<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 Ended:     September 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 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  3,756,903  shares of common  stock  outstanding  at November 5,
1999.

The aggregate market value of voting stock held by non-affiliates of the Company
at November 5, 1999 was $2,753,282.

Transitional small business disclosure format.   Yes       No  X



<PAGE>




                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES


                                TABLE OF CONTENTS



PART I.   FINANCIAL INFORMATION


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

<S>                                                                                                      <C>
         Condensed Consolidated Balance Sheets as of  September 30, 1999 and December 31, 1998............3

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

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

         Condensed Consolidated Statements of Cash Flows for the nine months ended
         September 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...........16



PART II.   OTHER INFORMATION

Item 1.      Legal Proceedings...........................................................................24

Item 2(c).   Recent Sales of Unregistered Securities.....................................................25

Item 6.      Exhibits and Reports on Form 8-K............................................................25
</TABLE>
















                                       2

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                    September 30,          December 31,
                                                                                        1999                   1998
                                                                                    (Unaudited)
CURRENT ASSETS:
<S>                                                                                <C>                     <C>
    Cash and cash equivalents                                                      $     141,680           $       2,268
    Trade accounts receivable, net of allowance for doubtful accounts of $30,846
       and $30,190, respectively                                                       2,228,560               2,229,157
    Accounts receivable - other                                                              970                     110
    Inventories (see Note 2)                                                           3,640,877               4,857,241
    Prepaid expenses and other                                                           501,651                 316,347
                                                                                   -------------           -------------
                Total current assets                                                   6,513,738               7,405,123
                                                                                   -------------           -------------

LAND, BUILDING AND EQUIPMENT, at cost:
    Land                                                                                 365,860                 365,860
    Building and improvements                                                          2,226,988               2,214,144
    Furniture, fixtures and equipment                                                  3,550,823               3,554,045
                                                                                   -------------           -------------
                                                                                       6,143,671               6,134,049

    Less accumulated depreciation and amortization                                     2,486,456               2,336,427
                                                                                   -------------           -------------

                Net land, building and  equipment                                      3,657,215               3,797,622
                                                                                   -------------           -------------
TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $431,651
    and $382,170, respectively (see Note 3)                                              214,928                 205,102
                                                                                   -------------           -------------
DEFERRED LOAN COSTS, net of accumulated amortization of $34,065 and
    $14,903, respectively                                                                 42,581                  61,743
                                                                                   -------------           -------------

OTHER ASSETS                                                                              71,024                  69,337
                                                                                   -------------           -------------

                                                                                   $  10,499,486           $  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>
                                                                                    September 30,           December 31,
                                                                                        1999                   1998
                                                                                    (Unaudited)
CURRENT LIABILITIES:
<S>                                                                                <C>                     <C>
    Short-term note payable                                                        $   2,503,277           $   1,389,223
    Convertible debentures                                                             1,699,846               1,667,079
    Current portion of long-term debt                                                    153,554                 246,855
    Current portion of capital lease obligations                                          32,829                  17,881
    Accounts payable                                                                   1,383,798               1,518,316
    Accounts payable - other                                                                   -                   9,000
    Accounts payable-related party                                                             -                  98,403
    Accrued expenses                                                                     454,699                 637,051
    Accrued advertising                                                                  152,478                 320,000
    Accrued royalties payable                                                             64,806                  70,246
                                                                                   -------------           -------------

              Total current liabilities                                                6,445,287               5,974,054

LONG-TERM DEBT, net of current portion                                                 1,850,311               2,006,518

DEPOSIT FOR STOCK ISSUANCE                                                                     -               1,000,000

CAPITAL LEASE OBLIGATIONS, net of current portion                                         63,330                  28,654
                                                                                   -------------           -------------

              Total liabilities                                                        8,358,928               9,009,226
                                                                                   -------------           -------------

STOCKHOLDERS' EQUITY (see Note 4):
    Common stock, $.01 par value; 100,000,000 shares authorized and 3,574,373
       and 2,891,627 shares outstanding, respectively                                     35,744                  28,916
    Treasury stock, at cost, 91,515 shares                                              (915,150)               (915,150)
    Additional paid-in capital                                                         8,253,543               7,041,690
    Accumulated deficit                                                               (5,233,579)             (3,625,755)
                                                                                   -------------           -------------

              Total stockholders' equity                                               2,140,558               2,529,701
                                                                                   -------------           -------------

                                                                                   $  10,499,486           $  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
                                                                                September 30, 1999       September 30, 1998
                                                                                    (Unaudited)             (Unaudited)

<S>                                                                                <C>                     <C>
   PRODUCT SALES                                                                   $   3,540,463           $   4,382,334
   COST OF SALES                                                                       2,081,965               2,788,193
                                                                                   -------------           -------------

          Gross Margin                                                                 1,458,498               1,594,141
                                                                                   -------------           -------------

   OPERATING COSTS AND EXPENSES:
       Selling expenses                                                                1,109,463                 903,386
       Research and development                                                           36,818                  12,045
       General and administrative                                                        834,353                 693,086
                                                                                   -------------           -------------

          Total operating costs and expenses                                           1,980,634               1,608,517
                                                                                   -------------           -------------

                     Loss  from operations                                              (522,136)                (14,376)
                                                                                   -------------           -------------

   OTHER EXPENSE:
       Interest expense (see Note 5)                                                    (155,474)               (243,989)
       Other income                                                                        1,525                       -
       Gain (loss) on sale of assets                                                       1,580                  (1,284)
                                                                                   -------------           -------------

          Total other expense, net                                                      (152,369)               (245,273)
                                                                                   -------------           -------------

             Loss before income tax provision                                           (674,505)               (259,649)

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

             Net loss                                                              $    (674,505)          $    (259,649)
                                                                                   =============           =============

   BASIC NET LOSS PER SHARE                                                        $        (.20)          $        (.09)
                                                                                   =============           =============

   DILUTED NET LOSS PER SHARE (see Note 2)                                         $        (.20)          $        (.09)
                                                                                   =============           =============

   WEIGHTED AVERAGE SHARES - BASIC AND DILUTED                                         3,303,371               2,820,802
                                                                                   =============           =============
</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>
                                                                                 Nine months Ended       Nine Months Ended
                                                                                September 30, 1999      September 30, 1998
                                                                                    (Unaudited)             (Unaudited)

<S>                                                                                <C>                     <C>
   PRODUCT SALES                                                                   $  10,874,236           $  12,166,092
   COST OF SALES                                                                       6,459,535               7,424,393
                                                                                   -------------           -------------

          Gross Margin                                                                 4,414,701               4,741,699
                                                                                   -------------           -------------

   OPERATING COSTS AND EXPENSES:
       Selling expenses                                                                2,773,528               2,586,079
       Research and development                                                          100,642                  47,528
       General and administrative                                                      2,449,495               1,786,857
                                                                                   -------------           -------------

          Total operating costs and expenses                                           5,323,665               4,420,464
                                                                                   -------------           -------------

             Income (loss) from operations                                              (908,964)                321,235
                                                                                   -------------           -------------

   OTHER INCOME (EXPENSE), net:
       Interest expense (see Note 5)                                                    (701,321)             (1,138,377)
       Interest income                                                                         -                   3,340
       Other income                                                                        4,581                       -
       Gain (loss) on sale of assets                                                         881                 (22,615)
                                                                                   -------------           -------------

          Total other expense, net                                                      (695,859)             (1,157,652)
                                                                                   -------------           -------------

             Loss before income tax provision                                         (1,604,823)               (836,417)

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

             Net loss                                                              $  (1,607,823)          $    (836,417)
                                                                                   =============           =============

   BASIC NET LOSS PER SHARE                                                        $        (.49)          $        (.30)
                                                                                   =============           =============

   DILUTED NET LOSS PER SHARE (see Note 2)                                         $        (.49)          $        (.30)
                                                                                   =============           =============

   WEIGHTED AVERAGE SHARES - BASIC AND DILUTED                                         3,303,371               2,820,802
                                                                                   =============           =============
</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>
                                                                                 Nine Months Ended        Nine Months Ended
                                                                                 September 30, 1999       September 30, 1998
                                                                                     (Unaudited)             (Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                <C>                     <C>
   Net loss                                                                        $  (1,607,823)          $    (836,417)

   Adjustments to reconcile net loss to net cash used in operating activities:
         Depreciation and amortization                                                   398,981                 359,723
         Amortization of deferred loan costs                                              19,161                  53,071
         Interest expense on convertible debentures                                      308,932                 685,611
         (Gain) loss on sale of assets                                                      (881)                 22,616
         Changes in assets and liabilities:
               Trade accounts receivable                                                     597                (708,311)
               Accounts receivable - other                                                  (860)                426,131
               Inventories                                                             1,216,364              (2,267,986)
               Prepaid expenses and other                                               (186,991)                 30,534
               Trade accounts payable                                                   (134,518)                (82,998)
               Accounts payable - other                                                 (107,403)                (21,375)
               Accrued expenses                                                         (257,837)                 19,555
               Accrued advertising                                                      (167,522)               (170,194)
               Accrued royalties                                                          (5,440)                 51,052
               Income tax payable                                                         18,000                       -
                                                                                   -------------           -------------
                  Net cash used in operating activities                                 (507,240)             (2,438,988)
                                                                                   -------------           -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from the sale of assets                                                        26,124                  48,006
  Purchase of property and equipment                                                    (224,179)               (376,195)
                                                                                   -------------           -------------
                  Net cash used in investing activities                                 (198,055)               (328,189)
                                                                                   -------------           -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings on line of credit                                                     1,114,054                 616,261
  Increase in debt issuance costs                                                              -                (275,640)
  Principal payments on long-term debt                                                  (249,508)               (749,944)
  Payments on capital lease obligations                                                  (19,839)                (12,476)
  Proceeds from capital addition                                                               -                 580,000
  Proceeds from convertible debenture offering                                                 -               1,500,000
  Proceeds from deposit for stock issuance                                                     -                 940,000
                                                                                   -------------           -------------
                  Net cash provided by financing activities                              844,707               2,598,201
                                                                                   -------------           -------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     139,412                (168,976)

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

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                                     $     141,680           $     163,918
                                                                                   =============           =============
</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>
                                                                                 Nine Months Ended        Nine Months Ended
                                                                                September 30, 1999       September 30, 1998
                                                                                    (Unaudited)              (Unaudited)

<S>                                                                                <C>                     <C>
    Cash paid for interest................................................         $     414,612           $     422,140
                                                                                   =============           =============

    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.......................................................         $     218,680           $           -
                                                                                   =============           =============

    Issuance of 500,000 shares of restricted stock........................         $   1,000,000           $           -
                                                                                   =============           =============
</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
historically 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
September  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 nine months ended  September 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 September 30, 1999 and December 31, 1998, respectively,  are summarized as
follows:

<TABLE>
<CAPTION>
                                              September 30,         December 31,
                                                   1999                 1998
                                             -----------------    -----------------
<S>                                          <C>                  <C>
Raw materials............................    $       932,959      $       902,703
Work-in-Process..........................            153,961              309,815
Finished Goods...........................          2,553,957            3,644,723
                                             =================    =================
                                             $     3,640,877      $     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 nine-month periods ended September 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 nine months ended
September  30,  1999 and 1998,  there were  warrants  and  options  to  purchase
1,556,000 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) TRADEMARKS AND OTHER INTANGIBLES

         On July  15,  1999 the  Company  purchased  the  assets  of  Transworld
Products,  Inc.  ("Transworld)  at a purchase price of $85,000.  Transworld is a
manufacturer  of  telephone  shoulder  rests  and was a main  competitor  of the
Company in that product  line.In  exchange for the purchase price  payment,  the
Company  acquired  certain  assets  of  Transworld,   including   machinery  and
equipment, inventory, and intangible assets that include a non-compete agreement
and  trademarks.  Additionally,  $34,000 of the purchase  price was allocated to
goodwill, which is being amortized over a 24-month period.

(4)  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.


(5)  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



                                       10
<PAGE>



                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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

principal amount of $1,500,000 due May 22, 2001. The Convertible  Debentures are
convertible  into shares of the Company's common stock at the lesser of: (i) 75%
of the average of the three lowest  closing bid prices of the  Company's  common
stock during the 22-trading-day period immediately preceding the conversion date
or (ii)  $6.50,  which  was 100% of the  closing  bid price on the  trading  day
immediately preceding the closing date of the agreement.

     As of November 5, 1999 the investors have  converted the following  amounts
of principal and interest accrued thereon in to the following  amounts of common
stock :

<TABLE>
<CAPTION>
  Date of             Conversion           Principal            Number of                              Number of
 Conversion           Price/Share            Amount              Shares         Interest Amount         Shares
------------          -----------            ------            ----------       ---------------       ------------
<S>                     <C>                 <C>                  <C>                <C>                 <C>
  6/10/99               $1.3438             $132,500             98,604             $11,180              8,320
  7/10/99               $0.9891             $ 65,934             66,667             $ 9,066              9,157
  10/8/99               $0.7500             $ 53,000             70,666             $ 8,904             11,872
</TABLE>


Accordingly,  as of September 30, 1999,  there was a total  principal  amount of
outstanding  Convertible  Debentures  of  $1,301,566.  Assuming  a  hypothetical
conversion  of  this  entire  remaining  principal  amount  of  the  Convertible
Debentures  outstanding  as of  September  30, 1999,  and all  interest  accrued
thereon at the rate of 12% per annum as of September 30, 1999,  the  Convertible
Debentures  would be  convertible  into  approximately  1,960,000  shares of the
Company's common stock.  The Convertible  Debentures are callable by the holders
thereof.

         In addition to the sale of the Convertible Debentures, under the Credit
Agreement,  the Company  also  obtained  the right to use a "put"  mechanism  to
periodically  draw down up to  $10,000,000  of  additional  equity  capital (the
"Equity  Line").  Under the  terms of the  Credit  Agreement,  the  Company  was
obligated  to draw down a minimum  of  $1,000,000  of the Equity  Line,  and all
amounts  were to have been  drawn in  increments  of not less than  $50,000.  In
return for the payment of additional  capital under the Equity Line, the Company
would have been  required  to issue  shares of its  common  stock at a per share
purchase  price  equal to 80% of the  average of the three  lowest  closing  bid
prices of the common stock during a six day valuation  period  commencing  three
days  before the draw date and  ending two days after the draw date.  The Equity
Line could not have been utilized,  and the Company would have had no obligation
to exercise any portion of the put mechanism,  until after the effective date of
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
nine-month  period ended September 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 was abated from June 24, 1999 through  September 23, 1999,
provided that the  registration  statement  was declared  effective on or before
October 31, 1999. Additional liquidated damages in the amount of $45,000 were to
have accrued for the period  between  September 24, 1999 and October 23, 1999 if
the Registration Statement is not declared effective before


                                       11
<PAGE>

                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(5)      CONVERTIBLE DEBENTURES/EQUITY LINE-OF-CREDIT-(CONTINUED)
October 31, 1999. If the registration statement was not declared effective on or
before October 31, 1999, the Modification  Agreement's  provisions providing for
the  payment of  liquidated  damages in stock and the  abatement  of  liquidated
damages from June 23, 1999 to September 23, 1999 and the provisions allowing the
Company to pay  liquidateddamages  in common stock rather than cash were subject
to rescission at the option of the Investors.  Except to the extent specifically
modified by the Modification  Agreement,  the terms and conditions of the Credit
Agreement and the documents and instruments incorporated in the Credit Agreement
shall continue in force.

     Although the Company  filed an amendment to the  registration  statement on
July 2, 1999,  the  registration  statement was not effective by the October 31,
1999 deadline set forth in the  Modification  Agreement.  Moreover,  because the
Company's  pending   preliminary  proxy  statement  is  being  reviewed  by  the
Securities  and  Exchange  Commission  in tandem with the  pending  registration
statement,  the Company was not able to hold its annual meeting of  shareholders
by the October 31, 1999  deadline.  On November  12,  1999,  the Company and the
Investors  executed an amendment to the Modification  Agreement that substituted
February  15,  2000  for  the  October  31,  1999  deadline  originally  in  the
Modification Agreement.  Consequently, the accrual of liquidated damages will be
deferred  from  June  24,  1999  until  February  15,  2000,  provided  that the
registration  statement  becomes  effective  and  shareholder  approval  of  the
transaction is obtained on or before that date. Liquidated damages from February
24, 1999  through  June 23, 1999 have been accrued and continue to be payable by
the Company as specified in the Modification  Agreement.  The November 12, 1999,
agreement  also  amended  the  Convertible  Debentures  such  that,  even if the
Convertible  Debentures  are still  outstanding  at their maturity date, May 22,
2001,  the  Convertible  Debentures  will not be  autormatically  converted into
common stock unless the holders so elect.

         Also 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>

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

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

(6)      BUSINESS SEGMENT 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.



                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED                    NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                        SEPTEMBER 30,
                                                         --------------------------------     ---------------------------------
REVENUES:                                                     1999              1998              1999               1998
-----------------------------------------------------    ---------------    -------------     --------------    ---------------
<S>                                                      <C>                <C>               <C>               <C>
Telecommunication Headsets and Amplifiers and
     Telephone Accessories.......................        $    1,700,000     $  1,855,000      $   5,472,000     $    5,977,000
Home Storage and Organization....................             1,339,000        1,302,000          3,510,000          3,498,000
Flashlights......................................               501,000          202,000            900,000            837,000
Miscellaneous/Mass Market........................                     -        1,023,000            992,000          1,854,000
                                                         ---------------    -------------     --------------    ---------------

       Total.....................................        $    3,540,000     $  4,382,000      $  10,874,000     $   12,166,000
                                                         ===============    =============     ==============    ===============
</TABLE>


<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                        SEPTEMBER 30,
                                                         ---------------------------------    --------------------------------
OPERATING INCOME (LOSS):                                      1999              1998              1999              1998
-----------------------------------------------------    ---------------    --------------    --------------    --------------
<S>                                                      <C>                <C>               <C>               <C>
Telecommunication Headsets and Amplifiers and
     Telephone Accessories.......................        $      (38,000)    $    180,000      $     (19,000)          $558,000
Home Storage and Organization....................              (243,000)         (33,000)          (469,000)           (54,000)
Flashlights......................................              (241,000)           4,000           (427,000)           (72,000)
Miscellaneous/Mass Market........................                     -         (165,000)             6,000           (111,000)
                                                         --------------    -------------      -------------     --------------

       Total.....................................        $     (522,000)    $    (14,000)     $    (909,000)    $      321,000
                                                         ==============     ============      =============     ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                        SEPTEMBER 30,
                                                         ---------------------------------    --------------------------------
DEPRECIATION AND AMORTIZATION (1):                            1999              1998              1999              1998
-----------------------------------------------------    ---------------    --------------    --------------    --------------
<S>                                                      <C>                <C>               <C>               <C>
Telecommunication Headsets and Amplifiers and
     Telephone Accessories.......................        $       77,000     $     69,000      $     220,000     $      205,000
Home Storage and Organization....................                60,000           49,000            141,000            123,000
Flashlights......................................                23,000            8,000             38,000             32,000
                                                         --------------     ------------      -------------     --------------

       Total.....................................        $      160,000     $    126,000      $     399,000     $      360,000
                                                         ==============     ============      =============     ==============
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                          SEPTEMBER 30,     DECEMBER 31,
ASSETS:                                                       1999              1998
----------------------------------------------------     --------------     ------------
<S>                                                      <C>                <C>
Telecommunication Headsets and Amplifiers and
   Telephone Accessories.........................        $    4,980,000     $  4,794,000
Home Storage and Organization....................             3,055,000        3,200,000
Flashlights......................................             1,707,000        1,729,000
Miscellaneous/Mass Market........................                     -        1,366,000
                                                         --------------     ------------
       Total assets for reportable segments......             9,742,000       11,089,000

Other Assets.....................................               715,000          388,000
Deferred Loan Costs And Other Assets Not
     Allocated To Segments.......................                42,000           62,000
                                                         ==============     ============
       Total.....................................        $   10,499,000     $ 11,539,000
                                                         ==============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                        SEPTEMBER 30,
                                                         ---------------------------------    --------------------------------
CAPITAL EXPENDITURES:                                         1999              1998              1999              1998
-----------------------------------------------------    ---------------    --------------    --------------    --------------
<S>                                                      <C>                <C>               <C>               <C>
Telecommunication Headsets and Amplifiers and
     Telephone Accessories.......................        $       56,000     $     11,000      $     120,000     $     221,000
Home Storage and Organization....................                44,000            8,000             79,000           120,000
Flashlights......................................                17,000            1,000             25,000            35,000
Miscellaneous/Mass Market........................                     -                -                  -                 -
                                                         --------------     ------------      -------------     --------------

       Total.....................................        $      117,000     $     20,000      $     224,000     $      376,000
                                                         ==============     ============      =============     ==============
</TABLE>



                                       13
<PAGE>


                  DYNATEC INTERNATIONAL, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(6)      BUSINESS SEGMENT INFORMATION-(CONTINUED)

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

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                     NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                          SEPTEMBER 30,
                                                         ---------------------------------     ----------------------------------
REVENUES:                                                     1999              1998               1999               1998
-----------------------------------------------------    ---------------    --------------     --------------    ----------------
<S>                                                      <C>                <C>               <C>               <C>
United States....................................        $    3,475,000     $  4,370,000      $  10,734,000     $   12,084,000
Other (1)........................................                65,000           12,000            140,000             82,000
                                                         --------------     ------------      -------------     --------------

       Total.....................................        $    3,540,000     $  4,382,000      $  10,874,000     $   12,166,000
                                                         ==============     ============      =============     ==============
</TABLE>

(1)      Includes Canada, Europe and other miscellaneous.

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                    NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                         SEPTEMBER 30,
                                                         ---------------------------------     --------------------------------
OPERATING INCOME (LOSS):                                      1999              1998               1999              1998
-----------------------------------------------------    ---------------    --------------     --------------    --------------
<S>                                                      <C>                <C>               <C>               <C>
United States....................................              (522,000)         (14,000)          (909,000)           321,000
                                                         ==============     ============      =============     ==============
</TABLE>

<TABLE>
<CAPTION>
                                                          SEPTEMBER 30,     DECEMBER 31,
ASSETS:                                                        1999             1998
-----------------------------------------------------    --------------     ------------
<S>                                                      <C>                <C>
United States....................................        $   10,108,000     $ 11,089,000
Asia.............................................               391,000          450,000
                                                         --------------     ------------

       Total.....................................        $   10,499,000     $ 11,539,000
                                                         ==============     ============
</TABLE>


(7)      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 an  exercise  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.  During the nine months
ended September 30, 1999, the  compensation  committee of the Company's Board of
Directors  has granted  stock options under the 1999 Plan to purchase a total of
634,500 shares of common stock to various executives, employees and directors of
the Company. Such options were as non-qualified options having terms of 10 years
from the date of grant. All such options have an exercise price of between $1.00
and $1.750 per share,  with a weighted  average  price of $1.057 per share.  The
exercise  price for the options  were 100% of the fair market value on the grant
date.

(8)        SUBSEQUENT EVENTS

          On  November 4, 1999,  the Company  sold  its  corporate  headquarters
facility for $2,900,000.  Simultaneously with the sale, the Company entered into
a 20-year leaseback agreement with the purchasing party. The net proceeds to the
Company were  $831,000,  after paying  long-term  debt secured by the  building,
broker and legal fees, and other ancillary  charges.  The proceeds from the sale
will be used for working capital  purposes.  As an additional  inducement to the
purchaser,  the Company issued a total of 33,948 shares of its restricted common
stock to the purchaser having a market value of $35,000 based on the fair market
value of the restricted stock on the date of issue. The party that purchased the
building is not affiliated with or related to the Company or any of its officers
or directors,  and the terms of the  transaction  were the result of arms-length
negotiations.

                                       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  nine-month
periods  ended  September  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 Nine Months Ended
                                        ----------------------------------------     ---------------------------------------------
                                                                          % OF                                         % OF
                                                                           CHG                                          CHG
                                                                           FROM                                         FROM
                                          SEPTEMBER       SEPTEMBER      1998 TO      SEPTEMBER       SEPTEMBER       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................... $   3,540,000     $4,382,000      (19.2)%    $10,874,000    $ 12,166,000        (10.6)%
       Cost of sales...................     2,082,000      2,788,000      (25.3)       6,460,000       7,424,000        (13.0)
                                        -------------     ----------                 -----------    ------------
               Gross margin............     1,458,000      1,594,000       (8.5)       4,414,000       4,742,000         (6.9)
                                        -------------     ----------                 -----------    ------------


    Operating Costs and Expenses:

       Selling expenses................     1,110,000        903,000       22.9        2,774,000       2,586,000          7.3
       Research and development........        37,000         12,000      208.3          101,000          48,000        110.4
       General and administrative......       834,000        694,000       20.2        2,451,000       1,786,000         37.2
                                        -------------     ----------                 -----------    ------------
             Total operating costs and
             Expenses                       1,981,000      1,609,000       23.1        5,326,000       4,420,000         20.5
                                        -------------     ----------                 -----------    ------------


    Other Income (Expense), net:

       Interest expense................      (155,000)      (244,000)     (36.5)        (701,000)     (1,138,000)       (38.4)
                                        -------------     ----------                 -----------    ------------
       Interest income.................             -              -          -                -           3,000            -
                                        -------------     ----------                 -----------    ------------
       Other (expense).................             -         (1,000)         -                -        (23,000)            -
                                        -------------     ----------                 -----------    ------------
       Other income....................         3,000              -          -            5,000               -            -
                                        -------------     ----------                 -----------    ------------
       Net income (loss)............... $    (675,000)    $ (260,000)    (159.6)%    $(1,608,000)   $   (836,000)      ( 92.3)%
                                        =============     ==========                 ===========    ============



Unaudited Supplemental Information:

Revenue by product line type:

     Telecommunication headsets and
             amplifiers and telephone
             accessories                $   1,700,000     $1,855,000       (8.4)%    $ 5,472,000    $  5,977,000         (8.4)%
      Home storage and organization         1,339,000      1,302,000        2.8        3,510,000       3,498,000          0.3
      Miscellaneous/Mass market                     -      1,023,000           -         992,000       1,854,000        (46.5)
      Flashlights                             501,000        202,000      148.0          900,000         837,000          7.5
                                        -------------     ----------                 -----------    ------------
           Total product sales          $   3,540,000     $4,382,000      (19.2)%    $10,874,000    $ 12,166,000        (10.6)%
                                        =============     ==========                 ===========    ============
</TABLE>


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


Revenues

          Total Product Sales.  Total product sales decreased  by  $842,000,  or
19.2%,  from  $4,382,000 to $3,540,000 for the three months ended  September 30,
1999 compared to the three months ended September 30, 1998.  Discussion of sales
in the various product lines follows.

          Telecommunication Headsets and Amplifiers and Telephone Accessories.
Sales of  telecommunication  headsets and amplifiers  and telephone  accessories
decreased $155,000,  or 8.4%, from $1,855,000 to $1,700,000 for the three months
ended  September 30, 1999 compared to the three months ended September 30, 1998.
This  decrease was  primarily  attributable  to a $156,000  decrease in sales of
telephone  shoulder rests as well as a decrease in sales of $25,000 in telephone
accessories.  This  decrease  was  partially  offset by an  increase in sales of
telephone  headsets and  amplifiers  of $24,000.  Overall  gross margins in this
category  increased to 55.1% for the three months ended  September 30, 1999 from
54.8% for the three months ended June 30, 1999, as a result of the sales mix and
more efficient production processes.

          Home Storage and Organization. Home storage and organization revenues
increased  $37,000,  or 2.8%, from $1,302,000 to $1,339,000 for the three months
ended  September 30, 1999 compared to the three months ended September 30, 1998.
The  increase  is  primarily  attributable  to an  increase  of  $47,000  in the
"Expand-A-Shelf"  product  line,  offset in part by a  decrease  of  $10,000  in
several   of  the   Company's   other   organizational   products,   namely  the
"Expand-A-Drawer product line, shoe organizers and ironing boards. Overall gross


                                       15
<PAGE>

margins for  products  in this  category  decreased  from 36.4% to 32.3% for the
three months ended June 30, 1999.

          Miscellaneous and Mass Market. Miscellaneous and mass market revenues
decreased  $1,023,000,  from  $1,023,000  to -0-  for  the  three  months  ended
September 30, 1999 compared to the three months ended  September 30, 1998.  This
decrease  was 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.  Management does not presently anticipate future significant sales in
this product line.

          Flashlights. Flashlight revenues increased $299,000, or 148.0%, from
$202,000 to $501,000 for the three months ended  September  30, 1999 compared to
the three months ended  September  30, 1998.  This  increase was  primarily  the
result of a successful  increase in the Company's  selling and marketing efforts
in this  product  line.  Overall  gross  margins for  products in this  category
decreased  from 30.2% to 17.6% for the three months  ended June 30,  1999,  as a
result of various  changes made to certain  flashlight  products to increase the
quality of these  products  and  increased  air freight  costs  necessitated  by
production  difficulties resulting from an earthquake in Taiwan during the third
quarter.  Management  is  addressing  this  decrease  by working  with its Asian
supplier  to   effectively   source  various   components   from  more  reliable
sub-assembly  vendors  and  to  address  the  difficulties  encountered  by  the
Company's Asian suppliers as a result of the earthquake.


Operating Costs and Expenses

          Selling Expenses. Selling expenses increased $207,000, or 22.9%, from
$903,000 to $1,110,000 for the three months ended September 30, 1999 compared to
the three months ended  September  30, 1998.  This increase is due in part to an
increase in advertising expense as the result of the Company securing additional
pages in certain office product  catalogues,  trade show expenditures due to the
Company participating in more regional trade shows , the hiring of two marketing
consultants  to assist the company in it's  campaign to upgrade its packaging of
products , and an increase in freight costs.  The increase was offset in part by
a  decrease  in  royalty  and   commission   payments  due  to  lower  sales  on
commissionable and royalty based products.

          Research and Development. Research and development costs increased by
$25,000, or 208.3%, from $12,000 to $37,000 for the three months ended September
30, 1999 compared to the three months ended  September  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  $140,000,  or 20.2%, from $694,000 to $834,000 for the three
months ended September 30, 1999 compared to the three months ended September 30,
1998.  The  increase in general and  administrative  expenses  was the result of
approximately  $34,000 in insurance  premiums paid for the company's  health and
dental insurance, $38,000 in employee recruitment and relocation, and $21,000 in
consulting  fees.  Additionally,  the Company incurred $49,000 in travel related
expenses for increased  international travel associated with strengthening Asian
supplier relationships.

          Total Operating Costs and Expenses. Total operating costs and expenses
increased by $372,000,  or 23.1%,  from  $1,609,000 to $1,981,000  for the three
months ended September 30, 1999 compared to the three months ended September 30,
1998, for the reasons discussed above.

          Interest Expense. Interest expense decreased $89,000, or 36.5%, from
$244,000 to $155,000 for the three months ended  September  30, 1999 compared to
the three months ended  September 30, 1998. This decrease was the result of debt
issuance  costs in  connection  with the value of the  warrants  and  beneficial
conversion  premium  allocated  to the debt  that were  recognized  in the three
months ended  September 30, 1998,  and not  applicable in the three months ended
September 30, 1999.

          Net Loss. The net loss increased by $415,000, or 159.6%, from $260,000
to $675,000 for the three months ended September  30,1999  compared to the three
months ended  September 30, 1998 due to a combination  of the factors  described
above.


                                       16
<PAGE>



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

Revenues

          Total Product Sales.  Total product sales  decreased by  $1,292,000,
or 10.6% from $12,166,000 to $10,874,000 for the nine months ended September 30,
1999 compared to the nine months ended  September 30, 1998.  Discussion of sales
in the various product lines follows.

          Telecommunication Headsets and Amplifiers and Telephone Accessories.
Sales of  telecommunication  headsets and amplifiers  and telephone  accessories
decreased  $505,000,  or 8.4%, from $5,977,000 to $5,472,000 for the nine months
ended  September 30, 1999 compared to the nine months ended  September 30, 1998.
Of this  decrease,  $320,000  is  attributable  to the loss of a  private  label
customer  for the  Company's  "Twisstop"  product.  Additionally,  sales  of the
Company's  shoulder rest products  decreased  approximately  $200,000.  Sales of
telephone  amplifiers and headsets  decreased by $237,000.  These decreases were
offset in part by  increases  in sales of the Cord  Manager  and other  Twisstop
sales of $254,000.  Overall gross margins for telephone accessories increased to
55.4% from 47.0% for the nine months ended  September  30, 1999  compared to the
nine months  ended  September  30,  1998,  as a result of the sales mix and more
efficient production processes.

          Home Storage and Organization. Home storage and organization revenues
increased  $12,000,  or 0.3%,  from $3,498,000 to $3,510,000 for the nine months
ended  September 30, 1999 compared to the nine months ended  September 30, 1998.
The  increase  is  primarily  attributable  to an  increase  of  $81,000  in the
"Expand-A-Drawer"   product   line   and  an   increase   of   $40,000   in  the
"Expand-A-Shelf"  product  line,  offset in part by a decrease  of  $104,000  in
several of the Company's other  miscellaneous  organizational  products,  namely
shoe organizers, ironing boards and wire baskets.

          Miscellaneous and Mass Market. Miscellaneous and mass market revenues
decreased  $862,000,  or 46.5%,  from $1,854,000 to $992,000 for the nine months
ended  September 30, 1999 compared to the nine months ended  September 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 September  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 nine months ended  September 30, 1999 as a
result of the "pass-through"  effect.  Management does not presently  anticipate
future significant sales in this product line.

          Flashlights. Flashlight revenues increased $63,000, or 7.5%, from
$837,000 to $900,000 for the nine months ended  September  30, 1999  compared to
the nine months ended September 30, 1998. This increase was primarily the result
of a successful  increase in the Company's selling and marketing efforts in this
product line. Overall gross margins for products in this category decreased from
36.5% to 19.9% for the nine months  ended  September  30,  1999,  as a result of
various  changes  made to certain of its  flashlight  products to  increase  the
quality of these  products  and  increased  air freight  costs  necessitated  by
production  difficulties resulting from an earthquake in Taiwan during the third
quarter.  Management  is  addressing  this  decrease  by working  with its Asian
supplier  to   effectively   source  various   components   from  more  reliable
sub-assembly  vendors  and  to  address  the  difficulties  encountered  by  the
Company's Asian suppliers as a result of the earthquake.


Operating Costs and Expenses

          Selling Expenses. Selling expenses increased $188,000, or 7.3%, from
$2,586,000 to $2,774,000  for the nine months ended  September 30, 1999 compared
to the nine months ended  September 30, 1998. This increase is due in part to an
increase in advertising expense as the result of the Company securing additional
pages in certain office product  catalogues,  trade show expenditures due to the
Company participating in more regional trade shows , the hiring of two marketing
consultants  to assist the company in it's campaign to upgrade it's packaging of
products , and an increase in freight costs. This increase was offset in part by
a  decrease  in  royalty  and   commission   payments  due  to  lower  sales  on
commissionable and royalty based products.

          Research and Development. Research and development costs increased by
$53,000, or 110.4%, from $48,000 to $101,000 for the nine months ended September
30, 1999 compared to the nine months ended September 30, 1998. This increase was
attributable  to the  addition of a full time Vice  President  of  Research  and
Development.

          General and Administrative Expenses. General and administrative
expenses  increased  $665,000,  or 37.2%,  from $1,786,000 to $2,451,000 for the
nine months ended September 30, 1999 compared to the nine months ended September


                                       17
<PAGE>

30, 1998. The increase in general and administrative  expenses was primarily the
result of payment  in 1999 of  approximately  $120,000  in  non-recurring  legal
expense  incurred  as a result of the  Company's  internal  investigation  which
commenced  in 1998 and  concluded  on  January  14,  1999 as well as  $85,000 in
additional legal expense related to various general corporate  matters,  as well
as payment of 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 $93,000 resulting from increased
international travel associated with strengthening Asian supplier relationships.
Additional  increases were $66,000 in insurance  premiums paid for the company's
health  and  dental  insurance  program,  $58,000 in  employee  recruitment  and
relocation, and $31,000 in consulting fees.

          Total Operating Costs and Expenses. Total operating costs and expenses
increased by $906,000,  or 20.5%,  from  $4,420,000 to  $5,326,000  for the nine
months ended  September 30, 1999 compared to the nine months ended September 30,
1998, for the reasons discussed above.

          Interest  Expense. Interest expense decreased $437,000, or 38.4%, from
$1,138,000 to $701,000 for the nine months ended  September 30, 1999 compared to
the nine months ended September 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  $137,000  and
$500,000,  respectively,  both  associated  with the issuance of  $1,500,000  of
Convertible  Debentures (the  "Convertible  Debentures") in May 1998. During the
nine months ended September 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 nine months ended  September  30, 1999 compared to the nine months ended
September  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 $23,000, from $23,000 to $-0-
for the nine months ended  September  30, 1999 compared to the nine months ended
September 30, 1998. This decrease was primarily the result of a loss on the sale
of  equipment  sold by the Company in the nine months ended  September  30, 1998
that did not occur in the nine months ended September 30, 1999.

          Other Income. Other income increased $3,000, from $-0- to $3,000 for
the nine  months  ended  September  30, 1999  compared to the nine months  ended
September  30, 1998.  This  increase is due to gains on sales of  equipment  the
Company sold in the nine months ended  September  30, 1999 that did not occur in
the nine months ended September 30, 1998.

          Net Loss. The net loss increased by $772,000, or 92.3%, from $836,000
to $1,608,000 for the nine months ended  September 30, 1999 compared to the nine
months ended  September 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
$3,000,000;  (ii) the inventory  advance rate  decreases from 48% to 40% between
July 1, 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


                                       18
<PAGE>

over the  remainder of calendar  year 2000 to the maximum  $300,000  amount.  On
September 23, 1999 the Company and its lending  institution entered into a Fifth
(the "Fifth Amendment") to the Credit Agreement. The Fifth Amendment changed the
terms of certain of the financial covenants and ratios for the remainder of 1999
and the year 2000. At September 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 interest rate presently applicable to the revolving credit line
is prime plus three percent,  with interest  payable  monthly.  At September 30,
1999,  the Company had $142,000 of cash and $497,000 of  availability  under its
credit facility.

          On May 22, 1998, the Company closed a transaction that provided net
capital proceeds of $1,335,000.  The transaction was accomplished  pursuant to a
Convertible  Debenture and Private Equity Line of Credit  Agreement (the "Credit
Agreement")  between  the Company  and a group of five  unaffiliated  investors.
These  funds were  raised  pursuant  to the sale by the  Company of  Convertible
Debentures in the aggregate  principal  amount of  $1,500,000.  The  Convertible
Debentures 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) $6.50,  which was 100% of the
closing bid price on the trading day  immediately  preceding the closing date of
the Credit Agreement. In addition to the sale of the Convertible Debentures, the
Company also obtained the right to use a "put"  mechanism to  periodically  draw
down up to $10,000,000 of additional  equity capital the ("Equity Line").  Under
the terms of the Credit  Agreement,  the  Company was  obligated  to draw down a
minimum of $1,000,000  under the Equity Line,  and all amounts were to have been
drawn in  increments  of not less than  $50,000.  In return  for the  payment of
additional  capital under the Equity Line,  the Company would have been required
to issue shares of its common stock at a per share  purchase  price equal to 80%
of the average of the three lowest closing bid prices of the common stock during
a six day valuation period commencing three days before the draw date and ending
two days after the draw date. The Equity Line could not have been utilized,  and
the Company had no  obligation  to  exercise  any portion of the put  mechanism,
until after the effective date of the registration  statement 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 was abated from June 24, 1999 through  September 23, 1999,
provided that the  registration  statement  was declared  effective on or before
October 31, 1999. Additional liquidated damages in the amount of $45,000 were to
have accrued for the period  between  September 24, 1999 and October 23, 1999 if
the Registration Statement is not declared effective before October 31, 1999. If
the registration  statement was not declared  effective on or before October 31,
1999,  the  Modification  Agreement's  provisions  providing  for the payment of
liquidated  damages in stock and the abatement of  liquidated  damages from June
23, 1999 to September  23, 1999 and the  provisions  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  continued in
force.

          Although the Company filed an amendment to the registration statement
on July 2, 1999, the registration statement was not effective by the October 31,
1999 deadline set forth in the  Modification  Agreement.  Moreover,  because the
Company's  pending   preliminary  proxy  statement  is  being  reviewed  by  the
Securities  and  Exchange  Commission  in tandem with the  pending  registration


                                       19
<PAGE>

statement,  the Company was not able to hold its annual meeting of  shareholders
by the October 31, 1999  deadline.  On November  12,  1999,  the Company and the
Investors  executed an amendment to the Modification  Agreement that substituted
February  15,  2000  for  the  October  31,  1999  deadline  originally  in  the
Modification Agreement.  Except for this modification,  none of the terms of the
Credit Agreement or the Modification Agreement were changed in any way.

          On November 4, 1999, the Company sold  its corporate headquarters
facility for $2,900,000.  Simultaneously with the sale, the Company entered into
a 20-year leaseback agreement with the purchasing party. The net proceeds to the
Company were  $831,000,  after paying  long-term  debt secured by the  building,
broker and legal fees, and other ancillary  charges.  The proceeds from the sale
will be used for working capital purposes. The party that purchased the building
is not  affiliated  with or related to the  Company  or any of its  officers  or
directors.

         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.

          September 30, 1999 Compared to December 31, 1998

          As of September 30, 1999, the Company had liquid assets (cash and cash
equivalents and trade accounts  receivable) of $2,370,000,  an increase of 6.2%,
or $139,000,  from  December 31, 1998 when liquid assets were  $2,231,000.  Cash
increased $140,000,  or 6,146.9%,  to $142,000 at September 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 September 30, 1999
were not yet  swept  and  applied  against  outstanding  draws.  Trade  accounts
receivable  decreased  $1,000, or 0.0%, to $2,228,000 at September 30, 1999 from
$2,229,000 at December 31, 1998.

          Current assets decreased by $891,000, or 12.0%, to $6,514,000 at
September  30, 1999 from  $7,405,000  at December  31, 1998.  This  decrease was
primarily the result of a decrease in inventory  levels by $1,216,000  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 September
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 $148,000, or 3.6%, to $3,986,000 at
September  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.  Offset in part by
fixed asset and intangible additions.

          Current liabilities increased by $471,000, or 7.9%, to $6,445,000 at
September  30, 1999 from  $5,974,000  at December  31, 1998.  This  increase was
primarily  due to an increase of  $1,114,999  in  short-term  notes payable as a
result of additional  borrowings  under the Company's  revolving line of credit.
The  increase  was  offset in part  by a  decrease  in  accrued  advertising  of
$168,000, trade accounts payable of $134,000, and accrued expenses of $182,000.


                                       20
<PAGE>

          The Company's working capital decreased by $1,363,000, or 95.2%, to
$68,000 at September  30, 1999 from  $1,431,000  at December  31, 1998,  for the
reasons described above.

         The Company  used net cash of $507,000 in operating  activities  during
the nine months ended September 30, 1999,  primarily as a result of the net loss
incurred during the period, offset in part from decreased inventory levels.

         The Company  used net cash of $198,000 in investing  activities  during
the nine  months  ended  September  30,  1999,  primarily  for the  purhcase  of
Transworld Products, Inc., a manufacturer of telephone shoulder rests and a main
competitor  of the  Company in that  product  line.  The Company  also  incurred
additional  expenditures  for new  computer  equipment  related to its Year 2000
preparations.

         The Company  provided net cash of $845,000  from  financing  activities
during the nine months ended  September  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.

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  $3,000,000  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


                                       21
<PAGE>

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 former 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 contingency  plan in the event of material
disruption related to the Year 2000 problem.

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.



                                       22
<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  alleged  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 alleged that Gledhill breached his fiduciary duty to
the Company and misappropriated corporate opportunities.  The complaint asserted
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 sought 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. In November 1999, the Gledhill litigation was
settled  on terms that do not  materially  affect the  Company's  operations  or
financial condition.


         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.

Item 2(c).  Recent Sales of Unregistered Securities

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


                                       23
<PAGE>

Conversions of Convertible Debentures

         As of November 5, 1999,  the five  investors  who  purchased a total of
$1,500,000 of the Company's  convertible  debentures in May 1998 have  converted
the following amounts into shares of the Company's Common Stock:

<TABLE>
<CAPTION>
       Date of            Conversion           Principal            Number of                             Number of
     Conversion          Price/Share            Amount               Shares        Interest Amount          Shares
     ---------           -----------            ------              ----------     ---------------        ----------
<S>   <C>                   <C>                 <C>                  <C>                <C>                 <C>
      6/10/99               $1.3438             $132,500             98,604             $11,180              8,320
      7/10/99               $0.9891             $ 65,934             66,667             $ 9,066              9,157
      10/8/99               $0.7500             $ 53,000             70,666             $ 8,904             11,872
</TABLE>

         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 634,500 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 between $1.00 and
$1.750  per  share,  with a weighted  average  price of $1.057  per  share.  The
exercise  price for the options  were 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

<TABLE>
<CAPTION>
Exhibit No.       Description

<S>   <C>         <C>
      10.1        Convertible Debenture and Line of Credit Agreement (Incorporated by reference from Form 8-K (File No. 000-12806)
                  filed by the Company with the Commission on June 8, 1998)
      10.2        Form of Convertible Debenture (Incorporated by reference from Form 8-K (File No. 000-12806) filed by the Company
                  with the Commission on June 8, 1998)
      10.3        Form of A Warrants (Incorporated by reference from Form 8-K (File No. 000-12806) filed by the Company with the
                  Commission on June 8, 1998)
      10.4        Form of B Warrants(Incorporated by reference from Form 8-K (File No. 000-12806) filed by the Company with the
                  Commission on June 8, 1998)
      10.5        Registration Rights Agreement(Incorporated by reference from Form 8-K (File No. 000-12806) filed by the Company
                  with the Commission on June 8, 1998)
      10.6        Escrow Agreement(Incorporated by reference from Form 8-K (File No. 000-12806) filed by the Company with the
                  Commission on June 8, 1998)
      10.7        Modification Agreement between the Company and the Investors, dated as of June 25, 1999
      10.8        Employment Contract of Frederick W. Volcansek, incorporated by reference from the Company's  Annual Report on
                  Form 10-KSB for the year ended December 31, 1998
      10.9        Employment   Contract  of  Paul  A.  Boyer,   incorporated  by reference from the Company's  Annual Report on
                  Form 10-KSB for the year ended December 31, 1998
      10.10       Employment Contract of Lloyd M. "Tag" Taggart
      10.11       Employment Contract of Michael L. Whaley
      10.12       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).
      10.13       Amendment to  Modification  Agreement  between the Company and the holders of the Convertible Debentures,  dated
                  November 12, 1999
      10.14       Lease  between the Company and FRE III  Corporation,  a  California corporation,  dated as of  November 4, 1999


                                       24
<PAGE>

      10.15       Commercial  Real Estate Purchase Contract between the Company and Darwin Datwyler dated as of July
                  16, 1999, as amended  through  November 4, 1999
      27          Financial  data schedule (for SEC use only).
</TABLE>


(b)    Forms 8-K

None



                                       25
<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.                      November   , 1999
--------------------------------------               -----------------
Frederick W. Volcansek, Sr.                          Date
Chairman & Chief Executive Officer



/s/ Michael L. Whaley                                November    , 1999
--------------------------------------               ------------------
Michael L. Whaley                                    Date
Senior Vice President &
Chief Financial Officer