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

                                  FORM 10-QSB/A
                                 Amendment No. 1

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

For the Quarterly Period Ended:     September 30, 1998

                                or

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

For the Transition Period from       to            

Commission File Number:    0-12806


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

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


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


                                 (801) 973-9500
                (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.

 X  yes        no

The Company had  2,800,112  shares of common stock  outstanding  at November 01,
1998.

The aggregate market value of voting stock held by non-affiliates of the Company
 at November 01, 1998 was $11,121,383

Transitional small business disclosure format.   Yes       No  X       



<PAGE>

                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES


                                TABLE OF CONTENTS



                                  INTRODUCTION

     This  Amendment  No.  1 to the  Quarterly  Report  on Form  10-QSB  for the
quarterly period ended September 30, 1998, of Dynatec  International,  Inc. (the
"Company") is submitted to amend the following Items:

Part I - Financial Information
         Item 1.  Financial Statements
         Item 2.  Management's Discussion and Analysis



PART I.   FINANCIAL INFORMATION


Item 1.   Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of September 30, 1998
  and December 31, 1997........................................................3

Condensed Consolidated Statements of Operations for the three months ended
  September 30, 1998 and 1997, respectively....................................5

Condensed Consolidated Statements of Operations for the nine months ended
  September 30, 1998 and 1997, respectively....................................6

Condensed Consolidated Statements of Cash Flows for the nine months ended
  September 30, 1998 and 1997, respectively....................................7

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


Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations...............................................13





<PAGE>



                         PART I - FINANCIAL INFORMATION

ITEM 1.    Financial Statements


                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                     ASSETS

                                                                                        September 30,          December 31,
                                                                                            1998                   1997
                                                                                        -------------          ------------
                                                                                   (Restated - see Note 2)
                                                                                         (Unaudited)
<S>                                                                               <C>                     <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                      $      163,918          $     332,894
    Trade Accounts receivable, net of allowance for doubtful accounts
       of $31,257 and$29,684 respectively                                               2,258,198              1,549,888
    Accounts receivable - other                                                                 -                426,131
    Inventories (see Note 3)                                                            4,790,135              2,522,149
    Prepaid expenses and other                                                            269,042                261,312
                                                                                    -------------            -----------

                Total current assets                                                    7,481,293              5,092,374
                                                                                    -------------            -----------

PROPERTY AND EQUIPMENT, at cost:
    Building and improvements                                                          2,214,144               2,214,144
    Furniture, fixtures and equipment                                                  3,559,306               3,289,886
    Land                                                                                 365,860                 365,860
                                                                                    -------------            -----------
                                                                                       6,139,310               5,869,890

    Less accumulated depreciation and amortization                                     2,226,812               1,928,303
                                                                                    ------------             -----------

                Net property and equipment                                             3,912,498               3,941,587
                                                                                    ------------             -----------

TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $366,952
    and $324,446, respectively                                                           220,320                 267,825
                                                                                    ------------             -----------

DEFERRED LOAN COSTS, net of accumulated amortization of $53,071 and
    $-0-, respectively                                                                    424,569                      -
                                                                                     ------------            -----------
                                                                                                                       

OTHER ASSETS                                                                               69,367                107,631
                                                                                     ------------            -----------

                                                                                      $12,108,047            $ 9,409,417
                                                                                     ============            ===========

</TABLE>



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


<PAGE>



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

<TABLE>
<CAPTION>
                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                                     September 30,        December 31,
                                                                                        1998                  1997
                                                                                     -------------        ------------
                                                                                (Restated - see Note 2)
                                                                                       (Unaudited)
<S>                                                                             <C>                       <C>
CURRENT LIABILITIES:
    Short-term note payable                                                        $  1,947,430            $ 1,331,169
    Current portion of long-term debt                                                   167,838              1,003,477
    Current portion of capital lease obligations                                         16,228                 15,699
    Accounts payable                                                                    909,634              1,077,632
    Accounts payable - other (see Note 4)                                             1,003,625                      -
    Accrued expenses                                                                    192,005                238,121
    Accrued advertising                                                                 179,806                350,000
    Accrued royalties payable                                                            68,933                 17,882
                                                                                   ------------          -------------

              Total current liabilities                                               4,485,499              4,033,980

LONG-TERM DEBT, net of current portion                                                2,080,050              1,994,355

CONVERTIBLE DEBENTURES (see Note 5)                                                   1,565,671                      -

DEFERRED INCOME TAXES                                                                     5,036                  5,036

CAPITAL LEASE OBLIGATIONS, net of current portion                                        33,080                 46,086
                                                                                   ------------          -------------

              Total liabilities                                                       8,169,336              6,079,457
                                                                                   ------------          -------------

STOCKHOLDERS' EQUITY (see Note 4):
    Common stock, $.01 par value; 100,000,000 shares authorized and 2,891,627
       and 2,859,940 shares outstanding, respectively                                    28,916                 28,599
    Treasury stock, at cost, 91,515 shares                                             (915,150)              (915,150)
    Additional paid-in capital                                                        7,041,690              5,596,840
    Accumulated deficit                                                              (2,216,745)            (1,380,329)
                                                                                   ------------            -----------

              Total stockholders' equity                                              3,938,711              3,329,960
                                                                                   ------------            -----------

                                                                                    $12,108,047            $ 9,409,417
                                                                                    ===========            ===========
</TABLE>






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

<PAGE>



                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                Three Months Ended        Three Months Ended
                                                                                September 30, 1998        September 30, 1997
                                                                                ------------------        ------------------
                                                                             (Restated - see Note 2)
                                                                                                  (Unaudited)
<S>                                                                                  <C>                       <C>        
   PRODUCT SALES                                                                     $ 4,382,334               $ 5,041,055
   COST OF SALES                                                                       2,977,658                 3,592,528
                                                                                     -----------               -----------

          Gross Margin                                                                 1,404,676                 1,448,527
                                                                                     -----------               -----------

   OPERATING COSTS AND EXPENSES:
       Selling expenses                                                                  772,748                   696,863
       Research and development                                                           27,546                    59,864
       General and administrative                                                        618,758                   433,439
                                                                                     -----------               -----------

          Total operating costs and expenses                                           1,419,052                 1,190,166
                                                                                     -----------               -----------

             Income (loss) from operations                                               (14,376)                  258,361
                                                                                     ------------              -----------

   OTHER INCOME (EXPENSE), net:
       Interest expense (see Note 5)                                                    (243,989)                 (109,089)
       Interest income                                                                         -                     2,635
       Other expense                                                                      (1,284)                  (19,000)
       Other income                                                                            -                   516,019
                                                                                     ------------              -----------

          Total other income (expense), net                                             (245,273)                  390,565
                                                                                     ------------              -----------

             Income (loss) before income tax provision                                  (259,649)                  648,926

   INCOME TAX PROVISION (see Note 3)                                                           -                         -
                                                                                     ------------              -----------

             Net income (loss)                                                      $   (259,649)             $    648,926
                                                                                     ============              ===========

   BASIC NET INCOME (LOSS) PER SHARE                                                $       (.09)             $        .29
                                                                                     ============              ===========

   DILUTED NET INCOME (LOSS) PER SHARE (see Note 3)                                 $       (.09)             $        .23
                                                                                     ============              ===========

   WEIGHTED AVERAGE SHARES - BASIC                                                     2,790,252                 2,219,096
                                                                                     ============              ===========

   WEIGHTED AVERAGE SHARES - DILUTED                                                   2,790,252                 2,821,243
                                                                                     ============              ===========
</TABLE>







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


<PAGE>


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


                                                                                  Nine Months Ended      Nine Months Ended
                                                                                  September 30, 1998     September 30, 1997
                                                                                  ------------------     ------------------
                                                                              (Restated - see Note 2)
                                                                                                  (Unaudited)
<S>                                                                                    <C>                    <C>        
PRODUCT SALES                                                                          $12,166,092            $11,086,616
COST OF SALES                                                                            8,005,006              7,716,962
                                                                                     --------------         -------------

       Gross Margin                                                                      4,161,086              3,369,654
                                                                                     -------------          -------------

OPERATING COSTS AND EXPENSES:
    Selling expenses                                                                     2,154,713              1,816,441
    Research and development                                                               112,741                227,742
    General and administrative                                                           1,572,395              1,359,033
                                                                                     -------------          -------------

       Total operating costs and expenses                                                3,839,849              3,403,216
                                                                                     -------------          -------------

          Income (loss) from operations                                                    321,237                (33,562)
                                                                                     -------------          -------------

OTHER INCOME (EXPENSE), net:
    Interest expense (see Note 5)                                                       (1,138,378)              (332,861)
    Interest income                                                                          3,340                  8,650
    Other expense                                                                          (22,616)               (32,500)
    Other income                                                                                 -                606,555
                                                                                      -------------         -------------

       Total other income (expense), net                                                (1,157,654)               249,844
                                                                                      -------------         -------------

          Income (loss) before income tax provision                                       (836,417)               216,282

INCOME TAX PROVISION (see Note 3)                                                                -                   (500)
                                                                                      -------------         -------------

          Net income (loss)                                                          $    (836,417)         $     215,782
                                                                                      =============         =============

BASIC NET INCOME (LOSS) PER SHARE                                                    $        (.30)         $         .10
                                                                                      =============         =============

DILUTED NET INCOME (LOSS) PER SHARE (see Note 3)                                     $        (.30)         $         .08
                                                                                      =============         =============

WEIGHTED AVERAGE SHARES - BASIC                                                          2,790,252              2,219,096
                                                                                      =============         =============

WEIGHTED AVERAGE SHARES - DILUTED                                                        2,790,252              2,821,243
                                                                                      =============         =============

</TABLE>





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


<PAGE>



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

<TABLE>
<CAPTION>

                                                                                 Nine Months Ended         Nine Months Ended 
                                                                                 September 30, 1998       September 30, 1997
                                                                                 ------------------       ------------------
                                                                              (Restated - see Note 2)

Increase (Decrease)in Cash and Cash Equivalents
-----------------------------------------------
                                                                                                (Unaudited)
<S>                                                                             <C>                       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                               $   (836,417)           $    215,782
   Adjustments to reconcile net income (loss) to net cash used in operating
     activities:
         Depreciation and amortization                                                  359,723                 366,177
         Amortization of deferred loan costs                                             53,071                   3,906
         Non-cash interest expense on convertible debentures (see Note 5)               685,611                       -
         Loss (Gain) on sale of assets                                                   22,616                (402,361)
         Changes in assets and liabilities:
               Accounts receivable - trade                                             (708,311)               (970,364)
               Accounts receivable - other                                              426,131                    (532)
               Inventories                                                           (2,267,986)               (591,727)
               Prepaid expenses and other                                                30,534                (274,848)
               Accounts payable                                                         (82,998)                (32,433)
               Accounts payable - other                                                 (21,375)                      -
               Accrued expenses                                                          19,555                 567,901
               Accrued advertising                                                     (170,194)                (23,130)
               Accrued royalties                                                         51,052                  40,196
               Income tax payable                                                             -                    (100)
                                                                                    ------------            ------------
                  Net cash used in operating activities                              (2,438,988)             (1,101,533)
                                                                                    ------------            ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from the sale of assets                                                       48,006               1,196,687
  Receivable from related parties                                                             -                 295,419
  Purchase of property and equipment                                                   (376,195)               (423,384)
  Advance to third parties                                                                    -                 (60,000)
                                                                                    ------------            ------------
                  Net cash provided by (used in) investing activities                  (328,189)              1,008,722
                                                                                    ------------            ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings on line of credit                                                          616,261                  29,260
  Debt issuance costs                                                                  (275,640)                      -
  Net borrowings (payments) on long-term debt                                          (749,944)                 66,103
  Principal payments on capital lease obligations                                       (12,476)                (33,800)
  Proceeds from capital addition (see Note 2)                                           580,000                       -
  Proceeds from the convertible debenture offering (see Note 5)                       1,500,000                       -
  Receipt of Treasury stock                                                                   -                (923,150)
  Proceeds from deposit for stock issuance (see Note 4)                                 940,000                       -
  Proceeds from stock sold pursuant to Regulation S offering                                  -               1,000,000
                                                                                    -----------             ------------
                  Net cash provided by financing activities                           2,598,201                 138,413
                                                                                    -----------             ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                   (168,976)                 45,602

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD                                    332,894                 240,145
                                                                                    -----------             ------------

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                                      $   163,918             $   285,747
                                                                                    ============            ============
</TABLE>

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

<PAGE>



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

<TABLE>
<CAPTION>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                                                                                  Nine Months Ended         Nine Months Ended 
                                                                                 September 30, 1998        September 30, 1997
                                                                                 ------------------        ------------------
                                                                               (Restated - see Note 2)

<S>                                                                                   <C>                        <C>      
    Cash paid for interest                                                            $ 422,140                  $ 332,861
                                                                                      =========                  =========

    Cash paid for income taxes                                                        $       -                  $     500
                                                                                      =========                  =========

    Debt issuance costs attributable to warrants to placement agent                   $ 385,062                  $       -
                                                                                      =========                  =========


</TABLE>







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


<PAGE>



                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



(1)      DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS

     Dynatec International,  Inc. (the "Company"), a Utah corporation,  has four
wholly owned subsidiaries;  namely, Softalk, Inc., Arnco Marketing, Inc., Nordic
Technologies,  Inc.  and SofTalk  Communications,  Inc..  During the nine months
ended September 30, 1998, the Company  conducted most of its operations  through
certain of its subsidiaries.

     The Company  primarily is engaged in the  manufacture  and  distribution of
consumer   products   in   the   following   areas;    Telephone    Accessories,
Hardware/Housewares,  Mass Market,  Flashlights,  Telecommunication Headsets and
other miscellaneous products sold to mass market merchandisers.

     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  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 September 30,
1998  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, 1997.

     The results of operations for the nine months ended  September 30, 1998 are
not necessarily indicative of the results that may be expected for the remainder
of the year ending December 31, 1998.


(2)  RESTATEMENT OF QUARTERLY FINANCIAL INFORMATION

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



<PAGE>



                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


(2)  RESTATEMENT OF QUARTERLY FINANCIAL INFORMATION (Continued)

     The  following  table  outlines the  revisions to the  previously  reported
condensed consolidated financial statements:
<TABLE>
<CAPTION>

                                                                    Nine Months Ended
                                                                   September 31, 1998
                                                 --------------------------------------------------------
                                                             As Restated       As Previously Reported
                                                                        (Unaudited)
<S>                                                       <C>                         <C>        
Product Revenue                                           $12,166,092                 $12,746,092

Gross profit                                                4,161,086                   4,741,086 

Income from operations                                        321,237                     901,237

Loss from operations                                         (836,417)                   (256,417)

Net loss                                                     (836,417)                   (256,417)

Basic net loss per share                                        (0.30)                      (0.09)

Diluted net loss                                                (0.30)                      (0.09)

</TABLE>

<TABLE>
<CAPTION>

                                                                    Nine Months Ended
                                                                   September 31, 1998
                                                 --------------------------------------------------------
                                                             As Restated       As Previously Reported
                                                                        (Unaudited)
<S>                                                     <C>                          <C>        
Accumulated deficit                                     $ 7,041,690                  $ 6,461,690

Total stockholders' equity                               (2,216,745)                  (1,636,745) 

</TABLE>



(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Inventories

     Effective  January 1, 1998,  the Company  changed its method of determining
the cost of inventory  from  last-in,  first-out  (LIFO) to first-in,  first-out
(FIFO).  Historically,  the  difference  between the LIFO and  current  costs of
inventories has been immaterial.



<PAGE>



                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                                   (Unaudited)


(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)

     Inventories,     consisting    principally    of    telephone    accessory,
hardware/housewares,   flashlights,   telecommunication   headsets,   and  other
miscellaneous  products  sold to mass market  merchandisers  as of September 30,
1998 and December 31, 1997, respectively, are summarized as follows:
<TABLE>
<CAPTION>
                                                                 September 30,         December 31,
                                                                      1998                 1997
                                                                -----------------    -----------------
<S>                                                                  <C>                   <C>      
                   Raw materials............................         $1,115,915            $ 831,483
                   Finished Goods...........................          3,674,220            1,690,666
                                                                =================    =================
                                                                     $4,790,135           $2,522,149
                                                                =================    =================
</TABLE>


Income Taxes

     The Company has net operating  loss  carry-forwards  from prior years which
will exceed  income  generated  during 1998.  The deferred tax asset  related to
these carry-forwards was fully reserved for as of December 31, 1997.


Basic and Diluted Net Income (Loss) Per Common Share

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

     A reconciliation between the basic and diluted  weighted-average  number of
shares outstanding as of September 30, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>

                                                                             September 30,
                                                                   ----------------------------------
                                                                          1998              1997
                                                                     ---------------    -------------
<S>                                                                       <C>              <C>      
Basic weighted average number of common shares...................         2,790,252        2,219,096
Weighted average number of common stock options..................                 -          602,147
                                                                     ===============    =============
       Diluted weighted average number of shares..................        2,790,252        2,821,243
                                                                     ===============    =============
</TABLE>

     In  calculating  net loss per share for the  three  and nine  months  ended
September  30, 1998,  respectively,  there were warrants and options to purchase
3,508,375  potential  common shares that were not included in the computation of
diluted  net  loss  per  common   shares  as  their   effect   would  have  been
anti-dilutive, thereby decreasing the net loss per common share.

Accounting Standards

     During the nine months  ended  September  30,  1998,  the  Company  adopted
Statement  of  Financial  Accounting  Standards  ("SFAS")  No.  130,  "Reporting
Comprehensive   Income.".  SFAS  No.  130  requires  an  "all-inclusive"  income
statement approach which specifies that all revenues, expenses, gains and losses
recognized  during the period be reported in income,  regardless of whether they
are  considered to be results of operations of the period.  The adoption of SFAS
No.  130  had  no  material   impact  on  the  Company's   financial   statement
presentation.


<PAGE>



                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                                   (Unaudited)


(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)

     The Company is required to adopt SFAS No. 131,  "Disclosures about Segments
of an Enterprise and Related Information," in 1998, however, this Statement need
not be  applied to  interim  financial  statements  in the  initial  year of its
application.  SFAS No.  131  will  supersede  the  business  segment  disclosure
requirements  currently in effect  under SFAS No. 14. SFAS No. 131,  among other
things, establishes standards regarding the information a company is required to
disclose  about its  operating  segments and provides  guidance  regarding  what
constitutes a reportable  operating segment. The Company is currently evaluating
disclosures under SFAS No. 131 compared to current disclosures.

Reclassifications

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


(4)  STOCKHOLDERS' EQUITY

     As of September 30, 1998,  $940,000 in funds, which is included in accounts
payable-other in the accompanying  condensed balance sheet, has been received as
a deposit for stock issuance.

     On June 16, 1998, Canaccord Capital Corporation  ("Canaccord"),  a Canadian
broker/dealer, filed an action against the Company in the U.S. District Court in
Salt Lake City,  Utah.  The action  seeks an order  compelling  the  issuance of
125,000  shares of  Dynatec  stock.  Canaccord  and the  Company  agree that the
Company,  or its transfer agent, had erroneously  over-issued shares of stock to
Canaccord in early 1997. In September 1997, Canaccord tendered  certificates for
other shares in  acknowledgment of a separate  over-issuance.  Management of the
Company  believed that an additional  125,000  shares had been over issued.  The
disputed  certificate  was  subsequently  returned  to the  transfer  agent  and
canceled  under the  direction of the Board of  Directors  of the Company.  This
action was taken by the Company based upon the  understanding of management that
the entity believed by the Company to be holding the beneficial  interest in the
certificate had not paid for the shares, and was not a holder in due course or a
"protected  person" under  applicable  Uniform  Commercial Code  provisions.  On
August 3, 1998, the Court entered an order granting the  preliminary  injunction
in favor of Canaccord  and  compelling  the issuance of a stock  certificate  to
Canaccord's  designee for the disputed  125,000  shares of stock.  If one of the
other entities now named in the litigation should subsequently establish a right
to the issuance of 125,000  shares of the stock of the  Company,  Dynatec may be
required to issue additional shares. Related to the forgoing litigation, a claim
for an  additional  125,000  shares of the stock of the Company had been made by
Katori Consultants,  Ltd., a Philippines corporation. The answer and third party
complaint of Dynatec named Katori  Consultants,  Ltd. As a third party defendant
so that such  additional  claim could be  addressed  as part of the single legal
action.  On October 21, 1998,  Katori  Consultants,  Ltd. Gave written notice to
Dynatec that it relinquished  any claim to additional  shares of common stock of
the  Company.  Dynatec  intends to  continue to pursue its claim for damages and
declaratory relief in this litigation (see Part II - Other Information;  Item 1.
"Legal Proceedings").




<PAGE>



                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                                   (Unaudited)


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

     On May 22, 1998,  the Company  closed a  transaction  that has provided net
capital  proceeds of  $1,335,000.  These funds have been raised  pursuant to the
sale by the Company of Convertible Debentures (the "Convertible  Debentures") in
the face amount of $1,500,000.  The Convertible  Debentures are convertible into
common  stock of the Company at the lesser of: (i) seventy  five  percent of the
average of the three  lowest  closing bid prices of the Common  Stock during the
ten day trading period  immediately  preceding the  conversion  date or (ii) one
hundred  percent  of the  closing  bid  price  on the  trading  day  immediately
preceding  the  closing  date  of  the  agreement.   The  transaction  has  been
accomplished  pursuant to a  Convertible  Debenture  and Private  Equity Line of
Credit Agreement (the "Equity  Line-of-Credit",  collectively referred to herein
as the "Credit  Agreement")  between  the Company and a group of five  investors
which have not previously been shareholders of the Company.  In addition,  under
the Equity Line-of-Credit, the Company can use a "put" mechanism to periodically
draw down up to $10,000,000.  Under the terms of the Credit Agreement, a minimum
of  $1,000,000  must be drawn in increments of not less than $50,000 in exchange
for common stock of the Company issued at 80 percent of the average of the three
lowest bid prices  during a six day  valuation  period  consisting of three days
prior to the put and  ending  two days  after  the put date.  The put  mechanism
cannot be utilized until after the effective date of the registration  statement
for  the  underlying  stock  of  the  Credit   Agreement.   Additionally,   upon
registration  of the  underlying  shares,  the Company will issue an  additional
$500,000 of Convertible Debenture.

     In connection with the Credit Agreement,  the investors and placement agent
were issued  warrants.  These warrants have been issued as Series A and Series B
as follows:
<TABLE>
<CAPTION>

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

     The Company must issue an additional  50,000 Series A warrants each to both
the  placement  agent  and the  investors  upon the  issuance  of an  additional
$500,000 of Convertible Debentures.  One-sixth of the market value of the Series
A and B warrants was allocated to the Convertible Debentures and five-sixths was
allocated  to the  Equity  Line-of-Credit.  This  allocation  was  based  on the
relative notional amounts of the two elements of the Credit Agreement. The value
of the  warrants  issued to the  investors  has been  written off as a one-time,
non-cash debt issuance cost, as the warrants are  immediately  exercisable.  The
value of the  warrants  issued  to the  placement  agent  and  allocated  to the
debentures  is  being  amortized  over  the 36  month  life  of the  Convertible
Debentures. In addition, because the Convertible Debentures are convertible at a
25 percent discount from the market value, an additional  $500,000  representing
the intrinsic  value of the beneficial  conversion  premium was written off as a
non-cash  expense for the second quarter of 1998. These non-cash charges for the
market value of the warrants are included with interest expense in the condensed
consolidated statements of operations for the three and nine month periods ended
September 30, 1998, respectively. The market value of the warrants issued to the
investors in connection with the additional  $500,000 of Convertible  Debentures
will be charged to operations at the time of issuance.

     The  Company  is also  directly  issuing,  as  part  of this  registration,
consideration  of up to 80,000 of its common shares as a fee or consideration to
the  placement  agent.  Of these  shares,  20,000 were issued at the time of the
closing of the  transaction.  The remaining 60,000 shares are retained in escrow
and are to be released in 6,000 share  increments  as each  $1,000,000  is drawn
down under the Equity Line-of-Credit. If all of the Equity Line-of-Credit is not
utilized,  the  remaining  shares held in escrow will be returned to the Company
and cancelled.



<PAGE>



                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                                   (Unaudited)

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

     In the event that the registration  statement for the shares underlying the
Credit  Agreement  is not  effective  with the SEC within 90 days of the closing
date,  liquidated  damages are  assessed  against the Company at the rate of two
percent  of the  purchase  price of the  Convertible  Debentures  for the  first
thirty-day  period beyond the original 90 days and three percent of the purchase
price  of the  Convertible  Debentures  (pro  rated on a daily  basis)  for each
thirty-day  period  thereafter.  As  of  November  11,  1998,  the  registration
statement had not yet become effective. As a result the Company has paid $30,000
and accrued $30,000 in liquidated damages.


(6)  OTHER

     On May 27,  1998,  the Company  obtained a new,  secured  revolving  credit
facility from a financing  institution to provide 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 accounts receivable and inventories. The Note
is due May 26, 2001.  Under the terms of the agreement,  the Company is required
to maintain financial covenants and ratios, including book net worth, net income
and debt service coverage.  At September 30, 1998, the Company was in default of
certain of these  covenants,  however,  the Company has  obtained a waiver.  The
Company and its lender are currently  negotiating  an amendment to the agreement
which will amend the terms of certain of the financial covenants and ratios.



<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 nine month
periods  ended  September  30,  1998 and  1997,  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 Nine Months Ended
                                   --------------------------------    ---------------------------------
<S>                                <C>         <C>         <C>         <C>          <C>         <C>
                                                             % OF                                  % OF
                                                              CHG                                   CHG 
                                                             FROM                                  FROM     
                                     SEPTEMBER  SEPTEMBER   1997 TO      SEPTEMBER   SEPTEMBER   1997 TO
                                     30,1998    30, 1997     1998        30,1998     30, 1997      1998
                                   -----------------------  -------    ------------------------  -------
                                                                       (Restated -
                                                                       see Note 2)
  Unaudited Statement of
  Operations Data:
         Product sales.............   $4,382,000  $5,041,000 (13.1)%     $12,166,000 $11,087,000  9.7 %
         Cost of sales.............    2,978,000   3,593,000 (17.1)        8,005,000   7,717,000  3.7
                                      ---------- -----------            ------------ -----------
                                                                                         
                 Gross margin......    1,404,000   1,448,000  (3.0)        4,161,000   3,370,000  23.5
                                      ---------- -----------            ------------ -----------

  Operating Costs and Expenses:
         Selling expenses..........      773,000     697,000  10.9         2,155,000   1,816,000  18.7
         Research and development..       28,000      60,000 (53.3)          113,000     228,000 (50.4) 
         General and administrative      618,000     433,000  42.8         1,572,000   1,359,000  15.7
                                      ---------- -----------            ------------ -----------
               Total operating costs   
                 and Expenses......    1,419,000   1,190,000  19.2         3,840,000   3,403,000  12.8
                                      ---------- -----------            ------------ -----------      
  Other Income (Expense), net:
         Interest expense..........     (244,000)   (109,000)123.8        (1,138,000)   (333,000) 241.7
                                      ---------- -----------            ------------ -----------
         Interest income...........            -       3,000     -             3,000       9,000  (61.4)
                                      ---------- -----------            ------------ -----------
         Other (expense)...........       (1,000)    (19,000)(94.7)          (23,000)    (33,000) (30.3) 
                                      ---------- -----------            ------------ -----------
         Other income..............            -     516,000     -                 -     607,000      -
                                      ---------- -----------            ------------ -----------
          Net income (loss).........  $ (260,000) $  649,000(140.0)%      $ (836,000) $  217,000 (485.3)%
                                      ========== ===========            ============ ===========

  Unaudited Supplemental Information:

  Revenue by product line type:
      Telephone accessories........   $1,547,000  $1,760,000 (12.1)%      $4,773,000  $4,607,000   3.6 %
       Hardware/housewares.........    1,276,000     811,000  57.4         3,311,000   2,528,000  31.0
       Mass market.................    1,023,000   2,217,000 (53.8)        1,854,000   3,050,000 (39.2)
         Flashlights...............      202,000     203,000  (0.5)          838,000     608,000  37.8
         Telecommunication headsets      308,000       5,000 642.2         1,204,000       5,000  23,890.0
       Other revenue...............       26,000      45,000 (42.2)          186,000     289,000 (35.6)  
           Total product              ---------- -----------              ---------- -----------
          sales and other..........   $4,382,000  $5,041,000 (13.1)%     $12,166,000 $11,087,000   9.7 %
                                      ==========  ==========             =========== ===========
</TABLE>



     The following are explanations of significant  period to period changes for
the three months ended September 30, 1998 and 1997:


Revenues

     Total Product Sales.  Total product sales decreased by $659,000,  or 13.1%,
from  $5,041,000  to  $4,382,000  for the three months ended  September 30, 1998
compared to the three months ended September 30, 1997.

     Telephone  Accessories.  Telephone accessories sales decreased $213,000, or
12.1%,  from  $1,760,000 to $1,547,000 for the three months ended  September 30,
1998  compared to the three months  ended  September  30, 1997.  The decrease in
telephone accessories was primarily  attributable to a Radio Shack order for the
"Softalk II" product which was received  during the three months ended September
30,  1997  that did not  occur in 1998.  Overall  gross  margins  for  telephone
accessories  increased to 48.2% for the three months  ended  September  30, 1998
from 45.9% for the three months  ended  September  30, 1997,  as a result of the
sales mix.



<PAGE>


     Hardware/Housewares.  Hardware/houseware  revenues increased  $465,000,  or
57.4%, from $811,000 to $1,276,000 for the three months ended September 30, 1998
compared  to the  three  months  ended  September  30,  1997.  The  increase  in
hardware/houseware  revenues was primarily  attributable to the  introduction of
several  new  drawer  organization  products,  namely  "Expand-A-Drawer",  which
accounted for $339,000 of this  increase.  Overall gross margins for products in
this category increased from 26.6% to 30.2% for the three months ended September
30, 1998.

     Mass Market.  Mass market revenues  decreased  $1,194,000,  or 53.8%,  from
$2,217,000 to $1,023,000 for the three months ended  September 30, 1998 compared
to the three months ended  September  30, 1997.  This decrease was primarily the
result  of  the  Company   receiving  certain  orders  for  crayons  which  were
subsequently  deferred  to the fourth  quarter of 1998 and the first  quarter of
1999.  Gross  margins on products  sold  generally  range between ten and twenty
percent,  depending on the sales mix.  Substantially all sales in this area were
to Dolgencorp, Inc.

     Flashlights.  Flashlight  revenues decreased $1,000, or 0.5%, from $203,000
to $202,000 for the three months ended  September 30, 1998 compared to the three
months ended  September 30, 1997.  Although sales were  relatively  flat for the
period,  gross margins on these product lines  increased from 24.4% to 38.1% for
the three months ended September 30, 1998, as a result of management's effort to
effectively  source these products from more reliable overseas vendors to ensure
timely delivery of reliable, high-quality flashlight products.

     Telecommunication  Headsets.  Telecommunication  headset revenues increased
$303,000,  or  642.2%,  from  $5,000  to  $308,000  for the three  months  ended
September  30, 1998 compared to the three months ended  September 30, 1997.  The
increase was  primarily  attributable  to the Company  introducing a new line of
telecommunications  products to include wired and wireless  telephone  headsets,
telephones,  conference  speakers,  and  other  related  products.  In the first
quarter of 1998,  initial  orders for  telephonic  amplifiers  and headsets were
filed with Lucent technologies.  Overall gross margins for this product line for
the three months ended September 30, 1998 were approximately 29.6%. In addition,
the  Company  has been  able to  secure  pages in  several  catalogues  of major
providers for various office products which began circulating  during the second
and third quarters of 1998.

     Other Revenue.  Other revenue decreased $19,000,  or 42.2%, from $45,000 to
$26,000 for the three  months  ended  September  30, 1998  compared to the three
months ended  September  30, 1997.  The decrease in other  revenue was primarily
attributable to a decline in other  miscellaneous  products sold by the Company,
namely,  "Softalk Erasable Boards" and product packaging for AT&T and Fuji Novel
Battery lines.



Operating Costs and Expenses

     Selling  Expenses.  Selling  expenses  increased  $76,000,  or 10.9%,  from
$697,000 to $773,000 for the three months ended  September  30, 1998 compared to
the three months ended September 30, 1997. The increase in selling  expenses was
primarily  attributable to increased  advertising expense related to the Company
securing pages in several office products providers catalogues. In addition, the
Company  experienced  an  increase  in the  cost  of  shipping  products  to its
customers and is addressing this issue by sourcing  competative  bids from other
carriers.  These increases were partially  offset by a decrease of approximately
$28,000 in travel and entertainment expense.

     Research and Development. Research and development decreased by $32,000, or
53.3%,  from $60,000 to $28,000 for the three months  ended  September  30, 1998
compared to the three  months  ended  September  30,  1997.  This  decrease  was
primarily attributable to the completion of the research and development related
to the  introduction  of the  Company's  new line of  telecommunication  headset
products.

     General and Administrative  Expenses.  General and administrative  expenses
increased  $185,000,  or 42.8%,  from  $433,000 to $618,000 for the three months
ended  September 30, 1998 compared to the three months ended September 30, 1997.
The increase in general and administrative expenses was due in part to increased
legal and accounting fees related to the Company's registration of securities on
Form SB-2 in connection with its Convertible Debenture and Equity Line-of-Credit
financing agreement which was put into place in May 1998.

     Total  Operating  Costs and Expenses.  Total  operating  costs and expenses
increased by $229,000,  or 19.2%,  from  $1,190,000 to $1,419,000  for the three
months ended September 30, 1998 compared to the three months ended September 30,
1997, for the reasons discussed above.

     Interest Expense.  Interest expense  increased  $135,000,  or 123.8%,  from
$109,000 to $244,000 for the three months ended  September  30, 1998 compared to
the  three  months  ended  September  30,  1997.  This  increase  was  primarily
attributable  to interest  related to the $1,500,000  Convertible  Debenture put
into place during May 1998,  as well as the  amortization  of non-cash  interest
expense associated with debt issuance costs.



<PAGE>


     Interest Income.  Interest income decreased $3,000, from $3,000 to $-0- for
the three months  ended  September  30, 1998  compared to the three months ended
September  30,  1997.  This  decrease  was  primarily  the result of the Company
utilizing its  revolving  credit  facility,  under which "draws" are made by the
Company.  After a draw is made a  corresponding  payable  is  established,  when
collections of outstanding  accounts  receivable are received,  collections  are
swept,  daily, and re-applied against outstanding draws. As a result the Company
does not keep excess cash on hand to invest.

     Other Income.  Other income decreased  $516,000,  from $516,000 to $-0- for
the three months  ended  September  30, 1998  compared to the three months ended
September  30,  1997.  This  decrease  is  primarily  the result of the  Company
recognizing a gain on the sale of assets during the three months ended September
30, 1997 that did not recur in 1998.

     Net (Loss)  Income.  Net income  decreased  by  $909,000,  or 140.0%,  from
$649,000 to a loss of $260,000  for the three months  ended  September  30, 1998
compared to the three months  ended  September  30 due to a  combination  of the
factors described above.


     The following are explanations of significant  period to period changes for
the nine months ended September 30, 1998 and 1997:


Revenues

     Total Product Sales. Total product sales increased by $1,079,000,  or 9.7%,
from  $11,087,000  to $12,166,000  for the nine months ended  September 30, 1998
compared to the nine months ended September 30, 1997.

     Telephone  Accessories.  Telephone accessories sales increased $166,000, or
3.6%, from $4,607,000 to $4,773,000 for the nine months ended September 30, 1998
compared to the nine months ended  September 30, 1997. The increase in telephone
accessories was primarily  attributable to an increase of approximately  $75,000
in the  Company's  "Twisstop"  product  line and an  increase  of  approximately
$35,000 in "Cord Manager" line. Overall gross margins for telephone  accessories
increased to 34.0%,  from 26.3% for the nine months ended September 30, 1998 and
1997, respectively as a result of the sales mix.

     Hardware/Housewares.  Hardware/houseware  revenues increased  $783,000,  or
31.0%,  from  $2,528,000 to $3,311,000  for the nine months ended  September 30,
1998  compared to the nine months  ended  September  30,  1997.  The increase in
hardware/houseware  revenues was primarily  attributable to the  introduction of
several  new  drawer  organization  products,  namely  "Expand-A-Drawer",  which
accounted  for  approximately  $790,000 of this  increase,  offset  in-part by a
decrease in shelf sales.  Overall  gross  margins for products in this  category
remained  relatively  flat for the nine months ended September 30, 1998 compared
to the nine months ended September 30, 1997.

     Mass Market.  Mass market revenues  decreased  $1,196,000,  or 39.2%,  from
$3,050,000 to $1,854,000  for the nine months ended  September 30, 1998 compared
to the nine months ended  September  30, 1997.  Substantially  all sales in this
area were to Dolgencorp,  Inc. The Company  received  certain orders for crayons
which were  subsequently  deferred  to the fourth  quarter of 1998 and the first
quarter of 1999.  Gross margins on products sold generally range between ten and
twenty percent, depending on the sales mix.

     Flashlights.   Flashlight  revenues  increased  $230,000,  or  37.8%,  from
$608,000 to $838,000 for the nine months ended  September  30, 1998  compared to
the nine months ended  September 30, 1997.  The increase in flashlight  revenues
was primarily  attributable  to increased  military  sales,  in addition,  gross
margins for  flashlights  improved  significantly,  from a negative 9.3% for the
nine months ended September 30, 1997 to a positive 29.2%.  This  improvement was
the direct result of the Company changing the source of  manufacturing  from the
United States to certain Asian countries.

     Telecommunication  Headsets.  Telecommunication  headset revenues increased
$1,199,000,  or 23,890.0%,  from $5,000 to $1,204,000  for the nine months ended
September  30, 1998 compared to the nine months ended  September  30, 1997.  The
increase was  primarily  attributable  to the Company  introducing a new line of
telecommunications  products to include wired and wireless  telephone  headsets,
telephones,  conference  speakers,  and  other  related  products.  In the first
quarter of 1998,  initial  orders for  telephonic  amplifiers  and headsets were
filed with Lucent technologies.  Overall gross margins for this product line for
the nine months ended September 30, 1998 were approximately  31.4%. In addition,
the  Company  has been  able to  secure  pages in  several  catalogues  of major
providers for various office products which began circulating  during the second
and third quarters of 1998.

     Other Revenue. Other revenue decreased $103,000, or 35.6%, from $289,000 to
$186,000  for the nine months  ended  September  30,  1998  compared to the nine
months ended  September  30, 1997.  The decrease in other  revenue was primarily
attributable to a decline in other miscellaneous products sold by the Company.

<PAGE>


Operating Costs and Expenses

     Selling  Expenses.  Selling expenses  increased  $339,000,  or 18.7%,  from
$1,816,000 to $2,155,000  for the nine months ended  September 30, 1998 compared
to the nine months ended  September 30, 1997.  The increase in selling  expenses
was  primarily   attributable   to  an  increase  in   advertising   expense  of
approximately $188,000,  related to the Company securing pages in several office
products providers' catalogues. In addition, the Company experienced an increase
of approximately $136,000 in the cost of shipping products to its customers, and
is addressing this issue by sourcing competitive bids from other carriers. These
increases were partially offset by a decrease of approximately $44,000 in travel
and entertainment expense.

     Research and Development.  Research and development  decreased by $115,000,
or 50.4%, from $228,000 to $113,000 for the nine months ended September 30, 1998
compared  to the nine  months  ended  September  30,  1997.  This  decrease  was
primarily attributable to the completion of the research and development related
to the  introduction  of the  Company's  new line of  telecommunication  headset
products.

     General and Administrative  Expenses.  General and administrative  expenses
increased $213,000,  or 15.7%, from $1,359,000 to $1,572,000 for the nine months
ended  September 30, 1998 compared to the nine months ended  September 30, 1997.
The increase in general and administrative expenses was due in part to increased
legal and accounting fees related to the Company's registration of securities on
Form SB-2 in connection with its Convertible Debenture and Equity Line-of-Credit
financing agreement which was put into place in May 1998.

     Total  Operating  Costs and Expenses.  Total  operating  costs and expenses
increased by $437,000,  or 12.8%,  from  $3,403,000 to  $3,840,000  for the nine
months ended  September 30, 1998 compared to the nine months ended September 30,
1997, for the reasons discussed above.

     Interest Expense.  Interest expense  increased  $805,000,  or 241.7%,  from
$333,000 to $1,138,000 for the nine months ended  September 30, 1998 compared to
the nine months ended September 30, 1997. This increase was primarily related to
the  recognition  of a  one-time,  non-cash  charge for the fair value of common
stock  warrants  and a  beneficial  conversion  premium,  totaling  $500,000 and
$137,000,  respectively,  both  associated  with the  issuance  of a  $1,500,000
Convertible Debenture in May, 1998.  Additionally,  normal non-cash interest was
recognized on the debenture,  as well as the  amortization  of the fair value of
other common stock warrants issued in connection with the debt.

     Interest Income. Interest income decreased $6,000, or 66.7%, from $9,000 to
$3,000 for the nine months ended  September 30, 1998 compared to the nine months
ended  September 30, 1997. This decrease was primarily the result of the Company
utilizing its  revolving  credit  facility,  under which "draws" are made by the
Company.  After a draw is made a  corresponding  payable  is  established,  when
collections of outstanding  accounts  receivable are received,  collections  are
swept,  daily, and re-applied against outstanding draws. As a result the Company
does not keep excess cash on hand to invest.

     Other Income.  Other income decreased  $607,000,  from $607,000 to $-0- for
the nine  months  ended  September  30, 1998  compared to the nine months  ended
September  30,  1997.  This  decrease  is  primarily  the result of the  Company
recognizing a gain on the sale of assets during the nine months ended  September
30, 1997 that did not recur in 1998.

     Net Income (Loss). The net income decreased by $1,053,000,  or 485.3%, from
$216,000 to a loss of  $836,000  for the nine months  ended  September  30, 1998
compared to the nine months ended September 30, 1997 due to a combination of the
factors described above.


Liquidity and Capital Resources

General

     The  Company's   principal   sources  of  liquidity  are  cash  flows  from
operations,  cash on hand and available  borrowings under the Company's existing
secured  revolving  credit  facilities.  At September 30, 1998,  the Company had
$169,000 of cash and $3,053,000  million of unused  borrowings  under its credit
facility.  It is expected that the Company's  principal  uses of cash will be to
provide  working  capital,  finance  capital  expenditures,  meet  debt  service
requirements  and  for  other  general  corporate  purposes.  Based  on  current
operations and anticipated  cost savings  through  operating  efficiencies,  the
Company  believes  that its  sources of  liquidity  will be adequate to meet its
anticipated  requirements for working capital,  capital expenditures,  scheduled
debt service requirements and other general corporate purposes.


<PAGE>


     On May 22, 1998,  the Company  closed a  transaction  that has provided net
capital  proceeds of  $1,335,000.  These funds have been raised  pursuant to the
sale by the Company of Convertible  Debentures in the face amount of $1,500,000.
The Convertible  Debentures are convertible  into common stock of the Company at
the lesser of:  (i)  seventy  five  percent of the  average of the three  lowest
closing  bid  prices of the  Common  Stock  during  the ten day  trading  period
immediately  preceding the  conversion  date or (ii) one hundred  percent of the
closing bid price on the trading day  immediately  preceding the closing date of
the agreement.  The transaction has been accomplished  pursuant to a Convertible
Debenture and Private Equity Line of Credit  Agreement (the "Credit  Agreement")
between the Company and a group of five investors which have not previously been
shareholders of the Company. In addition,  the Company can use a "put" mechanism
to  periodically  draw down up to  $10,000,000.  Under  the terms of the  Credit
Agreement,  a minimum of $1,000,000 must be drawn in increments of not less than
$50,000 in exchange for common stock of the Company  issued at 80 percent of the
average  of the three  lowest bid prices  during  the six day  valuation  period
consisting  of three  days  prior to the put and  ending  two days after the put
date. The put mechanism cannot be utilized 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 purchased
pursuant to the  convertible  debentures,  the Company must issue an  additional
$500,000 of Convertible Debentures (see Note 4 to the financial statements).

     On May 27,  1998,  the Company  obtained a new,  secured  revolving  credit
facility from a financing  institution to provide 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 accounts receivable and inventories. The Note
is due May 26, 2001.  Under the terms of the agreement,  the Company is required
to maintain financial covenants and ratios, including book net worth, net income
and debt service coverage.  At September 30, 1998, the Company was in default of
certain of these  covenants,  however,  the Company has  obtained a waiver.  The
Company and its lender are currently  negotiating  an amendment to the agreement
which will amend the terms of certain of the financial covenants and ratios.


     September 30, 1998 Compared to December 31, 1997

     As of  September  30,  1998,  the Company had liquid  assets (cash and cash
equivalents,  accounts receivable - trade and other) of $2,422,000,  an increase
of 5.1%, or $118,000, from December 31, 1997 when liquid assets were $2,304,000.
Cash  decreased  $169,000,  or 50.8%,  to  $164,000 at  September  30, 1998 from
$333,000 at December 31, 1997. This decrease in cash was primarily the result of
the Company  utilizing its revolving  credit  facility,  under which "draws" are
made by the Company to fund capital  expenditures,  purchase  inventory  and for
general  purpose  use.  After  a  draw  is  made  a  corresponding   payable  is
established,  when collections of outstanding  accounts  receivable are made the
monies collected are swept,  daily, and re-applied  against  outstanding  draws.
Accounts  receivable - trade  increased  $708,000,  or 45.7%,  to  $2,258,000 at
September  30, 1998 from  $1,550,000  at December  31,  1997.  This  increase is
primarily the result of increased sales during September 1998, offset in part by
improved collections.  Accounts receivable - other decreased $426,000 to $-0- at
September  30,  1998.  This  decrease  is  primarily  the result of the  Company
receiving payment for the sale of land held by the Company.

     Current  assets  increased  by  $2,389,000,  or  46.9%,  to  $7,481,000  at
September  30, 1998 from  $5,092,000  at December  31, 1997.  This  increase was
primarily the result of an increase in accounts  receivable - trade of $708,000,
discussed above, inventories of $2,268,000,  as a result of increasing inventory
related to the Company's new telephone  headset and flashlight  businesses,  the
increase in crayon  inventory as a result of the deferral of certain orders from
Dolgencorp,  Inc., and stockpiling for fourth quarter sales, offset in part by a
decrease in cash and accounts receivable as discussed above.

     Long-term assets increased $310,000, or 7.2%, to $4,627,000 at
September  30, 1998 from  $4,317,000  at December  31, 1997.  This  increase was
primarily the result of deferred loan costs related to the Company's Convertible
Debenture and Equity  Line-of-Credit  put into place during May 1998,  offset in
part  by  normal  recurring  amortization  of  deferred  loan  costs  and  other
intangibles.

     Current  liabilities  increased by $451,000,  or 11.2%,  to  $4,485,000  at
September  30, 1998 from  $4,034,000  at December  31, 1997.  This  increase was
primarily due to $1,190,000 of  borrowing's  made under the Company's  revolving
credit  facility,  offset in part by decreases in accrued salaries and benefits,
accrued advertising and the current portion of long-term debt.

     The  Company's  working  capital  increased by  $1,938,000,  or 183.2%,  to
$2,996,000 at September 30, 1998 from  $1,058,000 at December 31, 1997,  for the
reasons described above.

     The Company used cash of $2,439,000  from operating  activities  during the
nine months ended September 30, 1998,  primarily from increased inventory levels
relating  to  deferred  crayon  orders to  Dolgencorp,  Inc.  and the  Company's
telephone headset and flashlight businesses.
<PAGE>

     The Company used cash of $328,000 from investing activities during the nine
months ended September 30, 1998, primarily for capital expenditures  relating to
the Company's new accounting and material resource planning  integrated software
system implemented in early 1998.

     The Company provided  $2,598,000 of cash from financing  activities  during
the  nine  months  ended  September  30,  1998,  due in part to the  Convertible
Debenture  offering  in May 1998,  as well as  borrowings  under  the  Company's
revolving  line-of-credit,  less  payments  made on  long-term  debt  during the
period.

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


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 follows  seasonal  trends.  As a result the Company
experiences its highest revenues in the fourth quarter 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.

     Therefore,  the  operating  results  for any  three  month  period  are not
necessarily  indicative  of the results that may be achieved for any  subsequent
three month period or for a full year.

Year 2000 Compliance

     The Year 2000 issue is a result of computer  programs  being  written using
two digits rather than four to define the applicable  year. Any of the Company's
computer programs that have  date-sensitive  software may recognize a date using
"00" as the year  1900  rather  than the  year  2000.  This  could  result  in a
system/job  failure  or  miscalculations   causing  disruptions  of  operations,
including,  among other things, a temporary  inability to process  transactions,
send invoices, or engage in similar business transactions.

     The Company utilizes 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 designed with the Year
2000 issue in mind, and the Company believes it is year 2000 compliant; however,
the Company utilizes many different  software  programs to process and summarize
business transactions. The Company is continuing the evaluation of its operating
systems and determining the additional  remediation  efforts  required to ensure
its  computer  systems will  properly  utilize  dates beyond  December 31, 1999.
Preliminary  results of this assessment have revealed that  remediation  efforts
required will vary from system to system.  For example,  it appears some systems
will not require any additional  programming  efforts,  while others may require
some programming changes.



<PAGE>



     The Company has initiated formal communications with all of its significant
suppliers  and larger  customers to determine the extent to which the Company is
vulernable  to those third  parties'  failure to  remediate  their own Year 2000
issue. However, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be timely converted,  or that a failure to
convert  by another  company,  or a  conversion  that is  incompatible  with the
Company's systems,  would not have a material adverse effect on the Company. The
Company is also assessing the impact of Year 2000 on embedded systems  comprised
mainly of HVAC (heating, ventilation and air conditioning),  telephone and alarm
systems, and such assessment will be completed by the end of 1998.

     For those systems  identified as non-compliant,  the Company has begun and,
in certain cases,  completed  remediation efforts. The Company will utilize both
internal and external resources to reprogram,  or replace, the software for Year
2000  modifications.  The Company plans to complete the Year 2000 project before
March 31,  1999.  The total  estimated  cost of the Year 2000  project  is to be
between  $150,000 and $200,000 and is being funded through  operating cash flows
and its existing  $5,000,000  secured  credit  facility.  Of this project  cost,
approximately  $110,000  is  attributable  to the  purchase  of new  software or
equipment  which will be capitalized.  The remaining  $40,000 to $90,000 will be
expensed  as  incurred.  In a number of  instances,  the  Company  may decide to
install new software or upgrade versions of current software  programs which are
Year 2000  compliant.  In these  instances,  the Company may capitalize  certain
costs of the new systems in accordance with current accounting guidelines.

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

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


<PAGE>




                                   SIGNATURES

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




DYNATEC INTERNATIONAL, INC.



/s/Frederick W. Volcansek, Sr.               March 31, 1999
------------------------------               -------------- 
   Frederick W. Volcansek, Sr.                   Date
   Chairman & CEO



/s/Paul A. Boyer                             March 31, 1999
------------------------------               --------------
   Paul A. Boyer                                 Date
   Senior Vice President & CFO