<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: June 30, 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 3,574,373 shares of common stock outstanding at August 2, 1999.

The aggregate market value of voting stock held by non-affiliates of the Company
at August 2, 1999, was $4,566,036.

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





<PAGE>





      DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES


                   TABLE OF CONTENTS



PART I.   FINANCIAL INFORMATION


<TABLE>
<CAPTION>
<S>                                                                                                       <C>
Item 1.   Financial Statements (Unaudited)


         Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998..................3

         Condensed Consolidated Statements of Operations for the three months ended
         June 30, 1999 and 1998, respectively.............................................................5

         Condensed Consolidated Statements of Operations for the six months ended
         June 30, 1999 and 1998, respectively.............................................................6

         Condensed Consolidated Statements of Cash Flows for the six months ended
         June 30, 1999 and 1998, respectively.............................................................7

         Notes to Condensed Consolidated Financial Statements.............................................9

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


PART II.   OTHER INFORMATION

Item 1.        Legal Proceedings..........................................................................22

Item 2(c).   Recent Sales of Unregistered Securities......................................................23

Item 6.        Exhibits and Reports on Form 8-K...........................................................23
</TABLE>











                     PART I - FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS



                                       2
<PAGE>






            DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
               CONDENSED CONSOLIDATED BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                           June 30,            December 31,
                                                                                            1999                   1998
                                                                                            ----                   ----
                                                                                        (Unaudited)
CURRENT ASSETS:
<S>                                                                                <C>                    <C>
    Cash and cash equivalents                                                      $     325,038          $
                                                                                                                   2,268
    Trade accounts receivable, net of allowance for doubtful accounts of $38,171
       and $30,190, respectively                                                       2,040,558               2,229,157
    Accounts receivable - other                                                            1,275                     110
    Inventories (see Note 2)                                                           3,742,681               4,857,241
    Prepaid expenses and other                                                           474,750               316,347
                                                                                   -------------           ------------

                Total current assets                                                   6,584,302               7,405,123
                                                                                   -------------           -------------

LAND, BUILDING AND EQUIPMENT, at cost:
    Land                                                                                 365,860                 365,860
    Building and improvements                                                          2,218,443               2,214,144
    Furniture, fixtures and equipment                                                  3,607,122               3,554,045
                                                                                    ------------           -------------
                                                                                       6,191,425               6,134,049

    Less accumulated depreciation and amortization                                     2,517,343               2,336,427
                                                                                   -------------           -------------

                Net land, building and  equipment                                      3,674,082               3,797,622
                                                                                   -------------           -------------

TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $411,464
    and $382,170, respectively                                                           175,808                 205,102
                                                                                   --------------          -------------

DEFERRED LOAN COSTS, net of accumulated amortization of $27,678 and
    $14,903, respectively                                                                 48,968                  61,743
                                                                                   -------------           -------------

OTHER ASSETS                                                                              68,616                  69,337
                                                                                   -------------           -------------

                                                                                     $10,551,776            $ 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>
                                                                                       June 30,           December 31,
                                                                                        1999                  1998
                                                                                        ----                  ----
                                                                                     (Unaudited)
CURRENT LIABILITIES:
<S>                                                                                <C>                    <C>
    Short-term note payable                                                        $  2,348,733           $  1,389,223
    Convertible debentures                                                            1,736,046              1,667,079
    Current portion of long-term debt                                                   192,539                246,855
    Current portion of capital lease obligations                                         18,950                 17,881
    Accounts payable                                                                    950,371              1,518,316
    Accounts payable - other                                                                  -                  9,000
    Accounts payable-related party                                                            -                 98,403
    Accrued expenses                                                                    490,464                637,051
    Accrued advertising                                                                  94,932                320,000
    Accrued royalties payable                                                            61,018                 70,246
                                                                                   -------------          -------------

              Total current liabilities                                               5,893,053              5,974,054

LONG-TERM DEBT, net of current portion                                                1,882,148              2,006,518

DEPOSIT FOR STOCK ISSUANCE                                                                    -              1,000,000

CAPITAL LEASE OBLIGATIONS, net of current portion                                        36,512                 28,654
                                                                                   -------------          -------------

              Total liabilities                                                       7,811,713              9,009,226
                                                                                   -------------          -------------

STOCKHOLDERS' EQUITY (see Note 3):
    Common stock, $.01 par value; 100,000,000 shares authorized and 3,498,549
       and 2,891,627 shares outstanding, respectively                                    34,985                 28,916
    Treasury stock, at cost, 91,515 shares                                             (915,150)              (915,150)
    Additional paid-in capital                                                        8,179,301              7,041,690
    Accumulated deficit                                                              (4,559,073)            (3,625,755)
                                                                                   -------------          ------------

              Total stockholders' equity                                              2,740,063              2,529,701
                                                                                   -------------          -------------

                                                                                   $ 10,551,776           $ 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
                                                                                    June 30, 1999            June 30, 1998
                                                                                    -------------            -------------
                                                                                     (Unaudited)             (Unaudited)
<S>                                                                                  <C>                       <C>
   PRODUCT SALES                                                                    $  3,690,094               $ 4,135,972
   COST OF SALES                                                                       2,169,199                 2,562,588
                                                                                    -------------              -----------

          Gross Margin                                                                 1,520,895                 1,573,384
                                                                                    -------------              -----------

   OPERATING COSTS AND EXPENSES:
       Selling expenses                                                                  834,438                   842,919
       Research and development                                                           37,812                    25,302
       General and administrative                                                        783,828                   598,103
                                                                                    -------------              -----------

          Total operating costs and expenses                                           1,656,078                 1,466,324
                                                                                    -------------              -----------

             Income (loss) from operations                                              (135,183)                  107,060
                                                                                    -------------              -----------

   OTHER EXPENSE:
       Interest expense (see Note 4)                                                    (272,555)                 (787,379)
       Other expense                                                                         (77)                     (326)
                                                                                    -------------              ------------

          Total other income (expense), net                                             (272,632)                 (787,705)
                                                                                    -------------              ------------

             Loss before income tax provision                                           (407,815)                 (680,645)

   INCOME TAX PROVISION                                                                        -                         -
                                                                                    -------------              ------------

             Net loss                                                               $   (407,815)              $  (680,645)
                                                                                    =============              ============

   BASIC NET LOSS PER SHARE                                                         $       (.12)              $      (.24)
                                                                                    =============              ============

   DILUTED NET LOSS PER SHARE (see Note 2)                                          $       (.12)              $      (.24)
                                                                                    =============              ============

   WEIGHTED AVERAGE SHARES - BASIC AND DILUTED                                         3,324,140                 2,800,821
                                                                                    =============              ============
</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 OPERATIONS


<TABLE>
<CAPTION>
                                                                                    Six Months Ended         Six Months Ended
                                                                                     June 30, 1999            June 30, 1998
                                                                                     -------------            -------------
                                                                                      (Unaudited)              (Unaudited)
<S>                                                                                  <C>                       <C>
   PRODUCT SALES                                                                     $ 7,333,773               $ 7,783,758
   COST OF SALES                                                                       4,377,570                 4,636,201
                                                                                     ------------              ------------

          Gross Margin                                                                 2,956,203                 3,147,557
                                                                                     ------------              ------------

   OPERATING COSTS AND EXPENSES:
       Selling expenses                                                                1,664,065                 1,682,692
       Research and development                                                           63,824                    35,482
       General and administrative                                                      1,615,143                 1,093,770
                                                                                     ------------              ------------

          Total operating costs and expenses                                           3,343,032                 2,811,944
                                                                                     ------------              ------------

             Income (loss) from operations                                              (386,829)                  335,613
                                                                                     ------------              ------------

   OTHER INCOME (EXPENSE), net:
       Interest expense (see Note 4)                                                    (545,846)                 (894,388)
       Interest income                                                                         -                     3,340
       Other income                                                                        3,056                         -
       Other expense                                                                        (699)                  (21,332)
                                                                                     ------------              ------------

          Total other income (expense), net                                             (543,489)                 (912,380)
                                                                                     ------------              ------------

             Loss before income tax provision                                           (930,318)                 (576,767)

   INCOME TAX PROVISION                                                                    3,000                         -
                                                                                     ------------              ------------

             Net loss                                                                $  (933,318)              $  (576,767)
                                                                                     ============              ============

   BASIC NET LOSS PER SHARE                                                          $      (.29)              $     (.21)
                                                                                     ============              ============

   DILUTED NET LOSS PER SHARE (see Note 2)                                           $      (.29)              $     (.21)
                                                                                     ============              ============

   WEIGHTED AVERAGE SHARES - BASIC AND DILUTED                                         3,218,004                 2,800,821
                                                                                     ===========               ============
</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


<TABLE>
<CAPTION>
                                                                               Six Months Ended         Six Months Ended
                                                                                 June 30, 1999            June 30, 1998
                                                                                 -------------            -------------
                                                                                   (Unaudited)             (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                <C>                    <C>
   Net loss                                                                        $   (933,318)          $    (576,767)
   Adjustments to reconcile net loss to net cash used in operating
     activities:
         Depreciation and amortization                                                  239,229                 233,939
         Amortization of deferred loan costs                                             12,774                       -
         Interest expense on convertible debentures                                     269,260                 624,226
         Loss on sale of assets                                                             699                  21,332
         Changes in assets and liabilities:
               Trade accounts receivable                                                188,599              (1,001,812)
               Accounts receivable - other                                               (1,165)                382,403
               Inventories                                                            1,114,560              (1,712,002)
               Prepaid expenses and other                                              (157,682)                125,991
               Trade accounts payable                                                  (567,945)                (45,416)
               Accounts payable - other                                                (107,403)                (42,625)
               Accrued expenses                                                        (221,200)                (20,846)
               Accrued advertising                                                     (225,068)               (158,405)
               Accrued royalties                                                         (9,228)                 20,353
               Income tax payable                                                        18,000                       -
                                                                                   -------------          --------------
                  Net cash used in operating activities                                (379,888)             (2,149,629)
                                                                                   -------------          --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from the sale of assets                                                       19,804                  47,000
  Purchase of property and equipment                                                    (82,556)               (356,232)
                                                                                   -------------          --------------
                  Net cash used in investing activities                                 (62,752)               (309,232)
                                                                                   -------------          --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings on line of credit                                                      959,510                 307,545
  Increase in debt issuance costs                                                             -                (267,983)
  Principal payments on long-term debt                                                 (178,686)               (704,222)
  Payments on capital lease obligations                                                 (15,414)                 (8,387)
  Proceeds from capital addition                                                              -                 580,000
  Proceeds from convertible debenture offering                                                -               1,500,000
  Proceeds from deposit for stock issuance (see Note 3)                                       -                 940,000
                                                                                   -------------          --------------
                  Net cash provided by financing activities                             765,410               2,346,953
                                                                                   -------------          --------------

NET  INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS                                    322,770                (111,908)

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

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                                     $    325,038           $     220,986
                                                                                   =============          ==============
</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
            CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
                                                                                 Six Months Ended      Six Months Ended
                                                                                  June 30, 1999         June 30, 1998
                                                                                  -------------         -------------
                                                                                   (Unaudited)           (Unaudited)

<S>                                                                                   <C>                   <C>
    Cash paid for interest................................................            $ 310,829             $ 118,818
                                                                                      =========             =========

    Share certificate cancelled...........................................            $       -             $ 250,000
                                                                                      =========             =========

    Debt issuance cost attributable to warrants to placement agent........            $       -             $ 426,000
                                                                                      =========             =========

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

    Conversion of Convertible Debentures and accrued interest for
       Common stock.......................................................            $ 143,680             $       -
                                                                                      =========             =========

    Issuance of 500,000 shares of restricted stock........................            $ 500,000             $       -
                                                                                      =========             =========
</TABLE>



































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




                                       8
<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 June
30,  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 six months  ended June 30, 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 June 30, 1999 and December  31,  1998,  respectively,  are  summarized  as
follows:

<TABLE>
<CAPTION>
                                                 June 30,           December 31,
                                                   1999                 1998
                                             -----------------    -----------------
<S>                                          <C>                  <C>
Raw materials............................    $     1,050,297      $       902,703
Work-in-Process..........................            148,553              309,815
Finished Goods...........................          2,543,831            3,644,723
                                             =================    =================
                                             $     3,742,681      $     4,857,241
                                             =================    =================
</TABLE>





                                       9
<PAGE>




                   DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                (Unaudited)

(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.

         The Company has recognized no tax benefit for the net operating  losses
incurred  during the three and  six-month  periods  ended  June 30,  1999 due to
uncertainties  about the Company's ability to generate future earnings to offset
such losses.

Basic and Diluted Net Loss Per Common Share

         Basic net loss per common share is  calculated  based upon the weighted
average number of common shares outstanding during the periods presented.

         In  calculating  net loss per share for the three and six months  ended
June 30, 1999 and 1998,  there were  warrants and options to purchase  1,150,000
and 1,687,500 potential common shares,  respectively,  that were not included in
the  computation  of diluted net loss per share 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  period's
consolidated financial statements to conform with the current year presentation.


(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,  and the  Company  issued  500,000  shares of
restricted common stock to the depositor.


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

         On May 22, 1998,  the Company  closed a  transaction  that provided net
capital proceeds of $1,335,000.  The transaction was accomplished  pursuant to a
Convertible  Debenture and Private Equity Line of Credit  Agreement (the "Credit
Agreement")  between  the Company  and a group of five  unaffiliated  investors.
These  funds were  raised  pursuant  to the sale by the  Company of  Convertible
Debentures (the "Convertible  Debentures") in the aggregate  principal amount of
$1,500,000 due May 22, 2001. The  Convertible  Debentures are  convertible  into
shares of the Company's common stock at the lesser of: (i) 75% of the average of
the three  lowest  closing bid prices of the  Company's  common stock during the
22-trading-day  period immediately preceding the conversion date or (ii) $4.624,
which was 100% of the closing bid price on the trading day immediately preceding
the closing date of the agreement.

     On June  10,  1999,  the  five  investors  who  purchased  the  Convertible
Debentures in 1998 converted  $132,500  principal  amount of the debentures into
98,604 shares of common stock at the then-applicable conversion price of $1.3438
per share.  Additionally,  a total of 8,320  shares of common  stock were issued
upon the conversion of $11,180 of dividends  accrued on the principal  amount of
debentures converted on that date. Accordingly, as of June 30, 1999, there was a
total  principal  amount of  outstanding  Convertible  Debentures of $1,367,500.
Assuming a hypothetical




                                       10
<PAGE>





                DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

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

conversion  of  this  entire  remaining  principal  amount  of  the  Convertible
Debentures  outstanding as of June 30, 1999, and all interest accrued thereon at
the rate of 12% per annum as of June 30, 1999, the Convertible  Debentures would
be  convertible  into  approximately  1,195,000  shares of the Company's  common
stock. The Convertible Debentures are callable by the holders thereof.

         On July 8, 1999, the investors  converted $75,000 additional  principal
amount of  Convertible  Debentures  into  66,667  shares of  common  stock,  and
converted accrued interest on such principal amount of $10,299 into 9,157 shares
of common stock.

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

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

         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:




                                       11
<PAGE>






                   DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

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


<TABLE>
<CAPTION>
                                                                      Placement           Exercise
                                                 Investors              Agent              Price
                                              -----------------    ----------------    ---------------
<S>                                               <C>                  <C>                 <C>
   Series A Warrants.......................       150,000              150,000             $6.50
   Series B Warrants.......................       150,000              300,000             $7.15
</TABLE>

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

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


(5)      BUSINESS SEGMENT INFORMATION

         During  1998,  the Company  adopted  SFAS No. 131,  "Disclosures  about
Segments  of an  Enterprise  and  Related  Information".  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  interest,  taxes,  depreciation and
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                    SIX MONTHS ENDED
                                                                     JUNE 30,                             JUNE 30,
                                                         ---------------------------------     --------------------------------
REVENUES:                                                     1999              1998               1999              1998
-----------------------------------------------------    ---------------    --------------     --------------    --------------
<S>                                                      <C>                <C>                <C>               <C>
Telecommunication Headsets and Amplifiers and
     Telephone Accessories.......................        $    1,937,000     $   1,879,000      $   3,772,000     $   4,122,000
Home Storage and Organization....................             1,181,000         1,096,000          2,171,000         2,196,000
Flashlights......................................               188,000           445,000            399,000           636,000
Miscellaneous/Mass Market........................               384,000           716,000            992,000           830,000
                                                         ---------------    --------------     --------------    --------------

       Total.....................................        $    3,690,000     $   4,136,000      $   7,334,000     $   7,784,000
                                                         ===============    ==============     ==============    ==============
</TABLE>





                                       12
<PAGE>





                    DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

                  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

(5)      BUSINESS SEGMENT INFORMATION-(CONTINUED)

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                                     JUNE 30,                             JUNE 30,
                                                         ---------------------------------     --------------------------------
OPERATING INCOME (LOSS):                                      1999              1998               1999              1998
-----------------------------------------------------    ---------------    --------------     --------------    --------------
<S>                                                      <C>                <C>                <C>               <C>
Telecommunication Headsets and Amplifiers and
     Telephone Accessories.......................        $       39,000     $      84,000      $      19,000     $     378,000
Home Storage and Organization....................               (88,000)          (32,000)          (226,000)          (21,000)
Flashlights......................................               (60,000)           23,000           (186,000)          (76,000)
Miscellaneous/Mass Market........................               (26,000)           32,000              6,000            55,000
                                                         ---------------    --------------     --------------    --------------

       Total.....................................        $     (135,000)    $     107,000      $    (387,000)    $    $336,000
                                                         ===============    ==============     ==============    ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                                     JUNE 30,                             JUNE 30,
                                                         ---------------------------------     --------------------------------
DEPRECIATION AND AMORTIZATION (1):                            1999              1998               1999              1998
-----------------------------------------------------    ---------------    --------------     --------------    --------------
<S>                                                      <C>                <C>                <C>               <C>
Telecommunication Headsets and Amplifiers and
     Telephone Accessories.......................        $       71,000     $      81,000      $     143,000     $     136,000
Home Storage and Organization....................                43,000            47,000             81,000            74,000
Flashlights......................................                 7,000            19,000             15,000            24,000
                                                         ---------------    --------------     --------------    --------------

       Total.....................................        $      121,000     $     147,000      $     239,000     $     234,000
                                                         ===============    ==============     ==============    ==============
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                            JUNE 30,           DECEMBER 31, 1998
ASSETS:                                                       1999
----------------------------------------------------    ------------------    --------------------
<S>                                                     <C>                   <C>
Telecommunication Headsets and Amplifiers and
   Telephone Accessories.........................       $       5,341,000     $         4,794,000
Home Storage and Organization....................               3,182,000               3,200,000
Flashlights......................................               1,110,000               1,729,000
Miscellaneous/Mass Market........................                                       1,366,000
                                                                        -
                                                        ------------------    --------------------
       Total assets for reportable segments......               9,633,000              11,089,000

Other Assets.....................................                 870,000                 388,000
Deferred Loan Costs And Other Assets Not
     Allocated To Segments.......................                  49,000                  62,000
                                                        ==================    ====================
       Total.....................................       $      10,552,000     $        11,539,000
                                                        ==================    ====================
</TABLE>

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                                     JUNE 30,                             JUNE 30,
                                                         ---------------------------------     --------------------------------
CAPITAL EXPENDITURES:                                         1999              1998               1999              1998
-----------------------------------------------------    ---------------    --------------     --------------    --------------
<S>                                                      <C>                <C>                <C>               <C>
Telecommunication Headsets and Amplifiers and
     Telephone Accessories.......................        $       22,000     $     104,000      $      64,000     $     210,000
Home Storage and Organization....................                13,000            60,000             35,000           112,000
Flashlights......................................                 3,000            25,000              8,000            34,000
Miscellaneous/Mass Market........................                     -                 -                  -                 -
                                                         ---------------    --------------     --------------    --------------

       Total.....................................        $       38,000     $     189,000      $     107,000     $     356,000
                                                         ===============    ==============     ==============    ==============
</TABLE>





                                       13
<PAGE>





                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(5)      BUSINESS SEGMENT INFORMATION-(CONTINUED)

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

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                                     JUNE 30,                             JUNE 30,
                                                         ---------------------------------     --------------------------------
REVENUES:                                                     1999              1998               1999              1998
-----------------------------------------------------    ---------------    --------------     --------------    --------------
<S>                                                      <C>                <C>                <C>               <C>
United States....................................        $    3,671,000     $   4,090,000      $   7,259,000     $   7,714,000
Other (1)........................................                19,000            46,000             75,000            70,000
                                                         ---------------    --------------     --------------    --------------

       Total.....................................        $    3,690,000     $   4,136,000      $   7,334,000     $   7,784,000
                                                         ===============    ==============     ==============    ==============
</TABLE>

(1)      Includes Canada, Europe and other miscellaneous.

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                                     JUNE 30,                             JUNE 30,
                                                         ---------------------------------     --------------------------------
OPERATING INCOME (LOSS):                                      1999              1998               1999              1998
-----------------------------------------------------    ---------------    --------------     --------------    --------------
<S>                                                      <C>                <C>                <C>               <C>
United States....................................             (135,000)           107,000          (387,000)           336,000
                                                         ===============    ==============     ==============    ==============
</TABLE>

<TABLE>
<CAPTION>
                                                            JUNE 30,          DECEMBER 31,
ASSETS:                                                        1999               1998
-----------------------------------------------------     --------------    -----------------
<S>                                                       <C>               <C>
United States....................................         $   10,139,000    $      11,089,000
Asia.............................................                413,000              450,000
                                                          --------------    -----------------

       Total.....................................         $   10,552,000    $      11,539,000
                                                          ==============    =================
</TABLE>


(6)      STOCK OPTIONS

         The Company has established  three stock option programs under which it
has granted both  non-qualified and incentive stock options to employees,  board
members,   and  certain  related   entities.   Under  the  Company's   1996-1997
non-qualified  stock option  program  (the  "Non-Qualified  Plan"),  the Company
granted options to acquire  1,640,000 shares of common stock. The 1996 Incentive
Option Plan ("1996  Plan")  provides  for grants of qualified  stock  options to
acquire a maximum of 300,000  shares of common stock,  of which 200,000  options
have been granted to date.  The exercise  price of options  granted to employees
under either option program equals the market price on the date of grant, and as
a result  no  compensation  expense  has  been  recognized  in the  accompanying
financial  statements.  In January 1999, the Company's  former Chairman and CEO,
and holder of 900,000 of the options  granted in December 1996 (500,000  shares)
and January 1997 (400,000 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.

         In May 1999,  the  Company's  Board of Directors  adopted the Company's
1999 Stock Option And Incentive  Plan (the "1999 Plan").  Under the 1999 Plan, a
total of 640,000 shares were reserved for issuance in the form of  non-qualified
stock  options or  qualifying  Incentive  Stock  Options.  On June 8, 1999,  the
compensation committee of the Company's Board of Directors granted stock options
under the 1999 Plan to  purchase  a total of 572,000  shares of common  stock to
various executives, employees and directors of the Company. Such options were as
non-qualified  options having terms of 10 years from the date of grant. All such
options have an exercise  price of $1.625 per share,  which was 100% of the fair
market value on the grant date.




                                       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 and  six-month
period ended June 30, 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                  For the Six Months Ended
                                          ---------------------------------------   -----------------------------------------

                                                                          % OF                                      % OF
                                                                              CHG                                     CHG
                                                                           FROM                                      FROM
                                               JUNE             JUNE      1998 TO        JUNE          JUNE         1998 TO
                                              30, 1999        30, 1998     1999        30, 1999      30, 1998        1999
                                             -----------    -----------   -------     -----------   -----------    --------
Unaudited Statement of Operations Data:

<S>                                          <C>            <C>           <C>         <C>           <C>            <C>
       Product sales                         $ 3,690,000    $4,136,000    (10.8)%     $7,334,000    $7,784,000       (5.8)%
       Cost of sales                           2,169,000     2,563,000    (15.4)       4,378,000     4,637,000       (5.6)
                                             -----------    -----------               -----------   -----------
               Gross margin                    1,521,000     1,573,000     (3.3)       2,956,000     3,147,000       (6.1)
                                             -----------


    Operating Costs and Expenses:

       Selling expenses                          834,000       843,000     (1.0)       1,664,000     1,683,000       (1.1)
       Research and development                   38,000        25,000     49.4           64,000        35,000       82.9
       General and administrative                784,000       598,000     31.1        1,615,000     1,094,000       47.6
                                             -----------    -----------               -----------   -----------
         Total operating costs and expenses    1,656,000     1,466,000     13.0        3,343,000     2,812,000       18.9
                                             -----------    -----------               -----------   -----------


    Other Income (Expense), net:

       Interest expense                         (273,000)     (788,000)   (65.4)        (545,000)     (894,000)     (39.0)
                                             -----------    -----------               -----------   -----------
       Interest income                                 -             -         -              -          3,000          -
                                             -----------    -----------               -----------   -----------
       Other (expense)                                 -             -         -          (1,000)      (21,000)     (96.7)
                                             -----------    -----------               -----------   -----------
       Other income                                    -             -         -           3,000             -          -
                                             -----------    -----------
       Net income (loss)                     $  (408,000)   $ (681,000)   (40.1)%     $ (930,000)   $ (577,000)      61.2%
                                             ===========    ===========               ===========   ===========



Unaudited Supplemental Information:

Revenue by product line type:

 Telecommunication headsets and
   amplifiers and telephone accessories      $ 1,937,000    $1,879,000      3.1%      $3,772,000    $4,122,000       (8.5)%
 Home storage and organization                 1,181,000     1,096,000      7.7        2,171,000     2,196,000       (1.1)
 Miscellaneous/Mass market                       384,000       716,000    (46.4)         992,000       830,000       19.5
 Flashlights.....                                188,000       445,000    (57.7          399,000       636,000      (37.3)
                                             -----------    -----------               -----------   -----------
           Total product sales               $ 3,690,000    $4,136,000    (10.8)%     $7,334,000    $7,784,000
                                             ===========    ===========               ===========   ===========      (5.8)%
</TABLE>


The following are  explanations of significant  period to period changes for the
three months ended June 30, 1999 and 1998:

Revenues

         Total Product Sales.  Total product sales decreased by $446,000, or
10.8%,  from  $4,136,000 to $3,690,000  for the three months ended June 30, 1999
compared to the three months ended June 30, 1998.

         Telecommunication Headsets and Amplifiers and Telephone Accessories.
Sales of  telecommunication  headsets and amplifiers  and telephone  accessories
increased  $58,000,  or 3.1%, from $1,879,000 to $1,937,000 for the three months
ended June 30,  1999  compared to the three  months  ended June 30,  1998.  This
increase was primarily  attributable to a $74,000 increase in sales of telephone
shoulder  rests  as well  as an  increase  in  sales  of  $64,000  in  telephone
accessories.  This  increase  was  partially  offset by a  decrease  in sales of
telephone  headsets and amplifiers as a result of lower office supply  catalogue
sales.  Overall gross margins in this category increased to 54.8% from 44.3% for
the three  months  ended March 31,  1999,  as a result of the sales mix and more
efficient production processes.

         Home Storage and Organization. Home storage and organization revenues
increased  $85,000,  or 7.7%, from $1,096,000 to $1,181,000 for the three months
ended June 30,  1999  compared  to the three  months  ended June 30,  1998.  The
increase  is   primarily   attributable   to  an  increase  of  $20,000  in  the
"Expand-A-Drawer"  product  line,  $59,000  in  doorstops  and  $73,000  in  the


                                        15
<PAGE>


"Expand-A-Shelf"  product  line,  offset in part by a  decrease  of  $62,000  in
several of the Company's other  miscellaneous  organizational  products,  namely
shoe organizers and ironing  boards.  Overall gross margins for products in this
category  increased  from 32.7% to 36.3% for the three  months  ended  March 31,
1999.

         Miscellaneous and Mass Market. Miscellaneous and mass market revenues
decreased  $332,000,  or 46.4%,  from  $716,000 to $384,000 for the three months
ended June 30,  1999  compared to the three  months  ended June 30,  1998.  This
decrease 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  the  approximately  $1,800,000  of  inventory  earmarked  for  sale to
Dolgencorp.  As of June 30, 1999,  Grandway had purchased  the entire  remaining
inventory.  Gross margins on products in this category decreased from 28.2% to a
negative  6.8% for the three  months  ended  March  31,  1999 as a result of the
"pass-through" effect.

         Flashlights. Flashlight revenues decreased $257,000, or 57.7%, from
$445,000 to $188,000 for the three  months  ended June 30, 1999  compared to the
three months ended June 30, 1998.  This decrease was primarily the result of the
shipment of two purchase  orders being deferred until the beginning of the third
quarter of 1999.  Overall gross margins for products in this category  decreased
from 40.8% to 30.2% for the three months  ended March 31,  1999,  as a result of
various changes made to certain  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 $9,000, or 1.0%, from
$843,000 to $834,000 for the three  months  ended June 30, 1999  compared to the
three months ended June 30, 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 trade  show  expenditures  due to the
Company participating in more regional trade shows.

         Research and Development. Research and development increased by
$13,000,  or 49.4%,  from $25,000 to $38,000 for the three months ended June 30,
1999  compared  to the three  months  ended June 30,  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  $186,000,  or 31.1%, from $598,000 to $784,000 for the three
months ended June 30, 1999 compared to the three months ended June 30, 1998. The
increase in general and  administrative  expenses  was  primarily  the result of
approximately  $127,000 in general corporate legal expense,  $20,000 in employee
recruitment,  as well as  approximately  $36,000 in travel related expenses from
increased  international  travel  associated with  strengthening  Asian supplier
relationships.

         Total Operating Costs and Expenses. Total operating costs and expenses
increased by $190,000,  or 13.0%,  from  $1,466,000 to $1,656,000  for the three
months ended June 30, 1999 compared to the three months ended June 30, 1998, for
the reasons discussed above.

         Interest  Expense.  Interest expense decreased $515,000, or 65.4%, from
$788,000 to $273,000 for the three  months  ended June 30, 1999  compared to the
three months ended June 30, 1998.  This  decrease was  primarily  related to the
recognition  of a one-time,  non-cash  charge for the fair value of common stock
warrants and a beneficial  conversion  premium  totaling  $500,000 and $137,000,
respectively,  both  associated  with the issuance of $1,500,000 of  Convertible
Debentures (the  "Convertible  Debentures") in May 1998. During the three months
ended June 30, 1999, liquidated damages were assessed against the Company 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  with  the  time  specified  in  a  registration  rights
agreement executed in connection with the sale of the Convertible Debentures.

         Net Loss. The net loss decreased by $273,000, or 40.1%, from $681,000
to  $408,000  for the three  months  ended June 30,  1999  compared to the three
months ended June 30, 1998 due to a combination of the factors described above.

The following are  explanations of significant  period to period changes for the
six months ended June 30, 1999 and 1998:

Revenues

         Total Product Sales. Total product sales decreased by $450,000, or
5.8%,  from  $7,784,000  to  $7,334,000  for the six months  ended June 30, 1999
compared to the six months ended June 30, 1998.

                                        16

<PAGE>


          Telecommunication Headsets and Amplifiers and Telephone Accessories.
Sales of  telecommunication  headsets and amplifiers  and telephone  accessories
decreased  $350,000,  or 8.5%,  from $4,122,000 to $3,772,000 for the six months
ended June 30, 1999  compared  to the six months  ended June 30,  1998.  Of this
decrease,  $215,000 was attributable to the loss of a private label customer for
the Company's "Twisstop" product. Additionally, sales of the Company's Universal
and Softalk II products  decreased $44,000 and $39,000,  respectively.  Sales of
telephone  amplifiers and headsets  decreased by $261,000.  These decreases were
offset in part by increases in sales of the Softalk product of $23,000, the Cord
Manager  and  other  Twisstop  sales of  $180,000.  Overall  gross  margins  for
telephone  accessories  increased  to 55.5% from 47.3% for the six months  ended
June 30,  1999,  as a result of the sales  mix and a more  efficient  production
processes.

         Home Storage and Organization. Home storage and organization revenues
decreased  $25,000,  or 1.1%,  from  $2,196,000 to $2,171,000 for the six months
ended June 30, 1999  compared to the six months  ended June 30,  1998.  Although
sales were  relatively  flat for the  period.  Overall  gross  margins  for this
product  category  decreased from 31.0% to 29.9% for the three months ended June
30, 1999, as a result of the sales mix.

         Miscellaneous and Mass Market. Miscellaneous and mass market revenues
increased $162,000, or 19.5%, from $830,000 to $992,000 for the six months ended
June 30, 1999 compared to the six months ended June 30, 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  the  approximately  $1,800,000  of  inventory  earmarked  for  sale to
Dolgencorp.  As of June 30, 1999,  Grandway had purchased  the entire  remaining
inventory.  Overall gross margins for products in this category  decreased  from
27.0%  to 0.6%  for the six  months  ended  June  30,  1999 as a  result  of the
"pass-through" effect.

         Flashlights. Flashlight revenues decreased $237,000, or 37.3%, from
$636,000 to $399,000 for the six months ended June 30, 1999  compared to the six
months  ended June 30,  1998.  This  decrease  was  primarily  the result of the
shipment of two purchase  orders being deferred until the beginning of the third
quarter of 1999.  Overall gross margins for products in this category  decreased
from  35.7% to 22.7% for the six  months  ended  June 30,  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  $19,000,  or 1.1%, from
$1,683,000 to $1,664,000  for the six months ended June 30, 1999 compared to the
six months ended June 30, 1998.  This decrease is due in part from 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
$29,000,  or 82.9%,  from  $35,000 to $64,000 for the six months  ended June 30,
1999 compared to the six months ended June 30, 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 $521,000, or 47.6%, from $1,094,000 to $1,615,000 for the six
months ended June 30, 1999  compared to the six months ended June 30, 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 $82,000 in additional  legal  expense  related to various  general  corporate
matters,  as well as  approximately  $210,000 in combined  severance paid to the
Company's  former  Chairman  and CEO who  resigned  on January  14, 1999 and the
former  President  of  the  Company  who  resigned  effective  March  17,  1999.
Additionally,  travel expenditures  increased by approximately $58,000 resulting
from increased international travel associated with strengthening Asian supplier
relationships.

         Total Operating Costs and Expenses.  Total operating costs and expenses
increased by $531,000,  or 18.9%,  from  $2,812,000  to  $3,343,000  for the six
months ended June 30, 1999  compared to the six months ended June 30, 1998,  for
the reasons discussed above.

         Interest Expense.  Interest expense decreased $349,000,  or 39.0%, from
$894,000 to $545,000 for the six months ended June 30, 1999  compared to the six
months  ended  June  30,  1998.  This  decrease  was  primarily  related  to the

                                        17

<PAGE>


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.  During the six months
ended June 30, 1999, liquidated damages were assessed against the Company in the
amount of $258,000 due to the Company's failure to have effective a registration
statement  covering the shares of common stock  issuable upon  conversion of the
Convertible  Debentures  with  the  time  specified  in  a  registration  rights
agreement executed in connection with the sale of the Convertible Debentures.

         Interest Income. Interest income, decreased $3,000, from $3,000 to $-0-
for the six months ended June 30, 1999 compared to the six months ended June 30,
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 six months ended June 30, 1999 compared to the six months ended June 30,
1998.  This decrease was primarily the result of a loss on the sale of equipment
sold by the Company in the six months  ended June 30, 1998 that did not occur in
the six months ended June 30, 1999.

         Other Income.  Other income,  increased $3,000, from $-0- to $3,000 for
the six months  ended June 30, 1999  compared  to the six months  ended June 30,
1998.

         Net Loss. The net loss increased by $353,000,  or 61.2%,  from $577,000
to $930,000  for the six months  ended June 30, 1999  compared to the six months
ended June 30, 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.  On June 30,  1999,  the  Company  and its  lending
institution entered into a Fourth Amendment to the Credit Agreement (the "Fourth
Amendment").  Pursuant to the Fourth  Amendment,  certain  definitions have been
modified,  as  follows:  (i) the  maximum  line  decreased  from  $5,000,000  to
$4,000,000;  (ii) the inventory  advance rate  decreases from 48% to 40% between
July1,  1999 and October 1, 1999;  (iii) the  accounts  receivable  advance rate
decreased  from 85% to 78%; and (iv) the volume rebate  accrual  increased  from
$15,000 on June 1, 1999 to $300,000  at January 1, 2000.  This  accrual  goes to
$-0- when the volume rebates are paid in February 2000, and will begin to accrue
over the remainder of calendar year 2000 to the maximum $300,000 amount. At June
30, 1999, the Company was in default of certain of these covenants, however, the
Company  presently is negotiating and anticipates that it will be able to obtain
a waiver from the lending  institution.  The Company and the lending institution
are negotiating an amendment to the loan agreement that will change the terms of
certain of the financial  covenants and ratios for the remainder of 1999 and for
calendar  year 2000.  The interest  rate  presently  applicable to the revolving
credit line is prime plus three percent,  with interest payable monthly. At June
30, 1999, the Company had $325,000 of cash and $1,651,000 of availability  under
its credit  facility.  The Company  anticipates  that its 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 during the next
twelve months.

         On July 21,  1999,  the Company  entered  into an agreement to sell its
corporate headquarters facility for $3,200,000.  This transaction is anticipated
to close no later than 90 days from the date of the agreement. Simultaneous with
the sale,  the Company will enter into a 20-year  leaseback  agreement  with the
purchasing  party.  The  net  proceeds  to the  Company  will  be  approximately
$1,200,000,  after paying  long-term  debt secured by the  building,  broker and
legal fees, and other ancillary charges. The proceeds from the sale will be used
for working capital purposes.  The party that agreed to purchase the building is
not  affiliated  with  or  related  to the  Company  or any of its  officers  or
directors.

         On May 22, 1998,  the Company  closed a  transaction  that provided net
capital proceeds of $1,335,000.  The transaction was accomplished  pursuant to a
Convertible  Debenture and Private Equity Line of Credit  Agreement (the "Credit


                                       18
<PAGE>

Agreement")  between  the Company  and a group of five  unaffiliated  investors.
These  funds were  raised  pursuant  to the sale by the  Company of  Convertible
Debentures in the aggregate  principal  amount of  $1,500,000.  The  Convertible
Debentures 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 Credit Agreement. In addition to the sale of the Convertible Debentures, the
Company also obtained the right to use a "put"  mechanism to  periodically  draw
down up to $10,000,000 of additional  equity capital the ("Equity Line").  Under
the terms of the Credit  Agreement,  the  Company was  obligated  to draw down a
minimum of $1,000,000  under the Equity Line,  and all amounts were to have been
drawn in  increments  of not less than  $50,000.  In return  for the  payment of
additional  capital under the Equity Line,  the Company would have been required
to issue shares of its common stock at a per share  purchase  price equal to 80%
of the average of the three lowest closing bid prices of the common stock during
a six day valuation period commencing three days before the draw date and ending
two days after the draw date. The Equity Line could not have been utilized,  and
the Company had no  obligation  to  exercise  any portion of the put  mechanism,
until after the effective date of the registration  statement 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 was 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 has filed  two  pre-effective  amendments  to that  registration  statement.
However,  the  registration  statement  is not  effective as of the date of this
report,  and there can be no assurance that the  registration  statement will be
declared effective.

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


         June 30, 1999 Compared to December 31, 1998

         As of June 30,  1999,  the  Company  had liquid  assets  (cash and cash
equivalents and trade accounts  receivable) of $2,366,000,  an increase of 6.0%,
or $135,000,  from  December 31, 1998 when liquid assets were  $2,231,000.  Cash
increased  $323,000,  or 16,150.0%,  to $325,000 at June 30, 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 the Company makes "draws"
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.  The  increase  in cash
resulted  from the fact that the amounts in the account as of June 30, 1999 were
not yet swept and applied against  outstanding draws. Trade accounts  receivable
decreased  $188,000,  or 8.4%, to $2,041,000 at June 30, 1999 from $2,229,000 at
December 31,  1998.  This  decrease is  primarily  the result of lower sales and
improved collections.


                                       19
<PAGE>

         Current assets  decreased by $821,000,  or 11.1%, to $6,584,000 at June
30, 1999 from  $7,405,000 at December 31, 1998.  This decrease was primarily the
result of a decrease in accounts receivable-trade of $188,000,  discussed above.
Inventory levels decreased by $1,115,000 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 June 30, 1999,  Grandway had  purchased  the
entire remaining inventory. The decrease in current assets was offset in part by
an increase in cash as discussed above.

         Long-term assets decreased $166,000, or 4.0%, to $3,968,000 at June 30,
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 $1,081,000,  or 1.4%, to $5,893,000 at
June 30, 1999 from  $6,974,000 at December 31, 1998. This decrease was primarily
the result of the Company entering into 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.  Additionally,  accrued  advertising  decreased  $225,000  and  trade
accounts payable decreased  $568,000.  These decreases were offset in part by an
increase of  $960,000  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 $740,000,  or 51.7%,  to
$691,000 at June 30, 1999 from  $1,431,000 at December 31, 1998, for the reasons
described above.

         The Company  used net cash of $380,000 in operating  activities  during
the six  months  ended  June 30,  1999,  primarily  as a result  of the net loss
incurred during the period,  offset in part from decreased  inventory levels and
trade accounts receivable.

         The Company used net cash of $87,000 in investing activities during the
six months ended June 30, 1999, primarily for capital  expenditures  relating to
the Company's Year 2000 remediation efforts.

         The Company  provided net cash of $790,000  from  financing  activities
during the three months ended June 30, 1999,  primarily due to borrowings  under
the  Company's  revolving  line-of-credit,  offset 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.

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.


                                       20
<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 has completed its Year
2000  evaluation and  remediation of these various  internal  computer  systems.
Based on its efforts to date, the Company presently  believes that the Year 2000
problem  will not  materially  affect the  operation  of its  internal  computer
systems,  hardware,  software or its internal operations that are dependent,  in
material  part, on embedded  microchips or computer  controllers,  including the
HVAC,  security and telephone  systems  located at the  Company's  headquarters.
There can be no  assurance,  however,  that the Company's  internal  systems and
operations will not be adversely affected by the Year 2000 problem.

         In its evaluation and remediation  program,  the Company  utilized both
internal and external resources to reprogram or replace  non-compliant  software
for Year 2000 modifications.  The total cost of the Year 2000 project to date is
approximately  $193,000,  which has been funded through operating cash flows and
the  Company's  existing  $4,000,000  secured  credit  facility.  Of this  cost,
approximately  $120,000  was  attributable  to the  purchase of new  software or
equipment that will be capitalized.  The remaining  $73,000 has been expensed as
incurred. The Company does not anticipate incurring additional material expenses
related to its Year 2000 remediation  efforts in respect of its internal systems
and operations.

         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.  Additionally, in March 1999, the Company, through its own information
technology personnel and its Chief Financial Officer,  conducted on-site reviews
of certain of its key Asian suppliers to ascertain,  to the extent possible, the
Company's  exposure to  manufacturing  delays or  stoppages as a result of those
suppliers'  failure  to  remediate  their  Year  2000  problems.  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 assurance
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,  its  operations  and financial  condition.  The
Company  does  not  presently  have a  completed  contingency  plan  to  address
operational  difficulties  in the event the Company's  Year 2000  evaluation and
remediation efforts to date prove to be unsuccessful.

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 1934,  as  amended,  which are
intended to be covered by the safe harbors created thereby. Although the Company
believes  that  the  assumptions   underlying  the  forward-looking   statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore,  there can be no assurance that the  forward-looking  statements will
prove to be accurate.  Factors  that could cause  actual  results to differ from
results discussed in forward-looking statements include, but are not limited to,
potential increases in inventory costs,  competition,  and the Company's ability
to obtain additional working capital to fund future growth.


                                       21
<PAGE>

                           PART II - OTHER INFORMATION


ITEM 1.      LEGAL PROCEEDINGS

         On July 6, 1999,  the Company filed a lawsuit in Third  District  Court
for the State of Utah in Salt Lake City against Dale C. Gledhill,  a former vice
president of the Company  ("Gledhill").  The complaint  alleges  that,  upon the
termination of his employment with the Company, Gledhill immediately and for the
benefit of himself or other parties  unrelated to the Company,  commenced  using
information identifying the Company's sources of supply, vendors, manufacturer's
representatives,  all  of  which  information  derived  significant  independent
economic  value  from not  being  generally  known  to,  and not  being  readily
ascertainable  by proper means by, other persons who could obtain economic value
from its disclosure or use and, as such is  confidential  and proprietary to the
Company. The complaint also alleges that Gledhill breached his fiduciary duty to
the Company and misappropriated  corporate opportunities.  The complaint asserts
claims for breach of fiduciary duty,  misappropriation of trade secrets,  breach
of contract, tortious interference, unfair competition,  usurpation of corporate
opportunity,  accounting, and defamation. The Company seeks injunctive relief in
the  form  an a  court  order  prohibiting  Gledhill  from  engaging  in  unfair
competition  and  unauthorized  use of the  Company's  trade  secrets  and money
damages in an unspecified amount.

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

         On August 6,  1999,  the  Company  settled  litigation  with a Canadian
brokerage  firm captioned as Canaccord  Capital  Corporation  ("Canaccord")  vs.
Dynatec  International,  Inc., Civil No. 2:98-cv-420C,  that had been pending 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.  The Company 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. Pursuant to the global settlement, the Company and the other parties
to the  litigation  stipulated  to the dismissal of the lawsuit and the entry by
the court of an order making its preliminary injunction order permanent.

         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.


                                       22
<PAGE>

Item 2(c).  Recent Sales of Unregistered Securities

         During the three month period ended June 30, 1999, the Company sold the
following equity securities that were not registered under the Securities Act of
1933:

Conversions of Convertible Debentures

         On June 10, 1999, five investors who purchased a total of $1,500,000 of
the Company's  convertible  debentures  in May 1998  converted  total  principal
amount of $132,500 of the  debentures  into 98,604 shares of common stock at the
then-applicable conversion price of $1.3438 per share. Additionally,  a total of
8,320  shares of common  stock were  issued  upon the  conversion  of $11,180 of
dividends accrued on the principal amount of debentures  converted on that date.
The Company issued such shares without  registration under the Securities Act of
1933 in  reliance  on  Section  4(2) of the  Securities  Act,  and the rules and
regulations  promulgated under that section including  Regulation D. Such shares
of  common  stock  were  issued as  restricted  securities  and the  certificate
representing  such  shares was  stamped  with a standard  legend to prevent  any
resale  without  registration  under  the  Securities  Act  or  pursuant  to  an
exemption, except for that portion of such shares as were subject to sales under
Rule 144 under the Securities Act.

Stock Options

         On June 8, 1999, the  compensation  committee of the Company's Board of
Directors  granted stock options to purchase a total of 572,000 shares of common
stock to various  executives,  employees  and  directors  of the  Company.  Such
options were granted  pursuant to the Company's  1999 Stock Option And Incentive
Plan,  and were granted as  non-qualified  options having terms of 10 years from
the date of grant.  All such options have an exercise price of $1.625 per share,
which was 100% of the fair market  value on the grant date.  Such  options  were
granted  without  registration  under the Securities  Act,  although the Company
intends to file a  registration  statement  on Form S-8  covering  the shares of
common stock issuable upon the exercise of such options.

Item 6.  Exhibits and Reports on Form 8-K

(a)    Exhibits

Exhibit No.       Description

    10            Modification   Agreement  between  the Company, the  investors
                  who  acquired  the  Convertible Debentures,  and the placement
                  agent,  dated as of June 25, 1999,  incorporated by reference
                  from Amendment No. 2 to the Company's  Registration  Statement
                  on Form SB-2,  filed July 2, 1999 (File No. 333-57921).

    27            Financial data schedule (for SEC use only).


(b)    Forms 8-K

None


                                       23
<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, Sr.                      August 12, 1999
--------------------------------------               ---------------
Frederick W. Volcansek, Sr.                          Date
Chairman & Chief Executive Officer



/s/ Paul A. Boyer                                    August 12, 1999
--------------------------------------               ---------------
Paul A. Boyer                                        Date
Senior Vice President &
Chief Financial Officer