remaining   inventory.   Since  the  sale  of  the  remaining  inventory
constituting  the  Miscellaneous/Mass  Market  product  line in early 1999,  the
Company  has not  actively  sought to  further  develop or  participate  in this
segment.  The  Company's  management  does  not  presently  anticipate  that the
Miscellaneous/Mass  Market product line will be a source of material  revenue in
the future.

Subsidiaries of the Company

         During the year ended December 31, 1999, the Company  conducted most of
its  operations  through  its  subsidiaries.  The name of each of the  Company's
subsidiaries,  the  date of  organization  and the  date of  acquisition  by the
Company is set forth in the following table. Dynatec owns 100% of the voting and
other equity securities of each of its subsidiaries.
<TABLE>
<CAPTION>

                                                              Date                      Date Acquired
                       Subsidiary                          Organized                      By Company
         ----------------------------------------    -----------------------    -------------------------------
<S>                                                          <C>                          <C>
         Softalk, Inc. (1)                                    7/15/82                      4/18/83
         Arnco Marketing, Inc. (2)                            7/22/86                      9/30/91
         Nordic Technologies, Inc. (3)                       10/25/96                     10/25/96
         SofTalk Communications, Inc. (4)                    12/23/96                     12/23/96
</TABLE>

         (1)      Engaged in the manufacturing, sourcing and distribution of the
                  telephone  accessory,  hardware/housewares,  and  mass  market
                  products  of the  Company.
         (2)      Arnco Marketing imports and markets Twisstop  to  SofTalk  and
                  others  under  a  license agreement with Recoton Inc.
         (3)      Involved in the research, development and marketing of
                  flashlight products.
         (4)      Engaged in the research, development and marketing of
                  telecommunications products.

Raw Material and Supplies

         The Company uses a premixed plastisol to manufacture the Softalk,  Mini
Softalk, Universal Phone Rest, Sofstop, and Softalk II products.  "Plastisol" is
a  generic  term for the  petroleum  based  raw  material  from  which the vinyl
substance forming the Softalk products is manufactured.

         Other than the Softalk products,  the Company's  products are purchased
in finished  form and  packaged  according to  Dynatec's  specifications  by the
supplier.  In some cases,  Dynatec  purchases  finished product and packages the
product for  distribution at its Salt Lake City  headquarters.  The Company,  to
date, has relied upon  approximately  fifteen primary  suppliers for plastic and
other materials  ordered to specification for its assembly,  manufacturing,  and
marketing  processes.  The Company has not  experienced  any shortage of plastic
products or of Plastisol in the past year,  and does not anticipate any shortage
in the future.  With  respect to finished  products the Company  purchases  from
domestic or foreign manufacturers, which products constitute the majority of the
Company's business, the Company's suppliers of its home organization and storage
products have demonstrated continued  dependability in supplying quality product
in a timely manner.  During 1999, the Company experienced some difficulties with
its  Taiwan-based  supplier  of  finished  flashlight  products.  The  Company's
management believes that these difficulties resulted primarily from the regional
impact of an  earthquake  that occurred in August 1999.  The Company  intends to
continue to source its flashlight  products from such supplier through 2000. The
Company  believes that it could replace that supplier with a domestic  source or
another offshore supplier if necessary.


                                       5
<PAGE>


         The Company anticipates usual,  inflationary  increases in the price of
plastic  products,  the raw  materials  used  to  manufacture  its  flashlights,
freight,  and  packaging  in 2000.  The Company  anticipates  that these  usual,
inflationary  increases will not materially impact the results of operations for
the year ended 2000,  although  there can be no assurance  that the Company will
not encounter raw material or other  manufacturing  delays,  price  increases or
shortages,  or material  increases in shipping costs associated with rising fuel
prices,  any of which could adversely affect the Company's  financial  condition
and operations.



                                       6
<PAGE>



Trademarks and Patents

         The Company currently owns or licenses the following U.S. and foreign
trademarks.

<TABLE>
<CAPTION>

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

Trademarks

                                                                                                     Year of
                                                                                                    Trademark

           Product                                                             Trademark           Expiration
                                                Country                      Granted/Filed         or Renewal
--------------------------------------------------------------------------------------------------------------------
<S>  <C>                                        <C>                            <C>                <C>
     Softalk                                    U.S.A.                         07/20/99           Each 10 Years
                                                Canada                         02/05/81           Each 15 Years
     Sofstop                                    U.S.A.                         08/04/92           Each 10 Years
     The Wedge                                  U.S.A.                         10/20/92           Each 10 Years
     Wall Saver                                 U.S.A.                         07/15/97           Each 10 Years
     Expand-A-Shelf                             U.S.A.                         08/24/95              Pending
     Phoneworks & Design                        U.S.A.                         05/10/96              Pending
     Easy Reach                                 U.S.A.                         11/17/98           Each 10 Years
     Tele Link                                  U.S.A.                         04/10/97              Pending
     Computer Link                              U.S.A.                         04/10/97              Pending
     Power Link                                 U.S.A.                         11/23/99           Each 10 Years
     Power Phone                                U.S.A.                         04/10/97              Pending

     Smart Sound                                U.S.A.                         10/05/99           Each 10 Years
     Softalk Design (Shape)                     U.S.A.                         04/09/96           Each 10 Years
     Mini Softalk Design (Shape)                U.S.A.                         05/21/96           Each 10 Years
     Cord Manager                               U.S.A.                         09/16/97           Each 10 Years
                                                Canada                         10/27/97           Each 15 Years
                                                European Community             08/31/98           Each 8 Years
                                                Japan                          08/07/98           Each 10 Years
     Home Organization                          U.S.A.                         07/23/97              Pending
     NordicLite                                 U.S.A.                         04/03/96              Pending
     Nordic Helmet Design                       U.S.A.                         07/15/97           Each 10 Years
      Smoke Cutter                              U.S.A.                         12/23/97           Each 10 Years
        Nite-Site-Lite                          U.S.A.                         04/25/97           Each 10 Years
        Zoom Switch                             U.S.A.                         09/21/99           Each 10 Years
        See It, Find It, Get It                 U.S.A.                         05/11/98              Pending
        Expand-A-Drawer (Design)                U.S.A.                         04/17/98              Pending
        Color Splash                            U.S.A.                         04/17/98              Pending
</TABLE>






                                       7
<PAGE>



         The Company owns or licenses the following U.S. and foreign patents.


<TABLE>
<CAPTION>
Patents                                                                                              Year of
                                                                                                      Patent
                                                                                Patent             Expiration
Product                                         Country                      Granted/Filed         or Renewal
--------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                            <C>                   <C>
     Universal Softalk                          U.S.A.                         09/06/94               2008
     Softalk II                                 U.S.A.                         02/11/92               2006
     Expand-A-Drawer                            U.S.A.                         04/14/98               2016
     Expand-A-Shelf, Book Edition               U.S.A.                         06/25/96               2010
     Door Protector                             U.S.A.                         02/18/97               2013
     Interchangeable Doorstop                   U.S.A.                         02/18/97               2015
     Zoom Light                                 U.S.A.                         10/27/98               2016
        Slide Focus Flashlight                  U.S.A.                         02/02/99               2016
     Switch w/Spare Bulb Carrier                U.S.A.                         11/14/89               2009
     Flashlight w/Switch Assembly               U.S.A.                         06/27/89               2007
     Flashlight w/Nite-Site-Lite                U.S.A.                         05/07/91               2009
     Cord Manager                               U.S.A.                         02/17/98               2016
                                                Canada                         01/03/00              Pending
     Medicine Cabinet Organizer                 U.S.A.                         07/15/93              Pending
     Spring Wedge                               U.S.A.                         12/11/90               2007
     Expand-A-Drawer Continued                  U.S.A.                         03/30/99               2017
     Expand-A-Drawer                            Canada                         02/19/98              Pending
     Mini Softalk                               U.S.A.                         02/11/92               2006
     Combination Flashlight & Area Lights       U.S.A.                         01/29/99              Pending
     Magnetic Door Stop & Holder                U.S.A.                         05/16/93               2011
     Cover Up                                   U.S.A.                         03/03/87               2001
</TABLE>

Inventory Supply and Backlog Orders

         The Company has followed a standard  policy of shipping within 24 hours
of receipt of payment on orders, or within 48 hours of orders on approved credit
lines with the exception of large home storage and  organization  orders,  which
are filled within two to four weeks,  and large orders for flashlight  products,
which  typically have lead times before  shipment of between 45 and 90 days. The
Company  has been able to ship  within the  foregoing  guidelines  on almost all
occasions, although in 1999 the Company experienced limited shipping delays as a
consequence of disruption  caused by an earthquake in Taiwan in August 1999. The
Company may from time to time need to backorder certain items.

Major Customers

Telecommunication Headsets and Amplifiers and Telephone Accessories

         For the year ended  December 31, 1999,  22.9% of telephone  headset and
accessories   products  were  distributed   through  United  Stationers,   whose
headquarters are at 2200 E. Golf Road, Des Plaines,  IL 60016.  Another 15.4% of
sales in this product line were to S.P. Richards, whose headquarters are at P.O.
Box 1266,  Smyrna, GA 30081.  Boise Cascade,  whose headquarters are at 800 West
Bryn Mawr Road,  Itasca, IL 60143,  accounted for another 13.6% of sales in this
product line.



                                       8
<PAGE>




Home Storage and Organization

         For the year ended  December  31,  1999,  14.5% of the home storage and
organization  products  were  distributed  through Bed,  Bath and Beyond,  whose
headquarters are at 110 Bi-County Blvd.,  Suite 114,  Farmingdale,  NY 11735. An
additional  10.6% of the home storage and  organization  products  sales were to
Wal-Mart, whose headquarters are at 702 S.W. 8th Street,  Bentonville, AR 72716.
National  Manufacturing,  whose headquarters are at 1 First Avenue,  Sterling IL
61081,  accounted  for another  10.2% of the  distribution  of home  storage and
organization products.

Flashlights

         For the year ended December 31, 1999, 18.0% of the flashlight  products
were distributed through Aladdin Industries,  LLC, whose headquarters are at 703
Murfreesboro Road, Nashville, TN 37224. Another 11.0% of the flashlight products
sales were to Lowe's Companies,  Inc., whose  headquarters are at P.O. Box 1111,
N. Wilkesboro, NC 28656.

Miscellaneous/Mass Market

         Grandway China, a Hong Kong enterprise, accounted for substantially all
of the Company's  mass-market  revenues of $992,000 for the year ended  December
31, 1999.

Competitive Conditions in the Market

     The  Company  believes  that it is  engaged  in highly  competitive  market
segments for each of its product  lines.  The generic  design or function of the
telephone  accessory  products  such as Softalk could  probably be  functionally
replicated  without  great  difficulty.  Although  the Company  owns or licenses
patents  covering  certain  aspects of its Twisstop  and Cord Manager  products,
competing products having similar  functionality are readily available.  Many of
the home  organization  products,  as with other  housewares,  must compete with
similar products from other manufacturers. Although the Company believes certain
key  features of these  products  are  proprietary,  used by the  Company  under
license  agreements,  barriers to entry in this segment are  relatively  low and
multiple  products  having  essentially  identical   functionality  are  readily
available.  Competition in this segment is based primarily on marketing strength
and price competitiveness.

         The Company  believes that both the flashlight  and telephonic  headset
markets  are also very  competitive.  However,  the  Company  believes  that its
proprietary rights for both flashlights and headsets,  as well as the innovative
features  of those  products,  enable  the  Company  to compete in each of these
markets.

         In  all  of  the  markets  in  which  it  operates  the  Company  faces
competition  from a  number  of  sources,  many,  if not  most  of  which,  have
substantially more financial and other resources than the Company.

Environmental Regulation

         The Company  believes that it is in compliance  with all  environmental
quality  regulations  pertaining  to such matters as emission,  waste  disposal,
safety equipment, and like procedures.  The Company believes it is in compliance
with all state and local environmental  statutes. The Company also believes that
it is in compliance with all  Occupational,  Safety,  and Health  Administration
standards in its work place.

Employees

         The Company employs a full-time  executive,  sales,  administrative and
clerical staff of 28 people.  The Company also has an average monthly  assembly,
warehouse  and  distribution  staff of  approximately  39 people.  The number of
assembly,  warehouse and  distribution  employees is subject to adjustment based
upon production  demand, and ranged from a high of approximately 43 employees to
a low of approximately 35 employees during the year ended December 31, 1999.


                                       9
<PAGE>


Risk Factors

         There are certain  significant risks facing the Company,  many of which
are  substantial  in  nature.  The  following  risks and  information  should be
considered in connection with the other information contained in this Report.

         Recent Net Losses

         The Company had significant net operating losses in all of fiscal years
1996, 1997, 1998 and 1999. The Company's reported net losses for the years ended
December 31, 1999 and 1998 were  $3,477,545 and $2,245,427,  respectively.  As a
result, the Company had accumulated  deficits of $7,103,300 and $3,625,755 at
December 31, 1999 and 1998, respectively. In early 1999, the Company's executive
management was replaced entirely.  New management continues its efforts to adopt
or implement a variety of business  practices  designed to improve the financial
condition and operating  results of the Company.  Nevertheless,  there can be no
assurance that the Company will be able to achieve growth,  that significant net
losses  will not be incurred in future  operating  periods,  or that the Company
will become profitable in the foreseeable future, if at all.

         Need for Additional Funding

         The Company has operated  with  negative  cash flow for several  fiscal
years  and has  substantial  accumulated  operating  deficits.  To  finance  its
operations,  the Company likely will require additional  financing.  In November
1999,  the Company  completed a sale and lease  transaction of the building that
houses its  corporate  headquarters,  which  transaction  yielded to the Company
approximately $831,000 of proceeds,  which have been used for operating capital.
Additionally,  in February  2000, the Company  completed a private  placement of
restricted common stock that yielded proceeds of $1,600,000, $1,500,000 of which
was used to retire certain  convertible  debentures  issued by the Company,  and
$100,000  of which  was used for  general  working  capital.  See  "Management's
Discussion and Analysis - Liquidity and Capital  Resources." The Company may and
likely will be required to seek additional  sources of financing  through future
offers  and sales of its  equity or debt  securities  or  additional  commercial
credit  arrangements,  to  the  extent  available.  Securities  issued  in  such
offerings could substantially  dilute the holdings of other shareholders.  There
can be no  assurance  that the Company  will be  successful  in  obtaining  such
financing  or that  financing  will be  available to the Company on terms and at
rates that are  favorable  to the Company.  Absent such  funding,  however,  the
Company's ability to continue its operations may be adversely affected.

         Limited Market and Volatility of Stock Price

         The trading price of the Company's  common stock has been and is likely
to continue to be subject to wide fluctuations in response,  among other things,
to variations in the Company's operating results,  material announcements by the
Company or its competitors,  governmental regulatory actions,  conditions in the
Company's  industry,  or other  events or factors,  many of which are beyond the
Company's control.  In addition,  the stock market has historically  experienced
extreme  price and volume  fluctuations  which have  particularly  affected  the
market prices of many public  companies  and which often have been  unrelated to
the operating performance of such companies. Moreover, the Company has a limited
public market,  and sales of a relatively small number of shares of common stock
may adversely affect the prevailing  market price of shares currently issued and
outstanding  and make the  Company's  common stock even more prone to volatility
than the  securities  of other  businesses  in  similar  industries.  Given  the
relatively small amount of trading in the Company's securities,  there can be no
assurance  that  the  prevailing  market  price  of  common  stock  will  not be
artificially inflated or deflated by trading even of relatively small amounts of
common stock. See "Price Range of Common Stock."

         Nasdaq SmallCap Market Delisting

         The Company's common stock is listed on the Nasdaq SmallCap Market.  To
keep the common  stock listed on this  market,  the Company  must meet  Nasdaq's
listing  maintenance  standards  and abide by Nasdaq's  rules  governing  listed
companies.  If the price of the  Company's  common  stock  falls below $1.00 per
share for an  extended  period,  or if the  Company  fails to meet other  Nasdaq


                                       10
<PAGE>

standards or violates Nasdaq rules,  its common stock could be delisted from the
Nasdaq SmallCap  Market.  Additionally,  the corporate  governance rules require
that the  Company  hold a meeting  of its  shareholders  at least  annually,  in
connection  with which the Company  must solicit  proxies.  Although the Company
filed its proxy  statement on Schedule 14A in  anticipation  of a meeting of its
shareholders during 1999, because that filing was being reviewed by the staff of
the Securities and Exchange Commission (the "SEC") in conjunction with a pending
registration  statement,  which never became effective,  the Company was not, in
fact,  able to hold a meeting in 1999.  The Company  therefore is technically in
violation  of Nasdaq's  rules.  Although  the Company  intends to have an annual
meeting  of its  shareholders  in the  first  half of 2000,  has  withdrawn  the
registration  statement and the proxy  materials that were being reviewed by the
SEC staff as recently as January  2000,  and has not been notified by the Nasdaq
Stock Market of any adverse proceeding or consequence, there can be no assurance
that the Company will be able to preserve the listing of its common stock on the
Nasdaq Stock Market.

         If the  Company's  common  stock  were to be  delisted  from the Nasdaq
SmallCap Market,  it would likely continue to be traded in the  over-the-counter
market on an electronic bulletin board established for unlisted securities or in
what are  commonly  referred to as the "pink  sheets." As a result,  an investor
could find it more difficult to dispose of, or to obtain accurate quotations for
the price of, the  Company's  common  stock.  Therefore,  such  delisting  could
adversely affect the prevailing  market price of the common stock or the general
liquidity of an investment in the Company's common stock.

         In addition,  delisting from the Nasdaq  SmallCap Market and failure to
obtain  listing or quotation on such other market or exchange  would subject the
Company's  securities  to  so-called  "penny  stock"  rules.  These rules impose
additional sales practice and market-making  requirements on broker-dealers  who
sell and/or make a market in such  securities.  Consequently,  if the  Company's
common stock were to be delisted from the Nasdaq SmallCap Market, broker-dealers
may be less willing or able to sell and/or make a market in the Company's common
stock and  purchasers  of common stock may have more  difficulty  selling  their
securities  in the  secondary  market,  resulting  in a  decrease  in the market
liquidity of the Company's common stock.

         Possible Adverse Effect of Pending Litigation and Administrative
         Proceedings

         The Company is engaged in litigation outside the ordinary course of its
business, the effect of which on its business condition or results of operations
could be materially  adverse.  Such  litigation  is described  elsewhere in this
Report under the heading  "Legal  Proceedings."  There can be no assurance  that
such litigation and legal proceedings,  either  individually or in the aggregate
could have a material  adverse effect on the operations and financial  condition
of the Company.

         Foreign Operations Risks

         The Company  out-sources  most of its  manufacturing  to  manufacturers
located  outside the United  States.  There are numerous risks  associated  with
conducting business in foreign countries,  including the distance from corporate
headquarters,  problems associated with possible political risks, instability of
local governments, safety of personnel and equipment, the lack of spare parts or
adequate service assistance, the need for skilled labor and supervision, lack of
infrastructure  and  accessibility  to  sources  of  power  and  other  supplies
necessary for operations,  tariff  restrictions,  currency control  regulations,
competing or conflicting  manufacturing and production  standards,  governmental
approval,  licensing and permit requirements and procedures,  high inflation and
currency  fluctuations which may erode profitability  levels, and the difficulty
of obtaining and enforcing  judgments in foreign  courts and under foreign legal
systems that differ  substantially from the United States all add to the risk of
foreign  operations.  Difficulties  arising  out  of any of  these  risks  could
adversely affect the Company's financial condition and operations.

         Competition

         The Company's  current  products are divided into three primary product
lines:  telecommunications amplifiers, headsets and other telephone accessories,
flashlights and home storage and organization products.  Although certain of the
Company's  products  in these  product  lines  are  subject  to  patent or other
intellectual property protections, barriers to entry for competing manufacturers
and distributors are relatively low for the majority of the Company's  products.
See  "Description  of  Business  -  Competition"  Accordingly,  there  can be no


                                       11
<PAGE>

assurance  that  competitors  of the  Company,  many of which are likely to have
substantially greater financial resources, experience and marketing ability will
not  be  able  to  successfully  compete  with  the  Company,  which  successful
competition  could  adversely  affect the  Company's  operations  and  financial
condition.

         Dependence on Licensed Technology

         The Company  depends on licenses  granted by third  parties for certain
key elements of its product line. Some of these license  agreements require that
the Company achieve  minimum sales in order to retain the license rights.  There
can be no assurance that the Company will meet the minimum sales requirements to
avoid  cancellation  of the  licenses  or a change  in its  rights  or that such
license rights will continually be available to the Company.  Certain details of
some of such  licenses are not fully  documented  or were put in place by former
management  with  entities  affiliated  with  prior  management,   but  have  no
affiliation with current management.  The Company may not, therefore, be able to
fully  enforce or  benefit  from its rights  under  such  license  arrangements.
Termination  of any of such  licenses or any  restriction  or  limitation of the
Company's  rights  under such  licenses  or  inability  of the  Company to fully
enforce such  agreements  may  adversely  affect the  Company's  operations  and
financial condition.

         Dependence on Third-Party Manufacturers and Suppliers

         For  the  majority  of  its  products,  the  Company  is  dependent  on
third-party manufacturers to manufacture its products. Most of these third-party
manufacturers  are  located  in  foreign  countries,  primarily  Taiwan.  If any
manufacturer  fails  to  supply  any or all of the  Company's  requirements  for
product, or if the Company's or its manufacturer's suppliers of raw materials or
parts fail to fulfill  the  Company's  requirements  there is no  assurance  the
Company will be able to secure  alternate  sources in a timely  manner.  If such
alternate sources of supply or manufacturing are not available on a timely basis
or on reasonable  economic terms,  the Company's  results of operations could be
adversely affected.

         Government Regulation

         Various aspects of the Company's  business are subject to both domestic
and  foreign  government  regulation  by  such  agencies  as the  Federal  Trade
Commission,  the Federal Communications Commission and taxing authorities,  such
as the Internal Revenue Service. In addition,  as a public company,  the Company
is subject to  reporting  requirements  and other  regulations  promulgated  and
enforced by the SEC. The Company's  failure to comply with such laws,  rules and
regulations  could have a material adverse effect on the Company,  its business,
financial condition and results of operations.  For example, if the Company were
found to be in violation of regulations or other laws governing its business, it
could be assessed with substantial  penalties,  fees and expenses,  temporary or
permanent  suspension of trading in its shares,  or ultimately  interruption  or
shutdown  of some or all of its  operations.  The  Company may also from time to
time obtain and comply  with local,  state,  provincial  and federal  permits or
other  authorizations.  Obtaining  these  permits  can be very  costly  and take
significant  amounts of time. Although the Company foresees no material problems
or delays,  there can be no assurance  that the Company can obtain the necessary
permits  or  continue  existing  operations  or that the  Company  can  maintain
economic  operation in compliance  with the necessary  permits.  There can be no
assurance that future changes in existing law or new legislation  will not limit
or adversely impact the Company's business operations.

         No Dividends

         The Company has never declared or paid any cash dividends on its shares
and does not anticipate paying cash dividends in the foreseeable future.

         Effect of Certain Anti-Takeover Provisions of Utah Law

         Utah,  the state in which the  Company  was  organized,  has  adopted a
"Control Shares  Acquisition Act" (the "Control Shares Act").  This act provides
that any person or entity that  acquires 20% or more of the  outstanding  voting
shares of a publicly held Utah  corporation is denied voting rights with respect
to the acquired shares,  unless a majority of the disinterested  stockholders of
the  corporation  elects to restore such voting  rights.  The  provisions of the
Control Shares Act may discourage companies or persons interested in acquiring a
significant  interest in or control of the Company,  regardless  of whether such




                                       12
<PAGE>

acquisition  may  be  in  the  interest  of  the  Company's  stockholders.   See
"Description of Securities."

Item 2.   Description of Property

         The Company  occupies the  building  located at 3820 Great Lakes Drive,
Salt Lake City, Utah 84120, at which its corporate  headquarters,  manufacturing
and warehouse operations are housed. This facility was built in 1996 on property
purchased  by  the  Company  for  that  purpose.   The  Company's  facility  has
approximately 54,000 square feet, of which approximately 6,000 square feet (11%)
is used for office and  administrative  purposes and 48,000 square feet (89%) is
used for manufacturing, assembly and warehouse area.

         The Company  owned the building  until  November 4, 1999, on which date
the Company  closed a  transaction  providing  for the sale and leaseback of the
building.  The buyer was an unaffiliated  third party and the parties negotiated
the sale and leaseback as an arms-length  transaction.  The total purchase price
for the building was $2,865,000.  The proceeds to the Company,  after payment of
the existing  mortgage,  closing costs,  and brokerage fees  associated with the
sale, were approximately $831,000,  which the Company used for general corporate
purposes as operating capital. The lease is a triple net lease with a term of 20
years.  The initial base rent is $330,000 per year. In connection  with the sale
and leaseback transaction,  and as additional consideration,  the Company issued
33,948 shares of restricted common stock to the buyer.

         The Company  believes  that the  building and property are adequate for
its needs and currently has no plans to renovate the current facility or to find
additional or alternate facilities.

Item 3.   Legal Proceedings

         On  December 7, 1999,  Donald M. Wood,  the former  Chairman  and Chief
Executive  Officer of the  Company,  and the Stith Law Office  (Wood's  personal
legal counsel) filed a lawsuit in the District Court of Salt Lake County,  State
of Utah (Case No. 990912153).  In that lawsuit, Wood and Stith asserted that the
Company has  breached a  Settlement  Agreement  executed by the Company and Wood
upon Wood's  resignation as the Company's  Chairman and Chief Executive Officer,
effective  as of January 14,  1999.  The lawsuit  includes  claims for breach of
contract,  fraud and  intentional  infliction of emotional  distress,  and seeks
money damages and punitive  damages in the aggregate  amount of  $1,162,246.  On
February 7, 2000, the Company filed its answer to the Wood litigation,  in which
the Company asserted that its payment obligations under the Settlement Agreement
were excused by repeated breaches by Wood of various covenants of the Settlement
Agreement.  Simultaneously,  the Company filed a  counterclaim  against Wood for
money damages  incurred by the Company as a result of Wood's various breaches of
the  Settlement  Agreement.  The Company also  simultaneously  filed  motions to
dismiss the fraud and intentional  infliction of emotional  distress claims. The
Company's  management  believes the Wood litigation is without merit and intends
to vigorously defend.

         On March 19, 1999,  Alpha Tech Stock  Transfer  Company  ("Alpha Tech")
filed a lawsuit against the Company in Utah state court in Salt Lake City, Utah.
Alpha Tech was the Company's stock transfer agent for a period of  approximately
ten years  until the  Company  terminated  its  relationship  with Alpha Tech in
January 1999 and instructed  Alpha Tech to transfer the Company's stock transfer
records to American Stock  Transfer,  New York, New York. The complaint  alleges
that the Company breached its service contract with Alpha Tech by failing to pay
$132,165 to Alpha Tech for transfer  agent services  rendered and  reimbursement
for legal  expenses  incurred by Alpha  Tech.  Alpha Tech has not yet served the
complaint;  the Company  learned about the complaint  through an unrelated third
party.  The  Company  has  demanded  that Alpha  Tech  voluntarily  dismiss  the
complaint,  which it has refused to do. The  Company was  notified in March 2000
that  Alpha  Tech  intends  to  serve  process,  although  service  has not been
accomplished.  In any event,  the Company  disputes  the claims of Alpha  Tech's
complaint and intends to vigorously defend this action if process is served.

         On February 22, 1999, the Company received a demand letter from counsel
for Mag Instrument,  Inc., a manufacturer and distributor of flashlights and one
of the Company's  competitors ("Mag"). In the letter, Mag accused the Company of
infringing  certain of Mag's patents and committing false advertising and unfair
competition.  Attached to the demand  letter was a copy of a complaint  filed in


                                       13
<PAGE>

the U.S.  District Court for the Central  District of California on February 19,
1999. The complaint  alleges that the Company has infringed  three patents owned
by Mag,  and seeks (i) an order  enjoining  the Company  from  infringing  Mag's
patents,  (ii) the delivery to the Court of all flashlights which infringe Mag's
patents,  (iii) that the  Company  identify  all  entities  who have  purchased,
distributed or sold any infringing  products,  (iv) that the Company  deliver to
the  Court  all  documents  reflecting  or  relating  to the  purchase,  sale or
distribution of any flashlights which infringe Mag's patents,  (v) money damages
sustained  by Mag  by  reason  of the  alleged  patent  infringement,  including
interest, costs, and attorney's fees. During the second quarter of 1999, Mag and
the Company  agreed to pursue  efforts to settle the dispute  and,  pending such
discussions,  the complaint would be dismissed  without prejudice upon the joint
stipulation of the parties.  The Company has expressly agreed with Mag, however,
that if the pending  disputes are not settled,  Mag may refile the  complaint in
the same court and venue. Settlement negotiations with Mag are still ongoing.

         On April 27,  1998,  the  Enforcement  Division of the  Securities  and
Exchange Commission notified the Company that the SEC was anticipating filing an
administrative  proceeding  in the latter  part of  calendar  year 1998  against
various individuals and entities who had engaged in transactions with a Canadian
corporation. The SEC Enforcement Division further indicated that the Company may
be named as a defendant in such administrative action. In July 1998, the Company
submitted a Wells  Submission  to clarify why, in the Company's  estimation,  it
should  not be named  in the  administrative  proceeding,  if any.  The  Company
suggested  in  the  Wells  Submission  that  it  should  not  be  named  in  any
administrative  proceeding  because the Company never consummated  either of the
two  transactions  with  the  subject  Canadian  company  that the  Company  was
considering,  and the Company received no consideration in connection with those
aborted  transactions.  Moreover,  the  Company  believes  that its  conduct  in
connection  with those proposed but aborted  transactions  met applicable  legal
requirements. As of December 31, 1999, the Company had received no response from
the Enforcement  Division about whether the SEC plans to name the Company in any
administrative action.

         In  addition,  the Company has  previously  disclosed  that it has been
informed of an investigation  by the Enforcement  Division of the Securities and
Exchange  Commission.  The Company believes this investigation  concerns certain
trading activity in the Company's common stock and other transactions  involving
the  Company's  securities,  however,  the Company has not been  informed of the
specifics of such  investigation.  The Company is  cooperating  fully with these
administrative  proceedings.  Any finding or order of the Commission  adverse to
the Company or any judgment against the Company in any of the pending litigation
matters,  would have an adverse effect on the business,  financial  condition or
results of operations of the Company, or the market for its common stock.

         On  February  12,  1998,  Fuji  Corporation  filed  a  claim  with  the
International  Trade  Commission  seeking  a  cease  and  desist  order  against
approximately  30  entities.  Fuji sought to enlist the aid of the U.S.  Customs
Department  in  preventing  the  importation  of  single-use  cameras  which are
manufactured by any of the defendant  entities and which infringe the patents of
Fuji. The Company does not manufacture  single-use  cameras,  but previously has
distributed  single-use  cameras  which have been  refurbished  and  reloaded in
mainland China. The Company was therefore  involved in the Fuji proceeding.  The
Company  engaged  intellectual  property  counsel and  vigorously  defended  its
position until December 1998,  when the Company sold its remaining  inventory of
single-use  cameras  to  another  entity.  In  connection  with that  sale,  any
liability of the Company in connection with the Fuji  proceeding,  including the
costs of further  defending  the action,  were  assumed by the  purchaser of the
Company's  single-use camera  inventory,  although the Company nominally remains
part of that litigation.

         The  Company is  involved  in various  other  claims and legal  actions
arising in the ordinary  course of business.  In the opinion of management,  the
ultimate  disposition  of these other  matters will not have a material  adverse
effect on the Company's operations or financial condition.

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.



                                       14
<PAGE>

                                     Part II

Item 5.   Market for Common Equity and Related Stockholder Matters

         Market  Information and Number of  Stockholders.  The Company's  common
stock is listed on The Nasdaq  SmallCap  Market under the symbol  "DYNX".  As of
December 31, 1999 there were 1,223  shareholders  of the Company's  common stock
and 3,721,418 shares of common stock were outstanding.

         Price Range of Common Stock.  The  following  table sets forth the high
and low sale  prices of the  Company's  common  stock as  reported by the Nasdaq
SmallCap Market during the indicated periods.  The referenced  quotations do not
reflect inter-dealer prices, dealer retail markup, markdown, or commissions, and
may not necessarily represent actual transactions.

                           PRICE RANGE OF COMMON STOCK

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

Quarter & Year          Market High           Market Low
----------------------- -------------------- --------------------
1st 1998                $7.88                $6.06
----------------------- -------------------- --------------------
2nd 1998                $8.25                $4.75
----------------------- -------------------- --------------------
3rd 1998                $6.25                $2.25
----------------------- -------------------- --------------------
4th 1998                $5.75                $1.38
----------------------- -------------------- --------------------
1st 1999                $4.31                $2.25
----------------------- -------------------- --------------------
2nd 1999                $3.00                $1.63
----------------------- -------------------- --------------------
3rd 1999                $1.86                $0.81
----------------------- -------------------- --------------------
4th 1999                $1.25                $0.88
======================= ==================== ====================


         Dividends. During the year ended December 31, 1999, the Company did not
declare or pay cash  dividends.  The  Company  has no history of  declaring  and
paying  cash  dividends  to its  common  stockholders  and has no  intention  of
declaring such dividends into the foreseeable future.

         Recent Sales of Unregistered Securities.  On November 4, 1999, the
Company entered into a Real Estate Purchase Contract with an unaffiliated third
party pursuant to which the Company sold the real property at which it corporate
offices are located.  The Company simultaneously entered into a long-term lease
of that property.  As part of that transaction, and as an inducement to the
purchaser-lessor, the Company issued a total of 33,948 shares of restricted
common stock.  The Company issued such shares without registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act.  Such
shares of common stock were issued as restricted securities, and the certificate
representing such shares was stamped with a standard legend to prevent any
resale without registration under the Securities Act or pursuant to an
exemption.

         On December 1, 1999, one of the holders of the Company's Convertible
Debentures converted $13,000, together with interest accrued thereon, into a
total of 20,557 shares of common stock.  The Company issued such shares without
registration under the Securities Act of 1933 in reliance on Section 4(2) of the
Securities Act, and the rules and regulations promulgated under that section
including Regulation D.  Such shares of common stock were issued as restricted
securities and the certificate representing such shares was stamped with a
standard legend to prevent any resale without registration under the Securities
Act or pursuant to an exemption, except for that portion of such shares as were
subject to sales under Rule 144 under the Securities Act.



                                       15
<PAGE>



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

Results of Operations

         The  following  table sets forth,  for the periods  indicated,  certain
information  relating  to the  operations  of the Company  expressed  in dollars
(rounded)  and  percentage  changes  from  period to  period.  Data in the table
reflects the  consolidated  results of the Company for the years ended  December
31, 1999 and 1998,  respectively.  As supplemental  information,  the table also
segregates the Company's revenues by product line type.
<TABLE>
<CAPTION>

                                             For the Year Ended
                                   ---------------------------------------
                                                                   % OF
                                                                   CHG
                                                                   FROM
                                      DECEMBER    DECEMBER        1998 to
                                      31, 1999    31, 1998         1999
                                      ---------   ---------       --------
Statement of Operations Data:
<S>                                 <C>          <C>               <C>
   Product sales.............       $14,770,000  $16,579,000       (10.9)%
   Cost of sales.............         9,648,000   10,246,000        (5.8)
                                    -----------  -----------
       Gross margin......             5,122,000    6,333,000       (19.1)
                                    -----------  -----------

Operating Costs and Expenses:
   Selling expenses..........         4,090,000    3,407,000        20.0
   Research and development..           170,000       69,000       146.4
   General and administrative         3,459,000    3,297,000         4.9
                                    -----------  -----------
       Total operating costs
         and expenses.........        7,719,000    6,773,000        14.0
                                    -----------  -----------

Other Income (Expense), net:
   Interest expense..........          (889,000)  (1,773,000)      (49.9)
   Interest income...........             5,000        3,000        66.7
   Other income (expense)....             3,000      (35,000)      108.6
                                    ------------  -----------
   Net loss..................       $(3,478,000) $(2,245,000)       54.9%
                                    ========================


Supplemental Information:

Revenue by product line type:
   Telecommunication headsets and
    amplifiers and telephone
    accessories............         $ 7,320,000  $7,640,000         (4.2)%
   Home storage and organization      4,648,000   4,703,000         (1.2)
   Flashlights..................      1,810,000     989,000         83.0
   Miscellaneous/Mass market.           992,000   3,247,000        (69.4)
                                   ------------  ----------
       Total product sales and      $14,770,000 $16,579,000        (10.9)%
        other..........            ============ ===========
</TABLE>


Following are explanations of significant period to period changes for the years
ended December 31, 1999 and 1998:

Revenues

         Total Product Sales.  Total product sales  decreased by $1,809,000,  or
10.9%,  from  $16,579,000  to  $14,770,000  for the year ended December 31, 1999
compared to the year ended December 31, 1998.

         Telecommunication  Headsets and Amplifiers  and Telephone  Accessories.
Sales of  telecommunication  headsets and amplifiers  and telephone  accessories
decreased  $320,000,  or 4.2%,  from $7,640,000 to $7,320,000 for the year ended
December 31, 1999 compared to the year ended December 31, 1998. This decrease is
attributable  primarily to the decreased  sales of $360,000  resulting  from the
loss of a private label customer for the Company's "Twisstop" product, decreased
sales of the  Company's  shoulder rest products of  approximately  $96,000,  and
decreased sales of telephone  amplifiers and headsets of approximately  $80,000.
These  decreases  were offset in part by  increases in sales of Cord Manager and
other Twisstop sales of $216,000.

           Overall gross  margins for these  products  increased to 51.3%,  from
49.8% for the years ended December 31, 1999 and 1998, respectively,  as a result
of the sales mix, offset in part by a write down in inventory of $294,000.

         Home  Storage  and  Organization.  Revenues  in the  home  storage  and
organization  product  line  decreased  $55,000,  or 1.2%,  from  $4,703,000  to
$4,648,000  for the year ended  December  31,  1999  compared  to the year ended


                                       16
<PAGE>

December 31, 1998. The decrease is primarily  attributable to decreased sales of
$163,000  in several of the  Company's  miscellaneous  organizational  products,
namely  shoe  organizers,  ironing  boards and wire  baskets  and a decrease  of
$46,000 in the doorstop product line,  offset in part by an increase of $104,000
in the  "Expand-A-Drawer"  product  line,  and an  increase  of  $50,000  in the
"Expand-A-Shelf"  product  line.  Overall  gross  margins  for  products in this
category  decreased to 26.7% for the year ended December 31, 1999 from 33.7% for
the year ended  December 31, 1998.  This decrease in gross margins was primarily
attributable to a write down in inventory of $297,000.

         Flashlights.  Flashlight  revenues increased  $821,000,  or 83.0%, from
$989,000 to $1,810,000 for the year ended December 31, 1999 compared to the year
ended December 31, 1998.  This increase was primarily the result of the addition
of five  new  major  customers  as a  result  of a  successful  increase  in the
Company's  selling and  marketing  efforts in this product  line.  Overall gross
margins for products in this category  decreased from 32.2% to 6.8% for the year
ended  December  31,  1999 as a  result  of  various  changes  made  to  certain
flashlight  products  to  increase  the  quality of these  products,  as well as
increased air freight costs  necessitated by production  difficulties  resulting
from an earthquake in Taipei,  Taiwan  during the third  quarter.  Management is
addressing this gross margin decrease by working with its Asian supplier to more
effectively  source various components from more reliable  sub-assembly  vendors
and to address the difficulties  encountered by the Company's Asian suppliers as
a result of the earthquake.

         Miscellaneous   and  Mass  Market.   Mass  market  revenues   decreased
$2,255,000,  or 69.4%,  from  $3,247,000 to $992,000 for the year ended December
31,  1999  compared to the year ended  December  31,  1998.  This  decrease  was
primarily the result of the Company's decision to substantially  discontinue its
efforts in this product line and the resulting  December 24, 1998 agreement with
Grandway  China  ("Grandway").  The  agreement  provided  for  the  transfer  of
inventory,  distribution  and sales rights of products that the Company was then
supplying  to  Dolgencorp.   Upon   execution,   Grandway   agreed  to  purchase
approximately  $1,800,000 of inventory that had been acquired by the Company and
earmarked  for sale to  Dolgencorp.  During the year  ended  December  31,  1999
Grandway purchased the entire remaining  inventory according to the terms of the
December 24, 1998 agreement. Overall gross margins for products in this category
decreased from 19.3% to 0.6% for the year ended December 31, 1999 as a result of
the  "pass-through"  effect.  Management  does not presently  anticipate  future
significant sales in this product line.

Operating Costs and Expenses

         Selling Expenses.  Selling expenses increased $683,000,  or 20.0%, from
$3,407,000  to $4,090,000  for the year ended  December 31, 1999 compared to the
year ended  December  31, 1998.  This  increase is due in part to an increase in
advertising  expense as the result of the Company  securing  additional pages in
certain office product catalogs,  and trade show expenditures due to the Company
participation  in more  regional  trade  shows,  as well  as the  hiring  of two
marketing  consultants  to assist the Company in it's  campaign to upgrade  it's
packaging  of  products,  and an  increase  in travel  costs  for the  Company's
executives and sales managers.

         Research and Development. Research and development expense increased by
$101,000,  or 146.4%,  from $69,000 to $170,000 for the year ended  December 31,
1999  compared  to  the  year  ended  December  31,  1998.   This  increase  was
attributable  to the  addition of a full time Vice  President  of  Research  and
Development.

         General  and  Administrative   Expenses.   General  and  administrative
expenses increased $162,000, or 4.9%, from $3,297,000 to $3,459,000 for the year
ended  December  31, 1999  compared to the year ended  December  31,  1998.  The
increase in general and administrative  expenses was primarily the result of the
payment of approximately  $210,000 in combined severance to the Company's former
Chairman  and CEO who  resigned on January 14, 1999 and the former  President of
the Company who resigned  effective March 17, 1999.  Also,  travel  expenditures
increased by  approximately  $106,000  resulting  from  increased  international
travel associated with strengthening  Asian supplier  relationships.  Additional
increases included $69,000 in employee  recruitment and relocation expense,  and
$92,000 in consulting fees. These increases were offset in part by a decrease in
legal  expenses of  $209,000,  most of which  relate to the  Company's  internal
investigation  which commenced in 1998 and concluded on January 14, 1999,as well
as a decrease in corporate expense of $57,000 due to the Company's  cancellation
of a lease on residential  rental property in Park City, Utah in August of 1998.
Additional  decreases were the result of a reduction in life insurance  premiums
paid of $44,000  due to the  resignation  of the former  Chairman  and CEO,  and
President  of the  Company,  and  reduced  directors  fees of $30,000 due to the
Company's  decision  in June 1999 to issue  stock  options  to the  non-employee
members of the Board of Directors in lieu of cash compensation.



                                       17
<PAGE>

         Total Operating Costs and Expenses.  Total operating costs and expenses
increased by $946,000,  or 14.0%,  from  $6,773,000 to  $7,719,000  for the year
ended  December 31, 1999 compared to the year ended  December 31, 1998,  for the
reasons discussed above.

         Interest Expense.  Interest expense decreased $884,000,  or 49.9%, from
$1,773,000 to $889,000 for the year ended December  31,1999 compared to the year
ended December 31, 1998. This decrease was primarily  related to the recognition
of a one-time, non-cash charge for the fair value of common stock warrants and a
beneficial conversion premium totaling $426,000 and $237,000, respectively, both
associated  with the  issuance of  $1,500,000  of  convertible  debentures  (the
"Convertible  Debentures") in May 1998. During the year ended December 31, 1999,
liquidated  damages were assessed  against the Company in the amount of $258,000
due to the Company's failure to have effective a registration statement covering
the  shares  of  common  stock  issuable  upon  conversion  of  the  Convertible
Debentures with the time specified in a registration  rights agreement  executed
in connection with the sale of the Convertible Debentures.  Additionally, normal
non-cash interest was recognized on the Convertible  Debentures in the amount of
$166,000 during the year ended December 31, 1999.

         Interest  Income.  Interest  income  increased  $2,000,  from $3,000 to
$5,000 for the year ended  December 31, 1999 compared to the year ended December
31, 1998.  This increase was  primarily the result of the Company  utilizing its
revolving credit facility,  under which "draws" are made by the Company. After a
draw is  made a  corresponding  payable  is  established,  when  collections  of
outstanding accounts receivable are received,  collections are swept, daily, and
re-applied  against  outstanding  draws.  As a result the Company  does not keep
excess cash on hand to invest.

         Other  Income/Expense  and Income  Taxes.  Other income  (expense)  and
income  taxes  increased  $38,000,  from  $(35,000) to $3,000 for the year ended
December 31, 1999 compared to the year ended December 31, 1998. This increase is
primarily  the  result of a smaller  tax  provision  due to net  operating  loss
carryforwards.  As well  as an  increase  in the  gain  on  sale  of  assets  of
approximately $20,000 in 1999 compared with 1998.

         Net Loss. Net loss increased by  $1,233,000,  or 54.9%,  from a loss of
$2,245,000 to a loss of $3,478,000 for the year ended December 31, 1999 compared
to the  year  ended  December  31,  1998  due to a  combination  of the  factors
described above.

Liquidity and Capital Resources

         General

         The  Company's  principal  sources  of  liquidity  are cash  flows from
operations,  cash on hand and  borrowing  under the Company's  existing  secured
revolving  credit  facilities.  On May 27, 1998, the Company  obtained a secured
revolving  credit  facility  from a  regional  financing  institution  for up to
$5,000,000,  bearing interest at a rate of prime plus one percent, with interest
payable monthly.  The credit facility is secured by both the Company's  accounts
receivable and inventory.  The note underlying the revolving  credit line is due
May 26, 2001. Under the terms of the loan agreement,  the Company is required to
maintain  financial  covenants and ratios,  including book net worth, net income
and debt  service  coverage.  On June 30,  1999,  the  Company  and its  lending
institution entered into a Fourth Amendment to the Credit Agreement (the "Fourth
Amendment").  Pursuant to the Fourth  Amendment,  certain  definitions have been
modified,  as  follows:  (i) the  maximum  line  decreased  from  $5,000,000  to
$3,000,000; (ii) the inventory advance rate decreased from 48% to 40%; (iii) the
accounts  receivable advance rate decreased from 85% to 78%; and (iv) the volume
rebate accrual  increased from $15,000 on June 1, 1999 to $300,000 at January 1,
2000.  This accrual  goes to $-0- when the volume  rebates are paid in the first
quarter of 2000,  and will begin to accrue over the  remainder of calendar  year
2000 to the maximum $300,000  amount.  On September 23, 1999 the Company and its
lending  institution  entered into a Fifth (the "Fifth Amendment") to the Credit
Agreement.  The Fifth  Amendment  changed the terms of certain of the  financial
covenants and ratios for the  remainder of 1999 and the year 2000.  The interest
rate  presently  applicable  to the  revolving  credit  line is prime plus three
percent,  with interest payable monthly. At December 31, 1999 the Company was in
default of certain of these  covenants,  however,  the  Company  has  obtained a
waiver from the  lending  institution.  The Company and the lending  institution
have  negotiated an amendment to the loan  agreement  which changed the terms of
certain of the  financial  covenants  and ratios for 2000. At December 31, 1999,
the Company had $244,755 of cash and $1,168,000 of unused  borrowings  under its
credit  facility,  which  amount  is  limited  by the  levels of  inventory  and
receivables.



                                       18
<PAGE>

         On May 22, 1998,  the Company  closed a  transaction  that provided net
capital proceeds of $1,335,000.  The transaction was accomplished  pursuant to a
Convertible  Debenture and Private Equity Line of Credit  Agreement (the "Credit
Agreement")  between  the Company  and a group of five  unaffiliated  investors.
These  funds were  raised  pursuant  to the sale by the  Company of  Convertible
Debentures in the aggregate  principal  amount of  $1,500,000.  The  Convertible
Debentures were  convertible  into the Company's  common stock at the lesser of:
(i) 75% of the  average  of the three  lowest  closing  bid prices of the common
stock as quoted on the Nasdaq SmallCap  Market during the 22 trading-day  period
immediately  preceding the conversion date or (ii) $6.50,  which was 100% of the
closing bid price on the trading day  immediately  preceding the closing date of
the Credit Agreement. In addition to the sale of the Convertible Debentures, the
Company also obtained the right to use a "put"  mechanism to  periodically  draw
down up to $10,000,000 of additional  equity capital the ("Equity Line").  Under
the terms of the Credit  Agreement,  the  Company was  obligated  to draw down a
minimum of $1,000,000  under the Equity Line,  and all amounts were to have been
drawn in  increments  of not less than  $50,000.  In return  for the  payment of
additional  capital under the Equity Line,  the Company would have been required
to issue shares of its common stock at a per share  purchase  price equal to 80%
of the average of the three lowest closing bid prices of the common stock during
a six day valuation period commencing three days before the draw date and ending
two days after the draw date. The Equity Line could not have been utilized,  and
the Company had no  obligation  to  exercise  any portion of the put  mechanism,
until after the effective date of the registration  statement (the "Registration
Statement") for the underlying stock of the Credit Agreement. Additionally, upon
registration of the underlying shares which were issuable upon conversion of the
Convertible  Debentures,  the  Company  was  obligated  to issue  an  additional
$500,000 of Convertible Debentures. The Company filed the Registration Statement
on Form SB-2 as required by the Credit Agreement but it had not become effective
by June 1999.

         On June 25, 1999,  the Company and the  Convertible  Debenture  holders
entered into a Modification Agreement  ("Modification  Agreement"),  under which
the parties agreed to cancel the Equity Line and all of the parties'  respective
obligations thereunder. The parties to the Modification Agreement also agreed to
cancel the  investors'  obligation to purchase and the  Company's  obligation to
sell the additional $500,000 principal amount of Convertible Debentures upon the
effectiveness  of the  Registration  Statement.  Additionally,  the Modification
Agreement provided for the modification and temporary abatement of the Company's
obligation to pay cash  liquidated  damages of $45,000 per month  resulting from
the Company's  obligation to have the Registration  Statement declared effective
on or before August 28, 1998. Pursuant to the terms of the Credit Agreement, the
Company paid  liquidated  damages from  September 23, 1998 through and including
February 23, 1999 in the  aggregate  amount of $210,000,  of which  $135,000 was
paid in the  six-month  period  ended  June 30,  1999.  Under  the  Modification
Agreement,  the Company was to accrue a total of $180,000 of liquidated  damages
for the period from February 24, 1999 through and including June 23, 1999, which
accrued  amount was payable at any time after October 1, 1999,  upon request for
payment therefore by the Investors, in shares of the Company's common stock. The
number of shares of common  stock  issuable  upon such  payment was to have been
determined  by  dividing  the total  amount of  damages  accrued  by 100% of the
average of the closing bid prices of the Company's  common stock during the five
trading day period immediately preceding the date of such payment. Additionally,
under the  Modification  Agreement,  the Company's  obligation to pay liquidated
damages  under the  Credit  Agreement  was  abated  from June 24,  1999  through
September  23,  1999,  provided  that the  Registration  Statement  was declared
effective on or before October 31, 1999.  Additional  liquidated  damages in the
amount of $45,000 were to have accrued for the period between September 24, 1999
and October 23, 1999 if the  Registration  Statement was not declared  effective
before October 31, 1999.

         Although the Company filed an amendment to the  registration  statement
on July 2, 1999, the registration statement was not effective by the October 31,
1999 deadline set forth in the  Modification  Agreement.  Moreover,  because the
Company's  pending  preliminary  proxy  statement  was  being  reviewed  by  the
Securities  and  Exchange  Commission  in tandem with the  pending  registration
statement,  the Company was not able to hold its annual meeting of  shareholders
by the October 31, 1999  deadline.  On November  12,  1999,  the Company and the
Investors  executed an amendment to the Modification  Agreement that substituted
February  15,  2000  for  the  October  31,  1999  deadline  originally  in  the
Modification Agreement and made certain other changes to the Credit Agreement.

         On  December  8, 1999,  the Company  filed its third  amendment  to the
Registration  Statement.  The Registration  Statement did not become  effective,
however. The Company and the holders of the Convertible Debentures  subsequently
executed a Convertible  Debenture  Retirement  Agreement dated as of February 1,
2000, and which closed on February 23, 2000 (the "Retirement Agreement").  Under
the  Retirement  Agreement,  and in  exchange  for payment to the holders of the
Convertible  Debentures,  pro rata, of $1,500,000  cash,  the holders  agreed to


                                       19
<PAGE>

surrender  for  cancellation  all but a small  portion  of the then  unconverted
Convertible Debentures, to forgive or release the Company from its obligation to
pay accrued interest thereon,  to release the Company from its obligation to pay
accrued but unpaid liquidated damages resulting from the Company's  inability to
have the Registration Statement become effective, and otherwise terminate all of
the  obligations of either party under the Credit  Agreement.  At the closing of
the Retirement Agreement, the holders agreed to convert the remaining portion of
the principal  amount of the  Convertible  Debentures into that number of shares
that would have been issuable had such portion been converted as of February 14,
2000, or 94,450 shares. In light of the closing of the Retirement Agreement, the
Company has no ongoing obligations under the Credit Agreement, and has submitted
a request to the  Securities  and  Exchange  Commission  to withdraw the pending
Registration Statement.

         To allow the Company to consummate the transactions contemplated by the
Retirement  Agreement,   the  Company  completed  a  private  placement  of  its
restricted common stock to seven offshore  investors.  The private placement was
accomplished  pursuant  to a  Stock  Purchase  Agreement  (the  "Stock  Purchase
Agreement") between the Company and the investors dated as of February 11, 2000,
which closed on February  23,  2000.  Under the Stock  Purchase  Agreement,  the
Company agreed to issue a total of 1,222,811 shares of restricted  common stock.
The  consideration  paid by the investors was the greater of (i) $1.00 per share
or (ii) 100% of the average of the closing  bid prices of the  Company's  common
stock as quoted by the Nasdaq Stock Market for the five trading days immediately
preceding the date the investors paid the purchase price or any portion thereof.
The total proceeds to the Company from the private placement were $1,600,000, of
which  $1,500,000 was used to close the Retirement  Agreement,  and $100,000 was
used for general corporate purposes.

         On  November  4, 1999,  the  Company  sold its  corporate  headquarters
facility for $2,865,000.  Simultaneously with the sale, the Company entered into
a 20-year leaseback agreement with the purchasing party. The net proceeds to the
Company were  $831,000,  after paying  long-term  debt secured by the  building,
broker and legal fees, and other ancillary  charges.  The proceeds from the sale
will be used for working capital purposes. The party that purchased the building
is not  affiliated  with or related to the  Company  or any of its  officers  or
directors.

         Based on current  operations and, after accounting for anticipated cost
savings through  operating  efficiencies and reductions in selling,  and general
and  administrative  expenses,  the Company believes that its present sources of
liquidity  will be  adequate  to meet its  projected  requirements  for  working
capital,  capital  expenditures,  scheduled debt service  requirements and other
general  corporate  purposes  during  the  year  2000.   However,   the  Company
anticipates that it will pursue  additional  sources of liquidity in the form of
commercial credit or additional sales of the Company's debt or equity securities
during the second  quarter of 2000 to fund a combination  of short-term  working
capital requirements and growth.

         December 31, 1999 Compared to December 31, 1998

         As of December 31, 1999,  the Company had liquid  assets (cash and cash
equivalents, accounts receivable - trade and other) of $1,941,000, a decrease of
13.0%, or $291,000,  from December 31, 1998 when liquid assets were  $2,232,000.
Cash increased $243,000 to $245,000 at December 31, 1999 from $2,000 at December
31,  1998.  This  increase in cash was  primarily  the result of the  procedures
involving  use  of  the  Company's   revolving  credit  facility,   under  which
collections of outstanding  accounts  receivable are swept the day after receipt
and re-applied  against  outstanding  draws,  therefore amounts collected on the
last day of the year  would  not be swept  against  draws  until  January  2000.
Accounts  receivable - trade  decreased  $533,000,  or 23.9%,  to  $1,696,000 at
December  31,  1999 from  $2,229,000  at December  31,  1998.  This  decrease is
primarily  the  result  of  reduced  sales  during  December  1999 and  improved
collections.

         Current  assets  decreased by  $2,085,000,  or 28.2%,  to $5,320,000 at
December  31, 1999 from  $7,405,000  at December  31,  1998.  Of this  decrease,
$533,000 was primarily  the result of a decrease in accounts  receivable - trade
discussed  above and  $1,894,000  was the result of decreased  inventory  levels
related to the  Company's  December  24,  1998  agreement  with  Grandway  China
("Grandway"). The agreement provided for the transfer of inventory, distribution
and sales rights of products that the Company was then  supplying to Dolgencorp.
Upon  execution,   Grandway  agreed  to  purchase  approximately  $1,800,000  of
inventory  that had been  obtained  by the  Company  and  earmarked  for sale to
Dolgencorp.  During the year ended  December 31, 1999,  Grandway  purchased  the


                                       20
<PAGE>

entire remaining  inventory.  In addition to the inventory  reduction  resulting
from such sale, the Company wrote-down old inventory to the current market value
of the  inventory.  The  decrease  in  current  assets  was offset in part by an
increase in cash as discussed above.

         Long-term assets increased $334,000, or 8.1%, to $4,468,000 at December
31, 1999 from  $4,134,000 at December 31, 1998.  This increase was primarily the
result  of the  November  4, 1999  transaction  in which  the  Company  sold its
corporate  headquarters  facility for $2,900,000.  Simultaneously with the sale,
the  Company  entered  into a  20-year  capital  leaseback  agreement  with  the
purchasing  party.  Such capital addition was offset in part by normal recurring
depreciation  of fixed assets and  amortization of deferred loan costs and other
intangibles.

         Current  liabilities  increased by $62,000,  or 1.0%,  to $6,036,000 at
December  31, 1999 from  $5,974,000  at December  31,  1998.  Of this  increase,
$442,000  was  primarily  the result of an increase in  short-term  note payable
related to additional borrowings on the Company's line of credit, and $63,000 is
the result of an  increase  in  accounts  payable-trade.  These  increases  were
offset,  in part, by decreases in accrued  expenses,  accrued  advertising,  the
current portion of long-term debt, and accounts payable-related.

         The Company's  working capital  decreased by $2,147,000,  or 150.0%, to
$(716,000) at December 31, 1999 from  $1,431,000  at December 31, 1998,  for the
reasons described above.

         The Company used cash of $332,000 from operating  activities during the
year ended  December  31, 1999,  primarily as a result of the net loss  incurred
during the period, offset in part from decreased inventory levels.

         The  Company  received  $2,357,000  of cash from  investing  activities
during the year ended December 31, 1999,  primarily from proceeds  received from
the  November 4, 1999 sale of the  Company's  corporate  headquarters  facility,
offset  in part by the July  1999  purchase  of  Transworld  Products,  Inc.,  a
manufacturer of telephone shoulder rests and a main competitor of the Company in
that product line.  The Company also incurred  additional  expenditures  for new
computer equipment related to its Year 2000 preparations.

         The Company used cash of $1,783,000  from financing  activities  during
the year ended  December  31,  1999,  due in part to the increase in payments on
long-term  debt  related  to the  pay-off  of  the  mortgages  on the  Company's
corporate  headquarters  facility,  as well as  payments of  liquidated  damages
related  to  the  company's  convertible  debentures,  offset  in  part  by  the
borrowings on the Company's line of credit.

Inflation

         Most of the  Company's  products  are  purchased  in finished  form and
packaged by the supplier or at the  Company's  headquarters.  The Company uses a
premixed  plastisol (a petroleum  based raw material) to manufacture  certain of
its telephone  accessory products at its headquarters.  The Company  anticipates
usual inflationary  increases in the price of its plastic products and the other
raw  materials  used  in  the   manufacture   of  its  products,   whether  such
manufacturing is done by the Company or its suppliers.  Significant inflationary
pressure on such costs could  materially  affect the Company's  profitability if
these cost increases cannot be passed on to customers.  In general,  the Company
does not  believe  that  inflation  has had a material  effect on its results of
operations  in  recent  years.  However,  there  can be no  assurance  that  the
Company's business will not be affected by inflation in the future.


Seasonality

         The Company's business is seasonal.  The Company typically  experiences
its highest  sales volume in the fourth  quarter of each year as a result of the
retail environment in which most of its customers conduct business.  Because the
Company sells its products  primarily to major  retailers,  the Company's  sales
performance is  significantly  dependent on the performance of those  retailers.
Accordingly,  the fourth quarter is a key  determinate to overall  profitability
for the year.



                                       21
<PAGE>

Recent Accounting Pronouncements

         The Financial  Accounting Standards Board issued Statement on Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivatives  Instruments and
Hedging Activities,  in 1998. SFAS No. 133 establishes  accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts  (collectively referred to as derivatives),  and for
hedging  activities.  It requires that an entity  recognize all  derivatives  as
either assets or liabilities in the statement of financial  position and measure
those  instruments  at fair value.  For a derivative not designated as a hedging
instrument,  changes  in the fair  value of the  derivative  are  recognized  in
earnings in the period of change.  As a result of SFAS No.137 the effective date
of SFAS No. 133 shall be in the first  quarter  of 2001.  The  Company  does not
believe  the  adoption  of SFAS  No.  133 will  have a  material  affect  on the
financial position or results of operations of the Company.

         On  December 3, 1999 the SEC staff  issued  Staff  Accounting  Bulletin
(SAB)  No.  101,  Revenue  Recognition  in  Financial  Statements.  SAB No.  101
summarizes   certain  of  the  staff's  views  in  applying  generally  accepted
accounting  principles  to revenue  recognition  in  financial  statements.  The
Company will  incorporate the guidance of SAB 101 in the first quarter of fiscal
2001.

Year 2000 Compliance

            The Year 2000  problem  relates to the  inability  of many  computer
programs and microchip-based products and equipment to operate properly on dates
approaching and following December 31, 1999. This inability to operate correctly
results from the use in many computer programs and embedded  microchip code of a
two-digit  rather than a four-digit  date field.  Thus,  non Year 2000 compliant
software and firmware may misinterpret a date entry of "00" as 1900, rather than
2000,  resulting  in,  among  other  things,  a temporary  inability  to process
transactions, send invoices, or engage in similar business transactions.

            The Company uses and is dependent upon computer systems and software
to conduct  its  business.  In the fourth  quarter of 1997,  the  Company  began
implementing  a  new  accounting  and  materials  resource  planning  integrated
software system. The software system,  Made2Manage,  was purchased with the Year
2000  issue in mind,  and is  represented  by its  manufacturer  to be Year 2000
compliant  in all material  respects.  The Company has  completed  its Year 2000
evaluation and remediation of these various internal computer systems.

            In its evaluation and remediation program, the Company utilized both
internal and external resources to reprogram or replace  non-compliant  software
for Year 2000 modifications.  The total cost of the Year 2000 project to date is
approximately  $195,000,  which has been funded through operating cash flows and
the Company's  existing  secured credit  facility.  Of this cost,  approximately
$122,000 was attributable to the purchase of new software or equipment that will
be capitalized. The remaining $73,000 has been expensed as incurred. The Company
does not anticipate  incurring  additional material expenses related to its Year
2000 remediation efforts in respect of its internal systems and operations.

            As part of its  Year  2000  compliance  program,  the  Company  also
initiated  formal  communications  with  all of its  significant  suppliers  and
customers to determine  the extent to which the Company is  vulnerable  to those
third parties' failure to remediate their own Year 2000 problems.  Additionally,
in March 1999, the Company, through its own information technology personnel and
its Chief  Financial  Officer,  conducted  on-site reviews of certain of its key
Asian suppliers to ascertain,  to the extent possible, the Company's exposure to
manufacturing  delays or  stoppages as a result of those  suppliers'  failure to
remediate their Year 2000 problems.

            Through  December  31,  1999,  and  continuing  to the  date of this
Report,  the Company had  experienced  no material  impact to its operations and
financial condition,  other than the expenditures  summarized above, as a result
of the Year 2000  problem,  either as a result of internal  problems or problems
encountered  by its  suppliers or customers.  There  remains a possibility  that
residual consequences stemming from the change to the year 2000 could occur and,
if these  consequences  become  widespread,  they could have a material  adverse
effect  on  the  Company,  its  operations  and  financial  condition.  However,
management  considers  this  possibility  remote  and  does not  anticipate  any
significant problems due to the Year 2000 issue.

Forward Looking Statements

         The  foregoing  Management's   Discussion  and  Analysis  of  Financial
Condition and Results of Operations contains certain forward-looking  statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and


                                       22
<PAGE>

Section  21E of the  Securities  Exchange  Act of 1934,  as  amended,  which are
intended to be covered by the safe harbors created thereby. Although the Company
believes  that  the  assumptions   underlying  the  forward-looking   statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore,  there can be no assurance that the  forward-looking  statements will
prove to be accurate.  Factors  that could cause  actual  results to differ from
results discussed in forward-looking statements include, but are not limited to,
potential increases in inventory costs,  competition,  and the Company's ability
to obtain additional working capital to fund future growth, as well as the other
factors  described  elsewhere in this Report under the heading  "Description  of
Business Risk Factors".



                                       23
<PAGE>




Item 7.   Financial Statements



                          Independent Auditors' Report



The Board of Directors
Dynatec International, Inc.:


We  have  audited  the  accompanying  consolidated  balance  sheets  of  Dynatec
International,  Inc. and  subsidiaries  as of December 31, 1999 and 1998 and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for the years then ended. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,   in  all  material   respects,   the  financial   position  of  Dynatec
International,  Inc. and  subsidiaries  as of December 31, 1999 and 1998 and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.



                                                                    /s/ KPMG LLP


Salt Lake City, Utah
March 1, 2000


                                       24
<PAGE>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998


<TABLE>
<CAPTION>
                                     ASSETS

                                                                                          1999                1998
                                                                                     ---------------     --------------
CURRENT ASSETS:
<S>                                                                                  <C>                 <C>
    Cash and cash equivalents                                                        $      244,755      $       2,268
    Trade accounts receivable, net of allowance for doubtful accounts of $39,036
       in 1999 and $30,190 in 1998, respectively (note 6)                                 1,695,897          2,229,267
    Inventories (notes 3 and 6)                                                           2,963,064          4,857,241
    Prepaid expenses and other                                                              415,921            316,347
                                                                                     ---------------     --------------

                Total current assets                                                      5,319,637          7,405,123
                                                                                     ---------------     --------------

LAND, BUILDING AND EQUIPMENT, at cost (notes 7 and 8):
    Land                                                                                         -             365,860
    Building and improvements                                                            2,865,000           2,214,144
    Furniture, fixtures, and equipment                                                   3,724,808           3,554,045
                                                                                     ---------------     --------------
                                                                                         6,589,808           6,134,049
    Less accumulated depreciation and amortization                                       2,471,862           2,336,427
                                                                                     ---------------     --------------

                Net land, building and equipment                                         4,117,946           3,797,622

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES, net (note 4)                                  194,743             205,102

DEFERRED LOAN COSTS, net of accumulated amortization of $30,452 in
   1999 and $4,903 in 1998, respectively (note 2)                                           36,194              61,743

OTHER ASSETS                                                                               119,450              69,337
                                                                                     ---------------     --------------
                                                                                        $9,787,970         $11,538,927
                                        `                                            ===============     ==============
</TABLE>


















          See accompanying notes to consolidated financial statements.


                                       25
<PAGE>

                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS (Continued)
                           DECEMBER 31, 1999 AND 1998

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                           1999                 1998
                                                                                       -------------       -------------
CURRENT LIABILITIES:
<S>                                                                                    <C>                 <C>
    Short-term note payable (note 6)                                                   $  1,831,622        $  1,389,223
    Convertible debentures (note 9)                                                       1,649,342           1,667,079
    Current portion of long-term debt (note 7)                                               82,500             246,855
    Current portion of capital lease obligations (note 8)                                    60,739              17,881
    Accounts payable                                                                      1,581,463           1,518,316
    Accounts payable - other                                                                      -               9,000
    Accounts payable - related party (note 13)                                                    -              98,403
    Accrued expenses                                                                        525,038             637,051
    Accrued advertising                                                                     300,000             320,000
    Accrued royalties payable                                                                80,150              70,246
                                                                                       -------------       -------------

              Total current liabilities                                                   6,110,854           5,974,054

LONG-TERM DEBT, net of current portion (note 7)                                              81,175           2,006,518

DEPOSIT FOR STOCK ISSUANCE (note 11)                                                              -           1,000,000

DEFERRED GAIN ON SALE OF ASSET                                                              244,363                   -

CAPITAL LEASE OBLIGATIONS, net of current portion (note 8)                                2,957,740              28,654
                                                                                       -------------       -------------

              Total liabilities                                                           9,394,132           9,009,226
                                                                                       -------------       -------------

STOCKHOLDERS' EQUITY (note 11):
    Common stock,  $.01 par value;  100,000,000  shares authorized and 3,721,418
       and  2,901,627  shares   outstanding  at  December  31,  1999  and  1998,
       respectively                                                                          37,214              29,016
    Treasury stock, at cost, 91,515 shares                                                 (915,150)           (915,150)
    Additional paid-in capital                                                            8,375,074           7,041,590
    Accumulated deficit                                                                  (7,103,300)         (3,625,755)
                                                                                       -------------       -------------

              Net stockholders' equity                                                      393,838           2,529,701
                                                                                       -------------       -------------

COMMITMENTS AND CONTINGENCIES ( note 6, 7, 8, 9, 15,  and 19)
                                                                                       $  9,787,970        $ 11,538,927
                                                                                       =============       =============
</TABLE>









          See accompanying notes to consolidated financial statements.

                                       26
<PAGE>

                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>

                                                                     1999                  1998
                                                                  ---------------      ---------------

<S>                                                               <C>                  <C>
PRODUCT SALES                                                     $   14,770,244       $   16,578,694
COST OF SALES                                                         (9,647,770)         (10,246,369)
                                                                  ---------------      ---------------

       Gross Margin                                                    5,122,474            6,332,325
                                                                  ---------------      ---------------

OPERATING COSTS AND EXPENSES:
    Selling expenses                                                   4,089,515            3,406,558
    General and administrative                                         3,458,644            3,297,555
    Research and development                                             170,247               68,708
                                                                  ---------------      ---------------

       Total operating costs and expenses                              7,718,406            6,772,821
                                                                  ---------------      ---------------

          Loss from operations                                        (2,595,932)            (440,496)
                                                                  ---------------      ---------------

OTHER INCOME (EXPENSE):
    Interest expense (note 9)                                           (888,992)          (1,773,079)
    Interest income                                                        4,534                3,340
    Other income (expense)                                                 2,845              (20,192)
                                                                  ---------------      ---------------

       Total other expense, net                                         (881,613)          (1,789,931)
                                                                  ---------------      ---------------

          Loss before income tax provision                            (3,477,545)          (2,230,427)

INCOME TAX PROVISION (note 10)                                                 -              (15,000)
                                                                  ---------------      ---------------
          Net loss                                                $   (3,477,545)      $   (2,245,427)
                                                                  ===============      ===============

BASIC AND DILUTED NET LOSS PER SHARE                              $        (1.03)      $         (.80)
                                                                  ===============      ===============

WEIGHTED AVERAGE SHARES - BASIC AND DILUTED                             3,384,598            2,792,738
                                                                  ===============      ===============
</TABLE>















          See accompanying notes to consolidated financial statements.

                                       27
<PAGE>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                           Common Stock
                                     --------------------------
                                                                       Treasury     Additional                         Net
                                          Number of                     Stock        Paid-in       Accumulated    Stockholders'
                                          Shares         Amount        At Cost       Capital         Deficit          Equity
<S>                                       <C>            <C>           <C>          <C>            <C>               <C>
BALANCE DECEMBER 31, 1997                 2,869,940      $28,699       (915,150)     5,596,740       (1,380,328)      3,329,960
Shares issued pursuant to employee
    stock option plans                       11,687          117              -           (117)               -               -
Issuance of convertible debentures
    and equity line-of-credit
      (note 9)                               20,000          200              -        864,968                -         865,168
Capital addition (note 11)                        -            -              -        580,000                -         580,000
Net loss                                                                                             (2,245,427)     (2,245,427)
                                          ---------      -------     -----------    -----------    -------------    ------------
                                                  -            -              -              -

BALANCE DECEMBER 31, 1998                 2,901,627       29,016       (915,150)     7,041,590       (3,625,755)      2,529,701
Shares issued pursuant to conversion
    of  deposit payable
      (note 11)                             500,000        5,000              -        995,000                -       1,000,000
Shares issued pursuant to conversion
    of  convertible debenture (note 9)      285,843        2,858              -        303,824                -         306,682
Shares issued pursuant to
    sale/leaseback of company
    headquarters building (note 11)          33,948          340              -         34,660                -          35,000
Net loss                                                                                             (3,477,545)     (3,477,545)
                                          ---------      -------     -----------    -----------    -------------    ------------
                                                  -            -              -              -

BALANCE DECEMBER 31, 1999                 3,721,418      $37,214     $ (915,150)    $8,375,074     $ (7,103,300)    $   393,838
                                          =========      =======     ===========    ===========    =============    ============
</TABLE>























          See accompanying notes to consolidated financial statements.


                                       28
<PAGE>

                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                     1999                     1998
                                                                               -----------------         -----------------

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                            <C>                       <C>
   Net loss                                                                    $     (3,477,545)         $     (2,245,427)
   Adjustments to reconcile net loss to net cash used in operating activities:
         Depreciation and amortization                                                  588,146                   504,991
         Amortization of deferred loan costs                                             25,549                    97,415
         Non-cash interest expense on convertible debentures (note 9)                   423,945                 1,004,996
         Loss (gain) on sale of assets                                                   (2,935)                   20,192
         Provision for losses on accounts receivable                                     39,000                    77,125
         Changes in operating assets and liabilities:
               Trade accounts receivable                                                494,370                  (330,373)
               Inventories                                                            1,894,177                (2,335,092)
               Prepaid expenses                                                         (99,574)                   21,553
               Other assets                                                             (50,113)                  (38,294)
               Accounts payable                                                          63,147                   525,684
               Accounts payable - other                                                  (9,000)                  (76,000)
               Accounts payable - related party                                         (98,403)                   98,403
               Accrued expenses                                                        (112,013)                  573,136
               Accrued advertising                                                      (20,000)                  (30,000)
               Accrued royalties                                                           9,904                   52,365
                                                                               -----------------         -----------------
                  Net cash used in operating activities                                (331,345)               (2,079,326)
                                                                               -----------------         -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net proceeds from the sale of assets                                                2,693,698                    63,706
  Purchase of building and equipment                                                   (252,219)                 (394,365)
  Cash paid for asset acquisition (note 5)                                              (85,000)                        -
                                                                               -----------------         -----------------
                  Net cash provided by (used in) investing activities                 2,356,479                  (330,659)
                                                                               -----------------         -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings on line of credit                                                      442,399                    58,054
  Debt issuance costs                                                                         -                  (298,986)
  Net payments on long-term debt                                                     (2,089,698)                 (744,459)
  Principal payments on capital lease obligations                                       (35,348)                  (15,250)
  Payment of liquidated damages related to convertible debenture (note 9)              (135,000)                        -
  Proceeds from issuance of common stock related to sale of building
   (note 11)                                                                             35,000                         -
  Proceeds from capital addition (note 11)                                                    -                   580,000
  Proceeds from convertible debenture offering (note 9)                                       -                 1,500,000
  Proceeds from deposit for stock issuance (note 11)                                                            1,000,000
                                                                               --------------------      -----------------
                                                                                              -
                  Net cash provided by (used in) financing activities                (1,782,647)                2,079,359
                                                                               --------------------      -----------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    242,487                  (330,626)

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD                                      2,268                   332,894
                                                                               -----------------         -----------------

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                                  $       244,755          $         2,268
                                                                               =================         =================
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       29
<PAGE>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                      YEAR ENDED DECEMBER 31, 1999 AND 1998




<TABLE>
<CAPTION>

                                                                                 1999               1998
                                                                            --------------      -------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
<S>                                                                          <C>                   <C>
    Cash paid for interest                                                   $  552,928             $ 685,573

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
    Share certificate cancelled                                                       -               250,000

    Debt issuance costs attributable to warrants to placement agent                   -               426,000

    Convertible debt discount associated with warrants to investors                   -               426,000

    Property and equipment acquired under capital leases                      3,007,292                     -

    Conversion of Convertible Debentures and accrued interest for
         common stock                                                           306,682                     -

    Issuance of 500,000 shares of restricted stock                            1,000,000                     -
</TABLE>



























          See accompanying notes to consolidated financial statements.


                                       30
<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(1)  DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS

         Dynatec  International,  Inc.,  a  Utah  corporation  (Dynatec  or  the
Company),  is a manufacturer and distributor of consumer products comprising the
following  major product  lines:  telecommunication  headsets and amplifiers and
telephone  accessories,  home storage and  organization,  flashlights  and other
miscellaneous products sold to mass market merchandisers.  Dynatec is located in
Salt Lake City, Utah. The Company  conducts most of its operations  through four
wholly  owned  subsidiaries:   Softalk,  Inc.,  Arnco  Marketing,  Inc.,  Nordic
Technologies,  Inc. and SofTalk  Communications,  Inc.  Unless  specified to the
contrary  herein,  references  to Dynatec or to the Company refer to the Company
and its subsidiaries on a consolidated basis.

         The Company's business follows seasonal trends. As a result the Company
experiences  its  highest  revenues in the fourth  quarter.  Because the Company
sells its products primarily to major retailers, the Company's sales performance
is significantly dependent on the performance of those retailers.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

         The  consolidated  financial  statements  include  the  accounts of the
Company  and  its  wholly  owned  subsidiaries.  All  significant  inter-company
balances and transactions have been eliminated in consolidation.

Use of Estimates

         The preparation of the consolidated  financial statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities,  the  disclosure  of  contingent  assets and  liabilities,  and the
reported  amounts of revenue and expense for the period being  reported.  Actual
results could differ from those estimates.

Cash and Cash Equivalents

         The Company  considers  all highly  liquid  investments  with  original
maturities  at the  date  of  purchase  of  three  months  or  less  to be  cash
equivalents.

Inventories

         Effective   January  1,  1998,  the  Company   changed  its  method  of
determining the value of inventory from last-in,  first-out  (LIFO) to first-in,
first-out (FIFO). Historically,  the difference between the LIFO and FIFO values
of inventories  has been  immaterial.  Raw materials  inventory is stated at the
lower of cost or market.  Work-in-process  and finished  goods are stated on the
basis of  accumulated  manufacturing  costs,  but not in excess  of market  (net
realizable value).




                                       31
<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Building and Equipment

     Depreciation  on building and  equipment  is computed on the  straight-line
method over the following useful lives: Capital Leases 3-20 years Equipment 5-10
years  Office  Equipment  & Fixtures  3-7 years  Vehicles 5 years Signs and Show
Booths 3-7 years

         Assets  held  under  capital  leases  and  leasehold  improvements  are
amortized  on a  straight-line  basis  over the  shorter  of the  lease  term or
estimated useful life of the asset.

Accounting for Impairment of Long-Lived Assets

         Long-lived assets,  goodwill, and certain identifiable  intangibles 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 future net cash flows expected to be generated by the asset. If such
assets are  considered  to be  impaired,  the  impairment  to be  recognized  is
measured  by the amount by which the  carrying  amount of the assets  exceed the
fair value of the assets.  Assets to be disposed of are reported at the lower of
the carrying amount of fair value less costs to sell.

Intangible Assets

         Intangible assets include  purchased  patents,  product  licenses,  and
other  agreements  allowing  the Company  non-exclusive  rights to  manufacture,
produce, and sell various products.  Such costs are amortized on a straight-line
basis over  their  estimated  useful  lives of 5 to 40 years.  Other  intangible
assets  such  as  agreements  not to  compete  are  being  amortized  using  the
straight-lined method over five years.

Goodwill

         Goodwill  represents  the  excess of the  purchase  price over the fair
value of the net assets acquired from Transworld Products,  Inc. (Transworld) on
July 15, 1999. The goodwill,  is being amortized using the  straight-line  basis
over two years (note 5).

Deferred Loan Costs

         Deferred loan costs  totaling  $66,646  resulted  from  issuance  costs
related to the Company's  revolving credit facility,  and are being amortized as
interest  expense over  thirty-six  months using a basis that  approximates  the
effective-interest rate method (note 6).

Revenue Recognition

         The  Company  recognizes  revenue  from  product  sales  at the time of
shipment. The Company has established programs, which under specified conditions
enable  its  customers  to  return  product.  The  effect of these  programs  is
estimated and current period sales and cost of sales are reduced accordingly.



                                       32
<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation

         The Company employs the footnote disclosure  provisions of Statement of
Financial  Accounting  Standards  (SFAS) No.  123,  Accounting  for  Stock-Based
Compensation.  SFAS No. 123  encourages  entities  to adopt a  fair-value  based
method of  accounting  for stock  options or similar  equity based  compensation
using  the  intrinsic-value   method  of  accounting  prescribed  by  Accounting
Principles Board (APB) Opinion No. 25,  Accounting for Stock Issued to Employees
(APB 25). The Company has elected to continue to apply the  provisions of APB 25
and provide proforma footnote disclosures required by SFAS No. 123.


Concentrations of Credit Risk

         Financial   instruments  which  potentially   subject  the  Company  to
concentrations  of credit risk consist  principally  of trade  receivables.  The
Company  provides credit to its customers in the normal course of business,  and
accordingly  performs  ongoing credit  evaluations and maintains  allowances for
potential  credit  losses.  Concentrations  of credit risk with respect to trade
receivables are limited due to the Company's large number of customers and their
dispersion across many geographic areas.

         For the year ended December 31, 1999, one customer  accounted for 11.3%
and no other  customer  accounted  for  more  than  10% of the  Company's  total
revenues.

Income Taxes

         The  Company  uses the asset and  liability  method of  accounting  for
income  taxes.  Under this  method,  deferred  tax assets  and  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 basis.  Deferred tax assets and  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 settled or recovered.  The
effect  on  deferred  tax  assets  and  liabilities  of a change in tax rates is
recognized in the period that includes the enactment date.

         The Company has recognized no tax benefit for the net operating losses
incurred during the years ended December  31, 1999 and 1998 due to uncertainties
about the Company's ability to generate future earnings to offset such losses.

Basic and Diluted Net Loss Per Common Share

         Basic net loss per common share is  calculated  based upon the weighted
average  number of common  shares  outstanding  during  the  periods  presented.
Diluted loss per common share is the amount of loss 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.  In
calculating  net loss per share for the years ended December 31, 1999, and 1998,
warrants  and options to purchase  1,581,000,  and  1,687,500  potential  common
shares,  respectively,  are not included in the  computation of diluted net loss
per  common  share  as their  effect  would  have  been  anti-dilutive,  thereby
decreasing the net loss per common share.



                                       33
<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         A reconciliation between the basic and diluted  weighted-average number
of shares outstanding as of December 31, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
                                                                             December 31,
                                                                     --------------------------------
                                                                         1999              1998
                                                                     --------------     -------------
<S>                                                                  <C>                <C
Basic weighted average number of common shares...................         3,384,598         2,792,738
Weighted average number of common stock options..................                 -                -
                                                                     ==============     =============
       Diluted weighted average number of shares..................        3,384,598         2,792,738
                                                                     ==============     =============
</TABLE>


Advertising

         Advertising  costs are  expensed  as  incurred.  The  Company  does not
participate in direct  response  advertising.  Advertising  expense  amounted to
$956,106 and $531,949 in 1999 and 1998, respectively.

Comprehensive Loss

         The company  adopted  SFAS No.  130,  Reporting  Comprehensive  Income,
effective January 1, 1998. SFAS No. 130 establishes  standards for reporting and
display of comprehensive  loss and its components in financial  statements.  For
the years ended December 31, 1999 and 1998  comprehensive  loss was equal to the
net loss as presented in the accompanying statements of operations.

Reclassifications

         Certain  reclassifications  have been made in 1998 to conform  with the
1999 presentation.

(3)      INVENTORIES

          Inventories,  consisting principally of telecommunication headsets and
amplifiers   and   telephone   accessories,   home  storage  and   organization,
flashlights,  and other miscellaneous products sold to mass market merchandisers
as of December 31, 1999 and 1998, respectively, are summarized as follows:


                                                    1999               1998
                                                 ------------       ------------
   Raw materials............................     $   886,377             902,703
   Work-in-Process..........................         135,931             309,815
   Finished Goods...........................      1,940,7561           3,644,723
                                                 ------------       ------------
                                                 $  2,963,064          4,857,241
                                                 ============       ============



                                       34
<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998


(4)      INTANGIBLE ASSETS

Intangible assets are comprised of the following as of December 31:

                                                                  Est. Useful
                                       1999           1998       Life (years)
                                    ---------      --------      ------------
   Goodwill                            34,307             -           2
   License agreement                  203,509       203,509           40
   Product rights                     296,262       301,263           5-10
   Non-compete agreements             112,500        87,500           5
                                    ---------      --------
                                      646,578       592,272

   Less accumulated amortization      451,835       387,170
                                    ---------      --------
                                     $194,743      $205,102
                                    =========      ========

(5)      ASSET ACQUISITION

         On July 15, 1999, the Company purchased certain assets of Transworld at
a purchase price of $85,000.  The  acquisition was accounted for by the purchase
method.  Transworld is a manufacturer of telephone shoulder rests and was a main
competitor  of the Company in that  product  line.  In exchange for the purchase
price payment,  the Company  acquired  machinery and equipment,  inventory,  and
intangible assets that include a non-compete agreement and goodwill.

         The  allocation  of the $85,000  purchase  price among the tangible and
intangible assets is summarized as follows:
                                                                    Amortization
                                                                        Period
                                                                       (years)
                                                                   -------------
         Purchase price allocation:
         Net tangible assets acquired                    $25,693
           Intangible assets:
             Non-compete agreement                        25,000          5
             Goodwill                                     34,307          2
                                                        --------
         Total purchase price                            $85,000
                                                        ========


(6)      SHORT-TERM NOTE PAYABLE

              The short-term note payable consists of a revolving line-of-credit
obtained on May 27, 1998 from a regional financial  institution that provides up
to  $3,000,000  bearing  interest  at a rate of prime  plus three  percent  with
interest  payable  monthly  (11.5%  and  9.75% at  December  31,  1999 and 1998,
respectively).  The note is secured by accounts  receivable and inventory and is
due May  26,  2001.  As of  December  31,  1999  and  1998,  direct  outstanding
borrowings totaled $1,831,622 and $1,389,223, respectively. The amount of unused
borrowings  under the Company's  credit facility is limited to the  then-current
levels of inventory and  receivables  discounted  at 40% and 78%,  respectively.
Under the terms of the loan  agreement,  the  Company is  required  to  maintain
financial  covenants and ratios,  including book net worth,  net income and debt
service coverage.  At December 31, 1999 the Company was in default of certain of
these covenants, however, the Company has obtained a waiver. The Company and the
lending  institution have negotiated an amendment to the agreement which amended
the terms of certain of the financial covenants and ratios for 2000.

                                       35

<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(6)           SHORT-TERM NOTE PAYABLE (Continued)

          Maximum and average  borrowings as well as weighted  average  interest
rate for the years ended December 31, 1999 and 1998 are as follows:

                                                    1999               1998
                                               --------------     --------------
        Maximum Outstanding                        $2,503,277         $2,416,638
        Average Outstanding                        $2,048,824         $1,780,576
        Weighted Average Interest Rate                 10.83%              8.25%


(7)      LONG -TERM DEBT

         Long-term debt consists of the following at December 31, 1999 and 1998:

                                                               1999       1998
                                                             --------   --------

         Term note  payable  to a bank,  interest
         at prime plus 1%, due May 26, 2001,
         secured by equipment                                163,675     266,175

         Note payable to a company; due in monthly
         installments of  $6,807 plus interest at 6%;
         due October 31, 2000, unsecured                           -     149,755

         Note payable to a financial institution;
         due in monthly installments of $455 with
         interest at 8.75%, due November 29, 2001,
         secured by a vehicle                                      -      13,976

         Note  payable to a bank;  due in monthly
         installments  of $10,234 with interest at
         8.75%, due November 1, 2010, secured by
         land and building                                         -     882,782


         Note  payable  to the Small  Business
         Administration;  due in  monthly
         installments  of $8,541 with  interest at
         7.32%;  due August 14,  2016,
         secured by land and building as well as
         assets of a former officer of the Company                 -     940,685
                                                           ---------   ---------

         Total long-term debt                                163,675   2,253,373

         Less current portion                                 82,500     246,855
                                                           ---------   ---------

         Total long-term debt excluding current
         portion                                           $  81,175  $2,006,518
                                                           =========  ==========

                                       36

<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(7)      LONG -TERM DEBT (Continued)

         Aggregate maturities subsequent to December 31, 1999, are as follows:

2000      82,500
2001      81,175

                      Total long-term debt                          $163,675


(8)      LEASES

         The  following  represents  assets under  capital lease at December 31,
1999 and 1998:


                                                    1999                1998
                                                ------------         -----------
      Equipment                                 $   206,938          $    82,357
      Building                                    2,865,000                    -
                                                ------------         -----------
                                                   3,071,938              82,357
      Less accumulated depreciation                   71,172              33,704
                                                ------------         -----------
      Net property under capital lease          $  3,000,766         $    48,653
                                                ============         ===========

         Amortization  of assets  held  under  capital  lease is  included  with
depreciation expense. Rental expense for operating leases during the years ended
December 31, 1999 and 1998 was $31,189 and $21,407, respectively.

         On  November  4, 1999,  the  Company  sold its  corporate  headquarters
facility for $2,865,000.  Simultaneously with the sale, the Company entered into
a  20-year  leaseback  agreement  with the  purchasing  party.  The  party  that
purchased the building is not  affiliated  with or related to the Company or any
of its officers or directors,  and the terms of the transaction  were the result
of arms-length  negotiations.  In connection with the sale/leaseback the Company
recorded  a  deferred  gain  of  $246,417,   which  is  being   amortized  on  a
straight-line  basis  over  the term of the  related  lease  as a  reduction  to
interest expense.

         At  December  31,  1999 the  Company  is  obligated  under the terms of
non-cancelable  leases  on the  Company  headquarters  and  warehouse  building,
machinery and equipment, and automobiles.  The leases have the following minimum
lease commitments:
                                                  Capital      Operating
                                                   leases       leases
                                               ----------      ----------
     Year ended December 31: 2000                $407,033      $   11,170
                             2001                 407,817           6,501
                             2002                 371,938           6,076
                             2003                 330,915           6,076
                             2004                 335,724           3,038
                             Later              5,992,975               -
                                                ----------      ---------
     Total minimum lease payments               7,846,402       $  32,861
                                                                =========
      Less amount representing interest (at
        rates ranging from 3.38% to 29.69%)     4,827,923
     Present value of total minimum capital
        lease payments                          3,018,479
     Less current portion                          60,739
                                               ----------
     Capital lease obligations excluding
        current portion                        $2,957,740
                                               ==========

(9)      CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT

         On May 22, 1998,  the Company  closed a  transaction  that provided net
capital proceeds of $1,335,000.  The transaction was accomplished  pursuant to a
Convertible  Debenture and Private Equity Line of Credit  Agreement (the "Credit
Agreement")  between  the Company  and a group of five  unaffiliated  investors.
These  funds were  raised  pursuant  to the sale by the  Company of  Convertible
Debentures (the "Convertible  Debentures") in the aggregate  principal amount of
$1,500,000 due May 22, 2001. The  Convertible  Debentures are  convertible  into
shares of the Company's common stock at the lesser of: (i) 75% of the average of
the three  lowest  closing bid prices of the  Company's  common stock during the
22-trading-day  period immediately  preceding the conversion date or (ii) $6.50,
which was 100% of the closing bid price on the trading day immediately preceding
the closing date of the Credit Agreement.

         As of December  31, 1999 the  investors  had  converted  the  following
amounts of principal and interest accrued thereon into the following  amounts of
common stock :



                                       37
<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(9)      CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)
<TABLE>
<CAPTION>
     Date of         Conversion         Principal        Number of                         Number of
    Conversion      Price/Share         Amount           Shares       Interest Amount       Shares
   -----------      -----------        ---------        ---------     ---------------     ----------
<S>  <C>              <C>              <C>                <C>             <C>               <C>
     6/10/99          $1.3438          $132,500           98,604          $11,180            8,320
      7/8/99          $1.1250          $ 75,000           66,667          $10,680            9,157
     10/8/99          $0.7500          $ 53,000           70,666          $ 8,904           11,872
     12/1/99          $0.7500          $ 13,000           17,333          $ 2,418            3,224
</TABLE>


         Accordingly,  as of  December  31,  1999,  there was a total  principal
amount of  outstanding  Convertible  Debentures  of  $1,226,500  and $422,842 of
accrued  interest and  penalties.  Assuming a  hypothetical  conversion  of this
entire remaining principal amount of the Convertible  Debentures  outstanding as
of December 31, 1999,  and all interest  accrued  thereon at the rate of 12% per
annum as of December 31, 1999, the Convertible  Debentures  would be convertible
into  approximately   1,649,000  shares  of  the  Company's  common  stock.  The
Convertible Debentures are callable by the holders thereof.

         In addition to the sale of the Convertible Debentures, under the Credit
Agreement,  the Company  also  obtained  the right to use a "put"  mechanism  to
periodically  draw down up to  $10,000,000  of  additional  equity  capital (the
"Equity  Line").  Under the  terms of the  Credit  Agreement,  the  Company  was
obligated  to draw down a minimum  of  $1,000,000  of the Equity  Line,  and all
amounts  were to have been  drawn in  increments  of not less than  $50,000.  In
return for the payment of additional  capital under the Equity Line, the Company
would have been  required  to issue  shares of its  common  stock at a per share
purchase  price  equal to 80% of the  average of the three  lowest  closing  bid
prices of the common stock during a six day valuation  period  commencing  three
days  before the draw date and  ending two days after the draw date.  The Equity
Line could not have been utilized,  and the Company would have had no obligation
to exercise any portion of the put mechanism,  until after the effective date of
a registration  statement covering the shares of common stock issuable under the
Credit  Agreement  (the  "Registration  Statement").   Additionally,   upon  the
effectiveness of the Registration Statement,  the Company was obligated to issue
an additional $500,000 principal amount of Convertible  Debentures,  pro rata to
the investors.

     On June 25, 1999, the Company and the investors entered into a Modification
Agreement  (the  "Modification  Agreement"),  under which the parties  agreed to
cancel  the  Equity  Line  and  all  of  the  parties'  respective   obligations
thereunder.  The parties to the Modification Agreement also agreed to cancel the
investors'  obligation  to purchase  and the  Company's  obligation  to sell the
additional  $500,000  principal  amount  of  Convertible   Debentures  upon  the
effectiveness  of the  Registration  Statement.  Additionally,  the Modification
Agreement provided for the modification and temporary abatement of the Company's
obligation to pay cash  liquidated  damages of $45,000 per month  resulting from
the Company's  obligation to have the Registration  Statement declared effective
on or before August 28, 1998. Pursuant to the terms of the Credit Agreement, the
Company paid  liquidated  damages from  September 23, 1998 through and including
February 23, 1999 in the  aggregate  amount of $210,000,  of which  $135,000 was
paid  during the year ended  December  31,  1999 and $75,000 was paid during the
year ended December 31, 1998. Under the Modification  Agreement,  the Company is
to accrue atotal of $180,000 of liquidated  damages for the period from February
24, 1999 through and including  June 23, 1999,  which accrued amount was to have
been  payable  at any time  after  October 1, 1999,  upon  request  for  payment
therefore by the investors,  in shares of the Company's common stock. The number
of shares of common stock issuable upon such payment was to have been determined
by dividing  the total  amount of damages  accrued by 100% of the average of the
closing bid prices of the  Company's  common  stock  during the five trading day
period immediately preceding the date of such payment.  Additionally,  under the
Modification Agreement, the Company's obligation to pay liquidated damages under
the Credit  Agreement was abated from June 24, 1999 through  September 23, 1999,
provided that the  Registration  Statement  was declared  effective on or before
October 31, 1999. Additional liquidated damages in the amount of $45,000 were to
have accrued for the period  between  September 24, 1999 and October 23, 1999 if
the Registration  Statement was not declared  effective on or before October 31,
1999.  If the  Registration  Statement  was not declared  effective on or before
October 31, 1999,  the  Modification  Agreement's  provisions  providing for the
payment of liquidated  damages in stock and the abatement of liquidated  damages
from June 23, 1999 to September 23, 1999 and the provisions


                                       38
<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(9)      CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT (Continued)

allowing the Company to pay liquidated  damages in common stock rather than cash
were subject to rescission at the option of the investors.  Except to the extent
specifically modified by the Modification Agreement, the terms and conditions of
the Credit  Agreement  and the  documents and  instruments  incorporated  in the
Credit Agreement were not affected in any way by the Modification Agreement.

         Although the Company filed an amendment to the  Registration  Statement
on July 2, 1999, the Registration Statement was not effective by the October 31,
1999 deadline set forth in the Modification Agreement. On November 12, 1999, the
Company and the investors  executed an amendment to the  Modification  Agreement
that substituted  February 15, 2000 for the October 31, 1999 deadline originally
in the Modification Agreement.  Consequently,  the accrual of liquidated damages
will be deferred from June 24, 1999 until  February 15, 2000,  provided that the
Registration  Statement  becomes  effective  and  shareholder  approval  of  the
transaction is obtained on or before that date. Liquidated damages from February
24, 1999  through  June 23, 1999 have been accrued and continue to be payable by
the Company as specified in the  Modification  Agreement.  The November 12, 1999
agreement  also  amended  the  Convertible  Debentures  such  that,  even if the
Convertible  Debentures  are still  outstanding  at their maturity date, May 22,
2001, the Convertible Debentures will not automatically be converted into common
stock unless the holders so elect. See note 18 for discussion of The Convertible
Debenture Retirement Agreement ("The Retirement Agreement").

         Also in  connection  with  the  Credit  Agreement,  the  investors  and
placement agent were issued warrants. These warrants were issued as Series A and
Series B as follows:
<TABLE>
<CAPTION>
                                                                      Placement           Exercise
                                                 Investors              Agent              Price
                                              -----------------    ----------------    ---------------
<S>                                               <C>                  <C>                 <C>
   Series A Warrants.......................       150,000              150,000             $6.50
   Series B Warrants.......................       150,000              300,000             $7.15
</TABLE>

Under the Credit Agreement, the Company was obligated to issue 50,000 additional
Series A warrants to both the placement  agent and the investors,  collectively,
upon the issuance of the additional $500,000 of Convertible Debentures.  Because
the Modification  Agreement cancelled irrevocably the Company's obligations with
respect to the additional $500,000 of Convertible  Debentures,  the Company will
not issue  additional  Series A  warrants.  Of the  warrants  that were  issued,
one-sixth of the market  value of the Series A and B warrants  was  allocated to
the Convertible Debenture and five-sixths was allocated to the Equity Line. This
allocation was based on the relative notional amounts of the two elements of the
Credit  Agreement  as of the  date of the  Credit  Agreement.  The  value of the
warrants issued to the investors was written off in 1998 as a one-time, non-cash
debt issuance cost, because the warrants were immediately exercisable. The value
of the warrants  issued to the placement  agent and allocated to the Convertible
Debentures,  and $500,000,  representing  the intrinsic  value of the beneficial
conversion  premium,  were written off as non-cash expense in the fourth quarter
of 1998, when the Convertible Debentures became callable by the investors.

         The Company  also  issued,  as part of the  transaction  involving  the
Credit Agreement,  consideration of up to 80,000 shares of its common stock as a
fee to the placement  agent. Of these shares,  20,000 were issued at the time of
the closing.  The remaining 60,000 shares were deposited into escrow and were to
be released in 6,000 share  increments as each  $1,000,000  was drawn down under
the Equity  Line  established  under the  Credit  Agreement.  Because  under the
Modification  Agreement  the  Equity  Line  was  cancelled,  and  therefore  the
placement agent never would have been entitled to the 60,000  additional  shares
of common stock deposited in escrow,  the escrow was terminated,  and the 60,000
shares of common stock were returned to the Company for cancellation.

(10)     INCOME TAXES

         Income tax expense  (benefit)  attributable  to income from  continuing
operations consists of:



                                       39
<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(10)     INCOME TAXES (Continued)


                                          Current          Deferred        Total
      Year ended December 31, 1999
      Federal                         $         -      $        -     $        -
      State                                     -               -              -
                                      -----------      ----------     ----------
                                      $         -      $        -     $        -
                                      ===========      ==========     ==========

      Year ended December 31, 1998
      Federal                         $    19,386      $  (4,386)     $   15,000
      State                                   650           (650)              -
                                      -----------      ----------     ----------
                                      $    20,036      $  (5,036)     $   15,000
                                      ===========      ==========     ==========


         Income tax expense (benefit) from continuing  operations  differed from
the amounts  computed by applying the U.S. federal income tax rate of 34 percent
to pretax loss from continuing operations as a result of the following:

<TABLE>
<CAPTION>
                                                                   1999            1998
                                                                   ----            ----
<S>                                                           <C>             <C>
      Computed "expected" tax benefit                         $  (1,182,365)  $  (983,952)
      Change in the valuation allowance for deferred tax
         assets allocated to income tax expense                   1,108,011       269,952
      Non-deductible financing costs                                152,828       682,733
      State income tax benefit net of federal tax effect            (99,015)      (23,974)
      Other                                                          20,541        70,241
                                                              --------------  ------------
      Total                                                   $            -  $    15,000
                                                              ==============  ============
</TABLE>

         The tax effects of temporary  differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998, are presented below.


                                                           1999         1998
                                                           ----         ----
    Deferred tax assets:
      Inventory capitalization                         $    32,249   $    60,041
      Allowance for bad debts                               14,560        11,261
      Compensated absences accrued for financial
         reporting purposes                                 13,928        25,784
      Net operating loss carry-forward                   1,814,205       649,945
      Intangibles, principally due to differences
         in amortization                                    31,380        17,701
      Warranty and other reserve                            56,208         8,837
      Research and experimentation credit                        -        25,000
                                                       ------------  -----------
       Gross deferred tax assets                         1,962,530       798,569
        Less valuation allowance                         1,864,244       756,233
                                                       -----------   -----------
    Deferred tax assets                                     98,286        42,336

    Deferred tax liabilities:
      Plant and equipment, principally due to
         differences in depreciation                        98,286        42,336
                                                       -----------   -----------
    Deferred tax liabilities                                98,286        42,336
                                                       ===========   ===========

    Net deferred tax assets (liabilities)              $         -   $         -
                                                       ===========   ===========



                                       40
<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(10)     INCOME TAXES (Continued)

         The  valuation  allowance for deferred tax assets as of January 1, 1998
was  $486,281.  The net change in the total  valuation  allowance  for the years
ended December 31, 1999 and 1998 was $ 1,108,011 and $ 269,952, respectively.

         Subsequently   recognized  tax  benefits   relating  to  the  valuation
allowance  for deferred tax assets as of December 31, 1999 will be reported as a
reduction of income tax expense from continuing operations.
         The Company has  $4,863,370  of net  operating  loss  carryforwards  at
December 31, 1999.  Of the total net  operating  loss  carryforwards,  $525,792,
$490,219,  $847,359 and 3,000,000  expire in the years ended  December 31, 2011,
2012, 2018, and 2019 respectively.

         As measured  under the rules of the Tax Reform Act of 1986, the Company
has  undergone  a greater  than 50  percent  change  in  ownership  since  1986.
Consequently,  use of the  Company's  net operating  loss  carryforward  against
future  taxable  income in any one year may be limited.  The  maximum  amount of
carryforwards  available  in a  given  year is  limited  to the  product  of the
Company's  fair  market  value on the date of  ownership  change and the federal
long-term  tax-exempt rate, plus any limited  carryforward not utilized in prior
years.  Management  does not believe that these rules will adversely  impact the
Company's ability to utilize the above losses in the aggregate.

(11)     STOCKHOLDERS' EQUITY

           On  February  4, 1999,  the Company  entered  into a Deposit  Payable
Conversion  Agreement,  whereby a $1,000,000  deposit received by the Company in
early 1998 and recorded as a liability in the  accompanying  balance sheet,  was
cancelled and the Company issued 500,000 shares of restricted common stock under
Regulation D to the depositor.

         On  November  4, 1999,  the  Company  sold its  corporate  headquarters
facility for $2,865,000.  Simultaneously with the sale, the Company entered into
a 20-year leaseback agreement with the purchasing party. The net proceeds to the
Company were  $831,000,  after paying  long-term  debt secured by the  building,
broker and legal fees, and other ancillary  charges.  The proceeds from the sale
will be used for working capital  purposes.  As an additional  inducement to the
purchaser,  the Company issued a total of 33,948 shares of its restricted common
stock to the purchaser having a market value of $35,000 based on the fair market
value of the restricted stock on the date of issue. The party that purchased the
building is not affiliated with or related to the Company or any of its officers
or directors,  and the terms of the  transaction  were the result of arms-length
negotiations.

         In March 1998, the Company received $580,000 as a nonrefundable payment
under an agreement with a third party pursuant to which the third party acquired
nonexclusive rights to market certain of the Company's products internationally.
The cash paid to the Company was obtained from the sale of the Company's  common
stock by such third  party.  The Company is  therefore  of the opinion  that the
proceeds of such  transaction  were not  attributable  to the  culmination of an
earnings  process.  Consequently,  such proceeds  have been  accounted for as an
addition to capital in the accompanying consolidated financial statements.



                                       41
<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(12)     BUSINESS SEGMENT INFORMATION

         Information as to the  operations of the Company in different  business
segments  (rounded  to the nearest  thousandth)  is set forth below based on the
nature of the products and services offered.  Management  evaluates  performance
based on several  factors,  of which the primary  financial  measure is business
segment  operating  income before  noncash  amortization  of  intangible  assets
("EBITDA").  The  accounting  policies of the business  segments are the same as
those described in the summary of significant accounting policies.

                                                 YEARS ENDED DECEMBER 31,
                                             ----------------------------------
REVENUES:                                         1999                 1998
------------------------------------------     -------------      ------------
Telecommunication Headsets and
   Amplifiers and Telephone Accessories...     $   7,320,000      $  7,640,000
Home Storage and Organization.............         4,648,000         4,703,000
Flashlights...............................         1,810,000           989,000
Miscellaneous/Mass Market.................           992,000         3,247,000
                                               -------------      ------------

       Total..............................       $14,770,000      $ 16,579,000
                                                 ===========      ============


                                                   YEARS ENDED DECEMBER 31,
                                               --------------------------------
OPERATING INCOME (LOSS):                            1999            1998
--------------------------------------------     ---------        --------
Telecommunication Headsets and Amplifiers
   and Telephone Accessories................   $    (603,000)      $   904,000
Home Storage and Organization...............      (1,022,000)         (496,000)
Flashlights.................................        (977,000)         (696,000)
Miscellaneous/Mass Market...................           6,000          (152,000)
                                               --------------      ------------

       Total................................   $  (2,596,000)      $  (440,000)
                                               ==============      ============


                                                    YEARS ENDED DECEMBER 31,
                                               --------------------------------
DEPRECIATION AND AMORTIZATION (1):                  1999               1998
---------------------------------------------    ----------          ----------
Telecommunication Headsets and Amplifiers
   and Telephone Accessories.................   $   312,000         $   206,000
Home Storage and Organization................       198,000             183,000
Flashlights..................................        78,000              93,000
Miscellaneous/Mass Market....................             -              23,000
                                                -----------         -----------

       Total.................................     $ 588,000         $   505,000
                                                ===========         ===========

(1) Amortization  includes all amortization  relating to product license rights,
goodwill, non-competes and purchased patents.



                                       42
<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(12)     BUSINESS SEGMENT INFORMATION (Continued)

         Information as to the assets and capital expenditures of the Company is
as follows:

                                                    YEARS ENDED DECEMBER 31,
                                                --------------------------------
ASSETS (1):                                         1999                 1998
---------------------------------------------   ------------       -------------
Telecommunication Headsets and Amplifiers
   and Telephone Accessories.................   $  4,827,000       $   4,795,000
Home Storage and Organization................      2,468,000           3,200,000
Flashlights..................................      1,676,000           1,728,000
Miscellaneous/Mass Market....................              -           1,366,000
                                                ------------       -------------
     Total assets for reportable segments....      8,971,000          11,089,000

Other assets.................................        156,000             319,000
Deferred loan costs and other assets not
   allocated to segments.....................        661,000             131,000
                                                ============       =============
       Consolidated total....................   $  9,788,000       $  11,539,000
                                                ============       =============

                                                  YEARS ENDED DECEMBER 31,
                                                --------------------------------
CAPITAL EXPENDITURES:                               1999                 1998
---------------------------------------------   -------------      -------------
Telecommunication Headsets and Amplifiers
   and Telephone Accessories.................   $     179,000      $     157,000
Home Storage and Organization................         114,000            162,000
Flashlights..................................          44,000             69,000
Miscellaneous/Mass Market....................               -              6,000
                                                -------------      -------------

   Total.................................       $     337,000      $     394,000
                                                =============      =============


(12)     BUSINESS SEGMENT INFORMATION (Continued)

         Information  as to the Company's  operations in different  geographical
areas is as follows:

                                          YEARS ENDED DECEMBER 31,
                                       --------------------------------
REVENUES:                                 1999            1998
-----------------------------------    -----------    -----------
United States......................   $ 14,596,000   $ 16,402,000
Other (1)..........................        174,000        177,000
                                      ------------   ------------

       Total.......................   $ 14,770,000   $ 16,579,000
                                     =============   ============

(1)      Includes Canada, Europe and other miscellaneous.


                                                YEARS ENDED DECEMBER 31,
                                             -----------------------------
OPERATING LOSS:                                1999                 1998
--------------------------------             --------            ---------

United States...................           $ (2,596,000)         $ (440,000)
                                           =============         ===========


                                                YEARS ENDED DECEMBER 31,
                                             ------------------------------
ASSETS:                                        1999             1998
--------------------------------             --------         --------
United States...................          $  9,418,000     $  11,089,000
Asia............................               370,000           450,000
                                          ------------     -------------

       Total...........................   $  9,788,000     $  11,539,000
                                          ============     =============



                                       43
<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998


(13)     RELATED PARTY TRANSACTIONS

       The Company's  subsidiary  Softalk,  Inc.,  licenses  certain  patent and
trademark rights  associated with the Company's Softalk product line pursuant to
a royalty  agreement with WAC Research  Inc., a Utah  corporation  ("WAC").  The
Company  believes  that Donald M. Wood,  who,  until  January 14, 1999,  was the
Company's Chairman and Chief Executive Officer,  owns a one-half equity interest
in WAC. WAC obtained the patent and trademark rights for the Softalk products in
August 1986,  when WAC  purchased  them from the inventor of Softalk and related
products  in a private  transaction.  The  purchase  price for such  patent  and
trademark  rights was  $1,000,000  to  $2,000,000,  which was paid to  Practical
Innovations,  Inc. by a combination  of the Company's  common stock and cash. At
that time,  the  Company  acquired  license  rights to the  Softalk  patents and
trademark,  in return for which it agreed to pay a 10%  royalty  on all  Softalk
sales.  That royalty rate subsequently was reduced to 5%. During the years ended
December 31, 1999 and 1998,  the Company  paid  royalties to WAC of $298,420 and
$172,669, respectively.

         In September 1998 WAC advanced  $98,403 to the Company as reimbursement
to the  Company  of Mr.  Wood's  salary  for the first six  months of 1998.  The
Company  subsequently  determined  that this amount was a payable to WAC, and at
December 31, 1998 the Company had recognized  the $98,403 in accounts  payable -
related party, in the accompanying consolidated balance sheet. In February 1999,
the Company repaid this amount to WAC.

     Donald M. Wood, who served as the Company's Chief Executive  Officer during
the entirety of 1998 and until  January 14,  1999,  owned a  residential  rental
property in Park City,  Utah until August 1998. The Company leased this property
from him to use for  Company-related  travel,  promotional  work,  lodging,  and
entertainment  for  customers,  suppliers,  and  employees.  The monthly  rental
payment for this property was $7,000. The Company paid $-0- and $56,000 for each
of the years  ending  December 31, 1999 and 1998,  respectively.  This cost also
covered  operating and maintenance  costs, and general care of the property.  In
August 1998, this property was sold by Mr. Wood. As a result,  the Company is no
longer obligated to pay rental fees, and paid no such rental fees during 1999.

         In July 1998,  the Company's  Board of Directors  commenced an internal
investigation  into the facts  and  circumstances  of a number  of  transactions
between the Company and certain of its officers and directors as well as several
general  corporate  and  management  concerns  brought to the  attention  of the
Company's independent directors. The Company engaged an unrelated third party to
conduct the  investigation,  which  concluded in January 1999.  Thereafter,  the
Company's  former  Chairman and CEO  resigned and retired from the Company.  The
Company does not anticipate  taking  further  action,  legal or otherwise,  with
respect to the matters  and  individuals  investigated,  although  the  Company,
through its new management,  has identified several areas in which new corporate
governance  policies  have been adopted or old policies  changed.  In connection
with the investigation,  several of the Company's  directors engaged independent
legal  counsel.  An aggregate of $112,938 of such legal fees were  reimbursed by
the  Company  pursuant  to action by the  Company's  Board of  Directors  at the
commencement of the investigation.

         The  Company  grants  various  options  under  both  non-qualified  and
incentive stock options plans. These options are described in detail in Note 15.
The  non-qualified  plans included 537,500 options granted to Muito Bem Ltd., an
entity  controlled by Donald M. Wood,  the former  Chairman and Chief  Executive
Officer of the Company, at an exercise price of $2.50 per share. Mr. Wood agreed
in 1999 to cancel all stock options issued to Muito Bem.

         In May 1989,  the Company  engaged  Alpha Tech Stock  Transfer  Company
("Alpha Tech") as the Company's stock transfer agent.  Alpha Tech served in that
capacity until January 13, 1999, when the Company terminated Alpha Tech's agency
and  instructed  Alpha Tech to transfer the Company's  records to American Stock
Transfer Company,  New York, New York. James W. Farrell,  the principal of Alpha
Tech, is the brother-in-law of Donald M. Wood, the Company's former Chairman and
Chief  Executive  Officer who resigned  from the Company  effective  January 14,
1999.  During the years ended December 31, 1999 and 1998, the Company paid Alpha
Tech a total of $-0- and $1,530,  respectively,  in fees for services  rendered.
The Company  believes that the fees paid to Alpha Tech during these periods were
roughly  comparable to the fees it would have paid to a similar  local  transfer
agent for similar services.



                                       44
<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(14)     FAIR VALUE OF FINANCIAL INSTRUMENTS

         The fair  value of a  financial  instrument  is the amount at which the
instrument could be exchanged in a current  transaction between willing parties.
Financial  instruments  are  included  in the  consolidated  balance  sheets  at
carrying  cost.  The carrying  amounts  approximate  fair value for cash,  trade
accounts  receivable,  prepaid expenses and other current assets,  other assets,
accounts  payable,  and accrued  expenses because of the short maturity of these
instruments.  Because the blended interest rate of debt approximates the current
interest  rates   available,   the  carrying  value  of  debt  instruments  also
approximates fair market value.

(15)     STOCK OPTIONS

         The Company has established  three stock option programs under which it
has granted both  non-qualified and incentive stock options to employees,  board
members,   and  certain  related   entities.   Under  the  Company's   1996-1997
non-qualified  stock option  program ( the  "Non-Qualified  Plan"),  the Company
granted options to acquire  1,640,000 shares of common stock. The 1996 Incentive
Option Plan ("1996  Plan")  provides  for grants of qualified  stock  options to
acquire a maximum of 300,000  shares of common stock,  of which 200,000  options
have been granted to date.  The exercise  price of options  granted to employees
under either option program equals the market price on the date of grant, and as
a result  no  compensation  expense  has  been  recognized  in the  accompanying
financial statements.

          In January 1999, the Company's  former Chairman and CEO, and holder of
900,000 of the options  granted in December  1996  (500,000  shares) and January
1997  (400,00  shares)  under the  Non-Qualified  Plan,  agreed to cancel  those
options. In addition to the non-qualified  options granted to employees to date,
the Company granted options to purchase  537,500 shares of common stock to Muito
Bem Ltd., an entity  controlled by a shareholder  and former CEO of the Company,
at a strike  price of $2.50 per share in  December  1996.  The  shareholder  and
former  executive  officer of the  Company  who owns Muito Bem,  Ltd.  agreed in
January 1999 to cancel all stock options issued to Muito Bem, Ltd.

         In May 1999,  the  Company's  Board of Directors  adopted the Company's
1999 Stock Option And Incentive  Plan (the "1999 Plan").  Under the 1999 Plan, a
total of 640,000 shares were reserved for issuance in the form of  non-qualified
stock  options or  qualifying  Incentive  Stock  Options.  During the year ended
December  31,  1999,  the  compensation  committee  of the  Company's  Board  of
Directors  has granted  stock options under the 1999 Plan to purchase a total of
634,500 shares of common stock to various executives, employees and directors of
the Company.  Such options were granted as non-qualified options having terms of
10 years from the date of grant.  All such  options  have an  exercise  price of
between $1.00 and $1.75 per share,  with a weighted  average price of $1.495 per
share.  The exercise price for the options were 100% of the fair market value on
the grant date.

         The Company's  qualified options issued to employees  December 1996 and
January 1997  may be exercised upon the  holder-employee's continued  employment
with the  Company  for six years and the  Company's  achievement  of  profitable
operations for three out of those six years.  Such options expire ten years from
the date of the grant.  Options granted under the 1996 non-qualified Plan become
exercisable  as of the date of grant  and  expire  five  years  from the date of
grant, or three months  following  termination,  or 24 months following death of
the employee.



                                       45
<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(15)     STOCK OPTIONS (Continued)

  Summary of stock options is as follows for the years ended December 31:

<TABLE>
<CAPTION>
                                                          1999                              1998
                                              ----------------------------       -----------------------
                                                                Weighted                       Weighted
                                                                 Average                        Average
                                                   Shares       Exercise          Shares       Exercise
  FIXED OPTIONS:                                 (000's)         Price            (000's)        Price
  --------------                              -----------      ----------        ---------    ----------
<S>                                           <C>              <C>               <C>            <C>
  Outstanding at beginning of year.........          909         $2.500              934         $2.500
  Granted..................................          635         $1.495               --             --
  Exercised................................           --             --              (17)        $2.500
  Canceled.................................         (607)        $2.500               (8)        $2.500
                                              ===========                        --------
  Outstanding at end of year...............          937         $1.819              909         $2.500
                                              ===========                        ========
  Options exercisable at year-end..........          547         $1.708              171         $2.500
                                              ===========                        ========
  Weighted average fair value of
    options granted during the year.......    $    1.495                              --
  Weighted average remaining
    contractual life for exercisable
    options at year-end...................     8.5 years                          2.5 years
</TABLE>

<TABLE>
<CAPTION>
                                                                1999                              1998
                                                      --------------------------       -------------------------
         VARIABLE OPTIONS:                               Shares       Exercise            Shares       Exercise
                                                        (000's)         Price            (000's)         Price
<S>                                                   <C>               <C>             <C>               <C>
         Outstanding at beginning of year.........        1,640         $2.00               1,640         $2.00
         Granted..................................           --
         Canceled.................................       (1,315)        $2.00                  --            --
                                                      ==========                        =========
         Outstanding at end of year...............          325         $2.00               1,640         $2.00
                                                      ==========                        =========
</TABLE>

<TABLE>
<CAPTION>
         The  following  table  summarizes   information   about  stock  options
outstanding at December 31, 1999:

         FIXED OPTIONS
                                             OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
         ------------------    -------------------------------------------------    --------------------------------

                                                Weighted-average
                                                   remaining     Weighted-average                    Weighted-average
             Range of           Outstanding       contractual        exercise       Exercisable          exercise
          exercise prices          as of             life             price            as of              price
                                 12/31/99                                             12/31/99
         ------------------    --------------    --------------    -------------    -------------      -------------

<S>      <C>                   <C>                    <C>             <C>           <C>                   <C>
         $ 1.00 - 1.50               137,250          10              $1.03               72,594          $1.03
         $ 1.51 - 2.25               497,250          10              $1.63              372,812          $1.63
         $ 2.26 - 2.50               302,000          7.3             $2.50              102,000          $2.50
                               -------------                                        ------------
                                     936,500                                             547,406
                               =============                                        ============
</TABLE>

         The Company  applies the  intrinsic  value  method  under APB No. 25 in
accounting for stock-based employee compensation arrangements.  Had compensation
cost for the Company's stock option plans been  determined  pursuant to the fair
value method under SFAS No. 123, the  Company's  net loss and net loss per share
would have increased  accordingly.  The fair value of options  granted under the
Company's  1999 stock  option plan has been  estimated  using the  Black-Scholes
option pricing model with the following weighted average  assumptions:  dividend
yield of 0%, risk free interest rate of 5.8%,  expected  volatility of 81.8% and
expected lives of 10 years. No options were granted in 1998.

                                                      1999              1998
                                                 ---------------- -------------
     Net loss               As reported           $(3,477,545)     $(2,245,427)
                            Pro Forma             $(4,157,777)     $(2,245,427)
     Basic and diluted
        loss per share      As reported           $     (1.03)     $     (0.80)
                            Pro Forma             $     (1.23)     $     (0.80)





                                       46
<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(16)     EMPLOYEE BENEFITS

         The Company also has a defined  contribution  plan which is a qualified
retirement  plan under section  401(k) of the Internal  Revenue Code.  Under the
terms of the Plan, employees may make contributions to the Plan and are eligible
to  participate  in the Plan  immediately.  The  Company  has not made  matching
contributions to the Plan.

(17)     RECENT ACCOUNTING PRONOUNCEMENTS

         The  Financial   Accounting   Standards  Board  issued  SFAS  No.  133,
Accounting for Derivatives Instruments and Hedging Activities, in 1998. SFAS No.
133 establishes  accounting and reporting standards for derivative  instruments,
including   certain   derivative   instruments   embedded  in  other   contracts
(collectively  referred  to as  derivatives),  and for  hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities in the statement of financial position and measure those instruments
at fair value. For a derivative not designated as a hedging instrument,  changes
in the fair value of the  derivative are recognized in earnings in the period of
change. As a result of SFAS No. 137 the effective date for SFAS No. 133 shall be
in the first quarter of 2001.  The Company does not believe the adoption of SFAS
No.  133 will have a material  affect on the  financial  position  or results of
operations of the Company.

         On  December 3, 1999 the SEC staff  issued  Staff  Accounting  Bulletin
(SAB)  No.  101,  Revenue  Recognition  in  Financial  Statements.  SAB No.  101
summarizes   certain  of  the  staff's  views  in  applying  generally  accepted
accounting  principles  to revenue  recognition  in  financial  statements.  The
Company will  incorporate the guidance of SAB 101 in the first quarter of fiscal
2001.

(18)     SUBSEQUENT EVENTS

         The Company and the holders of the  Convertible  Debentures  executed a
Convertible  Debenture  Retirement  Agreement  dated as of February 1, 2000, and
which  closed on  February  23,  2000 (the  "Retirement  Agreement").  Under the
Retirement  Agreement,  and  in  exchange  for  payment  to the  holders  of the
Convertible  Debentures,  pro rata, of $1,500,000  cash,  the holders  agreed to
surrender  for  cancellation  all but a small  portion  of the then  unconverted
Convertible Debentures, to forgive or release the Company from its obligation to
pay accrued interest thereon,  to release the Company from its obligation to pay
accrued but unpaid liquidated damages resulting from the Company's  inability to
have the Registration Statement become effective, and otherwise terminate all of
the  obligations of either party under the Credit  Agreement.  At the closing of
the Retirement Agreement, the holders agreed to convert the remaining portion of
the principal  amount of the  Convertible  Debentures into that number of shares
that would have been issuable had such portion been converted as of February 14,
2000, or 94,450 shares. In light of the closing of the Retirement Agreement, the
Company has no ongoing obligations under the Credit Agreement, and has submitted
a request to the  Securities  and  Exchange  Commission  to withdraw the pending
Registration Statement.

         To allow the Company to consummate the transactions contemplated by the
Retirement  Agreement,   the  Company  completed  a  private  placement  of  its
restricted common stock to seven offshore  investors.  The private placement was
accomplished  pursuant  to a  Stock  Purchase  Agreement  (the  "Stock  Purchase
Agreement") between the Company and the investors dated as of February 11, 2000,
which closed on February  23,  2000.  Under the Stock  Purchase  Agreement,  the
Company agreed to issue a total of 1,222,811 shares of restricted  common stock.
The  consideration  paid by the investors was the greater of (i) $1.00 per share
or (ii) 100% of the average of the closing  bid prices of the  Company's  common
stock as quoted by the Nasdaq Stock Market for the five trading days immediately
preceding the date the investors paid the purchase price or any portion thereof.
The total proceeds to the Company from the private placement were $1,600,000, of
which  $1,500,000 was used to close the Retirement  Agreement,  and $100,000 was
used for general corporate purposes.



                                       47
<PAGE>
                           DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(19)     CONTINGENCIES

     On  December  7,  1999,  Donald M.  Wood,  the  former  Chairman  and Chief
Executive  Officer of the  Company,  and the Stith Law Office  (Wood's  personal
legal counsel) filed a lawsuit in the District Court of Salt Lake County,  State
of Utah (Case No. 990912153).  In that lawsuit, Wood and Stith asserted that the
Company has  breached a  Settlement  Agreement  executed by the Company and Wood
upon Wood's  resignation as the Company's  Chairman and Chief Executive Officer,
effective  as of January 14,  1999.  The lawsuit  includes  claims for breach of
contract,  fraud and  intentional  infliction of emotional  distress,  and seeks
money damages and punitive damages in the aggregate amount of $1,162,245.98.  On
February 7, 2000, the Company filed its answer to the Wood litigation,  in which
the Company asserted that its payment obligations under the Settlement Agreement
were excused by repeated breaches by Wood of various covenants of the Settlement
Agreement.  Simultaneously,  the Company filed a  counterclaim  against Wood for
money damages  incurred by the Company as a result of Wood's various breaches of
the  Settlement  Agreement.  The Company also  simultaneously  filed  motions to
dismiss the fraud and intentional  infliction of emotional  distress claims. The
Company's  management  believes the Wood litigation is without merit and intends
to vigorously defend.

         On March 19, 1999,  Alpha Tech Stock  Transfer  Company  ("Alpha Tech")
filed a lawsuit against the Company in Utah state court in Salt Lake City, Utah.
Alpha Tech was the Company's stock transfer agent for a period of  approximately
ten years  until the  Company  terminated  its  relationship  with Alpha Tech in
January 1999.  Alpha Tech is in the process of transferring  the Company's stock
transfer  records to American Stock Transfer,  New York, New York. The complaint
alleges  that the  Company  breached  its  service  contract  with Alpha Tech by
failing to pay $132,165 to Alpha Tech for transfer agent  services  rendered and
reimbursement  for legal expenses incurred by Alpha Tech. Alpha Tech has not yet
served  the  complaint;  the  Company  learned  about the  complaint  through an
unrelated  third  party.  The Company has demanded  that Alpha Tech  voluntarily
dismiss the  complaint,  which it has refused to do. The Company was notified in
March 2000 that Alpha Tech intends to serve  process,  although  service has not
been accomplished. In any event, the Company disputes the claims of Alpha Tech's
complaint and intends to vigorously defend this action if process is served.

         On February 22, 1999, the Company received a demand letter from counsel
for Mag Instrument,  Inc., a manufacturer and distributor of flashlights and one
of the Company's  competitors ("Mag"). In the letter, Mag accused the Company of
infringing  certain of Mag's patents and committing false advertising and unfair
competition.  Attached to the demand  letter was a copy of a complaint  filed in
the U.S.  District Court for the Central  District of California on February 19,
1999. The complaint  alleges that the Company has infringed  three patents owned
by Mag,  and seeks (i) an order  enjoining  the Company  from  infringing  Mag's
patents,  (ii) the delivery to the Court of all flashlights which infringe Mag's
patents,  (iii) that the  Company  identify  all  entities  who have  purchased,
distributed or sold any infringing  products,  (iv) that the Company  deliver to
the  Court  all  documents  reflecting  or  relating  to the  purchase,  sale or
distribution of any flashlights which infringe Mag's patents,  (v) money damages
sustained  by Mag  by  reason  of the  alleged  patent  infringement,  including
interest,  costs, and attorney's  fees.  During the quarter ended June 30, 1999,
Mag and the Company agreed to pursue efforts to settle the dispute and,  pending
such  discussions,  the complaint would be dismissed  without prejudice upon the
joint  stipulation  of the parties.  The Company has expressly  agreed with Mag,
however,  that if the  pending  disputes  are not  settled,  Mag may  refile the
complaint  in the same court and  venue.  Settlement  negotiations  with Mag are
still ongoing.



                                       48
<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

(19)     CONTINGENCIES (Continued)

         On April 27,  1998,  the  Enforcement  Division of the  Securities  and
Exchange Commission notified the Company that the SEC was anticipating filing an
administrative  proceeding  in the latter  part of  calendar  year 1998  against
various individuals and entities who had engaged in transactions with a Canadian
corporation. The SEC Enforcement Division further indicated that the Company may
be named as a defendant in such administrative action. In July 1998, the Company
submitted a Wells  Submission  to clarify why, in the Company's  estimation,  it
should  not be named  in the  administrative  proceeding,  if any.  The  Company
suggested  in  the  Wells  Submission  that  it  should  not  be  named  in  any
administrative  proceeding  because the Company never consummated  either of the
two  transactions  with  the  subject  Canadian  company  that the  Company  was
considering,  and the Company received no consideration in connection with those
aborted  transactions.  Moreover,  the  Company  believes  that its  conduct  in
connection  with those proposed but aborted  transactions  met applicable  legal
requirements. As of December 31, 1999, the Company had received no response from
the  Enforcement  Division about whether the SEC plans to name the Company in
any administrative action.

         In  addition,  the Company has  previously  disclosed  that it has been
informed of an investigation  by the Enforcement  Division of the Securities and
Exchange  Commission.  The Company believes this investigation  concerns certain
trading activity in the Company's common stock and other transactions  involving
the  Company's  securities,  however,  the Company has not been  informed of the
specifics of such  investigation.  The Company is  cooperating  fully with these
administrative  proceedings.  Any finding or order of the Commission  adverse to
the Company or any judgment against the Company in any of the pending litigation
matters,  would have an adverse effect on the business,  financial  condition or
results of operations of the Company, or the market for its common stock.

         On  February  12,  1998,  Fuji  Corporation  filed  a  claim  with  the
International  Trade  Commission  seeking  a  cease  and  desist  order  against
approximately  30  entities.  Fuji sought to enlist the aid of the U.S.  Customs
Department  in  preventing  the  importation  of  single-use  cameras  which are
manufactured by any of the defendant  entities and which infringe the patents of
Fuji. The Company does not manufacture  single-use  cameras,  but previously has
distributed  single-use  cameras  which have been  refurbished  and  reloaded in
mainland China. The Company was therefore  involved in the Fuji proceeding.  The
Company  engaged  intellectual  property  counsel and  vigorously  defended  its
position until December 1998,  when the Company sold its remaining  inventory of
single-use  cameras  to  another  entity.  In  connection  with that  sale,  any
liability of the Company in connection with the Fuji  proceeding,  including the
costs of further  defending  the action,  were  assumed by the  purchaser of the
Company's  single-use camera  inventory,  although the Company nominally remains
part of that litigation.

         The  Company is  involved  in various  other  claims and legal  actions
arising in the ordinary  course of business.  In the opinion of management,  the
ultimate  disposition  of these other  matters will not have a material  adverse
effect on the Company's operations or financial condition.























                                       49
<PAGE>

Item 8.   Changes In and Disagreements With Accountants on Accounting and
          Financial Disclosure

         During the Company's  two most recent  fiscal years and the  subsequent
interim period,  there have been no  disagreements  on financial  disclosures or
accounting  matters and no resignation by or dismissal of the independent public
accountants engaged by the Company.


                                       50
<PAGE>
                                     PART III

Item 9.   Directors and Officers of the Registrant; Compliance With Section
          16(a)  of the Exchange Act

         The  following  table  sets forth  certain  information  regarding  the
executive officers and directors of Dynatec as of March 10, 2000.

Name                            Age                                 Title
Frederick W. Volcansek, Sr...   53    Chairman of the Board of Directors and
                                        Chief Executive Officer
Lloyd M. "Tag" Taggart.......   55    Executive Vice President Sales
Michael L. Whaley............   43    Senior Vice President and Chief Financial
                                        Officer
Reed Newbold.................   52    Director
Wayne L. Berman..............   42    Director
John P. Schmitz..............   44    Director


         Mr. Volcansek was employed by the Company's Board of  Directors as  the
Company's Chief Executive Officer on February 6, 1999.  On  that same day he was
appointed Chairman of the Company's Board of Directors.  Prior to that time, Mr.
Volcansek  served as an outside director of the Company from 1988 to February 6,
1999.  Before  accepting full-time employment as the Chief Executive Officer of
the  Company,  from  June  1996  to  February  1999  Mr.  Volcansek was the Vice
President of Development for TM Global Power, LLC and the President of Mosbacher
Power do Brasil Ltda. in Houston, Texas.  Mr. Volcansek  also has several years'
experience in international market development and as a political consultant for
several large multi-national corporations, including US  West,  Enron  and Ogden
Corp. President Bush appointed Mr. Volcansek Deputy Under Secretary of  the U.S.
Department of Commerce (International Trade Administration) from  June 19, 1992,
after  serving  as  Deputy  Assistant  Secretary  of  Commerce  for  Trade  and
Development  from  June 1990.  Mr. Volcansek received a B.S. degree in 1967 from
Texas Tech University.

         Mr.  Taggart  joined the  Company in April  1999.  Prior to joining the
Company, from 1994 to 1999, Mr. Taggart was the President and CEO of Sweet Water
Ranch, Inc., a manufacturer of custom,  handmade  reproductions of the legendary
western style Molesworth  furniture.  Mr. Taggart expanded  distribution of that
company's  products  from  twenty-three  states  to all fifty  states  and eight
foreign countries. After service in the United States Navy, in 1972, Mr. Taggart
joined the Clorox  Company's brand  management team in Oakland,  California.  He
also served for three terms as a Commissioner of the Colorado River  Commission,
a board  that  controls  and  markets  $25,000,000  of  hydro  electrical  power
generated by the Hoover Dam and  5,000,000,000  GPM of water allocated to Nevada
from the Colorado River.  Mr. Taggart  received a B.S. degree from Brigham Young
University in 1968.

         Mr.  Whaley  joined the  Company  as Senior  Vice  President  and Chief
Financial Officer on October 29, 1999. Prior to joining the Company,  Mr. Whaley
worked for a year as an Engagement Manager for Prism Consulting International of
Bethesda,  Maryland, a strategy and operations  consulting firm. Before that, he
worked  as  the  Director  of  Westinghouse  Electric  Corporation's  Government
Privatization  Activities Division from February 1997 though August 1998, and as
the Chief Financial Officer of Westinghouse's  Commercial  Nuclear Fuel Division
from January 1993 through  February 1997. Mr. Whaley received his B.S. degree in
accounting from Norfolk State  University in Norfolk,  Virginia,  and received a
Certificate of Completion of the Harvard  Business School Program for Management
Development in 1996.

         Mr. Newbold has been an outside Director of the Company since 1988. In
1991, Mr. Newbold  founded  Newbold Financial, a financial planning and mortgage
brokerage services company located  in Salt Lake City, Utah. Since its founding,
Mr. Newbold has been the founding  principal of Newbold Financial.  Prior to his
founding  of  Newbold  Financial,  Mr. Newbold served as Vice President of Tracy
Collins Bank & Trust in Salt Lake City, Utah.

         Mr. Berman was  appointed to the Company's  Board of Directors on March
5, 1999. Mr. Berman presently is Managing  Director of Park Strategies,  L.L.C.,
an international  business consultancy he founded in 1999. In that capacity,  he
advises companies including Lockheed Martin,  American  International  Group, US
West, BMW Corporation,  AON Corporation and Philip Morris on matters relating to
new business  opportunities,  international  financing  strategies and strategic
relationships. Mr. Berman also is currently a Fellow at the Center for Strategic
and International Studies and was recently appointed to the Library of Congress'
Board of Trustees. From 1993 to 1999, Mr. Berman was Managing Director of Berman




                                       51
<PAGE>

Enterprises,  an  international  consultancy.  Prior to  that,  Mr.  Berman  was
Managing Partner of American Mercantile Group, a private merchant bank, in which
capacity  he  developed  and  managed  a  $100  million  merchant  banking  fund
specializing in middle-market American companies with underdeveloped exports. In
January 1989,  President George Bush appointed Mr. Berman Assistant Secretary of
Commerce for Policy,  a position he occupied  until  January  1991.  He has held
numerous  other  political  positions,   including  Vice  Presidential  Campaign
Director  for  Dole-Kemp  (1996),  member of the Budget  and  Policy  Priorities
Committee of the Pataki  transition  team (1994),  Deputy Director and Executive
Producer,  1992  Republican  National  Convention,  Senior Staff and Director of
Congressional  Relations,  Bush  Campaign  (1988),  and Deputy  Director  of the
Reagan-Bush  Transition Team (1981). Mr. Berman received his Bachelor of Arts at
the University of Buffalo and attended graduate school at Georgetown University.

         Mr.  Schmitz was  appointed  to the  Company's  Board of  Directors  on
September 16, 1999.  Since 1993, he has been a partner at the  Washington,  D.C.
office of the law firm of Mayer, Brown & Platt where his practice specializes in
the areas of energy and environment,  government and international. From 1989 to
1993 he was Deputy  Counsel to President  George Bush, and from 1985 to 1989 was
Deputy  Counsel to Vice  President  George  Bush.  From 1984 to 1985,  he was an
attorney at the firm of Wilmer, Cutler & Pickering,  Washington, D.C. In 1984 he
was  employed at the Robert  Bosch  Foundation  Fellowship,  Office of Bundestag
Member Matthias  Wissmann,  Bonn, and Office of General  Counsel,  Robert Bosch,
GmbH,  Stuttgart,  Germany.  From 1983 to 1984 he was law clerk to The Honorable
Antonin Scalia, U.S. Court of Appeals for the District of Columbia,  Washington,
D.C. Mr.  Schmitz  received his J.D.  from the Stanford Law School in 1981,  his
M.S. from the  California  Institute of  Technology  in 1978,  and his B.A. from
Georgetown University in 1976. His recent professional activities include, among
other activities, the Carnegie Endowment for International Peace, Study Group on
American-European   Community   Relations,   1993  to  date;  the  International
Republican   Institute,   Rule  of  Law  Advisory  Board,  1993  to  date;  U.S.
Representative,  Joint  U.S.-Panama  Commission on the  Environment,  1993-1994;
Member,   U.S.   Delegation,   United  Nations  Conference  on  Environment  and
Development  (UNCED),  Rio de Janeiro,  June 1992. He is admitted to the bars of
Pennsylvania and the District of Columbia.

         During the entirety of the year ended December 31, 1998, Donald M. Wood
served as the Company's Chairman and Chief Executive  Officer,  positions he had
held since 1982.  Effective January 14, 1999, Mr. Wood resigned and retired from
the  Company.  In the several  months  leading up to his  resignation,  Mr. Wood
suffered from several adverse health conditions.  Moreover, certain transactions
between Mr. Wood and the Company or between entities owned by or affiliated with
Mr. Wood and the Company,  and certain  activities  conducted  by the  Company's
executives   during  Mr.   Wood's   tenure  were  the  subject  of  an  internal
investigation  conducted by the Company's Board of Directors with the assistance
of an independent third party.  Specifically,  the investigation  focused on the
propriety of Mr. Wood's  conduct in causing the Company to employ certain of his
family members;  his conduct with respect to his use of Company assets,  such as
Company owned or leased vehicles, a houseboat timeshare interest; his conduct in
causing the Company to insure his  personal  watercraft;  his conduct in causing
the  Company  to rent  certain  real  property  owned by Mr.  Wood at rates that
potentially were in excess of fair market rates; the propriety of certain option
grants made to Mr. Wood or entities  controlled by or  affiliated  with him; and
other  miscellaneous  transactions and matters. By January 1999, the third party
investigator had completed its review of available  information pertinent to the
investigation.   Although  the   investigator   made  certain   conclusions  and
representations, those conclusions and representations were strongly disputed by
Mr. Wood, were not legally  conclusive,  by their own terms were inconclusive in
certain respects,  and, in some cases, involved situations that occurred as much
as twelve years prior to the investigation. In light of his health condition and
the  pendency  and status of the  investigation,  Mr.  Wood agreed to retire and
resign from the Company, effective January 14, 1999. In return for his agreement
to retire and resign,  the  independent  directors of the Company  agreed not to
take  further  action with respect to the  investigation,  although the Company,
through its new management,  has identified several areas in which new corporate
governance policies have been adopted or old policies changed.

         Additionally,  during the entirety of the year ended December 31, 1998,
F. Randy Jack served the Company's  President and Chief Operating  Officer.  Mr.
Jack also served on the  Company's  Board of  Directors  from 1986 to August 24,
1998, when he resigned from the Board of Directors.  On March 17, 1999, Mr. Jack
resigned as the Company's President and Chief Operating Officer.

         From  October  1998  through  October 8, 1999,  Paul A. Boyer served as
Senior Vice  President  and Chief  Financial  Officer of the Company.  Effective
October 8, 1999,  he resigned from the Company for personal  reasons.  Mr. Boyer


                                       52
<PAGE>

also was a director of the Company from January 14, 1999 through  September  18,
1999.  Prior to joining the Company,  from November  1996 to October  1998,  Mr.
Boyer served as Director of Finance for Mrs.  Fields'  Original  Cookies,  Inc.,
where he was  responsible  for mergers and  acquisitions,  corporate  budgeting,
financial  planning  and  strategic  analysis.  Mr.  Boyer also  served as Chief
Financial  Officer  of  Wasatch  Education  Systems,  an  educational   software
development  company from October 1990 to November 1996 . Mr. Boyer received his
Masters in Accountancy from San Diego State University in 1987.

Compliance with Section 16(a) of the Exchange Act

         During the year  ended  December  31,  1999,  as far as the  Company is
aware, all officers and directors prepared and timely filed all Forms 3, 4 and 5
required by Section 16(a) of the Exchange Act.

Board Compensation

         From March 1, 1999 until June 30, 1999,  members of the Company's Board
of Directors,  other than officers of the Company,  were compensated  $2,000 per
month for their  services  rendered.  Before March 1, 1999,  board  members were
compensated in the amount of $10,000 annually.  In June 1999, the Company issued
stock  options  to the  non-employee  members of the Board of  Directors,  which
option grants replace  future cash  compensation.  As of July 1, 1999,  Employee
directors  are not  compensated  for their  services on the Board of  Directors,
although  until  July  1,  1999  they  received  compensation  according  to the
historical rate of $10,000 per annum.

Board Committees

         Two  functioning  committees of the Company's  Board of Directors  have
been organized  including (i)  Compensation  Committee and (ii) Audit Committee.
Following is a brief description of each of these committees.

         Compensation  Committee.  The  Compensation  Committee  is  composed of
Messrs.  Berman (Chairman) Newbold and Vo1cansek.  The purpose of this committee
is to ensure that the Company has a broad plan of executive compensation that is
competitive and motivating to the degree that it will attract,  hold and inspire
performance  of managerial  and other key personnel of a quality nature and that
will enhance the growth and profitability of the Company.

         Audit Committee.  The Audit Committee is  comprised  of Messrs. Newbold
(Chairman), Berman  and  Volcansek. The  purpose  of  the  Audit Committee is to
provide  oversight  and  review  of  the  Company's  accounting  and  financial
reporting process in consultation with the Company's independent auditors.

Indemnification and Compensation

         The Company's Bylaws authorize the Company to indemnify its present and
former  directors  and  officers  and to  pay or  reimburse  expenses  for  such
individuals in advance of the final  disposition of a proceeding upon receipt of
an undertaking  by or on behalf of such  individuals to repay such amounts if so
required.



                                       53
<PAGE>

Item 10.   Executive Compensation

         The following table sets forth  information with regard to compensation
for services rendered in all capacities to the Company by the (i)Chief Executive
Officer,  (ii)the four most highly compensated executive officers other than the
CEO who were  serving as  executive  officers  at the end of the last  completed
fiscal year and (iii)two  additional  individuals for whom disclosure would have
been  provided,  but for the fact  that the  individual  was not  serving  as an
executive officer at the end of the last completed fiscal year.  Information set
forth in the table reflects compensation earned by such individuals for services
with the Company or its subsidiaries.


                                     Summary Compensation Table

<TABLE>
<CAPTION>

                                                                                    Long Term Compensation
                                                                          --------------------------------------------
                                          Annual Compensation                   Awards                 Payouts
                             -------------------------------------------  --------------------- ----------------------

                                                                                    Securities
                                                                Other     Restricted Underlying
Name and                                                       Annual      Stock     Options/     LTIP     All Other
Principal Position                    Salary     Bonus (1)  Compensation  Award(s)   SARs (2)   Payouts  Compensation
------------------
                             Year      ($)          ($)         ($)          ($)        (#)        ($)       ($)
                             ---- ------------  ----------- ------------  ---------- ---------- --------- ------------
<S>                          <C>     <C>           <C>         <C>            <C>     <C>          <C>         <C>
Frederick W. Volcansek, Sr.  1999    175,795         -         38,902         -       125,000      -           -
(3)                          1998       -            -            -           -          -         -           -
Chairman and CEO             1997       -            -            -           -          -         -           -

Donald M. Wood (4)           1999     40,550         -            -           -          -         -           -
Former Chairman and CEO      1998    193,723       1,624       12,500         -          -         -           -
                             1997    194,433       3,249       14,000         -        14,000      -           -

Lloyd M. Taggart (5)         1999    107,267         -          3,570         -       110,000      -           -
Executive Vice President     1998       -            -            -           -          -         -           -
Sales                        1997       -            -                        -          -         -           -

Michael L. Whaley (6)        1999     24,167         -             85         -       100,000      -           -
Sr. Vice President and       1998       -            -            -           -          -         -           -
Chief Financial Officer      1997       -            -            -           -          -         -           -

Paul A. Boyer (7)            1999    117,267         -          7,500         -       110,000      -           -
Former Sr. Vice President    1998     28,745         -          3,130         -          -         -           -
and Chief Financial Officer  1997       -            -            -           -          -         -           -
</TABLE>

-----------------
(1)  Bonus compensation includes time in service bonus.
(2)  An incentive  stock option plan was  implemented  in November  1996 and May
     1999. Options were granted as approved by the Board of Directors on January
     2, 1997 and July 6, 1999 respectively.
(3)  Employed as Company's  Chief Executive  Officer on February 6, 1999.  Other
     annual  compensation  includes directors fees of $7,500,  personal use of a
     company  vehicle of $1,848,  premiums paid on life  insurance of $6,259 and
     non-deductible moving expenses of $23,295.
(4)  Resigned from Company on January 14, 1999.
(5)  Employed as Company's  Executive  Vice President of sales on April 6, 1999.
     Other annual  compensation  includes  personal use of a company  vehicle of
     $371, and premiums paid on life insurance of $3,199.
(6)  Employed as Company's  Sr. Vice  President and Chief  Financial  Officer on
     October 29, 1999. Other annual  compensation  consists of personal use of a
     company vehicle.
(7)  Employed as Company's Sr. Vice President and Chief Financial Officer from
     October 19, 1998 to October 8, 1999. Other annual compensation  consists of
     directors fees.


         In November  1996,  the  Company's  shareholders  approved an Incentive
Stock Option plan for the benefit of the officers and  employees of the Company.
No formal criteria have been  established to determine the amount of benefits to
be granted pursuant to the 1996 plan,  except that the Plan authorizes grants of
no more than  300,000  shares.  The Plan  provides  that  options are granted at
exercise  prices equal to the market value as of the date the option is granted.
On January 2, 1997 and December 30,  1996,  the Board of Directors  approved the
issuance of 105,000 and 95,000  options to purchase  stock  pursuant to the 1996
incentive  stock option plan.  Further  description of the Plan and the exercise
prices are  provided  in the Notes to the  accompanying  Consolidated  Financial
Statements.




                                       54
<PAGE>

Employment Agreements

         Mr. Wood and Mr. Jack had employment contracts with the Company that
were terminated upon their respective resignations.

         Mr.  Volcansek,  Lloyd M. "Tag" Taggart,  the Company's  Executive Vice
President Sales, and Michael L. Whaley,  the Company's Senior Vice President and
Chief  Financial  Officer,  each have  employment  agreements that provide for a
period of employment of four years from the date of the  agreements,  subject to
termination  and extension  provisions.  The  agreements  permit each of them to
participate  in any  incentive  compensation  plan  adopted by the  Company  and
benefit and equity-based plans or arrangements. If the Company terminates either
of Mr. Volcansek's,  Mr. Taggart's,  or Mr. Whaley's employment for cause, or if
either of them terminates their employment  without good reason, the Company has
no further  obligation  to pay them under their  respective  agreements.  If the
Company  terminates  either of them without cause, the terminated  executive may
receive  severance pay equal to two years of his then current annual salary.  In
the event of a merger, acquisition, dissolution or transfer of substantially all
of the Company's assets,  the employment  agreements must then be honored by the
surviving entity or it must purchase the agreements for a sum equal to three (3)
years'  base  salary.  The  employment   agreements  prohibit  each  of  Messrs.
Volcansek,  Taggart,  and Whaley for two years from the date of  termination  of
their  respective  employment  under the agreements,  from becoming an employee,
owner (except for investments in up to 5% of the equity  securities of a company
listed or traded on a national  securities exchange or the NASDAQ Stock Market),
officer, agent or director of a firm or person that competes with the Company in
the  consumer  products  industry.  The  employment  agreements  have  customary
provisions  for vacation,  fringe  benefits,  payment of expenses and automobile
allowances.  Mr. Volcansek's base salary is $205,000,  Mr. Taggart's base salary
is $167,500, and Mr. Whaley's base salary is $145,000.



                                       55
<PAGE>


Item 11.   Security Ownership of Certain Beneficial Owners and Management

         The  following  table sets  forth,  as of March 13,  2000 the number of
shares of Common Stock of the Company beneficially owned by all persons known to
be holders of more than five  percent of the  Company's  Common Stock and by the
executive  officers and  directors of the Company  individually  and as a group.
Unless  indicated  otherwise,  the address of the  shareholder  is the Company's
principal  executive offices,  3820 West Great Lakes Drive, Salt Lake City, Utah
84120.


        BENEFICIAL OWNERS HOLDING FIVE PERCENT OR MORE OF THE SECURITIES
                                                                   Percent of
      Name, Title, and Address of            Common Stock         Class as of
           Beneficial Owner               Beneficially Owned     March 13, 2000
           ----------------               ------------------     --------------
Touchstone Transport Services                    457,660              9.1%
5% Beneficial Owner
c/o Oxford International Management, Inc.
Suite 1402, 14th Floor
PDCP Bank Centre, 8737 Paseo De Roxas
Cor. Makati Avenue, Makati City
Phillipines

Wilford A. Cardon                                320,831 (1)           6.4%
5% Beneficial Owner
1819 East Southern Avenue, Suite B-10
Mesa, Arizona 85204-5219

Frederick W. Volcansek, Sr.                       94,850 (2)           1.8%
Chairman and Chief Executive Officer

Lloyd M. "Tag" Taggart                            75,000 (3)           1.5%
Executive Vice President Sales & Marketing

Michael L. Whaley                                 75,000 (5)           1.5%
Chief Financial Officer

Reed Newbold                                      24,050 (4)            *
Director

Wayne L. Berman                                   18,750 (3)            *
Director

John P. Schmitz                                   18,750 (6)            *
Director

Directors and Officers as a group                306,400               5.7%
-------------------------

         *        Less than one percent.
         (1)      Includes 158,831 shares and 162,000 shares owned respectively
                  by two entities affiliated with Mr.Cardon.
         (2)      Includes 93,750 shares issuable on exercise of options having
                  an exercise price of $1.625 per share, and 1,100 shares.
         (3)      All shares issuable on exercise of options having an exercise
                  price of $1.625 per share.
         (4)      Includes 18,750 shares issuable on exercise of options having
                  an exercise price of $1.625 per share, and 5,300 shares.
         (5)      All shares issuable on exercise of options having an exercise
                  price of $1.031 per share.
         (6)      All shares issuable on exercise of options having an exercise
                  price of $1.000 per share.




                                       56
<PAGE>

         During 1996,  the  Company's  Board of Directors  authorized  grants of
non-qualified  stock options that are tied to the  profitability  of the Company
and based upon  minimum  years of  employment.  Options  to  purchase a total of
840,000  shares at an exercise  price of $2.00 per share were granted.  To vest,
the  holder-employee  must continue his employment  with the Company through the
year 2001 and the Company must be profitable  three out of four years commencing
January 1, 1998. Additional  non-qualified stock options for 800,000 shares with
similar terms were granted on January 2, 1997. To vest, the holder-employee must
continue his employment  with the Company  through the year 2001 and the Company
must be profitable three out of four years commencing January 1, 1998.

         In 1996, the Company  granted  537,500  non-qualified  stock options to
Muito Bem Ltd., an entity owned by Donald M. Wood,  the  Company's  former Chief
Executive  Officer,  at an exercise price of $2.50 per share in consideration of
all  knowledge,  trade  secrets  and a  continuing  non-compete,  regarding  the
telephone  headset  product  line,  as well as personal  real estate  pledged as
collateral  on Company debts by Mr. Wood.  In addition,  WAC Research,  Inc., an
entity  affiliated  with Mr.  Wood,  was granted  200,000  options  having terms
identical  to the Muito Bem options.  These  options are not  exercisable  until
December 30, 2000. In January 1999, upon his resignation  from the Company,  Mr.
Wood agreed to the cancellation of all of the Muito Bem options.




                                       57
<PAGE>

Item 12.   Certain Relationships and Related Transactions

       The Company's  subsidiary  Softalk,  Inc.,  licenses  certain  patent and
trademark rights  associated with the Company's Softalk product line pursuant to
a royalty  agreement with WAC Research  Inc., a Utah  corporation  ("WAC").  The
Company  believes  that Donald M. Wood,  who,  until  January 14, 1999,  was the
Company's Chairman and Chief Executive Officer,  owns a one-half equity interest
in WAC. WAC obtained the patent and trademark rights for the Softalk products in
August 1986,  when WAC  purchased  them from the inventor of Softalk and related
products  in a private  transaction.  The  purchase  price for such  patent  and
trademark  rights was  $1,000,000  to  $2,000,000,  which was paid to  Practical
Innovations,  Inc. by a combination  of the Company's  common stock and cash. At
that time,  the  Company  acquired  license  rights to the  Softalk  patents and
trademark,  in return for which it agreed to pay a 10%  royalty  on all  Softalk
sales.  That royalty rate subsequently was reduced to 5%. During the years ended
December  31,  1999 and  1998,  the  Company  paid WAC  $298,420  and  $172,669,
respectively, in royalties.

         In September 1998 WAC advanced  $98,403 to the Company as reimbursement
to the  Company  of Mr.  Wood's  salary  for the first six  months of 1998.  The
Company  subsequently  determined  that this amount was a payable to WAC, and at
December 31, 1998 the Company had recognized  the $98,403 in accounts  payable -
related party, in the accompanying consolidated balance sheet. In February 1999,
the Company repaid this amount to WAC.

         Donald M. Wood,  who served as the Company's  Chief  Executive  Officer
during the  entirety of 1998 and until  January 14,  1999,  owned a  residential
rental property in Park City, Utah August 1998. The Company leased this property
from him to use for  Dynatec-related  travel,  promotional  work,  lodging,  and
entertainment  for  customers,  suppliers,  and  employees.  The monthly  rental
payment for this property was $7,000. The Company paid $-0- and $56,000 for each
of the years  ending  December 31, 1999 and 1998,  respectively.  This cost also
covered  operating and maintenance  costs, and general care of the property.  In
August 1998, this property was sold by Mr. Wood. As a result,  the Company is no
longer obligated to pay rental fees, and paid no such rental fees during 1999.

         In July 1998,  the Company's  Board of Directors  commenced an internal
investigation  into the facts  and  circumstances  of a number  of  transactions
between the Company and certain of its officers and directors as well as several
general  corporate  and  management  concerns  brought to the  attention  of the
Company's independent directors. The Company engaged an unrelated third party to
conduct the  investigation,  which  concluded in January 1999.  Thereafter,  the
Company's  former  Chairman and CEO  resigned and retired from the Company.  The
Company does not anticipate  taking  further  action,  legal or otherwise,  with
respect to the matters  and  individuals  investigated,  although  the  Company,
through its new management,  has identified several areas in which new corporate
governance  policies  have been adopted or old policies  changed.  In connection
with the investigation,  several of the Company's  directors engaged independent
legal  counsel.  An aggregate of $112,938 of such legal fees were  reimbursed by
the  Company  pursuant  to action by the  Company's  Board of  Directors  at the
commencement of the investigation.

         During 1997 the Board of Directors authorized grants of various options
under both  non-qualified  and incentive stock options plans.  These options are
described in detail in Note 14. The non-qualified plans included 537,500 options
granted to Muito Bem Ltd., an entity  controlled  by Donald M. Wood,  the former
Chairman and Chief  Executive  Officer of the Company,  at an exercise  price of
$2.50 per share.  Mr. Wood agreed in 1999 to cancel all stock options  issued to
Muito Bem.  Additionally,  in 1997,  200,000  options were granted to WAC, at an
exercise  price  of  $2.50  per  share  in  consideration  for  certain  royalty
reductions and abatements.

         In May 1989,  the Company  engaged  Alpha Tech Stock  Transfer  Company
("Alpha Tech") as the Company's stock transfer agent.  Alpha Tech served in that
capacity until January 13, 1999, when the Company terminated Alpha Tech's agency
and  instructed  Alpha Tech to transfer the Company's  records to American Stock
Transfer Company,  New York, New York. James W. Farrell,  the principal of Alpha
Tech, is the brother-in-law of Donald M. Wood, the Company's former Chairman and
Chief  Executive  Officer who resigned  from the Company  effective  January 14,
1999.  During the years ended December 31, 1999 and 1998, the Company paid Alpha
Tech a total of $-0- and $1,530,  respectively,  in fees for services  rendered.
The Company  believes that the fees paid to Alpha Tech during these periods were
roughly  comparable to the fees it would have paid to a similar  local  transfer
agent for similar services.



                                       58
<PAGE>

Item 13.   Exhibits and Reports on Form 8-K

(a)      Exhibits

                  No.      Description

                  3.1      Restated  Articles of  Incorporation  of the Company.
                           (Incorporated   by   reference   from    Registration
                           Statement on Form SB-2 (File No.  333-57921) filed by
                           the  Company   with  the   Securities   and  Exchange
                           Commission (the "SEC") on June 25, 1998).

                  3.2      Amended   and   Restated   Bylaws  of  the   Company.
                           (Incorporated   by   reference   from    Registration
                           Statement on Form SB-2 (File No.  333-57921) filed by
                           the Company with the SEC on June 25, 1998).

                  10.1     Convertible  Debenture  and  Equity  Line  of  Credit
                           Agreement  between  the  Company  and five  investors
                           dated as of May 28, 1998.  (Incorporated by reference
                           from Current  Report on Form 8-K filed by the Company
                           with the SEC on June 8, 1998).

                  10.2     Form of  Convertible  Debentures  issued in May 1998.
                           (Incorporated  by reference  from  Current  Report on
                           Form 8-K filed by the Company with the SEC on June 8,
                           1998).

                  10.3     Form  of  A  Warrants  issued  in  conjunction   with
                           Convertible  Debentures.  (Incorporated  by reference
                           from Current  Report on Form 8-K filed by the Company
                           with the SEC on June 8, 1998).

                  10.4     Form  of  B  Warrants  issued  in  conjunction   with
                           Convertible  Debentures.  (Incorporated  by reference
                           from Current  Report on Form 8-K filed by the Company
                           with the SEC on June 8, 1998).

                  10.5     Registration  Rights Agreement  entered into with the
                           holders of Convertible  Debentures.  (Incorporated by
                           reference  from  Current  Report on Form 8-K filed by
                           the Company with the SEC on June 8, 1998).

                  10.6     Modification  Agreement  between  the Company and the
                           holders of Convertible  Debentures,  dated as of June
                           25, 1999.  (Incorporated  by reference from Quarterly
                           Report on Form  10-QSB for the period  ended June 30,
                           1999).

                  10.7     Amendment  to  Modification   Agreement  between  the
                           Company  and the holders of  Convertible  Debentures,
                           dated  as of  November  12,  1999.  (Incorporated  by
                           reference  from  Quarterly  Report on Form 10-QSB for
                           the period ended September 30, 1999.)

                  10.8     Convertible  Debenture  Retirement  Agreement between
                           the  Company  and  the  holders  of  the  Convertible
                           Debentures, dated as of February 1, 2000.

                  10.9     Stock  Purchase  Agreement  between  the  Company and
                           seven investors, dated as of February 11, 2000.

                  10.10    Employment   Agreement   between   the   Company  and
                           Frederick W. Volcansek, dated as of February 5, 1999.
                           (Incorporated by reference from Annual Report on Form
                           10-KSB for the year ended December 31, 1998).



                                       59
<PAGE>

                  10.11    Employment  Agreement between the Company and Paul A.
                           Boyer, dated as of October 19, 1998. (Incorporated by
                           reference  from Annual  Report on Form 10-KSB for the
                           year ended December 31, 1998).

                  10.12    Employment Agreement between the Company and Lloyd M.
                           Taggart, dated as of June 22, 1999.  (Incorporated by
                           reference  from  Quarterly  Report on Form 10-QSB for
                           the period ended September 30, 1999.)

                  10.13    Employment  Agreement between the Company and Michael
                           L.   Whaley,   dated   as  of   October   29,   1999.
                           (Incorporated  by reference from Quarterly  Report on
                           Form 10-QSB for the period ended September 30, 1999.)

                  10.14    Commercial  Lease  between  the  Company and FRE II I
                           Corporation,  a California  corporation,  dated as of
                           November 4, 1999.  (Incorporated  by  reference  from
                           Quarterly  Report on Form 10-QSB for the period ended
                           September 30, 1999.)

                  10.15    Commercial Real Estate Purchase  Contract between the
                           Company  and  Darwin  Datwyler  dated  as of July 16,
                           1999,   as   amended   through   November   4,  1999.
                           (Incorporated  by reference from Quarterly  Report on
                           Form 10-QSB for the period ended September 30, 1999.)

                  11       Computation of Per Share Earnings for the Year Ended
                           December 31, 1999; and for the Year Ended December
                           31, 1998.

                  21       List of Subsidiaries of the Registrant (See,
                           "Subsidiaries of the Company" at page 5).

                  27       Financial Data Schedule.


(b)      Reports on Form 8-K

                  None



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<PAGE>




SIGNATURES

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



DYNATEC INTERNATIONAL, INC.




 /s/ Fredierick W. Volcansek               March 28, 2000
----------------------------               --------------
Frederick W. Volcansek, Sr.                     Date
Chief Executive Officer




                                       61
<PAGE>




                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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.

         Signature                   Title                            Date


/s/ Frederick W. Volcansek, Sr.
-----------------------------  Chairman of the Board of Directors    March 28,
(Frederick W. Volcansek, Sr.)  and Chief Executive Officer             2000
                               (Principal Executive Officer)

/s/ Michael L. Whaley
-----------------------------  Senior Vice President, Chief           March 28,
(Michael L. Whaley)            Financial Officer, Director              2000
                               and Secretary  (Principal
                               Accounting Officer)

/s/ Wayne L. Berman
-----------------------------  Director                               March 28,
(Wayne L. Berman)                                                       2000

/s/ Reed Newbold
-----------------------------  Director                               March 28,
(Reed Newbold)                                                          2000

/s/ John P. Schmitz
-----------------------------  Director                               March 28,
(John P. Schmitz)                                                       2000


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<PAGE>