<PAGE>

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

                                   FORM 10-QSB

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

    For the Quarterly Period: March 31, 1999

                                      or

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

      For the Transition Period from          to         .
                                     --------    --------
Commission File Number: 0-12806


                          DYNATEC INTERNATIONAL, INC. 
        (Exact name of small business issuer as specified in its charter)


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



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


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


              -------------------------------------------------
             (Former name, former address and former fiscal year,
                       if changed since last report)

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

The Company had 3,391,627 shares of common stock outstanding at April 30, 1999.

The aggregate market value of voting stock held by non-affiliates of the Company
at April 30, 1999, was $7,825,119.

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





<PAGE>


                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES


                                TABLE OF CONTENTS



PART I.   FINANCIAL INFORMATION


Item 1.   Financial Statements (Unaudited)

      Condensed Consolidated Balance Sheets as of March 31, 1999 and December
      31, 1998.................................................................3

      Condensed Consolidated Statements of Operations for the three months
      ended March 31, 1999 and 1998, respectively..............................5

      Condensed Consolidated Statements of Cash Flows for the three months ended
      March 31, 1999 and 1998, respectively....................................6

      Notes to Condensed Consolidated Financial Statements.....................8

Item 2.   Management's Discussion and Analysis of Financial Condition and 
          Analysis of Financial Condition and Results of Operations...........15



PART II.   OTHER INFORMATION

Item 1.   Legal Proceedings...................................................21

Item 2(c).Recent Sales of Unregistered Securities.............................22

Item 6.   Exhibits and Reports on Form 8-K....................................22







                                       2

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1.    Financial Statements

                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>

                                                                                     March 31,                 December 31,
                                                                                       1999                      1998     
                                                                                       ----                      ----
                                                                                    (Unaudited)
<S>                                                                               <C>                        <C>
CURRENT ASSETS:
   Cash and cash equivalents                                                       $   146,672                $     2,268
     Trade accounts receivable, net of allowance for doubtful accounts of
     $30,848 and $30,190, respectively                                               1,953,973                  2,229,157
     Accounts receivable - other                                                         1,340                        110
   Inventories (see Note 2)                                                          4,112,082                  4,857,241
   Prepaid expenses and other                                                          352,660                    316,347
                                                                                   -----------                 ----------
           Total current assets                                                      6,566,727                  7,405,123 
                                                                                   -----------                 ----------

LAND, BUILDING AND EQUIPMENT, at cost:
   Land                                                                                365,860                    365,860
   Building and improvements                                                         2,214,144                  2,214,144
   Furniture, fixtures and equipment                                                 3,595,625                  3,554,045
                                                                                   -----------                 ----------
                                                                                     6,175,629                  6,134,049

      Less accumulated depreciation                                                  2,428,301                  2,336,427
                                                                                   -----------                 ----------
           Net land, building and  equipment                                         3,747,328                  3,797,622
                                                                                   -----------                 ----------
   TRADEMARKS AND OTHER INTANGIBLES, net of accumulated                                                                     
   amortization of $396,817 and $382,170, respectively     -                           190,455                    205,102 
                                                                                   -----------                 ---------- 
   DEFERRED LOAN COSTS, net of accumulated amortization of $21,291 and                                          
    $14,903, respectively                                                               55,355                     61,743
                                                                                   -----------                 ----------
OTHER ASSETS                                                                            69,335                     69,337
                                                                                   -----------                 ----------
                                                                                   $10,629,200                $11,538,927
                                                                                   ===========                ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.




                                       3
<PAGE>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                                March 31,          December 31,             
                                                                                  1999                  1998             
                                                                                  ----                  ----
                                                                               (Unaudited)                                   
<S>                                                                          <C>                   <C>    
CURRENT LIABILITIES:                                                                                        
   Short-term note payable                                                   $  1,599,548          $  1,389,223             
   Convertible debentures                                                       1,711,462             1,667,079             
   Current portion of long-term debt                                              206,155               246,855             
   Current portion of capital lease obligations                                    22,188                17,881             
   Accounts payable                                                             1,370,259             1,518,316             
   Accounts payable - other                                                        86,563                 9,000             
   Accounts payable-related party                                                       -                98,403             
   Accrued expenses                                                               530,574               637,051             
   Accrued advertising                                                             25,000               320,000             
   Accrued royalties payable                                                       71,397                70,246             
                                                                             ------------          ------------             
                                                                                                                            
         Total current liabilities                                              5,623,146             5,974,054             
                                                                                                                            
LONG-TERM DEBT, net of current portion                                          1,961,598             2,006,518             
                                                                                                                            
DEPOSIT FOR STOCK ISSUANCE                                                              -             1,000,000             
                                                                                                                            
CAPITAL LEASE OBLIGATIONS, net of current portion                                  40,258                28,654             
                                                                             ------------          ------------             
         Total liabilities                                                      7,625,002             9,009,226
                                                                             ------------          ------------             
                                                                                           
STOCKHOLDERS' EQUITY (see Note 3):                                                                               
     Common stock, $.01 par value; 100,000,000 shares authorized and         
       3,391,627 and 2,891,627 shares outstanding, respectively                    33,916                28,916
     Treasury stock, at cost, 91,515 shares                                      (915,150)             (915,150)
     Additional paid-in capital                                                 8,036,690             7,041,690       
     Accumulated deficit                                                       (4,151,258)           (3,625,755)       
                                                                             ------------          ------------
         Total stockholders' equity                                             3,004,198             2,529,701       
                                                                             ------------          ------------
                                                                             $ 10,629,200          $ 11,538,927       
                                                                             ============          ============
</TABLE>

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



                                       4
<PAGE>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                      Three Months Ended          Three Months Ended
                                                        March 31, 1999              March 31, 1998  
                                                    --------------------           ------------------
                                                           (Unaudited)                 (Unaudited)  
<S>                                                      <C>                         <C>          
PRODUCT SALES                                              $ 3,643,679                 $ 3,647,786  
COST OF SALES                                                2,208,371                   2,073,613   
                                                           -----------               -------------               
                                                                                                    
     Gross Margin                                            1,435,308                   1,574,173  
                                                           -----------               -------------               
                                                                                                    
OPERATING COSTS AND EXPENSES:                                                                       
   Selling expenses                                            829,627                     839,773  
   Research and development                                     26,012                      10,180  
   General and administrative                                  831,314                     495,667  
                                                           -----------               -------------               
                                                                                                    
     Total operating costs and expenses                      1,686,953                   1,345,620  
                                                           -----------               -------------               
                                                                                                    
         Income (loss) from operations                       (251,645)                     228,553  
                                                           -----------               -------------  
                                                                                                    
OTHER INCOME (EXPENSE), net:                                                                        
   Interest expense (see Note 4)                             (273,289)                    (107,009)  
   Interest income                                                   -                       3,340  
   Other expense                                                 (625)                     (21,006)  
   Other income                                                  3,056                           -
                                                           -----------               -------------               
                                                                                                    
     Total other income (expense), net                       (270,858)                    (124,675)  
                                                           -----------               -------------               
                                                                                                    
        Income (loss) before income tax provision            (522,503)                     103,878  

INCOME TAX PROVISION                                             3,000                           -
                                                           -----------               -------------
                                                                                                    
        Net income (loss)                                $   (525,503)               $     103,878   
                                                           ===========               =============
                                                                                                    
BASIC NET INCOME (LOSS) PER SHARE                        $       (.17)               $         .04  
                                                         =============               =============   
                                                                                                    
DILUTED NET INCOME (LOSS) PER SHARE
      (see Notes 2 and 3)                                $       (.17)               $         .03  
                                                         =============               =============  
                                                                                                    
WEIGHTED AVERAGE SHARES - BASIC                              3,111,223                   2,779,982  
                                                          ============               ============= 
                                                                                                    
WEIGHTED AVERAGE SHARES - DILUTED                            3,111,223                   3,363,281  
                                                          ============               =============  
</TABLE>

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



                                       5
<PAGE>

                DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                  Three Months Ended    Three Months Ended
                                                                    March 31, 1999        March 31, 1998
                                                                  -------------------   -------------------
                                                                       (Unaudited)         (Unaudited)
<S>                                                                <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                               $     (525,503)     $     103,878 
   Adjustments  to reconcile net income(loss) to net                                                 
    cash used in operating activities:                                                               
         Depreciation and amortization                                    118,317             87,333 
         Amortization of deferred loan costs                                6,387             15,942 
         Loss on sale of assets                                               625             21,006 
         Changes in assets and liabilities:                                                          
           Trade accounts receivable                                      275,184           (598,513) 
           Accounts receivable - other                                     (1,230)           372,611 
           Inventories                                                    745,159           (465,297) 
           Prepaid expenses and other                                     (36,311)            70,799 
           Trade accounts payable                                        (148,057)           238,221 
           Accounts payable - other                                       (20,840)           (63,750) 
           Accrued expenses                                               (80,094)           (72,594) 
           Accrued advertising                                           (295,000)          (221,519) 
           Accrued royalties                                                1,151             73,519 
           Income tax payable                                              18,000                  - 
                                                                    -------------      ------------- 
               Net cash provided by (used in)                                                        
                operating activities                                       57,788           (438,364) 
                                                                    -------------      -------------
                                                                                                     
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                
  Proceeds from the sale of assets                                         15,441             47,000 
  Purchase of property and equipment                                      (69,441)          (167,478) 
                                                                    -------------      ------------- 
               Net cash used in investing activities                      (54,000)          (120,478) 
                                                                    -------------      ------------- 
                                                                                                     
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                
  Net borrowings on line of credit                                        210,325            322,704 
  Principal payments on long-term debt                                    (85,620)          (352,728) 
  Net borrowings (payments) on capital lease obligations                   15,911             (4,381) 
  Proceeds from deposit for stock issuance (see Note 3)                         -            940,000 
                                                                    -------------      ------------- 
               Net cash provided by financing activities                  140,616            905,595 
                                                                    -------------      ------------- 
                                                                                                     
NET  INCREASE IN CASH AND CASH EQUIVALENTS                                144,404            346,753 
                                                                                                     
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD                        2,268            332,894 
                                                                    -------------      ------------- 
                                                                                                     
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                       $    146,672      $     679,647 
                                                                     ============      ============= 
</TABLE>

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



                                       6
<PAGE>

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


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

<TABLE>
<CAPTION>

                                                   Three Months Ended   Three Months Ended
                                                     March 31, 1999      March 31, 1998
                                                  -------------------   ------------------- 
                                                       (Unaudited)         (Unaudited)
<S>                                                     <C>                 <C>      
     Cash paid for interest                             $ 205,447           $ 118,818
                                                        =========           =========

     Cash paid for income taxes                         $       -           $       -
                                                        =========           =========
</TABLE>
      The accompanying notes to condensed  consolidated financial statements are
        an integral part of these condensed consolidated statements.



                                       7
<PAGE>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


(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.


Basis of Presentation

      The accompanying  unaudited condensed  consolidated  financial  statements
have been prepared by the Company in accordance  with the rules and  regulations
of the Securities and Exchange  Commission for Form 10-QSB, and accordingly,  do
not include all of the information and footnotes  required by generally accepted
accounting principles.  In the opinion of management,  these unaudited condensed
consolidated financial statements reflect all adjustments, which consist only of
normal  recurring  adjustments,  which  are  necessary  to  present  fairly  the
Company's financial  position,  results of operations and cash flows as of March
31,  1999  and for the  periods  presented  herein.  These  unaudited  condensed
consolidated  financial  statements  should  be read  in  conjunction  with  the
consolidated  financial  statements and notes thereto  included in the Company's
annual report on form 10-KSB for the year ended December 31, 1998.

      The results of  operations  for the three  months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the remainder
of the year ending December 31, 1999.


(2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 March 31, 1999 and December  31, 1998,  respectively,  are  summarized  as
follows:


<TABLE>
<CAPTION>
                                March 31,      December 31,
                                   1999            1998
                               ------------    ------------
<S>                            <C>             <C>        
Raw materials...............   $  1,050,308    $   902,703
Work-in-Process.............        187,603        309,815
Finished Goods..............      2,874,171      3,644,723
                               ------------    -----------
                               $  4,112,082    $ 4,857,241
                               ============    =========== 
</TABLE>
                                       8 
<PAGE>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



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 Income (Loss) Per Common Share

      Basic net  income  (loss) per common  share is  calculated  based upon the
weighted  average  number  of  common  shares  outstanding  during  the  periods
presented.  Diluted net income (loss) per common share is calculated  based upon
the  weighted  average  number of common  shares  outstanding  plus the  assumed
exercise of all dilutive  securities using the treasury stock method and the "if
converted" method for convertible securities.

      A reconciliation between the basic and diluted  weighted-average number of
shares outstanding as of March 31, 1999 and 1998 is summarized as follows:


<TABLE>
<CAPTION>
                                                          March 31,
                                                  -----------------------
                                                    1999          1998
                                                 -----------    ---------
<S>                                                <C>          <C>      
Basic weighted average number of common shares     3,111,223    2,779,982

Weighted average number of common stock options            -      583,299
                                                   ---------      -------

   Diluted weighted average number of shares       3,111,223    3,363,281
                                                   =========    =========
</TABLE>

      In  calculating  net loss per share for the three  months  ended March 31,
1999,  there were warrants and options to purchase  1,150,000  potential  common
shares that were not included in the  computation of diluted net loss per common
shares as their effect would have been anti-dilutive, thereby decreasing the net
loss per common share.

Reclassifications

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

New Accounting Pronouncements

      The Company adopted Statement of Position 98-1 (SOP 98-1),  Accounting for
Costs of Computer  Software  Developed or Obtained for Internal  Use,  effective
January 1, 1999.  SOP 98-1  provides  guidance  on  accounting  for the costs of
computer software  developed or obtained for internal use. As of March 31, 1999,
the Company has incurred no costs associated with developing  computer  software
for internal use.


(3)STOCKHOLDERS' EQUITY

      On February 4, 1999, the Company entered into a deposit payable conversion
agreement,  whereby a $1,000,000  deposit  received by the Company in early 1998
and recorded as a liability in the accompanying balance sheet as of December 31,
1998 was  cancelled,  in return for which the Company  issued  500,000 shares of
restricted common stock under Regulation D to the depositor.




                                       9
<PAGE>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(3)   STOCKHOLDERS' EQUITY-(CONTINUED)

      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. (See
Part II - Other Information; Item 1. "Legal Proceedings").

(4)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 April  30,  1999,  and all  interest
accrued  thereon  at the  rate  of 12% per  annum  as of  April  30,  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.



                                       10
<PAGE>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

 (4) CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT-(CONTINUED)

      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  was  written  off in the fourth  quarter of 1998 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  was also written off in the fourth  quarter of 1998. 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.  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.

      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  per  month of the
purchase price of the  outstanding  Convertible  Debentures for the first 30-day
period  beyond the original 90 days and three  percent per month of the purchase
price of the then  outstanding  securities (pro rated on a daily basis) for each
30-day period  thereafter.  As of April 30, 1999 (the date of this filing),  the
registration statement had not yet become effective, and as a result the Company
has paid $210,000 and accrued $90,000 in liquidated damages.



                                       11
<PAGE>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


(5)   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.

      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 non-cash
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>
                                             THREE MONTHS ENDED
                                                    MARCH 31,
                                         ---------------------------

REVENUES:                                    1999             1998
------------------------------------    -------------   -------------
<S>                                     <C>             <C>
Telecommunication Headsets and
   Amplifiers and Telephone Accessories $   1,836,000   $  2,242,000
Home Storage and Organization                 990,000      1,100,000
Flashlights                                   210,000        192,000
Miscellaneous/Mass Market                     608,000        114,000
                                        -------------   ------------

     Total                              $   3,644,000   $  3,648,000
                                        =============   ============   
</TABLE>


<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED
                                                    MARCH 31,
                                        ---------------------------

OPERATING INCOME (LOSS):                    1999             1998
------------------------------------    ------------    -------------
<S>                                     <C>             <C>
Telecommunication Headsets and
   Amplifiers and Telephone Accessories $     (20,000)  $    294,000
Home Storage and Organization                (138,000)        11,000
Flashlights                                  (126,000)       (99,000)
Miscellaneous/Mass Market                      32,000         23,000
                                        -------------   ------------   

     Total                              $    (252,000)  $    229,000
                                        =============   ============  
</TABLE>


<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED
                                                    MARCH 31,
                                        ---------------------------

DEPRECIATION AND AMORTIZATION (1):          1999            1998
------------------------------------    ------------    ------------ 
<S>                                     <C>             <C>
Telecommunication Headsets and
   Amplifiers and Telephone Accessories $      72,000   $     55,000
Home Storage and Organization                  38,000         27,000
Flashlights                                     8,000          5,000
                                        -------------   ------------    

     Total                              $     118,000   $     87,000
                                        =============   ============ 
</TABLE>

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



                                      12
<PAGE>
                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(5)   BUSINESS SEGMENT INFORMATION (Continued)

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


<TABLE>
<CAPTION>
                                             MARCH          DECEMBER
ASSETS (1):                                31, 1999         31, 1998
-----------------------------------      -------------    -------------
<S>                                     <C>              <C>
Telecommunication Headsets and 
   Amplifiers and Telephone Accessories $  5,420,000     $   4,794,000
Home Storage and Organization              2,891,000         3,200,000
Flashlights                                1,185,000         1,729,000
Miscellaneous/Mass Market                    508,000         1,366,000
                                        ------------     -------------

   Total assets for reportable segments $ 10,004,000        11,089,000

Other assets                                 570,000           388,000
Deferred loan costs and other
 assets not allocated to segments             55,000            62,000
                                        ------------     -------------
     Total                              $ 10,629,000     $  11,539,000
                                        ============     =============
</TABLE>


<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED
                                                    MARCH 31,
                                        ----------------------------

CAPITAL EXPENDITURES:                         1999             1998
-----------------------------------     -------------    -------------
<S>                                     <C>              <C>
Telecommunication Headsets and
   Amplifiers and Telephone Accessories $     42,000     $     106,000
Home Storage and Organization....             22,000            52,000
Flashlights......................              5,000             9,000
Miscellaneous/Mass Market........                  -                 -
                                        ------------     -------------

     Total...................           $     69,000     $     167,000
                                        ============     =============
</TABLE>

Information  as  to  Dynatec  International,   Inc.'s  operations  in  different
geographical areas is as follows:


<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED
                                                    MARCH 31,
                                        ---------------------------
REVENUES:                                     1999             1998
----------------------------            ------------     -------------
<S>                                     <C>              <C>          
United States                           $  3,588,000     $   3,624,000
Other (1)                                     56,000            24,000
                                        ------------     -------------

     Total                              $  3,644,000     $   3,648,000
                                        ============     =============
</TABLE>

(1) Includes Canada, Europe and other miscellaneous.


<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED
                                                    MARCH 31,
                                        ---------------------------

OPERATING LOSS (INCOME):                      1999             1998
----------------------------            ------------     -------------
<S>                                     <C>              <C>          
United States                           $   (252,000)    $     229,000
                                        ============     =============


                                            MARCH          DECEMBER
ASSETS:                                   31, 1999        31, 1998
----------------------------            ------------     ------------
United States                           $10,200,000      $  11,089,000
Asia                                        429,000            450,000
                                        --------------   -------------
     Total                              $10,629,000      $  11,539,000
                                        ============     =============
</TABLE>



                                      13
<PAGE>

(6)   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.




                                      14
<PAGE>



ITEM  2.    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 three month  period
ended March 31, 1999 and 1998, respectively.  As supplemental  information,  the
table also segregates the Company's revenues by product line type.

<TABLE>
<CAPTION>
                                           For the Three Months Ended
                                         ----------------------------    
                                                                                % of
                                                                                 Chg
                                                                                from
                                              March 31,      March 31,         1998 to
                                                1999          1998              1999
                                             ----------     ----------       ---------- 
<S>                                        <C>            <C>                 <C>
Unaudited Statement of Operations                                        
Data:                                                                    
       Product sales                       $ 3,644,000    $ 3,648,000           (0.1)%
       Cost of sales                         2,209,000      2,074,000            6.5
                                           -----------    -----------
               Gross margin                  1,435,000      1,574,000           (8.8)
                                           -----------    -----------             
                                                                         
    Operating Costs and Expenses:                                        
                                                                         
       Selling expenses                        830,000        840,000           (1.2)
       Research and development                 26,000         10,000          160.0
       General and administrative              831,000        495,000           67.9
                                           -----------    -----------
               Total operating costs and                                 
                     Expenses                1,687,000      1,345,000           25.4
                                           -----------    -----------

    Other Income (Expense), net:                                         
       Interest expense                       (273,000)      (107,000)         155.1
                                           -----------    -----------
       Interest income                               -          3,000            -
                                           -----------    -----------
       Other (expense)                          (1,000)       (21,000)         (95.2)
                                           -----------    -----------
       Other income                              3,000             -             -
                                           -----------    -----------
       Net income (loss)                   $  (523,000)   $   104,000         (602.9)%
                                           ===========    ===========
                                                                         
Unaudited Supplemental Information:
                                                                         
Revenue by product line type:
      Telecommunication headsets and                                        
          amplifiers and telephone                                   
          accessories                      $ 1,836,000    $ 2,242,000          (18.1)%
      Home storage and organization            990,000      1,100,000          (10.0)
      Miscellaneous/mass market                608,000        114,000          433.3
      Flashlights                              210,000        192,000            9.4
                                           -----------    -----------
           Total product sales             $ 3,644,000    $ 3,648,000           (0.1)%
                                           ===========    ===========
</TABLE>

The following are  explanations of significant  period to period changes for the
three months ended March 31, 1999 and 1998:


Revenues

      Total Product  Sales.  Total product sales  decreased by $4,000,  or 0.1%,
from $3,648,000 to $3,644,000 for the three months ended March 31, 1999 compared
to the three months ended March 31, 1998.

       Telecommunication  Headsets and  Amplifiers  and  Telephone  Accessories.
Telecommunication  headsets  and  amplifiers  and  telephone  accessories  sales
decreased $406,000, or 18.1%, from $2,242,000 to $1,836,000 for the three months
ended March 31, 1999  compared to the three months ended March 31, 1998. Of this
decrease,  $180,000 was attributable to a one-time order from Lucent  Technology
received  during the three months ended March 31, 1998 that did not occur during
the three months ended March 31, 1999.  Additionally,  the Company's Softalk and
MiniSoftalk  products decreased  $121,000,  offset in part by an increase in the
Softalk II product of $7,000.  Overall gross  margins for telephone  accessories
increased to 54.2% from 47.5% for the three  months  ended March 31, 1999,  as a
result of the sales mix and a more efficient production process.




                                      15
<PAGE>

      Home  Storage and  Organization.  Home storage and  organization  revenues
decreased  $110,000,  or 10.0%, from $1,100,000 to $990,000 for the three months
ended March 31, 1999  compared to the three  months  ended March 31,  1998.  The
decrease   is   primarily   attributable   to  a  decline   of  $64,000  in  the
"Expand-A-Drawer"  product  line,  $67,000  in  doorstops  and  $28,000 in other
miscellaneous  shelves,  offset in part by an  increase of $73,000 in several of
the Company's drawer organization products, namely "Mega-Expand-A-Drawer", which
accounted  for $51,000 of this  increase.  Overall gross margins for products in
this category decreased from 35.9% to 35.2% for the three months ended March 31,
1999.

      Miscellaneous  and Mass  Market.  Miscellaneous  and mass market  revenues
increased  $494,000,  or 433.3%,  from $114,000 to $608,000 for the three months
ended March 31, 1999  compared to the three months  ended March 31,  1998.  This
increase was primarily the result of the Company's  December 24, 1998  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 from the Company  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 April 30, 1999,  Grandway had purchased all but approximately  $320,000 of
the remaining  inventory.  Gross margins on products in this category  decreased
from 19.7% to 2.3% for the three  months ended March 31, 1999 as a result of the
"pass-through" effect.

      Flashlights. Flashlight revenues increased $18,000, or 9.4%, from $192,000
to $210,000  for the three  months  ended  March 31, 1999  compared to the three
months ended March 31, 1998. Although sales were relatively flat for the period,
gross margins on these product lines decreased from 24.0% to 16.1% for the three
months ended March 31, 1999,  as a result of various  changes made to certain of
its flashlight products to increase the quality of these products. Management is
addressing  this  decrease by working  with its Asian  supplier  to  effectively
source various components from more reliable sub-assembly vendors.

Operating Costs and Expenses

      Selling  Expenses.  Selling  expenses  decreased  $10,000,  or 1.2%,  from
$840,000 to $830,000 for the three  months ended March 31, 1999  compared to the
three months ended March 31, 1998.  This decrease is due, in part, to a decrease
in royalty and  commission  payments  due to lower sales on  commissionable  and
royalty based products, offset by increases in advertising expense as the result
of the Company securing  additional  pages in certain office product  catalogues
and trade show  expenditures  due to the Company  participating in more regional
trade shows.

      Research and Development.  Research and development  increased by $16,000,
or 160.0%,  from  $10,000 to $26,000 for the three  months  ended March 31, 1999
compared to the three months ended March 31, 1998.  This  increase was primarily
attributable  to the  addition of a full time Vice  President  of  Research  and
Development.

      General and Administrative  Expenses.  General and administrative expenses
increased  $336,000,  or 67.9%,  from  $495,000 to $831,000 for the three months
ended March 31, 1999  compared to the three  months  ended March 31,  1998.  The
increase in general and  administrative  expenses  was  primarily  the result of
approximately  $120,000 in  non-recurring  legal expense incurred as a result of
the Company's  internal  investigation  which  concluded on January 14, 1999, as
well as  approximately  $210,000 in  combined  severance  paid to the  Company's
former  Chairman  and CEO who resigned on January 14, 1999 as well as the former
President of the Company who resigned effective March 17, 1999.

      Total  Operating  Costs and Expenses.  Total  operating costs and expenses
increased by $342,000,  or 25.4%,  from  $1,345,000 to $1,687,000  for the three
months  ended March 31, 1999  compared to the three months ended March 31, 1998,
for the reasons discussed above.

      Interest Expense.  Interest expense increased  $166,000,  or 155.1%,  from
$107,000 to $273,000 for the three  months ended March 31, 1999  compared to the
three months ended March 31, 1998.  This increase was primarily  associated with
the  issuance  of  $1,500,000  of  Convertible   Debentures  (the   "Convertible
Debentures") in May 1998.  Also,  liquidated  damages were assessed  against the
Company for the three months ended March 31, 1999, in the amount of $135,000 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
within  the time  specified  in a  registration  rights  agreement  executed  in
connection with the sale of the Convertible Debentures.

      Interest Income. Interest income decreased $3,000, from $3,000 to $-0- for
the three months  ended March 31, 1999  compared to the three months ended March
31, 1998.  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 $20,000, from $21,000 to $1,000 for
the three months  ended March 31, 1999  compared to the three months ended March
31,  1998.  This  decrease  was  primarily  the  result of a loss on the sale of
equipment  sold by the Company in the three months ended March 31, 1998 that did
not occur in the three months ended March 31, 1999.



                                      16
<PAGE>

      Other Income. Other income,  increased $3,000, from $-0- to $3,000 for the
three months  ended March 31, 1999  compared to the three months ended March 31,
1998.

      Net (Loss) Income. The net income decreased by $627,000,  or 605.9%,  from
$104,000  to a loss of  $523,000  for the three  months  ended  March  31,  1999
compared to the three  months ended March 31, 1998 due to a  combination  of the
factors described above.

Liquidity and Capital Resources

      General

      The  Company's   principal  sources  of  liquidity  are  cash  flows  from
operations,  cash on hand and  borrowing  under the Company's  existing  secured
revolving  credit  facilities.  On May 27, 1998, the Company  obtained a secured
revolving  credit  facility  from a  regional  financing  institution  for up to
$5,000,000,  bearing interest at a rate of prime plus one percent, with interest
payable monthly.  The credit facility is secured by both the Company's  accounts
receivable and 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 March 31,  1999 the  Company  was in default of
certain of these covenants,  however, the Company has obtained a waiver from the
lending institution.  The Company and the lending institution have negotiated an
amendment  to the loan  agreement  which  changed  the terms of  certain  of the
financial  covenants  and ratios for the  remainder of 1999.  The interest  rate
applicable  to the  revolving  credit  line is prime  plus three  percent,  with
interest  payable  monthly.  At March 31, 1999, the Company had $147,000 of cash
and $3,400,000  million of unused  borrowings under its credit  facility.  It is
expected 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 ("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 4 to the  condensed  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.

      March 31, 1999 Compared to December 31, 1998

      As of March  31,  1999,  the  Company  had  liquid  assets  (cash and cash
equivalents,  trade accounts receivable and other) of $2,101,000,  a decrease of
5.8%, or $130,000,  from  December 31, 1998 when liquid assets were  $2,231,000.
Cash increased  $145,000,  or 7250.0%, to $147,000 at March 31, 1999 from $2,000
at December  31, 1998.  This  increase in cash was  primarily  the result of the
Company utilizing its revolving credit facility, under which "draws" are made by
the Company to fund capital  expenditures,  purchase  inventory  and for general
purpose  use.  After a draw is  made a  corresponding  payable  is  setup,  when
collections of outstanding  accounts  receivable are made the monies  collected,
are  swept,  the next day,  and  re-applied  against  outstanding  draws.  Trade
accounts  receivable  decreased  $275,000,  or 12.3%, to $1,954,000 at March 31,
1999 from $2,229,000 at December 31, 1998. This decrease is primarily the result
of improved collections.

      Current assets decreased by $838,000, or 11.3%, to $6,567,000 at March 31,
1999 from  $7,405,000  at December 31, 1998.  This  decrease was  primarily  the
result of a decrease in accounts receivable-trade of $275,000,  discussed above,
inventory levels decreased by $745,000  primarily due to the Company's  December
24, 1998  agreement with Grandway China  ("Grandway"),  a Hong Kong  enterprise,
whereby  Grandway agreed 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 April 30, 1999, Grandway had purchased all but
approximately  $320,000  of the  remaining  inventory.  The  decrease in current
assets was offset in part by an increase in cash as discussed above.



                                      17
<PAGE>

      Long-term  assets decreased  $72,000,  or 1.7%, to $4,062,000 at March 31,
1999 from  $4,134,000  at December 31, 1998.  This  decrease was  primarily  the
result of recurring depreciation of building and equipment,  and amortization of
deferred loan costs, and other intangibles.

      Current  liabilities  decreased by $351,000,  or 19.4%,  to  $5,623,000 at
March 31, 1999 from $5,974,000 at December 31, 1998. This decrease was primarily
due to a decrease  of  $295,000  in accrued  advertising  and  $148,000 in trade
accounts payable,  offset in part by an increase of $210,000 in short-term notes
payable as a result of additional  borrowings under the Company's revolving line
of credit.

      The Company's working capital decreased by $487,000, or 34.0%, to $944,000
at March 31,  1999  from  $1,431,000  at  December  31,  1998,  for the  reasons
described above.

      The Company  provided net cash of $58,000 in operating  activities  during
the three months ended March 31, 1999, primarily from decreased inventory levels
as well as a decrease in trade  accounts  receivable,  offset in part by the net
loss incurred during the period.

      The Company  used net cash of $54,000 in investing  activities  during the
three months ended March 31, 1999, primarily for capital  expenditures  relating
to the Company's Year 2000 remediation efforts.

      The Company provided net cash of $141,000 from financing activities during
the three  months  ended March 31,  1999.  The  increase  was  primarily  due to
borrowings  under the  Company's  revolving  line-of-credit,  off-set in part by
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.


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

                                       18
<PAGE>

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 95% 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  May 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 and its Chief Financial Officer,  conducted on-site reviews of certain
of its key Asian suppliers to ascertain,  to the extent possible,  the Company's
exposure to  manufacturing  delays or stoppages as a result of those  suppliers'
failure to  remediate  their Year 2000  problems.  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.

      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

                                      19

<PAGE>

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.



                                      20
<PAGE>

                           PART II - OTHER INFORMATION


Item 1.    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 has  transferred  the  Company's  stock  transfer  records to
American Stock Transfer, New York, New York, which has assumed its serves as the
Company's  present  transfer  agent.  Alpha  Tech's  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  three 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 in the complaint.  The Company is
presently involved in further discussions with Mag. If process is served by Mag,
the Company intends to vigorously defend the lawsuit.

      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
during the second quarter of 1999. 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 April 30, 1999,  the Company had received

                                      21

<PAGE>

no response  from the Enforcement  Division about whether the SEC plans to name
the Company in any administrative action.

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

Item 2(c).  Recent Sales of Unregistered Securities

      During the three month period  ended March 31, 1999,  the Company sold the
following equity securities that were not registered under the Securities Act of
1933:

      The  Company  entered  a  "Deposit  Payable  Conversion  Agreement"  dated
February 4, 1999 between the Company and Touchstone Transport Services, Inc., an
entity  located  in the  Philippines.  During  the  first  quarter  of 1998,  in
connection  with an ongoing  offering of the Company's  common stock to offshore
investors under Regulation S of the Securities Act of 1933, the Company received
a wire transfer in the amount of $1,000,000.  However, no specific  subscription
agreement or other  contract was ever  prepared or executed in  connection  with
this wire  transfer,  and the Company never issued any securities in conjunction
with the  transfer.  Subsequently,  the wire transfer was recorded as a payable.
The Company had the use of the transferred  funds for  approximately ten months,
in exchange for which it neither issued any securities nor paid any principal or
interest in respect of the payable.  In January 1999, the Company requested that
the depositor of the $1,000,000  wire transfer agree to convert the payable that
had been  recorded  into shares of the Company's  restricted  common stock.  The
depositor  agreed to convert the payable  into 500,000  shares of the  Company's
restricted  common  stock,  which were issued to an entity  affiliated  with the
depositor.  The  Company  issued  such  shares  without  registration  under the
Securities  Act of 1933 in reliance on Section 4(2) of the  Securities  Act, and
the rules and regulations promulgated under that section including Regulation D.
Such  shares of  common  stock  were  issued as  restricted  securities  and the
certificate  representing  such  shares was  stamped  with a standard  legend to
prevent any resale without  registration under the Securities Act or pursuant to
an exemption.

Item 6Exhibits and Reports on Form 8-K

(a)  Exhibits

Exhibit No. Description
   27       Financial data schedule (for SEC use only)


(b)  Forms 8-K

None




                                      22
<PAGE>
                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




DYNATEC INTERNATIONAL, INC.




  /s/ Frederick W. Volcansek,     May 10, 1999
-----------------------------     ------------
Frederick W. Volcansek, Sr.           Date
Chairman & CEO



  /s/ Paul A. Boyer               May 10, 1999
-------------------               ------------
Paul A. Boyer                        Date
Senior Vice President & CFO