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, 1998                  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,  1998  were
$16,578,694.

     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 16, 1999 as reported on The Nasdaq Stock Market (R), was $7,850,388.

     The Company had 3,300,112 shares of common stock outstanding at March
16, 1999.

     Transitional small business disclosure format. Yes X No


<PAGE>

                               TABLE OF CONTENTS

PART I.

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

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

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


PART II.

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

Item 6.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations........................................

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

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

PART III.

Item 9.   Directors and Executive Officers, Compliance with Section 16(a)
          of the Exchange Act..............................................

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

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

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

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




<PAGE>

                                     PART I

Item 1.   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,  1998,  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 11 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
(R)",  "Mini-Softalk  (TM) ", "Softalk II" and "Universal  Phone Rest",  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 Softalk  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"  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 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  has   invested   significant   capital  in  research  and
development  ("R&D") in developing a new line of telephone and computer  headset
amplifiers and headset telephones.  These products 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)".  These products were launched  during the fourth quarter
of 1997.
<PAGE>

         For the year ended  December  31,  1998,  revenues  from the  telephone
accessories product line accounted for 46.1% of the Company's total revenues and
42.2% of total  revenues for the year ended December 31, 1997.  Major  customers
for this product line include  United  Stationers,  Lucent  Technologies,  Boise
Cascade,  Radio Shack,  Staples,  Gemini  Industries and Corporate  Express.  In
addition, the Company has secured pages in several catalogues of major providers
for various  office  products  for all of these types of  products,  which pages
began circulating during the third and fourth quarters of 1998 and will continue
for the 1999 year.

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"                       >>       "Freedom Hanger"
>>       "Cover-Up"                      >>       "Expand-A-Drawer"
>>       "Hide It"                       >>       "Easy Reach Roll-Out" shelves
>>       "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 offshore,  nonaffiliated  manufacturers using proprietary third party
designs that the Company licenses.

         For the year ended December 31, 1998, the home storage and organization
product line accounted for 28.4% of the Company's  total  revenues,  compared to
25.4% of Company  revenues for the year ended December 31, 1997.  These products
generally are distributed directly to retail stores, distributors,  and catalogs
including National Manufacturing, Lechters, Container Store, Sams Club, Walmart,
Target, Bed Bath & Beyond and others.

Flashlights

         In December 1996,  Dynatec acquired  substantially all of the assets of
Nordic Lights, Inc., a Texas corporation. Prior to the acquisition, Nordic Lites
was  engaged  in the  business  of  manufacturing  and  distributing  a line  of
battery-powered flashlight products. The Company transferred the assets acquired
from  Nordic  Lites  to  a  wholly  owned  subsidiary  of  the  Company,  Nordic
Technologies, Inc., a Utah corporation ("Nordic Technologies"),  which continues
to operate Dynatec's flashlight business.  Nordic Technologies  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.
These package units are being marketed to major retailers and warehouse shopping
customers.  Major customers for the flashlight products include Giga, Inc. (U.S.
military procurement) and Dixie Electric Supply Corp.

         In July 1997,  the Company  sold the assets  located at the Ft.  Worth,
Texas  facility at which Nordic  Lites had operated in favor 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 third parties.  Sales of flashlight  products for
the year ended  December 31, 1998  amounted to $989,000 or 6.0% of the Company's
total revenues and 6.1% of revenues for the year ended December 31, 1997.


<PAGE>


Miscellaneous/Mass Market

         Miscellaneous  products  the Company has offered from time to time have
included the "Softalk  Erasable Board", a soft wipe erasable  planning board for
office and personal use,  product  packaging for AT&T and the Fuji Novel Battery
Line. The  miscellaneous  product segment accounted for less than one percent of
the Company's revenues for the year ended December 31, 1997.

         Additionally,  the Company  sells  commodity  type products to national
mass-market merchandisers,  such as Dolgencorp, Inc. Such products have included
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 19.6% and 26.3% of the  Company's  revenues for
the years ended December 31, 1998 and 1997, respectively.

Subsidiaries of the Company

         During the year ended December 31, 1998, 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
<FN>

         (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.
</FN>
</TABLE>

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.  The Company  anticipates  usual,  inflationary  increases in the
price  of  plastic  products,  freight,  and  packaging  in  1999.  The  Company
anticipates that these usual,  inflationary increases will not materially impact
the  results of  operations  for the year ended 1999,  although  there can be no
assurance   that  the  Company  will  not   encounter   raw  material  or  other
manufacturing delays, price increases or shortages, any of which could adversely
affect  the  Company's  financial  condition  and  operations.  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 have demonstrated continued dependability in supplying quality product
in a  timely  manner.  Moreover,  the  Company  believes  that the  third  party
manufacturers  it uses to produce  its  products  could be readily  replaced  if
necessary.


<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>  
     Softalk                                    U.S.A.                                            Each 10 Years
                                                Canada                         02/05/81           Each 15 Years
     Mini-Softalk                               U.S.A.                                            Each 10 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
     Audioworks & Design                        U.S.A.                         05/10/96              Pending
     Videoworks & 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.                         04/10/97              Pending
     Pace Setter                                U.S.A.                         04/10/97              Pending
     Power Phone                                U.S.A.                         04/10/97              Pending

     Smart Sound                                U.S.A.                         04/10/97              Pending
     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.                         07/05/97           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.                         08/19/96              Pending
     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
     Softalk                                    U.S.A.                         04/17/98              Pending


</TABLE>


<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
     Easy Reach Roll-Out                        U.S.A.                         08/01/97              Pending
     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
     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.                         03/17/98              Pending
     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.  The Company has been able to ship within
the foregoing guidelines on almost all occasions. The Company keeps an inventory
of  approximately  two  months  of all  products  in order to meet the  shipping
policy.  Nevertheless,  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, 1998, 42.0% of the Company's  telephone
headset products were distributed through Lucent Technologies/Phillips  Consumer
Communications,  whose  headquarters are at P.O. Box 295 Parisippany,  NJ 07054.
Another 17.0% of telephone  headset  products were  distributed  through  United
Stationers, whose headquarters are at 2200 E. Golf Road, Des Plaines, IL 60016.



<PAGE>


     For the year ended  December 31,  1998,  16.5% of the  telephone  accessory
products were distributed  through sales to United Stationers.  Another 13.0% of
sales in this product line were to Boise Cascade,  whose headquarters are at 800
West Bryn Mawr Road, Itasca, IL 60143. S.P. Richards,  whose headquarters are at
P.O.  Box  1266,  Smyrna,  GA 30081,  accounted  for  another  12.7% of sales of
telephone accessory products.

Home Storage and Organization

     For the year  ended  December  31,  1998,  12.8% of the  home  storage  and
organization products were distributed through Target Stores, whose headquarters
are at 33 South 6th Street, P.O. Box 1392, Minneapolis,  MN 55440. Another 10.9%
of these products were distributed to National Manufacturing, whose headquarters
are at 1 First  Avenue,  Sterling  IL  61081.  An  additional  10.4% of the home
storage and organization products sales were to Wal-Mart, whose headquarters are
at 702 S.W.  8th Street,  Bentonville,  AR 72716.  Bed,  Bath and Beyond,  whose
headquarters  are at 110  Bi-County  Blvd.,  Suite 114,  Farmingdale,  NY 11735,
accounted for another 10.2% of the distribution of houseware/hardware products.

Flashlights

     For the year ended December 31, 1998, 38.3% of the flashlight products were
distributed  through Giga, Inc. whose  headquarters are at P.O. Box 4265, Macon,
GA 31208.  Another 12.4% of the flashlight products sales were to Dixie Electric
Supply Corp., whose headquarters are at P.O. Box 6522, Richmond, VA 23230.

Miscellaneous/Mass Market

     Dolgencorp,  Inc. whose headquarters are at 427 Beech Street,  Scottsville,
KY 42164,  accounted for substantially all of the Company's mass-market revenues
of $3,246,000 for the year ended December 31, 1998.

     Dolgencorp,  Inc. was the only customer that accounted for more than 10% of
the total Company  revenues.  The loss of a single  customer in any of the other
product lines of the Company would not have a significant  adverse effect on the
Company's overall financial condition and operations.

Competitive Conditions in the Market

     The  Company  believes  that it is  engaged  in highly  competitive  market
segments for each of its products. The Company bases this conclusion on the fact
that the generic  design or function of the telephone  accessory  products could
probably be functionally replicated without any great difficulty.  Further, many
of the other products of the Company involve  relatively easy assembly processes
which would allow for ease of entry into the marketplace by competitors.

     The doorstop products,  which are marketed as part of the home organization
product line, as with other hardware items,  experience significant  competition
with numerous  other doorstop  products,  but are  substantially  different than
traditional doorstops.  Competition with this product is largely on the basis of
price,  although it is believed  that the Company's  products are  competitively
priced. The majority of the other products could be easily replicated,  although
the mold costs for such  products  could be  substantial.  The Company  also has
legal  protection  on various  products in the forms of various  trademarks  and
patents.

     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.



<PAGE>


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 further believes that it is
exempted  from  specific   Environmental   Protection  Agency   requirements  or
regulations as to its  manufacturing  and distribution of products.  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  45 people.  The number of
assembly,  warehouse and  distribution  employees is subject to adjustment based
upon production  demand, and ranged from a high of approximately 56 employees to
a low of approximately 45 employees during the year ended December 31, 1998.


Item 2.   Properties

         The Company owns and 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.


Item 3.   Legal Proceedings

         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.  In any event,  the Company  disputes the claims of Alpha
Tech's complaint.  If the complaint is not voluntarily  dismissed and process is
served, the Company intends to vigorously defend the suit.

         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 accuses 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.  The demand letter  specified that the
complaint  was filed as a  "precaution,"  and that Mag will refrain from serving
the complaint on the Company pending the receipt of certain  assurances from the
Company.  The Company has engaged  patent  litigation  counsel and commenced its
preliminary assessment of the claims asserted contained in the complaint.


<PAGE>


         The Company is a party to pending  litigation with a Canadian brokerage
firm  captioned as  Canaccord  Capital  Corporation  ("Canaccord")  vs.  Dynatec
International,  Inc.,  Civil No.  2:98-cv-420C,  and filed in the United  States
District  Court for the  District  of Utah.  Canaccord  initially  sued  seeking
injunctive  relief  and money  damages  stemming  from the  Company's  allegedly
wrongful cancellation of 125,000 shares of the Company's common stock in January
1998.  Canaccord  claimed  that it suffered  damage from a market  shortage  and
deficiency to various  accounts which had previously been sold by Canaccord as a
result of the allegedly  wrongful  cancellation of shares. On July 17, 1998, the
District Court entered a preliminary injunction requiring the Company to reissue
125,000 shares in the name of CEDE & Company,  as the market  clearing house, to
replace the alleged market shortage.  The court preserved  Canaccord's remaining
claims for money damages and the return of an additional block of shares alleged
to have been  wrongfully  cancelled,  which are still  pending.  The Company has
named  various  third party  defendants  to whom it believes the shares may have
been  improperly  issued and is  seeking  either  recovery  of the shares or the
recovery of damages.  At present,  the Company is engaged in  negotiations  with
representatives of various of the third parties and Canaccord, and believes that
a resolution of the  outstanding  claims,  in whole or in part, will be reached.
Related to the Canaccord litigation, a claim for an additional 125,000 shares of
the  stock  of the  Company  had  been  made  by  Katori  Consultants,  Ltd.,  a
Philippines  corporation.  The answer and third party complaint of Dynatec named
Katori  Consultants,  Ltd. as a third party  defendant  so that such  additional
claim could be addressed as part of the Canaccord  legal action.  On October 21,
1998,  Katori  Consultants,   Ltd.  gave  written  notice  to  Dynatec  that  it
relinquished any claim to additional shares of common stock of the Company.

         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 later  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, 1998, the Company had received no response from
the Enforcement  Division about whether the SEC plans to name the Company in any
administrative action.

         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.

         In July 1997,  the market price of the  Company's  common stock dropped
rapidly and  dramatically.  Thereafter,  the Nasdaq Stock Market  commenced  and
informal  inquiry into market  activities and  transactions by the Company.  The
Company  cooperated with that inquiry and, on January 13, 1999, the Nasdaq Stock
Market notified the Company that the informal review was terminated.

         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.


<PAGE>


                                     Part II

Item 5.   Market for Registrant's 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,  1998  there were  1,265  shareholders  of the  Company's  common  stock and
2,891,627 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 1997               $5.75                $2.63

                            2nd 1997               $11.00               $5.75

                            3rd 1997               $10.69               $4.00
 
                            4th 1997               $8.81                $4.50

                            1st 1998               $7.88                $6.06

                            2nd 1998               $8.25                $4.75

                            3rd 1998               $6.25                $2.25

                            4th 1998               $5.75                $1.38
 

     Dividends.  During the year ended  December 31,  1998,  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.




<PAGE>


Item 6. Management's  Discussion and Analysis of Financial Condition and Results
        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 twelve month  periods
ended December 31, 1998 and 1997, 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     1997 TO
                                     31, 1998     31, 1997      1998              
                                    ----------    ---------    --------
  <S>                              <C>          <C>           <C> 
  Statement of Operations Data:
         Product sales.............  $16,579,000 $14,566,000     13.8 %
         Cost of sales.............   10,973,000  10,174,000      7.9
                                    ------------ -----------
                 Gross margin......    5,606,000   4,392,000     27.6
                                    ------------ -----------

  Operating Costs and Expenses:
         Selling expenses..........    2,874,000   2,379,000     20.8
         Research and development..      143,000     508,000    (71.9)
         General and administrative    3,029,000   1,730,000     75.1
                                     ----------- -----------
           Total operating
            costs and Expenses.....    6,046,000   4,617,000     31.0
                                     ----------- -----------
  Other Income (Expense), net:
         Interest expense..........   (1,773,000)   (427,000)   315.2
                                     ----------- -----------
         Interest income...........        3,000       9,000    (66.7)                    
                                     ----------- -----------
         Other expense.............      (35,000)    (61,000)    42.6
                                     ----------- -----------
         Other income..............            -     295,000        -  
                                     ----------- -----------
         Net loss.................. $(2,245,000)  $(409,000)    448.9%
                                     =========== ===========          

  Supplemental Information:

  Revenue by product line type:
      Telecommunication headsets                             
         and amplifiers and            
         telephone accessories..... $ 7,640,000  $6,146,000      24.3 %
      Home storage and organization   4,444,000   3,387`000      31.2
      Miscellaneous/mass market....   3,506,000   4,140,000     (15.3)
      Flashlights..................     989,000     893,000      10.8                       
                                     ----------  ----------
  Total product sales and other.... $16,579,000 $14,566,000      13.8%
                                     =========== ===========
</TABLE>


Following are explanations of significant period to period changes for the years
ended December 31, 1998 and 1997:

Revenues

         Total Product Sales.  Total product sales  increased by $2,013,000,  or
13.8%,  from  $14,566,000  to  $16,579,000  for the year ended December 31, 1998
compared to the year ended December 31, 1997.

                   Telecommunication   Headsets  and  Amplifiers  and  Telephone
Accessories. Telecommunication headsets and amplifiers and Telephone accessories
sales increased $1,496,000, or 24.3%, from $6,146,000 to $7,640,000 for the year
ended  December  31, 1998  compared to the year ended  December  31,  1997.  The
increase was primarily  attributable to an increase of approximately $210,000 in
the  Company's  "Cord  Manager"  product  line and an increase of  approximately
$38,000 in the  "Twisstop"  line,  offset in-part by a decrease in shoulder rest
sales.  Overall gross margins for these products  increased to 48.4%, from 46.6%
for the years ended December 31, 1998 and 1997, respectively, as a result of the
sales mix. Additionally,  this increase was due to the Company's introduction of
a new line of telecommunications products including wired and wireless telephone
headsets,  telephones,  conference speakers, and other related products. Overall
gross  margins  for these  products  for the year ended  December  31, 1998 were
approximately  36.4%. In addition,  the Company has been able to secure pages in
several  catalogues of major  providers for various  office  products for all of
these types of  products  which  began  circulating  during the third and fourth
quarters of 1998 and will continue into 1999 for the 1999 year.
<PAGE>

         Home Storage and Organization.  Home storage and organization  revenues
increased $1,057,000, or 31.2%, from $3,387,000 to $4,444,000 for the year ended
December 31, 1998 compared to the year ended  December 31, 1997. The increase in
home  storage  and  organization  revenues  was  primarily  attributable  to the
introduction of several new products,  including drawer  organization  products,
namely  "Expand-A-Drawer",  which accounted for approximately  $1,042,297 of the
revenue  increase,  and several wire basket  rollout  products  which  increased
approximately $66,000 of the increase.  These increases were offset in-part by a
decrease in sales of the "Expand-a-shelf" product line of approximately $88,000.
Overall gross  margins for products in this category  increased to 30.1% for the
year ended  December  31, 1998 from 27.3% for the year ended  December 31, 1997.
This increase in gross margins was primarily  attributable to increased sales in
the higher margin "Expand-A-Drawer" product line.

         Miscellaneous and Mass Market. Mass market revenues decreased $579,000,
or 15.1%,  from  $3,825,000 to $3,246,000  for the year ended  December 31, 1998
compared to the year ended  December 31, 1997.  This  decrease was primarily the
result of the  Company's  receipt of large orders for crayons in early 1998 from
Dolgencorp., Inc., which orders were subsequently deferred indefinitely.  Before
learning of the deferral,  the Company had procured crayons to fill Dolgencorp's
order.  Consequently,  Dolgencorp's  deferral of delivery of product under those
orders  caused  the  Company to  stockpile  approximately  $1,000,000  in crayon
inventory  with no guarantee of future orders for these  crayons.  At the end of
1998, the Company decided to change its relationship  with Dolgencorp due to the
enormous  strain that  servicing  Dolgencorp's  orders  placed on the  Company's
physical and financial  resources.  In addition,  the Company  determined  that,
strategically,  it should focus on its other  product  categories  which produce
greater gross margins and have the most growth potential. Therefore, the Company
anticipates a significant  drop in revenues from this segment of its business in
1999. Overall gross margins for products in this category decreased to 13.5% for
the year ended  December  31,  1998 from 17.6% for the year ended  December  31,
1997.  This decrease in gross margins  resulted  from the  additional  warehouse
space leased to store the crayon  inventory  Substantially  all sales in 1998 in
this category were to Dolgencorp, Inc.

         On December 24, 1998, the Company  entered into an inventory and single
customer  purchase  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
Dolgencorp  inventory,  on the following  terms:  (i) at the closing  date,  the
Company  transferred  to  Grandway   approximately  $800,000  of  unpaid  crayon
liability,  and (ii) at the closing date Grandway  purchased  $103,000,  or cost
plus three percent, of additional  inventory.  Additionally,  Grandway agreed to
continue to make guaranteed  minimum monthly inventory draws of $103,000 or cost
plus three percent until the remaining approximately  $1,000,000 of inventory is
purchased.  As of March 26, 1999,  Grandway had purchased all but  approximately
$339,124.  of the  remaining  inventory.  Finally,  for a period  of two  years,
Grandway  will pay a two  percent  (2%)  royalty  to the  Company  on all orders
shipped to  Dolgencorp,  in addition,  the Company can still sell other types of
products to Dolgencorp.

         Other revenue  decreased  $55,000,  or 17.5%, from $315,000 to $260,000
for the year ended  December  31, 1998  compared to the year ended  December 31,
1997. The decrease in other revenue was primarily  attributable  to a decline in
other  miscellaneous  products sold by the Company,  namely,  closet hangers and
tote bags.

         Flashlights.  Flashlight  revenues  increased  $96,000,  or 10.8%, from
$893,000 to $989,000 for the year ended  December 31, 1998  compared to the year
ended  December 31,  1997.  The increase in  flashlight  revenues was  primarily
attributable  to  increased  military  sales.  In  addition,  gross  margins for
flashlights  improved  significantly,  from 0.4% for the year ended December 31,
1997 to 24.9% for 1998. This improvement resulted from the Company's decision to
change  the source of  manufacturing  from the  United  States to certain  Asian
countries.


Operating Costs and Expenses

         Selling Expenses.  Selling expenses increased $495,000,  or 20.8%, from
$2,379,000  to  $2,874,000  for the year  December 31, 1998 compared to the year
December 31, 1997. The increase in selling  expenses was primarily  attributable
to an increase in advertising expense of approximately $128,000,  related to the
Company  securing pages in several office  products  providers'  catalogues.  In
addition,  the Company experienced an increase of approximately  $220,000 in the
cost of shipping products to its customers.  Management is addressing this issue
by sourcing  competitive  bids from  carriers.  These  increases  were partially
offset by a  decrease  of  approximately  $46,000  in travel  and  entertainment
expense.



<PAGE>


         Research  and  Development.   Research  and  development  decreased  by
$365,000,  or 71.9%,  from $508,000 to $143,000 for the year ended  December 31,
1998 compared to the year ended  December 31, 1997.  This decrease was primarily
attributable  to the completion of the research and  development  related to the
introduction of the Company's new line of telecommunication headset products.

         General  and  Administrative   Expenses.   General  and  administrative
expenses increased  $1,299,000,  or 75.1%, from $1,730,000 to $3,029,000 for the
year ended  December 31, 1998  compared to the year ended  December 31, 1997. Of
this  increase,  approximately  $450,000  was  incurred by the Company to defend
itself in patent infringement lawsuits,  approximately $300,000 related to legal
and accounting fees related to the Company's effort to register  securities on a
registration  statement on Form SB-2 in connection with a Convertible  Debenture
and Equity  Line-of-Credit  financing  agreement between the Company and private
investors  which was put into place in May 1998, and  approximately  $500,000 in
legal  expense was incurred as a result of certain  internal  investigative  and
general corporate matters.

         Total Operating Costs and Expenses.  Total operating costs and expenses
increased by $1,429,000,  or 31.0%,  from  $4,617,000 to $6,046,000 for the year
ended  December 31, 1998 compared to the year ended  December 31, 1997,  for the
reasons discussed above.

         Interest Expense.  Interest expense,  increased $1,346,000,  or 315.2%,
from $427,000 to $1,773,000 for the year ended December 31, 1998 compared to the
year ended  December  31,  1997.  This  increase  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 $500,000 and $137,000,
respectively,  both  associated  with the issuance of $1,500,000 of  Convertible
Debentures  (the  "Convertible  Debentures") in May 1998.  Additionally,  normal
non-cash interest was recognized on the Convertible  Debentures,  as well as the
amortization  of the  fair  value of  other  common  stock  warrants  issued  in
connection with the debt.  Also,  liquidated  damages were assessed  against the
Company in the amount of $110,000 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.

         Interest  Income.  Interest income  decreased  $6,000,  or 66.7%,  from
$9,000 to $3,000 for the year ended December 31, 1998 compared to the year ended
December  31,  1997.  This  decrease  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 Expense. Other expense decreased $26,000, from $61,000 to $35,000
for the year ended  December  31, 1998  compared to the year ended  December 31,
1997.  This  decrease is primarily  the result of a smaller tax provision due to
net operating loss carryforwards.

         Other Income.  Other income decreased  $295,000,  from $295,000 to $-0-
for the year ended  December  31, 1998  compared to the year ended  December 31,
1997. This decrease is primarily the result of the Company recognizing a gain on
the sale of assets during the year ended December 31, 1997 that did not recur in
1998.

         Net Loss. Net loss increased by $1,836,000,  or 448.9%,  from a loss of
$409,000 to a loss of $2,245,000  for the year ended  December 31, 1998 compared
to the  year  ended  December  31,  1997  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 inventories. 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.  At December 31, 1998 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

<PAGE>

amendment  to the loan  agreement  which  changed  the terms of  certain  of the
financial covenants and ratios for 1999. As a result of the net loss incurred in
1998, and to induce the lending institution to change the terms of the financial
covenants for 1999,  the interest rate  applicable to the revolving  credit line
was increased to prime plus three percent,  with interest  payable  monthly.  At
December  31,  1998,  the  Company had $2,268 of cash and  $3,311,000  of unused
borrowings under its credit  facility,  of which amount is limited to the levels
of  inventory  and  receivables.  The  Company  anticipates  that the  Company's
principal  uses of cash will be to  provide  working  capital,  finance  capital
expenditures,  meet debt service  requirements  and for other general  corporate
purposes.  Based on current  operations  and  anticipated  cost savings  through
operating efficiencies,  the Company believes that its sources of liquidity will
be adequate to meet its anticipated  requirements for working  capital,  capital
expenditures,  scheduled debt service  requirements and other general  corporate
purposes.

         On May 22, 1998, the Company closed a transaction  that has provided to
date net capital proceeds of $1,335,000. 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 are  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)  $4.624,  which  was  100% of the  closing  bid  price on the  trading  day
immediately  preceding the closing date of the agreement.  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.  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. Under the
terms of the Credit  Agreement,  a minimum of $1,000,000 must be drawn,  and all
amounts must be drawn in increments of not less than $50,000.  In return for the
payment of additional  capital upon such put exercises,  the Company is 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 put date and ending
two days  after the put date.  The put  mechanism  cannot be  utilized,  and the
Company has no  obligation to exercise any portion of the put  mechanism,  until
after the effective date of the registration  statement for the underlying stock
of the Credit  Agreement.  Additionally,  upon  registration  of the  underlying
shares which may be issued upon  conversion of the Convertible  Debentures,  the
Company is obligated to issue an additional  $500,000 of Convertible  Debentures
(see Note 8 to the  consolidated  financial  statements).  The  Company  filed a
registration  statement on Form SB-2 as required by the Credit  Agreement and is
in the  process  of  preparing  an  amendment  to that  registration  statement.
However,  there can be no  assurance  that the  registration  statement  will be
declared effective.


         December 31, 1998 Compared to December 31, 1997

         As of December 31, 1998,  the Company had liquid  assets (cash and cash
equivalents, accounts receivable - trade and other) of $2,231,000, a decrease of
3.4%, or $78,000,  from  December 31, 1997 when liquid  assets were  $2,309,000.
Cash decreased $331,000,  or 99.4%, to $2,000 at December 31, 1998 from $333,000
at December  31, 1997.  This  decrease 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 daily and re-applied
against outstanding draws.  Accounts  receivable - trade increased $679,000,  or
43.8%,  to $2,229,000 at December 31, 1998 from $1,550,000 at December 31, 1997.
This increase is primarily the result of increased  sales during  December 1998,
offset in part by improved  collections.  Accounts  receivable - other decreased
$426,000  to $-0- at  December  31,  1998.  This  decrease  is the result of the
Company's  receipt of  payment in full for the sale of land held by the  Company
during 1998.

         Current  assets  increased by  $2,313,000,  or 45.4%,  to $7,405,000 at
December  31, 1998 from  $5,092,000  at December  31,  1997.  Of this  increase,
$679,000 was primarily the result of an increase in accounts  receivable - trade
discussed  above and  $2,335,000  was the result of increased  inventory  levels
related to the Company's new telephone  headset and flashlight lines in addition
to the  increase in crayon  inventory as a result of the deferral of orders from
Dolgencorp, Inc. The increase in current assets was offset in part by a decrease
in cash and accounts receivable-other as discussed above.



<PAGE>


         Long-term assets decreased $183,000, or 4.2%, to $4,134,000 at December
31, 1998 from  $4,317,000 at December 31, 1997.  This decrease was primarily the
result of the Company's decision to write-off deferred loan costs related to the
Company's Convertible  Debenture and Equity Line-of-Credit  executed in May 1998
due to the "call"  provision of the debenture,  in addition to normal  recurring
depreciation  of fixed assets and  amortization of deferred loan costs and other
intangibles.

         Current liabilities increased by $1,940,000, or 48.1%, to $5,974,000 at
December  31, 1998 from  $4,034,000  at December  31,  1997.  Of this  increase,
$440,000 was primarily the result of an increase in accrued  expenses related to
legal fees. Additionally,  the Company reclassed the Convertible Debentures from
long-term  to  short-term  liabilities  due  to  the  "call"  provision  of  the
debenture,  offset in part by the  reclassification  of a $1,000,000 deposit for
stock issuance from short-term to long-term liabilities. On February 4, 1999 the
Company  entered  into a  deposit  payable  conversion  agreement,  whereby  the
$1,000,000  liability  was  cancelled  in return  for which the  Company  issued
500,000 shares of restricted common stock. These increases were offset, in part,
by  decreases in accrued  salaries and  benefits,  accrued  advertising  and the
current portion of long-term debt.

         The Company's  working  capital  increased by $1,045,000,  or 98.7%, to
$2,103,000 at December 31, 1998 from  $1,058,000  at December 31, 1997,  for the
reasons described above.

         The Company used cash of $2,079,000  from operating  activities  during
the year ended December 31, 1998,  resulting  primarily from increased inventory
levels relating to anticipated  sales of  miscellaneous/mass  market products to
Dolgencorp, Inc. and the Company's telephone headset and flashlight businesses.

         The Company used cash of $331,000 from investing  activities during the
year ended December 31, 1998, primarily for capital expenditures relating to the
Company's new  accounting and material  resource  planning  integrated  software
system implemented in early 1998.

         The  Company  received  $2,079,000  of cash from  financing  activities
during the year ended December 31, 1998,  due in part to a private  placement of
Convertible  Debentures  completed in May 1998 as well as  borrowings  under the
Company's revolving line-of-credit,  less payments made on long-term debt during
the period.

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 does not
intend to pass these increases along to its customers,  primarily as a result of
other operating  efficiencies gained through changing the sourcing of certain of
its  flashlight  manufacturing  from the  United  States  to  Asia.  Significant
increases in the cost of plastisol  in the future  could  materially  affect the
Company's  profitability  if these costs  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. The
Company purchases corrugated  packaging materials from several suppliers.  These
suppliers  source raw materials from Asia and have indicated to the Company that
they anticipate a price increase of between 10% and 14% in the second quarter of
1999,  and have  indicated  that they will be passing  this  increase  on to all
customers.  The Company does not believe that this increase will have a material
adverse affect on results of operations in 1999.

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.



<PAGE>


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.  Consequently, the Company believes its core
enterprise  resource planning and accounting systems will not be affected by the
Year 2000 problem. However, the Company uses many different software programs to
process and summarize business transactions. The Company is presently continuing
the evaluation of its operating systems and determining what, if any, additional
remediation  efforts  required to ensure its internal  systems will be Year 2000
compliant.  That assessment is approximately 90% completed.  Preliminary results
of this  assessment  reveal that  remediation  efforts  required  will vary from
system to system.  For  example,  it appears  some  systems will not require any
additional  programming  efforts,  while  others may  require  some  programming
changes or complete replacement.

         For those systems  identified as  non-compliant,  the Company has begun
and, in certain cases,  completed  remediation efforts. The Company will utilize
both  internal  and external  resources  to  reprogram or replace  non-compliant
software  for Year 2000  modifications.  The Company  plans to complete the Year
2000 project  before March 31, 1999.  The total  estimated cost of the Year 2000
project is  approximately  $200,000 and is being funded  through  operating cash
flows and the Company's  existing  $5,000,000  secured credit facility.  Of this
project  cost,  approximately  $120,000 is  attributable  to the purchase of new
software or equipment which will be capitalized.  The remaining  $80,000 will be
expensed  as  incurred.  In a number of  instances,  the  Company  may decide to
install new software or upgrade versions of current software  programs which are
Year 2000  compliant.  In these  instances,  the Company may capitalize  certain
costs of the new systems in accordance with current accounting guidelines.

         The Company is also  assessing  the impact of the Year 2000  problem on
embedded  systems in equipment and machinery  located at the Company,  comprised
mainly of heating,  ventilation and air conditioning equipment and telephone and
alarm systems.  Based on the  assessments  completed to date, the Company is not
aware of any respect in which those  systems  will fail or otherwise be impaired
by the Year 2000 problem.

         The  Company  has  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.  In March 1999, the Company,  through its own  information  technology
personnel,  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.  Based on those  efforts,  the Company  does not  presently
anticipate  that its  operations  will be adversely  affected as a result of the
Year 2000  problem  as it may  affect  the  Company's  key  suppliers'  internal
systems.  However, there can be no guarantee that the systems of other companies
on which the Company  relies for products and services  will be timely  assessed
and, where appropriate  remediated,  or that other companies'  failure to become
Year 2000 compliant would not have a material adverse effect on the Company.

         The Company  presently  believes  that with  modifications  to existing
software and conversions to new software for those systems which it believes may
be  affected,   the  Year  2000  issue  can  be  mitigated.   However,  if  such
modifications  and  conversions are not made, or are not completed  timely,  the
Year 2000 issue  could  have a material  adverse  impact on the  operations  and
financial condition of the Company.



<PAGE>


         The costs of the  project  and the date on which the  Company  plans to
complete the Year 2000 modifications are based upon management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources,  third party modification plans and
other factors.  However,  there can be no guarantee that these estimates will be
achieved and actual results could differ  materially from those plans.  Specific
factors that might cause such material  differences include, but are not limited
to, the availability  and cost of personnel  trained in Year 2000 consulting and
remediation,  the ability to locate and correct all relevant  computer codes and
similar uncertainties.  As testing and assessment of third parties is completed,
the  Company  intends  to  develop  contingency  plans  for  possible  Year 2000
problems.

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
Section  21E of the  Securities  Exchange  Act of 1936,  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.


<PAGE>


Item 7.   Financial Statements



                    Independent Auditors' Report of KPMG LLP

The Board of Directors
Dynatec International, Inc.:

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Dynatec
International,  Inc.  as of  December  31,  1998  and  1997  , 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 included
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.  as of December  31, 1998 and 1997,  and the results of its
operations  and its cash  flows  for the years  then  ended in  conformity  with
generally accepted accounting principles.

                                                   /s/ KPMG LLP
                                                       KPMG LLP

Salt Lake City, Utah
February 19, 1999, except as to
     Note 15, which is as of
     March 19, 1999


<PAGE>

<TABLE>
<CAPTION>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                                                                       December 31,       December 31,
                                                                                          1998                1997
                                                                                     ---------------     --------------
CURRENT ASSETS:
<S>                                                                                  <C>                 <C>
    Cash and cash equivalents                                                        $                   $ 
                                                                                             2,268             332,894
    Trade accounts receivable, net of allowance for doubtful accounts
       of $30,190 and $29,684, respectively                                              2,229,157           1,549,888
    Accounts receivable - other                                                                110             426,131
    Inventories (see Note 3)                                                             4,857,241           2,522,149
    Prepaid expenses and other                                                             316,347             261,312
                                                                                     -------------         -----------
                Total current assets                                                     7,405,123           5,092,374
                                                                                     -------------         -----------

LAND, BUILDING AND EQUIPMENT, at cost:
    Land                                                                                   365,860             365,860
    Building and improvements                                                            2,214,144           2,214,144
    Furniture, fixtures and equipment                                                    3,554,045           3,289,886
                                                                                      ------------         -----------
                                                                                         6,134,049           5,869,890
    Less accumulated depreciation and amortization                                       2,336,427           1,928,303
                                                                                      ------------         -----------

                Net land, building and equipment                                         3,797,622           3,941,587
                                                                                      ------------         -----------

TRADEMARKS AND OTHER INTANGIBLES, net (see Note 4)                                         205,102             267,825
                                                                                      ------------         -----------

DEFERRED LOAN COSTS, net of accumulated amortization of $4,903 and
    $-0-, respectively (see Note 2)                                                         61,743                   -
                                                                                      ------------         -----------
OTHER ASSETS                                                                                69,337             107,631
                                                                                      ------------         -----------
                                                                                       $11,538,927          $9,409,417
                                                                                       ===========          ==========
</TABLE>





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


<PAGE>

<TABLE>
<CAPTION>

                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS (Continued)

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                                       December 31,        December 31,
                                                                                          1998                 1997
                                                                                     ---------------     ---------------
CURRENT LIABILITIES:
    <S>                                                                              <C>                   <C>
    Short-term note payable (see Note 5)                                                $  1,389,223         $ 1,331,169
     Convertible debentures (see Note 8)                                                   1,667,079                   -
    Current portion of long-term debt (see Note 6)                                           246,855           1,003,477
    Current portion of capital lease obligations (see Note 7)                                 17,881              15,699
    Accounts payable                                                                       1,518,316           1,077,631
    Accounts payable - other                                                                   9,000                   -
    Accounts payable-related party (see Note 12)                                              98,403                   -
    Accrued expenses                                                                         637,051             238,121
    Accrued advertising                                                                      320,000             350,000
    Accrued royalties payable                                                                 70,246              17,882
                                                                                         -----------         -----------
              Total current liabilities                                                    5,974,054           4,033,979

LONG-TERM DEBT, net of current portion (see Note 6)                                        2,006,518           1,994,355

DEPOSIT FOR STOCK ISSUANCE (see Note 12)                                                   1,000,000                   -

DEFERRED INCOME TAXES (see Note 9)                                                                 -               5,036

CAPITAL LEASE OBLIGATIONS, net of current portion (see Note 7)                                28,654              46,086
                                                                                         -----------         -----------
              Total liabilities                                                            9,009,226           6,079,457
                                                                                         -----------         -----------

STOCKHOLDERS' EQUITY (see Note 10):
    Common stock, $.01 par value; 100,000,000 shares authorized and 2,891,627
       and 2,859,940 shares outstanding, respectively                                         28,916              28,599
    Treasury stock, at cost, 91,515 shares                                                  (915,150)           (915,150)
    Additional paid-in capital                                                             7,041,690           5,596,840
    Accumulated deficit                                                                   (3,625,755)         (1,380,329)
                                                                                         -----------         -----------
              Total stockholders' equity                                                   2,529,701           3,329,960
                                                                                         -----------         -----------
COMMITMENTS AND CONTINGENCIES (see Note 7, 8, 14, 15 and 17)

                                                                                         $11,538,927         $ 9,409,417
                                                                                         ===========         ===========
</TABLE>









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


<PAGE>

<TABLE>
<CAPTION>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                                       Year Ended            Year Ended
                                                                                    December 31, 1998     December 31, 1997
                                                                                    -----------------     -----------------
<S>                                                                                    <C>                   <C>        
PRODUCT SALES                                                                          $16,578,694           $14,566,079
COST OF SALES                                                                           10,973,161            10,174,205
                                                                                     -------------         -------------
       Gross Margin                                                                      5,605,533             4,391,874
                                                                                     -------------         -------------

OPERATING COSTS AND EXPENSES:
    Selling expenses                                                                     2,874,259             2,378,547
    Research and development                                                               143,088               508,314
    General and administrative                                                           3,028,682             1,729,639
                                                                                     -------------         -------------
       Total operating costs and expenses                                                6,046,029             4,616,500
                                                                                     -------------         -------------
          Loss from operations                                                            (440,496)             (224,626)
                                                                                     -------------         -------------

OTHER INCOME (EXPENSE):
    Interest expense (see Note 8)                                                       (1,773,079)             (427,392)
    Interest income                                                                          3,340                 9,417
    Other expense                                                                          (20,192)                    -
    Other income                                                                                 -               295,023
                                                                                     --------------        -------------
       Total other expense, net                                                         (1,789,931)             (122,952)
                                                                                     --------------        -------------

          Loss before income tax provision                                              (2,230,427)             (347,578)

INCOME TAX PROVISION (see Note 9)                                                          (15,000)              (61,594)
                                                                                     --------------        -------------
          Net loss                                                                    $ (2,245,427)        $    (409,172)
                                                                                     =============         =============

BASIC AND DILUTED NET LOSS PER SHARE (see Note 2)                                     $       (.80)        $        (.18)
                                                                                     =============         =============

WEIGHTED AVERAGE SHARES - BASIC AND DILUTED                                              2,792,738             2,284,419
                                                                                     =============         =============

</TABLE>











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


<PAGE>
<TABLE>
<CAPTION>

                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                  Common Stock
                                          ------------------------------
                                                Number of                  Treasury Stock      Additional       Accumulated
                                                 Shares        Amount          At Cost      Paid-in Capital       Deficit
                                              ------------    ----------   --------------   ---------------    -------------
<S>                                           <C>            <C>               <C>           <C>               <C>        
BALANCE  DECEMBER 31, 1996                       1,974,104      $ 19,741          $      -      $ 3,595,699       $ (971,156)
Shares Issued pursuant to Regulation S
Stock offerings                                    881,836         8,818                 -        1,991,181                 -
Treasury Stock (18,000 shares) received to
    satisfy related-party receivable                     -             -         (180,000)                -                 -
Treasury Stock (73,515 shares) received in
    exchange for assets                                  -             -         (735,150)                -                 -
Shares issued pursuant to employee stock
    option plans                                     4,000            40                 -            9,960                 -
Net Loss                                                 -             -                 -                -          (409,172)
                                              ------------     ----------   --------------    --------------     ------------

BALANCE DECEMBER 31, 1997                        2,859,940      $ 28,599       $ (915,150)      $ 5,596,840      $(1,380,328)

Shares issued pursuant to employee stock
    option plans                                    11,687           117                 -             (117)                -
Issuance of convertible debentures and
    equity line-of-credit (see Note 8)              20,000           200                 -          864,967                 -
Capital addition (see Note 10)                           -             -                 -          580,000                 -
Net loss                                                 -             -                 -                -        (2,245,427)
                                              ------------     ----------   --------------    --------------     ------------

BALANCE DECEMBER 31, 1998                        2,891,627      $ 28,916       $ (915,150)      $ 7,041,690      $(3,625,755)
                                                 =========      ========       ===========      ===========      ============

</TABLE>





















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


<PAGE>
<TABLE>
<CAPTION>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                    Year Ended           Year Ended 
                                                                                 December 31, 1998    December 31, 1997
                                                                                 -----------------    -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                             <C>                     <C>           
   Net loss                                                                     $    (2,245,427)        $    (409,172)
                                                                                     
   Adjustments to reconcile net loss to net cash used in operating activities:
         Depreciation and amortization                                                  504,991               461,231
         Amortization of deferred loan costs                                             97,415
         Non-cash charges on issuance of convertible
             debentures (see Note 8)                                                  1,004,996                     -
         Loss (gain) on sale of assets                                                   20,192               (90,829)
         Changes in assets and liabilities:
               Accounts receivable - trade                                             (679,269)             (424,138)
               Accounts receivable - other                                              426,021                80,325
               Inventories                                                           (2,335,092)           (1,337,963)
               Prepaid expenses and other                                               (16,741)             (139,239)
               Accounts payable                                                         525,684               537,488
               Accounts payable - other                                                  22,403               (11,575)
               Accrued expenses                                                         558,136               146,182
               Accrued advertising                                                      (30,000)               45,500
               Accrued royalties                                                         52,365               (48,325)
               Income tax payable                                                        15,000                  (500)
                                                                                ---------------        --------------
                  Net cash used in operating activities                              (2,079,326)           (1,191,015)
                                                                                ---------------        --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from the sale of assets                                                       63,706                 6,007
  Receivable from related parties                                                             -               (30,000)
  Purchase of property and equipment                                                   (394,365)             (587,187)
                                                                                ----------------       ---------------
                  Net cash used in investing activities                                (330,659)             (611,180)
                                                                                ----------------       ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings on line of credit                                                       58,054               108,447
  Debt issuance costs                                                                  (298,986)                3,906
  Net payments on long-term debt                                                       (744,459)             (190,635)
  Principal payments on capital lease obligations                                       (15,250)              (36,774)
  Proceeds from capital addition (see Note 10)                                          580,000                     -
  Proceeds from convertible debenture offering (see Note 8)                           1,500,000                     -
  Proceeds from issuance of stock pursuant to Incentive Stock Option Plan                     -                10,000
  Proceeds from deposit for stock issuance (see Note 10)                              1,000,000                     -
  Proceeds from stock sold pursuant to Regulation S offering                                  -             2,000,000
                                                                                ---------------         -------------
                  Net cash provided by financing activities                           2,079,359             1,894,944
                                                                                 --------------         -------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   (330,626)               92,749

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD                                    332,894               240,145
                                                                                ---------------        --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                                  $         2,268        $      332,894
                                                                                ===============        ==============
</TABLE>

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


<PAGE>
<TABLE>
<CAPTION>

                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                                                                                   Year Ended             Year Ended
                                                                                December 31, 1998     December 31, 1997
                                                                                -----------------     -----------------

<S>                                                                               <C>                   <C>      
    Cash paid for interest                                                        $ 685,573             $ 346,648
                                                                                  =========             =========

    Cash paid for income taxes                                                    $       -             $     500
                                                                                  =========             =========
    Debt issuance costs attributable to warrants to placement agent               $ 385,062             $       -
                                                                                  =========             =========


</TABLE>



























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

<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 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  purchased with an
original maturity 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.  Accordingly,  the  accompanying  financial
statements for the years ended December 31, 1997 and 1996 have not been restated
for the change.

Property and Equipment

     Depreciation  on Property and  Equipment  is computed on the  straight-line
method over the following useful lives:


   Building  and  Improvements  7-39 years
   Capital  Leases              5-7 years
   Equipment                    5-10 years
   Office Equipment & Fixtures  5-7 years  
   Vehicles                       5 years
   Signs and Show Booths        5-7 years


<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

         Long-lived assets 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  covenants  not to  compete  are not  significant  and are being
amortized using the straight-lined method over five years.

Deferred Loan Costs

     Deferred loan costs totaling  $61,743  resulted from issuance costs related
to the Company's revolving credit facility,  and are being amortized as interest
expense over thirty-six months (see Note 5).

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.

Stock-Based Compensation

         The Company uses the  intrinsic  value method  prescribed by Accounting
Principles  Board (APB) Opinion No. 25 when  accounting  for its employee  stock
compensation  plans.  As such,  compensation  expense is recorded on the date of
grant only if the current market price of the stock exceeds the exercise price.

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, 1998, one customer  accounted for 19.6%
and no other  customer  accounted  for  more  than  10% of the  Company's  total
revenues.



<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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.  In
calculating  net loss per share for the years ended December 31, 1998, and 1997,
warrants and options to purchase  606,145,  and 555,062 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.

         A reconciliation between the basic and diluted  weighted-average number
of shares outstanding as of December 31, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>

                                                                               December 31,
                                                                     --------------------------------
                                                                          1998              1997
                                                                     ---------------    -------------
<S>                                                                       <C>              <C>      
Basic weighted average number of common shares...................         2,792,738        2,284,419
Weighted average number of common stock options..................                 -                -
                                                                     ===============    =============
       Diluted weighted average number of shares..................        2,792,738        2,284,419
                                                                     ===============    =============
</TABLE>


Accounting Standards

         During the year ended December 31, 1998, the Company adopted  Statement
of Financial  Accounting  Standards ("SFAS") No. 130,  "Reporting  Comprehensive
Income".  SFAS No. 130 requires an  "all-inclusive"  income  statement  approach
which specifies that all revenues,  expenses, gains and losses recognized during
the period be reported in income,  regardless of whether they are  considered to
be results of  operations  of the  period.  The  adoption of SFAS No. 130 had no
material  impact  on the  Company's  financial  statement  presentation,  as the
Company had no items of comprehensive income as defined by SFAS No. 130.

Advertising

         Advertising  costs are  expensed  as  incurred.  The  Company  does not
participate in direct  response  advertising.  Advertising  expense  amounted to
$531,949 and $404,426 in 1998 and 1997, respectively.

Reclassifications

         Certain   reclassifications  have  been  made  in  the  prior  period's
consolidated financial statements to conform with the current year presentation.




<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(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, 1998 and December 31, 1997,  respectively,  are summarized as
follows:
<TABLE>
<CAPTION>

                                                                  December 31,         December 31,
                                                                      1998                 1997
                                                                -----------------    -----------------
                   <S>                                            <C>                 <C>      
                   Raw materials............................           $902,703            $ 671,883
                   Work-in-Process..........................            309,815              159,600
                   Finished Goods...........................          3,644,723            1,690,666
                                                                =================    =================
                                                                     $4,857,241           $2,522,149
                                                                =================    =================
</TABLE>


(4)      INTANGIBLE ASSETS

Intangible  assets are  comprised  of the  following as of December 31, 1998 and
1997 and are  amortized on a  straight-line  basis over their  estimated  useful
lives.
<TABLE>
<CAPTION>
                                                                            Est. Useful
                                           1998              1997           Life (years)
                                           ----              ----           ------------
        <S>                             <C>               <C>                  <C>
        License agreement                $203,509          $203,509             40
        Product rights                    301,263           301,263             5-10
        Non-compete agreements             87,500            87,500             5
                                         --------          --------
                                          592,272           592,272

        Less accumulated amortization     387,170           324,447
                                         --------          --------
                                         $205,102          $267,825
                                         ========          ========
</TABLE>

(5)      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 $5,000,000 bearing interest at a rate of prime plus one percent with interest
payable monthly. The note is secured by accounts receivable and inventory and is
due May  26,  2001.  As of  December  31,  1998  and  1997,  direct  outstanding
borrowings totaled $1,389,223 and $1,331,169,  respectively.  Direct outstanding
borrowings as of December 31, 1997 were under a revolving credit line terminated
in 1998 and replaced by the Company's  current credit line. The amount of unused
borrowings  under the Company's  credit facility is limited to the  then-current
levels of inventory and receivables.  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,  1998 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 1999. As a result of the net loss incurred in 1998, the
pricing  of the  credit  facility  was  increased  to a rate of prime plus three
percent, with interest payable monthly.



<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(5)      SHORT-TERM NOTE PAYABLE (Continued)

         Maximum and average  borrowings  as well as weighted  average  interest
rate for the years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
                                                                1998               1997
                                                                ----               ----
         <S>                                                <C>                  <C>       
         Maximum Outstanding                                $2,416,638           $1,471,802
         Average Outstanding                                $1,780,576           $1,127,635
         Weighted Average Interest Rate                           8.25%                9.91%
</TABLE>


(6)      LONG -TERM DEBT

         Long-term debt consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>

                                                                                       1998            1997
                                                                                    ----------      ----------
         <S>                                                                      <C>               <C>
         Revolving  line-of-credit up to $1,000,000 payable to a bank;  interest
         at prime plus 1% and terminated May 1, 1998;
         secured by equipment                                                       $       -        $ 564,816

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

         Note payable to a company; due in annual
         installments of $79,560 plus interest at 7%;
         due December 31, 1999, unsecured                                                   -          195,991

         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           17,992

         Note payable to a company; due in monthly
         installments of $1,160 plus accrued interest
         at 7.9%, due November 30, 2002,                                  
         secured by equipment                                                               -           70,800

         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        1,182,158

</TABLE>

<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(6)      LONG -TERM DEBT (Continued)
<TABLE>
<CAPTION>

         <S>                                                                     <C>              <C>
         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          966,075
                                                                                   ----------      -----------
         Total Long-term debt                                                      2,253,373        2,997,832

         Less current portion                                                        246,855        1,003,477
                                                                                  -----------      -----------
         Total Long-term debt excluding current portion                           $2,006,518       $1,994,355
                                                                                  ==========       ===========
</TABLE>

Aggregate maturities for each of the five years subsequent to December 31, 1998,
are as follows:

1999                      $   246,855
2000                          222,440
2001                          164,107
2002                          107,636
2003                           96,989
Later                       1,415,346
                          -----------
Total Long-term debt       $2,253,373
                          ===========


(7)      LEASES

     The  following  represents  assets under capital lease at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
                                                                1998              1997
                                                                ----              ----
         <S>                                                  <C>               <C>
         Equipment                                            $82,357           $82,357
         Less accumulated depreciation                         33,704            19,409
                                                               ------            ------
         Net property under capital lease                     $48,653           $62,948
                                                               ======            ======
</TABLE>

         Amortization  of assets  held  under  capital  lease is  included  with
depreciation expense. Rental expense for operating leases during the years ended
December 31, 1998 and 1997 was $21,407 and $28,007, respectively.

         At  December  31,  1998 the  Company  is  obligated  under the terms of
non-cancelable leases for the following minimum lease commitments:
<TABLE>
<CAPTION>

                                                                Capital          Operating
                                                                Leases             Leases    
                                                               --------          --------- 
         <S>                                                   <C>                <C>    
         Year ended December 31:     1999                      $17,882            $20,659
                                     2000                       12,958             18,136
                                     2001                       15,695              6,960
                                                                ------            -------
         Total minimum lease payments                          $46,535            $45,755
                                                                                  =======
         Less current portion                                   17,881
         Capital Lease obligations excluding                   -------
              current portion                                  $28,654
                                                               =======
</TABLE>

<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

     On May 22, 1998, the Company closed a transaction that has provided to date
net capital proceeds of $1,335,000. 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) $4.624,  which was 100% of the closing bid price on
the  trading  day  immediately  preceding  the  closing  date of the  agreement.
Assuming  a  hypothetical  conversion  of the  entire  principal  amount  of the
Convertible  Debentures  outstanding  as of March  26,  1999,  and all  interest
accrued  thereon  at the  rate  of 12% per  annum  as of  March  26,  1999,  the
Convertible Debentures would be convertible into 978,961 shares of the Company's
common stock.  The Convertible  Debentures are callable by the holders  thereof.
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.  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.  Under the terms of the Credit Agreement,  a minimum of $1,000,000 must
be drawn,  and all amounts must be drawn in increments of not less than $50,000.
In return for the payment of  additional  capital upon such put  exercises,  the
Company is 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
put date and  ending two days after the put date.  The put  mechanism  cannot be
utilized,  and the Company has no  obligation to exercise any portion of the put
mechanism,  until after the effective date of the registration statement for the
underlying stock of the Credit Agreement. Additionally, upon registration of the
underlying  shares  which  may be  issued  upon  conversion  of the  Convertible
Debentures,  the  Company  is  obligated  to issue  an  additional  $500,000  of
Convertible Debentures.

         In connection  with the Credit  Agreement,  the investors and placement
agent were  issued  warrants.  These  warrants  have been 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>

     The  Company  must 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.  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-of-credit  established  under the
Credit Agreement.  This allocation was based on the relative notional amounts of
the two elements of the Credit  Agreement.  The value of the warrants  issued to
the investors has been written off as a one-time,  non-cash debt issuance  cost,
as the warrants are immediately exercisable. The value of the warrants issued to
the  placement  agent  and  allocated  to the  Convertible  Debentures  is being
amortized  over the 36 month life of the  Convertible  Debentures.  In addition,
because the  Convertible  Debentures are  convertible at a 25% discount from the
market value,  an additional  $500,000  representing  the intrinsic value of the
beneficial  conversion  premium was  written  off as a non-cash  expense for the
second quarter of 1998.

     These  non-cash  charges for the market  value of the warrants are included
with interest expense in the consolidated  statements of operations for the year
ended  December  31,  1998.  The  market  value of the  warrants  issued  to the
investors in connection with the additional  $500,000 of Convertible  Debentures
will be charged to operations at the time of issuance.



<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

         The  Company  is also  directly  issuing,  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 are retained in
escrow and are to be released in 6,000 share  increments  as each  $1,000,000 is
drawn  down  under  the  equity  line-of-credit  established  under  the  Credit
Agreement.  If all of the equity  line-of-credit is not utilized,  the remaining
shares held in escrow will be returned to the Company and cancelled.

         Because  the  registration  statement  for the  shares of common  stock
underlying  the Credit  Agreement  was not  effective  with the  Securities  and
Exchange Commission within 90 days of the closing date,  liquidated damages were
assessed against the Company at the rate of two percent of the purchase price of
the  outstanding  Convertible  Debentures for the first 30-day period beyond the
original 90 days and three percent of the purchase price of the then outstanding
securities (pro rated on a daily basis) for each 30-day period thereafter. As of
March 15, 1999, the registration  statement had not yet become  effective.  As a
result the  Company  has paid  $165,000,  and  accrued  $45,000,  in  liquidated
damages.

(9)   INCOME TAXES

         Income tax expense  (benefit)  attributable  to income from  continuing
operations consists of:
<TABLE>
<CAPTION>

                                                       Current         Deferred        Total
                                                      ---------       ----------      --------
              <S>                                     <C>             <C>             <C>
              Year ended December 31, 1998
              Federal                                 $ 19,386        $  (4,386)      $ 15,000
              State                                        650             (650)             -                            
                                                      ---------       ----------      --------
                                                      $  20,036       $  (5,036)      $ 15,000
                                                      =========       ==========      ========
              Year ended December 31, 1997
              Federal                                 $      -        $  53,694       $ 53,694
              State                                          -            7,900          7,900
                                                      ---------       ----------      --------
                                                      $      -        $  61,594       $ 61,594
                                                      =========       ==========      ========
</TABLE>

         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>
                                                                          1998           1997
                                                                          ----           ----
             <S>                                                     <C>            <C>       
              Computed "expected" tax benefit                        $ (983,952)    $(118,177)
              Change in the valuation allowance for deferred tax
                 assets allocated to income tax expense                 269,952       177,961
              Non-deductible financing costs                            682,733             -
              Other                                                      46,267         1,810
                                                                      ----------     ---------
              Total                                                   $  15,000      $ 61,594
                                                                       =========      ========

</TABLE>



<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(9)   INCOME TAXES (Continued)

         The tax effects of temporary  differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997, are presented below.
<TABLE>
<CAPTION>

                                                                             1998           1997
                                                                             ----           ----
             <S>                                                           <C>          <C> 
             Deferred tax assets:
             Inventory capitalization                                       $60,041      $165,343
             Allowance for bad debts                                         11,261        11,072
             Compensated absences accrued for  financial
                reporting purposes                                           25,784        14,377
             Net operating loss carry-forward                               649,945       290,216
             Intangibles, principally due to differences in
                Amortization                                                 17,701         5,273
             Warranty reserve                                                 8,837             -
             Research and experimentation credit                             25,000             -
                                                                            --------     ---------
             Total gross deferred tax assets                                798,569       486,281
             Less valuation allowance                                       756,233       486,281
                                                                            -------       -------
             Total deferred tax assets                                       42,336           -0-

             Deferred tax liabilities:
             Plant and equipment, principally due to differences
             in depreciation                                                 42,336       (5,036)
                                                                            -------       -------
             Total gross deferred tax liabilities                            42,336       (5,036)
                                                                            =======       =======
             Net deferred tax assets (liabilities)                          $    -      $ (5,036)
                                                                            =======     =========
</TABLE>

         The  valuation  allowance for deferred tax assets as of January 1, 1997
was -0-.  The net change in the total  valuation  allowance  for the years ended
December 31, 1998 and 1997 was $269,952 and $ 177,961, respectively.

         The Company has  $1,742,481  of net  operating  loss  carryforwards  at
December 31, 1998.  Of the total net  operating  loss  carryforwards,  $525,792,
$490,219 and  $726,470  expire in the years ended  December  31, 2011,  2012 and
2018, respectively.

(10)  STOCKHOLDERS' EQUITY

         On March 11, 1997, the Company's Board of Directors approved Regulation
S  offerings  of its  common  stock to raise  three to five  million  dollars in
working  capital.  The  stock  was  offered  to non U.S.  persons  at a price of
approximately 50% of the then-prevailing  market value, which was $3.88 on March
11, 1997. As a result, 881,836 shares of restricted common stock was issued.

         During  June  1997,  the  Company  received  18,000  shares of stock in
exchange for debts owed to the Company.  These shares were  recorded as treasury
stock at the fair market value of $10.00 per share.  In  addition,  4,000 shares
were exercised under the 1996 incentive stock option plan.

         In July 1997, the Company received 73,515 shares of its common stock in
exchange  for assets sold by the  Company.  The shares  received in exchange for
these  assets  were  recorded as  treasury  stock at their fair market  value of
$10.00 per share.  The value of the stock received from the sale of these assets
approximated the current book value of the assets sold.



<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10)  STOCKHOLDERS' EQUITY (Continued)

         As of December 31, 1998,  $1,000,000,  which is included in deposit for
stock issuance in the accompanying  balance sheet, was received as a deposit. 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 is 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.

         The Company is a party to pending  litigation with a Canadian brokerage
firm  captioned as  Canaccord  Capital  Corporation  ("Canaccord")  vs.  Dynatec
International,  Inc.,  Civil No.  2:98-cv-420C,  and filed in the United  States
District  Court for the  District  of Utah.  Canaccord  initially  sued  seeking
injunctive  relief  and money  damages  stemming  from the  Company's  allegedly
wrongful cancellation of 125,000 shares of the Company's common stock in January
1998.  Canaccord  claimed  that it suffered  damage from a market  shortage  and
deficiency to various  accounts which had previously been sold by Canaccord as a
result of the allegedly  wrongful  cancellation of shares.  On July 17, 1998 the
District Court entered a preliminary injunction requiring the Company to reissue
125,000 shares in the name of CEDE & Company,  as the market  clearing house, to
replace the alleged market shortage.  The court preserved  Canaccord's remaining
claims for money damages and the return of an additional block of shares alleged
to have been  wrongfully  cancelled,  which are still  pending.  The Company has
named  various  third party  defendants  to whom it believes the shares may have
been  improperly  issued and is  seeking  either  recovery  of the shares or the
recovery of damages.  At present,  the Company is engaged in  negotiations  with
representatives of various of the third parties and Canaccord, and believes that
a resolution of the outstanding claims, in whole or in part, will be reached.

         Related to the Canaccord litigation,  a claim for an additional 125,000
shares of the stock of the Company had been made by Katori Consultants,  Ltd., a
Philippines  corporation.  The answer and third party complaint of Dynatec named
Katori  Consultants,  Ltd. as a third party  defendant  so that such  additional
claim could be addressed as part of the Canaccord  legal action.  On October 21,
1998,  Katori  Consultants,   Ltd.  gave  written  notice  to  Dynatec  that  it
relinquished any claim to additional shares of common stock of the Company.

         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.

(11)     BUSINESS SEGMENT INFORMATION

         During the year ended  December  31, 1998 the Company  adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". SFAS
No. 131 establishes standards for reporting information about operating segments
in annual financial statements and requires selected information about operating
segments  in  interim  financial   reports  issued  to  stockholders.   It  also
established  standards for related disclosures about products and services,  and
geographic areas.  Operating segments are defined as components of an enterprise
about which  separate  financial  information  is  available  that is  evaluated
regularly by the chief  operating  decision  maker, or decision making group, in
deciding how to allocate resources and in assessing performance.



<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(11)     BUSINESS SEGMENT INFORMATION (Continued)

         Information as to the  operations of the Company in different  business
segments  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.
<TABLE>
<CAPTION>

                                                              YEARS ENDED DECEMBER 31,
                                                      -----------------------------------------
REVENUES:                                                      1998                 1997
-----------------------------------------------------     ---------------     ------------------
<S>                                                    <C>                    <C>
Telecommunication Headsets and
   Amplifiers and Telephone Accessories..........         $ 7,640,000         $ 6,146,000
Home Storage and Organization....................           4,444,000           3,387,000
Flashlights......................................             989,000             893,000
Miscellaneous/Mass Market........................           3,506,000           4,140,000
                                                          ---------------     ------------------
       Total.....................................         $16,579,000         $14,566,000
                                                          ===============     ==================
</TABLE>

<TABLE>
<CAPTION>

                                                              YEARS ENDED DECEMBER 31,
                                                      -----------------------------------------
OPERATING INCOME (LOSS):                                       1998                  1997
-----------------------------------------------------     ----------------      ----------------
<S>                                                      <C>                   <C> 
Telecommunication Headsets and Amplifiers and                                    
   Telephone Accessories.........................             $ 904,000            $ 718,000
Home Storage and Organization....................              (496,000)            (317,000)
Flashlights......................................              (696,000)            (852,000)
Miscellaneous/Mass Market........................              (152,000)             226,000
                                                          ----------------      ----------------
       Total.....................................            $(440,000)            $(225,000)
                                                          ================      ================
</TABLE>
<TABLE>
<CAPTION>

                                                              YEARS ENDED DECEMBER 31,
                                                      -----------------------------------------
DEPRECIATION AND AMORTIZATION (1):                             1998                 1997
-----------------------------------------------------     ----------------    ------------------
<S>                                                     <C>                  <C> 
Telecommunication Headsets and Amplifiers and                                  
   Telephone Accessories.........................            $ 206,000           $ 189,000
Home Storage and Organization....................              183,000             167,000
Flashlights......................................               93,000              87,000
Miscellaneous/Mass Market........................               23,000              18,000
                                                          ----------------    ------------------
       Total.....................................            $ 505,000           $ 461,000
                                                          ================    ==================
<FN>

(1) Amortization  includes all amortization  relating to product license rights,
non-competes and purchased patents.
</FN>
</TABLE>




<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11)     BUSINESS SEGMENT INFORMATION (Continued)

     Information  as  to  the  assets  and  capital   expenditures   of  Dynatec
International, Inc. is as follows:

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                      -----------------------------------------
ASSETS (1):                                                    1998                 1997
----------------------------------------------------      ----------------    ------------------
<S>                                                      <C>                 <C> 
Telecommunication Headsets and Amplifiers and
   Telephone Accessories.........................         $  4,795,000        $ 3,938,000
Home Storage and Organization....................            3,200,000          2,628,000
Flashlights......................................            1,728,000          1,213,000
Miscellaneous/Mass Market........................            1,366,000            502,000
                                                          ----------------    ------------------
       Total assets for reportable segments......           11,089,000           8,281,000

Other assets.....................................              319,000           1,020,000
Deferred loan costs and other assets not allocated
to segments......................................              131,000             108,000
                                                          ================    ==================
       Consolidated total........................         $ 11,539,000         $ 9,409,000
                                                          ================    ==================
</TABLE>

<TABLE>
<CAPTION>

                                                             YEARS ENDED DECEMBER 31,
                                                      ----------------------------------------
CAPITAL EXPENDITURES:                                          1998                 1997
----------------------------------------------------      ----------------    -----------------
<S>                                                     <C>                  <C>
Telecommunication Headsets and Amplifiers and                                  
   Telephone Accessories.........................            $ 157,000           $ 397,000
Home Storage and Organization....................              162,000             135,000
Flashlights......................................               69,000              46,000
Miscellaneous/Mass Market........................                6,000               9,000
                                                          ----------------    -----------------
       Total.....................................            $ 394,000           $ 587,000
                                                          ================    =================
</TABLE>

     Information  as to Dynatec  International,  Inc.'s  operations in different
geographical areas is as follows:
<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                                           ----------------------------------------
REVENUES:                                           1998                 1997
------------------------------------------     ----------------    -----------------
<S>                                            <C>                 <C>         
United States..........................        $ 16,402,000        $ 14,344,000
Other (1)..............................             177,000             222,000
                                               ----------------    -----------------
       Total...........................         $16,579,000         $14,566,000
                                               ================    =================
<FN>

(1) Includes Canada, Europe and other miscellaneous.
</FN>
</TABLE>

<TABLE>
<CAPTION>

                                                  YEARS ENDED DECEMBER 31,
                                           ----------------------------------------
OPERATING LOSS:                                     1998                 1997
------------------------------------------     ----------------    -----------------
<S>                                               <C>                 <C>       
United States..........................           $(440,000)          $(225,000)
                                               ================    =================
</TABLE>
<TABLE>
<CAPTION>

                                                  YEARS ENDED DECEMBER 31,
                                           ----------------------------------------
ASSETS:                                             1998                 1997
------------------------------------------     ----------------    -----------------
<S>                                            <C>                 <C>        
United States..........................        $11,089,000         $ 8,996,000
Asia...................................            450,000             413,000
                                               ----------------    -----------------
       Total...........................        $11,539,000         $ 9,409,000
                                               ================    =================
</TABLE>

<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12)     RELATED PARTY TRANSACTIONS

     The Company's subsidiary Softalk, Inc., holds licensing rights for the
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").  Donald M. Wood, a shareholder  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 to 2 million,  which was paid to Practical  Innovations,
Inc. in a combination of Dynatec  common stock and cash.  Under the terms of the
agreement,  Dynatec was obligated to pay a 10% royalty on all Softalk sales.  At
that time, WAC and the Board of Directors of the Company determined that the 10%
royalty  was  onerous and  non-sustainable.  Therefore,  WAC agreed to lower the
royalty  to 5%. In  addition,  under the  royalty  arrangement  between  WAC and
Dynatec,  the  payment  of  royalties  for the  fourth  quarter  of each year is
contingent  upon the Company  obtaining a specified  level of earnings  for each
calendar  year.  During the years ended  December 31, 1998 and 1997, the Company
paid WAC $172,669 and $120,312, respectively, in royalties.

     During  1995,   the  Company  sold  all  rights  and  interest  in  various
discontinued  products to WAC for  $193,000 in the form of a demand note bearing
8% interest.  As part of the transaction,  inventory and molds were also sold at
cost to WAC. In June 1997,  the  Company  received  18,000  shares of its common
stock from WAC as payment in full of all outstanding balances.  Such shares were
valued at the market price of $10.00 per share,  which  represented  the current
market value of the stock.  The  treasury  stock was used to pay off $154,000 on
the note and accrued interest and $26,000 of other WAC related receivables.

     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  during  all of 1997 and until  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  $56,000  and $84,000 for each of the years  ending  December  31, 1998 and
1997, 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.

     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 the Company  eventually  terminated 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 ongoing  investigation,  several of the Company's  directors
engaged  independent legal counsel.  An aggregate of $230,000 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.



<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12)     RELATED PARTY TRANSACTIONS (Continued)

         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 a shareholder and former CEO
of the Company,  at an exercise price of $2.50 per share.  The  shareholder  and
former  executive  officer of the  Company  who owns Muito Bem 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  notified  Alpha Tech of the
Company's  termination  of 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  Chairman and Chief  Executive  Officer until his
resignation from the Company  effective January 14, 1999. During the years ended
December  31, 1998 and 1997,  the Company  paid Alpha Tech a total of $1,530 and
$16,679,  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.


(13)     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,  related party and other  receivables,  prepaid  expenses,
other assets,  trade accounts payable, and accrued expenses because of the short
maturity of these  instruments.  Because the blended  interest rate of long-term
debt  approximates the current  interest rates available,  the carrying value of
long-term debt instruments also approximates fair market value.

(14).....STOCK OPTIONS

         The Company has  established  two 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  non-qualified  stock option
program (the  "Non-Qualified  Plan"), the Company has granted to date options to
acquire  1,640,000  shares of common  stock of the Company.  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  non-qualified  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..
Additionally,  in  December  1996,  the  Company  granted  a  total  of  200,000
non-qualified stock options to WAC Research,  Inc., an entity owned, in part, by
a shareholder  and the former CEO of the Company,  which options were granted in
exchange for the  reduction of royalties  payable by the Company to WAC on sales
of the Softalk  products and for  reimbursement to the Company of certain travel
expenses  incurred by the Company's former CEO. These options have been included
in the options outstanding at year-end in the tables setforth below.

<PAGE>
                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(14).....STOCK OPTIONS (Continued)

     The Company's  non-qualified  options  issued to employees 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  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.

     Summary of stock options is as follows for the years ended December 31:
<TABLE>
<CAPTION>

                                                                1998                              1997
                                                    ------------------------------     ----------------------------
         FIXED OPTIONS:                                  Shares       Exercise            Shares       Exercise
                                                        (000's)         Price            (000's)        Price
                                                      ------------    ---------         ----------     ---------
<S>                                                       <C>           <C>                <C>          <C>  
         Outstanding at beginning of year.........        934           $2.50              833          $2.50
         Granted..................................         --            --                105          $2.50
         Exercised................................        (17)          $2.50              (4)          $2.50
         Canceled.................................        (8)           $2.50               --            --
                                                      =============                    -------------
         Outstanding at end of year...............        909           $2.50              934          $2.50
                                                      =============
                                                                                       =============
         Options exercisable at year-end..........        171           $2.50              196          $2.50
                                                      =============                    =============
         Weighted average fair value of
            Options granted during the year.......         --                             $1.42

         Weighted average remaining
            contractual life for exercisable
            options at year-end...................     2.5 years                        3.5 years

</TABLE>
<TABLE>
<CAPTION>
                                                                1998                              1997
                                                    ------------------------------     ----------------------------
         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              840          $2.00
         Granted..................................         --            --                800          $2.00
                                                      =============                    =============
         Outstanding at end of year...............       1,640          $2.00             1,640         $2.00
                                                      =============                    =============
         Weighted average fair value of
            Options granted during the year.......         --                             $2.22

</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 stock option plans 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 5.5%,  expected  volatility of 60.3% and expected
lives of 16 years for options granted under the Non-Qualified  Plan and 10 years
for options granted under the 1996 Plan.


<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(14)     STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
                                                                             1998              1997  
                                                                       ---------------- -------------
                    <S>                        <C>                     <C>              <C>           
                     Net loss                   As reported            $(2,245,427)     $    (409,172)
                                                Pro Forma              $(2,245,427)     $  (2,333,753)
                     Basic and diluted
                        loss per share          As reported            $     (0.80)     $       (0.18)
                                                Pro Forma              $     (0.80)     $       (1.02)
</TABLE>


(15)     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 does not currently make any
matching contributions to the Plan.


(16)     SUBSEQUENT EVENTS

         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 filing of the  complaint
through an  unrelated  third  party.  The Company has  demanded  that Alpha Tech
voluntarily dismiss the complaint.  In any event the Company disputes the claims
of Alpha Tech's  complaint.  If the complaint is not  voluntarily  dismissed and
process is served, the Company intends to vigorously defend the suit.

         Effective  January  14,  1999,  Donald M.  Wood,  who had served as the
Company's Chairman and Chief Executive Officer since 1982,  resigned and retired
from the Company. In the several months leading up to his resignation,  Mr. Wood
was hindered in his efforts on the  Company's  behalf by poor health.  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.  In light of Mr. Wood's  resignation,
the  Company  terminated  its  internal  investigation.  The  Company  does  not
anticipate  taking  further  action,  legal or  otherwise,  with  respect to the
matters  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.

         The Company will continue to pay Mr. Wood his salary through July 1999.
Mr. Wood has agreed to the cancellation of 900,000  non-qualified  stock options
that were issued to him in 1996 and 1997. He also has agreed to the cancellation
of 537,500 stock options granted in 1996 to an entity owned by him.



<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(16)     SUBSEQUENT EVENTS (Continued)

         On January 14, 1999, Paul A. Boyer, the Company's Senior Vice President
and Chief  Financial  Officer was appointed to the Company's Board of Directors,
which as of that time was comprised of Frederick W. Volcansek, Sr., Reed Newbold
and Mr.  Boyer.  On  February  6,  1999,  the Board of  Directors  employed  Mr.
Volcansek as the Company's Chief Executive Officer and appointed him Chairman of
the Company's  Board of  Directors.  On March 5, 1999,  the  Honorable  Wayne L.
Berman, a principal of Park Strategies,  L.L.C.  located in Washington D.C., was
appointed  as an outside  director of the Company.  On March 17, 1999,  F. Randy
Jack, the Company's President and Chief Operating Officer resigned.

         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 is  recorded  as a  liability  in the  accompanying  consolidated
balance sheet, was cancelled and the Company issued 500,000 shares of restricted
common stock under Regulation D to the depositor.

         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 accuses 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.  The demand letter  specified that the
complaint  was filed as a  "precaution,"  and that Mag will refrain from serving
the complaint on the Company pending the receipt of certain  assurances from the
Company.  The Company has engaged  patent  litigation  counsel and commenced its
preliminary assessment of the claims asserted contained in the complaint.


(17)     CONTINGENCIES

         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 later  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, 1998, the Company had received no response from
the Enforcement  Division about whether the SEC plans to name the Company in any
administrative action.


<PAGE>

                          DYNATEC INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(17)     CONTINGENCIES

         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.

         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.



<PAGE>




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

         In December  1997,  the Company  appointed KPMG LLP ("KPMG") to replace
Jones, Jensen & Company ("Jones") as independent auditors of the Company for the
fiscal year ended December 31, 1997. Jones resigned as the Company's independent
auditors on December  16, 1997.  Management  believed at the time of such change
that the Company had reached a level of financial  complexity which demanded the
resources of a major public  accounting firm. The decision to engage KPMG as the
Company's independent auditors was approved by the Company's Board of Directors.


                                    PART III

Item 9.   Directors and Officers of the Registrant

     The following table sets forth certain information  regarding the executive
officers and directors of Dynatec as of March 31, 1999.
<TABLE>
<CAPTION>

Name                                        Age                                 Title
<S>                                         <C>   <C>                                                              
Frederick W. Volcansek, Sr............      53    Chairman of the Board of Directors and Chief Executive Officer
Paul A. Boyer.........................      34    Senior Vice President, Chief Financial Officer and Director
Reed Newbold..........................      52    Director
Wayne L. Berman.......................      42    Director
</TABLE>

     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 U.S. West and Enron. Mr.
Volcansek  served as Deputy Under  Secretary in the U.S.  Department of Commerce
(International  Trade  Administration)  from June 1990 to  September  1992.  Mr.
Volcansek received a B.S. degree in 1967 from Texas Tech University.

     Mr. Boyer has been Senior Vice President, Chief Financial Officer and
Secretary of the Company  since  October 1998. He was appointed to the Company's
Board of  Directors  on January 14,  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.,  were  he  was  responsible  for  mergers  &
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.

     Mr.  Newbold has been an outside  Director of the Company  since 1988.  Mr.
Newbold is the founder of Newbold  Financial,  a financial planning and mortgage
brokerage  services  company.  He also served as Vice President of Tracy Collins
Bank & Trust.

     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'

<PAGE>

Board of Trustees. From 1993 to 1999, Mr. Berman was Managing Director of Berman
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.

     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. In light of Mr. Wood's  resignation,  the Company
terminated its internal  investigation.  The Company does not anticipate  taking
further  action,  legal or  otherwise,  with  respect to the  matters or persons
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.

     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.

Compliance with Section 16(a) of the Exchange Act

     During the year ended  December 31,  1998,  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

         Board  members,  other than  officers  of the  Company,  presently  are
compensated $2,000 per month for their services  rendered.  Until March 1, 1999,
board members were  compensated in the amount of $10,000  annually.  The Company
believes that, given the amount of time expended by the board members during the
fourth  quarter of 1998 and the first  quarter  of 1999,  an  increase  in board
compensation to the present level was necessary to attract qualified new members
of  the  board.  Officers  of  the  Company,  also  serving  as  directors,  are
compensated  according to the historical  rate of $10,000 per annum.  All of the
present members of the Board of Directors are director  nominees for election at
the Company's 1999 Annual Meeting of shareholders.

Board Committees

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

     Executive  Committee.  The  Executive  Committee  is  composed  of  Messrs.
Volcansek  (Chairman),  Newbold and Berman.  The purpose of this committee is to
act on the behalf of the entire Board of Directors between Board Meetings.
<PAGE>

     Compensation  Committee.  The Compensation Committee is composed of Messrs.
Berman  (Chairman) and Newbold.  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 and nature 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.


<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 Chief  Executive
Officer, 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 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.
<TABLE>
<CAPTION>

                           Summary Compensation Table

                                                                           Long Term Compensation
                                                                   ------------------------------------------
                                       Annual Compensation               Awards               Payouts
                              -----------------------------------  ---------------------   ------------------
                                                                                 Securities
                                                           Other     Restricted  Underlying
                                                           Annual      Stock     Options/      LTIP     All Other
Name and                          Salary      Bonus (2)  Compensation  Award(s)    SARs (3)   Payouts Compensation
Principal Position      Year        ($)          ($)         ($)           ($)       (#)        ($)      ($)
------------------            ----------------------- ------------- ---------- ---------- ------------ -----------
<S>                     <C>       <C>           <C>       <C>          <C>      <C>          <C>        <C>
Donald M. Wood (4)      1998      $193,723      $1,624     $12,500       -           -         -          -
Chairman and CEO        1997       194,433       3,249      14,000       -        14,000       -          -
                        1996       194,640       1,421       8,000       -        10,000       -          -

F. Randy Jack (5)       1998       140,333       1,725      10,000       -           -         -          -
President and COO       1997       129,142       3,465      14,000       -        10,000       -          -
                        1996       142,440       1,522       8,000       -         9,000       -          -

Dale Gledhill (6)       1998       162,556       355           -         -           -         -          -
Vice President Sales    1997       143,029       541           -         -           -         -          -
                        1996       124,354       152           -         -           -         -          -
<FN>

-----------------
(1)  Total cash  compensation  shown above does not include the value of company
     leased or owned vehicles and insurance payments made on behalf of officers.
     Such items are included on the individual officers W-2's. The amounts shown
     as other annual  compensation are directors fees received during the fiscal
     year.
(2)  Bonus compensation includes time in service bonus.
(3)  An incentive  stock option plan was  implemented in November 1996.  Options
     were granted as approved by the Board of Directors on December 30, 1996 and
     again on January 2, 1997.
(4)  Resigned  from Company on January 14,  1999.  (5) Resigned  from Company on
     March 17, 1999.
(6)  Not an Executive Officer.
</FN>
</TABLE>


         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.



<PAGE>


Employment Agreements

     Mr. Wood and Mr. Jack had  employment  contracts  with the Company prior to
their respective  resignations.  In both cases, their employment  contracts were
terminated upon their respective resignations.  Additionally, Mr. Volcansek, the
Company's  Chief  Executive  Officer as of February 5, 1999, and Mr. Boyer,  the
Company's Chief  Financial  Officer as of October 19, 1998, each have employment
contracts with the Company.

     Mr. Volcansek's employment agreement with the Company provides for a period
of  employment  of four  years  from  the  date  of the  agreement,  subject  to
termination  provisions  and to  extension  of the  agreement  as  provided  for
therein.  The employment  agreement  permits Mr. Volcansek to participate in any
incentive  compensation  plan  adopted  by the  Company,  benefit  plans  and an
equity-based  plan or arrangements.  If the Company  terminates Mr.  Volcansek's
employment  for cause or if Mr.  Volcansek  terminates  employment  without good
reason,  the  Company  has no  further  obligation  to pay him.  If the  Company
terminates his employment  without cause, he 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 contract  must then be honored by the  surviving  entity or it must
purchase  the  contract  for a sum equal to three (3) years'  base  salary.  The
employment  agreement  prohibits Mr.  Volcansek,  for two years from the date of
termination of employment under the agreement,  from becoming an employee, owner
(except for  investments 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  agreement has customary  provisions for vacation,  fringe  benefits,
payment of expenses and automobile  allowances.  Mr.  Volcansek's base salary is
$195,000.

     Mr. Boyer's employment  agreement with the Company provides for a period of
employment of four years from the date of the agreement,  subject to termination
provisions  and  to  automatic  extension  of  the  agreement.  This  employment
agreement  permits Mr. Boyer to participate in any incentive  compensation  plan
adopted by the Company,  benefit plans and an equity-based plan or arrangements.
If the Company  terminates Mr. Boyer's  employment for cause or if he terminates
his employment without good reason, the Company has no further obligation to pay
Mr. Boyer. If the Company terminates Mr. Boyer's employment without cause, or he
terminates  employment with good reason,  he can receive  severance pay equal to
the amount equal to the product of his then current  semi-monthly base salary by
the greater of the number of semi-monthly periods from the notice of termination
or twenty-four  monthly periods,  plus a portion of any discretionary bonus that
would  otherwise  have been  payable.  In the  event of a  merger,  acquisition,
dissolution  or  transfer  of assets  the  contract  must then be honored by the
surviving entity or purchase the contract for a sum equal to four (4) years base
salary and then current benefits.  The employment agreement prohibits Mr. Boyer,
for a year from the date of termination of employment under the agreement,  from
becoming an employee,  owner (except for  investments of not more than 3% of the
equity of a company  listed or traded on a national  securities  exchange  or an
over-the-counter  securities  market),  officer,  agent or director of a firm or
person that directly competes with the Company in a line or lines of business of
the Company that accounts for 10% or more of the Company's gross sales, revenues
or earnings before taxes. The employment  agreement has customary provisions for
vacation,  fringe benefits,  payment of expenses and automobile allowances.  Mr.
Boyer's base salary is $140,000.



<PAGE>


Item 11.   Security Ownership of Certain Beneficial Owners and Management

         The Company has only one class of equity,  common stock, par value $.01
per share. The only persons known by the Board of Directors to be the beneficial
owners of more than five percent of the  outstanding  shares of the Common Stock
of the Company, as of December 31, 1998 are indicated in the following table:
<TABLE>
<CAPTION>

        BENEFICIAL OWNERS HOLDING FIVE PERCENT OR MORE OF THE SECURITIES

Name and Address of               Common Stock              Percent of Class
Beneficial Owner                  Beneficially Owned        as of 12/31/98
--------------------------------- ------------------------- ------------------ -------------------
<S>                               <C>                             <C> 
Boa Sorte Limited Partnership     162,000                         5.6%
1819 East Southern Avenue
Mesa, AZ 85204

Ditta Limited Partnership         158,831                         5.5%
1819 East Southern Avenue
Mesa, AZ 85204

Muito Bem, LTD (1)                158,000 (2)                     5.5%
3078 American Saddler Dr.
Park City, UT 84060
<FN>

-------------------------
     The above table reflects the actual Beneficial Ownership as of December 31,
1998. It does not take into account shares  available  under the incentive stock
option plans. A total of 2,891,627 shares were outstanding at December 31, 1998.

         (1)      Muito Bem LTD is a limited  partnership in which Mr. Donald M.
                  Wood,  former  Chairman and CEO, is a limited  partner and the
                  president of the corporate general partner. Mr. Wood is deemed
                  to be a beneficial owner of these shares.
</FN>
</TABLE>

         During 1996,  the  Company's  Board of Directors  authorized  grants of
non-qualified  stock options which 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.  800,000  additional  non-qualified  stock options 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 the chief  executive  officer.  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.  Subsequent  to the  issuance  of these
options,  the strike price was adjusted from $2.00 to $2.50 per share to reflect
the market value on the date of grant.  In January  1999,  upon his  resignation
from the Company,  Mr. Wood agreed to the  cancellation  of all of the Muito Bem
options.



<PAGE>


         The following table sets out the beneficial  ownership of the Company's
common stock of all of the Company's directors and officers.
<TABLE>
<CAPTION>

                        SECURITY OWNERSHIP OF MANAGEMENT
                        --------------------------------

                                                    Amount and Nature of
                                                   Beneficial Ownership of
                                                      Common Stock by
                                                      Management as of
                       Name                           December 31, 1998        Percent of Class
                       --------------------------- --------------------------- ----------------
                      <S>                         <C>                           <C> 
                       Donald M. Wood (3)              188,007 (1)                 6.5%

                       Frederick R. Jack (4)            37,009 (2)                 1.3%

                       Reed D. Newbold                   2,000                      (5)

                       All directors and               227,016                     7.9%
                       officers as a group (5
                       persons)

<FN>

---------------------- 
(1)  This reflects the 2,007 shares owned by Annalee G. Wood,  wife of Donald M.
     Wood;  162,000  shares  held by Muito  Bem LTD of which  Donald  M. Wood is
     deemed a beneficial owner; and 24,000 shares subject to options exercisable
     under the incentive stock option plan.

(2)  This number includes 19,000 shares subject to options exercisable under the
     incentive stock option plan.

(3)  Resigned from the Company on January 14, 1999.

(4)  Resigned from the Company on March 17, 1999.

(5)  Ownership is less than 1% of the outstanding shares of the Company.
</FN>
</TABLE>


Item 12.   Certain Relationships and Related Transactions

         The Company's subsidiary Softalk,  Inc., holds licensing rights for the
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").  Donald M. Wood, a shareholder  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 to 2 million,  which was paid to Practical  Innovations,
Inc. in a combination of Dynatec  common stock and cash.  Under the terms of the
agreement,  Dynatec was obligated to pay a 10% royalty on all Softalk sales.  At
that time, WAC and the Board of Directors of the Company determined that the 10%
royalty  was  onerous and  non-sustainable.  Therefore,  WAC agreed to lower the
royalty  to 5%. In  addition,  under the  royalty  arrangement  between  WAC and
Dynatec,  the  payment  of  royalties  for the  fourth  quarter  of each year is
contingent  upon the Company  obtaining a specified  level of earnings  for each
calendar  year.  During the years ended  December 31, 1998 and 1997, the Company
paid WAC $172,669 and $120,312, respectively, in royalties.

         During  1995,  the  Company  sold all  rights and  interest  in various
discontinued  products to WAC for  $193,000 in the form of a demand note bearing
8% interest.  As part of the transaction,  inventory and molds were also sold at
cost to WAC. In June 1997,  the  Company  received  18,000  shares of its common
stock from WAC as payment in full of all outstanding balances.  Such shares were
valued at the market price of $10.00 per share,  which  represented  the current
market value of the stock.  The  treasury  stock was used to pay off $154,000 on
the note and accrued interest and $26,000 of other WAC related receivables.
<PAGE>
        
     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  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 during all of 1997 and until 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  $56,000  and $84,000 for each of the years  ending  December  31, 1998 and
1997, 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.

         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 the Company  eventually  terminated in January
1999.  Thereafter,  Donald M. Wood  resigned and retired  from the Company.  The
Company does not anticipate  taking  further  action,  legal or otherwise,  with
respect to the  matters  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 $230,000 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 programs. 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 a shareholder and former CEO
of the Company, at a strike price of $2.50 per share. The shareholder and former
executive  officer of the  Company  who owns Muito Bem,  Ltd.  agreed in 1999 to
cancel all stock  options  issued to Muito  Bem,  Ltd..  Additionally,  in 1997,
200,000  options  were  granted to WAC, at a strike  price of $2.50 per share in
consideration for certain royalty reductions and travel expense reimbursements.

         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  notified  Alpha Tech of the
Company's  termination  of 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  Chairman and Chief  Executive  Officer until his
resignation from the Company  effective January 14, 1999. During the years ended
December  31, 1998 and 1997,  the Company  paid Alpha Tech a total of $1,530 and
$16,679,  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.

Item 13.   Exhibits, Financial Statement Schedule and Reports on Form 8-K

(a)      Exhibits

                  The exhibits filed with or  incorporated  by reference in this
                  report are listed in the Exhibit Index beginning on page 50.

(b)      Reports on Form 8-K

                  None


<PAGE>


                                  EXHIBIT INDEX

Exhibit
Number                                               Description

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

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

4.1  Specimen  Common Stock  Certificate  (Incorporated  by  reference  from the
     Registration   Statement   on  Form  10  filed  by  the  Company  with  the
     Commission).

10.1 Convertible Debenture and Equity Line of Credit Agreement. (Incorporated by
     reference from Form 8-K filed by the Company with the Commission on June 8,
     1998).

10.2 Form of  Convertible  Debenture.  (Incorporated  by reference from Form 8-K
     filed by the Company with the Commission on June 8, 1998).

10.3 Form of A Warrants.  (Incorporated  by reference from Form 8-K filed by the
     Company with the Commission on June 8, 1998).

10.4 Form of B  Warrants.(Incorporated  by  reference  from Form SB-2  (File No.
     333-57921) filed by the Company with the Commission on June 25, 1998).

10.5 Registration  Rights  Agreement  (Incorporated  by reference from Form SB-2
     (File No.  333-57921)  filed by the Company with the Commission on June 25,
     1998).

10.6 Escrow  Agreement  (Incorporated  by  reference  from Form  SB-2  (File No.
     333-57921) filed by the Company with the Commission on June 25, 1998).

10.7 Employment Agreement between the Company and Frederick W. Volcansek,  dated
     as of February 5, 1999

10.8 Employment  Agreement  between the  Company and Paul A. Boyer,  dated as of
     October 19, 1998

11   Computation of Per Share Earnings for the Year Ended December 31, 1998; and
     for the Year Ended December 31, 1997.

21   List of Subsidiaries of the Registrant (See,  "Subsidiaries of the Company"
     at page 25).

27   Financial Data Schedule (for SEC use only)


<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/Frederick W. Volcansek, Sr.               March 31, 1999
-----------------------------                --------------
Frederick W. Volcansek, Sr.                     Date
Chief Executive Officer



<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.
<TABLE>
<CAPTION>

         Signature                                   Title                                       Date
         ---------                                  ------                                      -----
<S>                                     <C>                                                    <C>

/s/Frederick W. Volcansek, Sr.          Chairman of the Board of Directors                    March 31, 1999
------------------------------          and Chief Executive Officer (Principal Executive
(Frederick W. Volcansek, Sr.)           Officer)


/s/Paul A. Boyer                        Senior Vice President, Chief Financial                March 31, 1999
------------------------------          Officer, Director and Secretary  (Principal
(Paul A. Boyer)                         Accounting Officer) 
                                    

/s/Wayne L. Berman                      Director                                              March 31, 1999
------------------------------
(Wayne L. Berman)


/s/Reed Newbold                         Director                                              March 31, 1999
------------------------------
(Reed Newbold)

</TABLE>