##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---





FORM 10-KSB



---





ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended May 31, 2004



Commission file number 0-16250



---



DYNATEM, INC.

(Name of small business issuer in its charter)



---



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|California                                                     |  | 95-3627099                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



23263 Madero, Suite
C

Mission Viejo, California

(949) 855-3235

(Address and telephone number of principal executive offices)



---



Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act:

Common Stock

(Title of class)



---



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



Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB.  x



The issuers revenues for its most recent fiscal year were $4,476,685



The aggregate market value of voting and non-voting Common Stock held by nonaffiliates of the registrant was approximately $1 million on August 1, 2004.



On August 1, 2004, there were 1,499,564 shares of the issuers Common Stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the issuers Definitive Proxy Statement to be filed for its
Annual Meeting of Shareholders to be held on October 28, 2004, are incorporated herein by reference into Part III hereof, to the extent indicated herein.



Transitional Small Business Disclosure Format    Yes ̈No  x



---



---

##### Table of Contents

PART I



This report contains forward-looking statement within the meaning of Section 27A or the Securities Act of 1933 as amended
(the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act) that relate to future events or future financial performance. These statements, which may be identified by terms such as
may, will, should, expects, plans, anticipates, believes, estimates, forecasts, potential, or continue, or the
negative of such terms and other comparable technology, only reflect managements expectations. Actual events or results may differ materially, as a result of competitive products and pricing, new product introductions, developing technologies
and general economic conditions affecting the Company and its customers, as more fully discussed below and in Managements Discussion and Analysis or Plan of Operation.



Item 1. Description of Business.



History



Dynatem, Inc. (the Company or Dynatem) was incorporated on May 15, 1981, under the laws of the State of California.
It was organized to design, manufacture and market microcomputers and microcomputer-based systems and software for industrial applications such as factory automation, sensor monitoring, process control, robots, data acquisition, networking and
displays. The Company commenced manufacturing and marketing operations in May 1981 and has conducted such operations continuously from such date. As part of such operations, the Company was, until October 1984, an authorized dealer of certain
modular board level computer products manufactured by Rockwell International Corporation. In October 1984, the Company entered into an agreement with Rockwell pursuant to which the Company was licensed to manufacture these products.



The Company currently designs, manufactures, distributes and markets more than 250 products
or product variations including microcomputers, microcomputer systems, microcomputer modules, software and peripherals, and markets such products and other licensed products individually or as components of a system.



In 1987, the Company began concentrating its design efforts to develop a range of products
compatible with the VMEbus (see below). In order to further expand the product offering, Dynatem entered into agreements to resell the VMEbus products of other vendors that were complimentary to the Companys products. This allowed the Company
to easily integrate complete embedded systems. In 1996, the Company began concentrating most of its design effort in the development of VMEbus systems based on the x86 family of processors. The Company was able to combine the broad range of
relatively inexpensive components and software found in desktop PC- compatible systems with the high performance, flexibility and stability of the VMEbus. To accompany the new x86 hardware, it has been equally important for the Company to develop
software drivers that could enable popular desktop operating systems to operate across the VMEbus. In fact, the ability to run Windows NT in VMEbus systems has been one of the major appeals of this product. In this way, embedded system designers can
combine user-friendly Windows NT or Windows XP, with their huge range of software applications, on the same backplane with dedicated high-speed real-time operating systems. More recently, the interest in Linux systems has also added to the market
appeal of these products.



One area of design effort continues to be the
integration of expansion cards compatible with the PMC (PCI Mezzanine Card) standard. This enables adding functionality to VMEbus x86 processor boards by expansion via the local PCI bus.



Another area of design activity has been based upon the Compact PCI Bus. These products have a similar form factor to the VMEbus but use the
PCI bus as the basis for the interface between modules. This is a simpler and less expensive design than the VMEbus-based products, and from a design and support point of view is a subset of the Pentium-based VMEbus products. The CompactPCI
Bus popularity is based upon its simplicity, high bandwidth and reliability and relatively low cost. Its simplicity and low cost are due to its reliance on architectures and components found in the desktop world. Recent changes to the
CompactPCI specification incorporate switched Ethernet backplane support. This specification is the beginning of the evolution of the backplane technology toward high-speed serial interfaces.



2



---

##### Table of Contents

Market



The Company markets its products on a worldwide basis and its customers include many Fortune 100 corporations. Included among the export markets are the United Kingdom,
Germany, Japan and Mexico.



For the last two fiscal years the export net sales
and the percentage to total net sales were:



|     |  |           |  |                     
|---- |  | --------- |  | --------------------
|Year |  | Amount    |  | % of Total Net Sales
|2004 |  | $ 348,613 |  | 8%                  
|2003 |  | $ 190,740 |  | 5%                  



Products



The Companys products generally consist of modular single board microcomputers known
as Central Processing Unit (CPU) boards, peripheral systems and software. The products are intended for use by manufacturing companies seeking to increase efficiency and productivity through factory automation, sensor monitoring, process control and
other electronic implementations. The military services use Dynatem products for a number of applications including navigation, control of systems and rapid handling of data. The Company provides warranties ranging from 90 days to one year on all
products sold.



VME. The Companys
principal product group is based on the VMEbus specification. These products are used as embedded controllers for telecommunications, industrial controls, robotics, aerospace, and a wide variety of military applications.



In 1996, the Company established a distributor relationship with a German
VMEbus manufacturer, Microsys Electronics GmbH (Microsys). The products manufactured by Microsys are consistently compatible with the Companys product line because, like the Companys VMEbus products, the Microsys products are
relatively low in power consumption and well suited to extended temperature range systems.



The addition of the Microsys line to the Dynatem line has augmented the Dynatem range of products. It has also increased the range of hardware to meet virtually every customers system requirements in connection
with the products designed and manufactured by the Company. This is extremely important because customers prefer buying all of the modules in their system from one vendor who takes responsibility for guaranteeing that all modules function well
together.



New offerings from Microsys include VMEbus and
CompactPCI designs based upon Motorolas Power PC family of processors. Microsys has also introduced Computers on Modules (COM) which put CPUs and memory on a module about the size of a credit card. By greatly simplifying the
design, this enables embedded board level designers to develop hardware and software faster and at a lower cost than designing from scratch. COMs recently introduced by Microsys are based upon Motorola embedded PowerPC, PowerQUICC, and Intel Xscale
processors.



Among new products offered, the Company has
recently introduced both VME and CompactPCI processor boards based upon the Low Voltage Xeon processor from Intel. The embedded PC is excellent for situations where original equipment manufacturers need full PC functionality with the complexity of
the VMEbus or even the CompactPCI bus. A new ruggedized VMEbus processor board based upon the Pentium M processor is being introduced in the summer of 2004. This product will feature conduction-cooled versions and is targeted for military
applications.



3



---

##### Table of Contents

With the recent increase in design engineering capability, the Company is also able to offer custom
design capabilities based upon the standard product offering.



Software. The Company offers to its customers software drivers that it has developed, and software which the Company purchases from other suppliers. The Company believes that there are alternative sources of supply for such
software. Since all of the modules offered are part of highly integrated real-time systems, it is essential that all boards work well together. For this reason, the Company is required to provide drivers for all the board level products, enabling
them to run any of the standard real-time operating systems. The Company therefore distributes, sells and supports real-time operating systems that have been modified to work with the Dynatem products. This is a value-added service, which ties the
Company more closely to its customer base.



Operations



The Companys products are manufactured either at the Companys
facility in Mission Viejo, California, or by outside assembly contractors. They are produced from the Companys designs using standard, semi-custom and custom components such as multi-layer circuit boards. Most of the devices and components
used in the Companys products are available from several sources. Although no assurance can be given as to the future, the Company believes that the loss of one or more of its current suppliers would not have a material adverse effect upon its
business.



Marketing



The Companys marketing and sales department consists of marketing, sales, customer
service, engineering and engineering application support. The Company has in recent years continued the use of advertising in major trade publications, coupling it with wide distribution of marketing brochures. In addition, the Company participates
in regional trade shows during the year throughout the United States and Canada. There are over 200 VMEbus and CompactPCI vendors worldwide. Depending on the application, at least one or more of these companies are in direct competition with
Dynatem. Details of unique characteristics of the Companys offerings are more fully described in Products above.



Marketing of the Companys products is accomplished through direct marketing and telemarketing efforts. Direct marketing efforts include responding to inquiries
generated through press releases, trade publications, advertising, current customer lists and other similar leads. Telemarketing is utilized to inform current and potential customers of new products and technical product changes, as well as allow
the Company to evaluate the market and customer needs. Implementation of a World Wide Web site (www.dynatem.com) has been accomplished over the past few years. It has become an effective means of attracting new customers throughout the world.
It has also become an excellent product and technical reference for existing and potential customers.



Research and Development



The
Company believes that its future growth greatly depends on its ability to be an innovator in the development and application of new and existing hardware and software technology. Expenditures for Company-sponsored research and development for the
fiscal years ended May 31, 2004 and 2003 were $516,605 and $480,452, respectively. Increases in R&D expenditures reflect the increased emphasis on new product development and additional engineering staff.



Last fiscal year Dynatem introduced the DHC, a high performance X86 family processor board
for the VMEbus. To take advantage of the DHC modules high performance PCI-X I/O expansion capability, the Company introduced a line of PMCX (PMC (PCI Mezzanine Card) with PCI-X compatibility) modules that break the technological
envelope in embedded computing. Three modules have been developed and brought into production that support, respectively, two Gigabit Ethernet ports, four Serial ATA ports, and two Ultra 320 SCSI channels.



4



---

##### Table of Contents

The DHC was adapted into a CompactPCI version that can operate as a System Controller or an embedded slot module. This
Single Board Computer (SBC), the CHC, uses its two Gigabit Ethernet ports to support PICMG 2.16 packet switching operation and this is a growth area in the board level product market.



A VMEbus single board computer design based upon the Intel Pentium M is being introduced in the summer of 2004. This product, the RPM,
addresses diverse markets: those looking for a low power, high-processing, general-purpose processor board and those looking for a conduction-cooled rugged SBC for military applications. The RPM will exploit the cool low-power performance of the
Pentium M to operate in a broad temperature range. With its IEEE 1101.2 compatible heat sink and wedgelocks the RPM will be the Companys first fully rugged product offering since the 1990s.



The Company is modifying the popular DPC2 product as the manufacturer of a key part of its
design has gone out of business. The CPU sub-assembly module is no longer available through Intel so the discrete components have been integrated with the rest of the design. The modifications will enhance the modules ruggedness as the
socketed CPU module is no longer required and it will feature faster processing and more system memory.



On the software front the Company has developed BIOS firmware for the new SBCs. The Company has added PXE support to its BIOS. PXE enables diskless booting through the modules Ethernet ports.
This is a valuable feature for military customers who cannot support mass storage components for security reasons.



Integration and support efforts continue resulting in several important design-ins based on a combination of Dynatem and/or Microsys CPU cards, PMC support cards,
third-party software and the Companys software.



Employees



At present the Company employs 20 people in sales, engineering, financial
and manufacturing departments. Neither the Company nor its employees are parties to a collective bargaining agreement. The Company believes that its employee relations are good.



Competition



Competition within the industry is based primarily upon product line breadth, product performance, price and customer service. The Company competes with over 200
manufacturers of VMEbus and CompactPCI products in North America and Europe. The Company believes it has a marketing advantage based upon its ability to offer a one-stop-shop approach, which provides full system integration not always
provided by the Companys competitors. As part of this approach, the Company provides high quality products, competitive pricing, and technical support, which includes, when needed, customization, special products and/or writing of special
software programs. In addition, the Company provides customers with most products required for specific applications including, but not limited to, special power supplies, special enclosures, cables and other requisite hardware. This approach is not
customary with larger competitors who would normally limit themselves to sales of standard products. However, most of these manufacturers have certain other competitive advantages over the Company, including greater financial and technological
resources, earlier access to customers, established client service programs and client loyalty.



Item 2. Description of Property.



The Companys executive offices and manufacturing plant are located in a 6,357 square foot facility in Mission Viejo, California. The facility is leased from an unaffiliated party for a term expiring in January 2006. In addition, on
April 1, 2003, the Company opened a new engineering design office in a 1,430 square foot facility in Escondido, California. The facility is leased from an unaffiliated party for a term expiring March 31, 2005.



5



---

##### Table of Contents

Item 3. Legal Proceedings.



None.



Item 4. Submission of Matters to a Vote of Security Holders.



None.



PART II



Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.



There is a limited trading market for the Companys common stock (Common Stock). Set forth below are the high and low closing bid prices per share of the
Companys Common Stock for the periods indicated, as reported by The Pink Sheets weekly OTC Market Report. This report lists the firms who make a market in the Common Stock. The OTC Report presents inter-dealer sales without
adjustment for retail mark-up, markdown or commissions, and may not represent actual transactions. Trading in the Companys Common Stock is limited in volume and may not be a reliable indicator of its market value.



|               |  |                            |  |      |  |      |  |     
|-------------- |  | -------------------------- |  | ---- |  | ---- |  | ----
|               |  | Fiscal Years Ended May 31,
|               |  | 2004                       |  | 2003
|               |  | High                       |  | Low  |  | High |  | Low 
|First Quarter  |  | 1.50                       |  | 1.20 |  | 1.25 |  | 0.91
|Second Quarter |  | 2.00                       |  | 1.30 |  | 1.01 |  | 0.87
|Third Quarter  |  | 1.65                       |  | 1.45 |  | 2.25 |  | 0.70
|Fourth Quarter |  | 1.80                       |  | 1.50 |  | 1.50 |  | 1.30



On August 1, 2004, the closing bid
price of the Companys Common Stock was $1.90 per share.



Rules 15g-1
through 15g-9 promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), imposes sales practice and disclosure requirements on certain broker-dealers who engage in certain transactions involving a penny
stock. Subject to certain exceptions, a penny stock generally includes any non-NASDAQ equity security that has a market price of less than $5.00 per share. The market price of our Common Stock during the twelve months ended July 31, 2004 has
ranged between a high of $2.00 and a low of $1.20 per share, and our Common Stock is thus deemed to be penny stock for purposes of the Exchange Act. The additional sales practice and disclosure requirements imposed upon broker-dealers may discourage
them from effecting transactions in our Common Stock, which could severely limit the liquidity of the sale of our Common Stock in the secondary market.



As of August 1, 2004, there were approximately 200 shareholders reported by Continental Stock Transfer and Trust Company, the Companys Transfer Agent, and ADP
Investor Communications Services, the firm that handles communications with shareholders holding stock in street name.



The Company has never paid cash dividends on its Common Stock and the Board of Directors intends to continue this policy for the foreseeable future. Future dividend
policy will depend upon the Companys earnings, capital requirements, financial condition and other factors considered relevant by the Companys Board of Directors.



6



---

##### Table of Contents

The following table sets forth as of May 31, 2004, information on the Companys equity compensation plans in effect
as of that date:



|                                                           |  |                                                                                               |  |                                                                             |  |                                                                                                                                       
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Plan category                                              |  | Number of securities to be issued upon exercise of outstanding options,warrants and rights(1) |  | Weighted-average exercise price of outstanding options, warrants and rights |  | Number of securities remainingavailable for future issuance underequity compensation plans(excluding securities reflected incolumn (a)
|Equity compensation plans approved by security holders     |  | 205,000                                                                                       |  | $ 0.66                                                                      |  | 81,150                                                                                                                                
|Equity compensation plans not approved by security holders |  | N/A                                                                                           |  | N/A                                                                         |  | N/A                                                                                                                                   

---

|(1) | Net of 88,850 options exercised during fiscal 2004.
|--- | ---------------------------------------------------



Item 6. Managements Discussion and Analysis or Plan of Operation.



Results of Operations



Net sales for the Companys fiscal year ended May 31, 2004 increased 19.4% to $4,476,685 as compared to net sales of $3,749,801 in fiscal year 2003. The increase in
total net sales is attributed to the continued growth of sales of Dynatem designed single-board computer products. Export sales amounted to $348,613, representing 8 % of the total net sales for the fiscal year ended May 31, 2004.



Gross profit as a percentage of sales for the year ended May 31, 2004 and 2003 was 43% and
46%, respectively.



Selling, general and administrative expenses were
$1,002,386 for fiscal year 2004 compared to $855,191 for fiscal year 2003, an increase of 14.9%. The increase in selling, general and administrative expenses is primarily the result of aggressive spending for marketing.



Research and development costs were $516,604 in fiscal year 2004 compared to $480,452 in
fiscal year 2003, a 7.5% increase. The increase is attributable to development of new single-board computer products utilizing advanced microprocessor technology. These units include the DMC and DHC product lines. The Company added engineering
capability in order to optimize the scheduling and completion of its new products, to design integrated computer solutions for its customers and to design more cost competitive product alternatives.



At May 31, 2004, the Company does not expect to pay significant income taxes due to its
utilization of net operating loss carry forwards and tax credits, which the Company expects to utilize fully during fiscal 2005.



Net income for fiscal years 2004 and 2003 was substantially unchanged.



Liquidity and Capital Resources



As of May 31, 2004, the Companys working capital was $2,191,921 and its current ratio was 5.00 to 1. Management believes that the Companys existing working
capital and cash flows from operations will be sufficient to meet its working capital needs during fiscal year 2005.



The Company has a revolving line-of-credit agreement (the Line of Credit) that permits borrowings of up to $500,000. This Line of Credit is secured by
substantially all of the assets of the Company, expires on September 18, 2004, as amended, and automatically renews. Interest on the borrowings is paid monthly at varying interest rates based on the Lenders prime rate (4.00% at May 31, 2004)
plus 1.5%. There were no borrowings outstanding as of May 31, 2004.



7



---

##### Table of Contents

Critical Accounting Policies



Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, the valuation of long-lived and intangible assets, and the
amortization of intangible assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies
affect our more significant judgments and estimates used in preparation of our consolidated financial statements.



| |  | Revenue recognition;
| | - | --------------------



| |  | Valuation of deferred tax assets; and
| | - | -------------------------------------



| |  | Estimation of the allowance for doubtful accounts receivable.
| | - | -------------------------------------------------------------



Revenue recognition



Revenues from product sales are recognized at the time the product is shipped.



In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 (SAB 101), Revenue Recognition, as superseded
by SAB 104, which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the Securities and
Exchange Commission. Management believes the Companys revenue recognition policy conforms to SAB 104.



Valuation of deferred tax assets



The Company records an estimated valuation allowance on its significant deferred tax assets when, based on the weight of available evidence (including the scheduled reversal of deferred tax liabilities, projected future taxable income or
loss, and tax-planning strategies), it is more likely than not that some or all of the tax benefit will not be realized.



Allowance for doubtful accounts receivable



We establish our allowance for doubtful accounts receivable based on our qualitative and quantitative review of credit profiles of our customers, contractual terms and
conditions, current economic trends and historical payment, return and discount experience. We reassess the allowance for doubtful accounts each period. If we made different judgments or utilized different estimates for any period, material
differences in the amount and timing of revenue recognized could result.



Significant Recent Accounting Pronouncements



Statement
of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit and Disposal Activities, was issued in June 2002 and is effective for exit and disposal activities initiated after December 31, 2002.
The Company is complying with SFAS No. 146.



In November 2002, the Financial
Accounting Standards Board (the FASB) issued FASB Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN
No. 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the estimated fair value of the obligation undertaken in issuing the guarantee. The initial



8



---

##### Table of Contents

recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, while the disclosure requirements became applicable in 2002. The Company is complying with the disclosure requirements of FIN No. 45. The other requirements of this pronouncement did not materially affect the
Companys consolidated financial statements.



SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, an amendment of FASB Statement No. 123, was issued in December 2002 and is effective for fiscal years ending after December 15, 2002. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this pronouncement amends the disclosure requirements of SFAS 123 to require more prominent disclosure in both
annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is complying with the disclosure requirements of SFAS No. 148.



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest
entities, or VIEs), and how to determine when and which business enterprise should consolidate the VIE. Management has determined that the Company does not have any VIEs (as defined).



In April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on Derivative
Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133.
This pronouncement is effective for contracts entered into or modified after June 30, 2003 (with certain exceptions), and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the
Companys consolidated financial statements.



In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with
characteristics of both liabilities and equity, and is effective for public companies as follows: (i) in November 2003, the FASB issued FASB Staff Position (FSP) FAS 150-03 (FSP 150-3), which defers indefinitely (a) the
measurement and classification guidance of SFAS No. 150 for all mandatorily redeemable non-controlling interests in (and issued by) limited-life consolidated subsidiaries, and (b) SFAS No. 150s measurement guidance for other types of
mandatorily redeemable non-controlling interests, provided they were created before November 5, 2003; (ii) for financial instruments entered into or modified after May 31, 2003 that are outside the scope of FSP 150-3; and (iii) otherwise, at the
beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 on the aforementioned effective dates. The adoption of this pronouncement did not have a material impact on the Companys results of
operations or financial condition.



Other recent accounting pronouncements
issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Companys present or future
consolidated financial statements.



Future Trends



The Company continues to launch new products of its own design and expects significant
growth in sales of Microsys products over in fiscal 2005.



The Companys
PC-compatible VMEbus module has been designed into several fairly large, long-term programs, and it is being well received by the VMEbus market. New product introductions in fiscal 2005 are expected to enable the Company to win a larger percentage
of new programs. CompactPCI versions of these products should enable the Company to become a larger player in the CompactPCI market. The Company has put great effort into being first to the market with error-free versions of several popular
real-time operating systems. As the PC-compatible market changes, the Company will, in a timely manner, attempt to achieve market leadership by offering new products based upon the latest PC-compatible technology.



9



---

##### Table of Contents

The Company will continue to take advantage of local contract manufacturing facilities utilizing the most modern
techniques of SMT (Surface Mount Technology) and BGA (Ball Grid Array).



Item 7. Financial Statements.



The Financial
Statements of the company required to be included in this Item 7 are set forth in a separate section of this report and commence on Page F-1 immediately following page 13.



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



None.



Item 8A. Controls and Procedures.



Under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a  15(e) and 15d  15(e) of the Exchange Act as of a date (the
Evaluation Date) within 90 days prior to filing the Companys Form 10-KSB. Based upon that evaluation, the CEO and CFO concluded that, as of May 31, 2004, our disclosure controls and procedures were effective in timely alerting
management to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic filings with the SEC. Based on their most recent evaluation as of the Evaluation Date, the CEO and the CFO have also
concluded that there are no significant deficiencies in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Companys ability to record, process, summarize and report
financial information, and such officers have identified no material weaknesses in the Companys internal controls over financial reporting.



There were no significant changes made in our internal controls over financial reporting during the quarter ended May 31, 2004 that have materially affected or are
reasonably likely to materially affect these controls. Thus, no corrective actions with regard to significant deficiencies or material weaknesses were necessary.



Item 8B. Other Information.



None.



PART III



Item 9. Directors
and Executive Officers of the Registrant.



Information concerning the
Companys directors and executive officers in compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the portion of the Companys Definitive Proxy Statement, to be filed on or before September 28, 2004 for
its 2004 Annual Meeting of Shareholders to be held on October 28, 2004, set forth under the heading ELECTION OF DIRECTORS



Item 10. Executive Compensation.



Information concerning executive compensation is incorporated herein by reference to the portion of the Companys Definitive Proxy Statement, to be filed on or
before September 28, 2004 for its 2004 Annual Meeting of Shareholders to be held on October 28, 2004, set forth under the heading ELECTION OF DIRECTORS - Compensation of Executive Officers.



10



---

##### Table of Contents

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.



Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference to the portion of the Companys Definitive Proxy Statement, to be filed on or before September 28, 2004 for its 2004 Annual Meeting of Shareholders to be held on October 28, 2004, set forth
under the heading PRINCIPAL HOLDERS OF VOTING SECURITIES.



Item 12. Certain Relationships and Related Transactions.



Information concerning certain relationships and related transactions is incorporated herein by reference to the portion of the Companys Definitive Proxy Statement, to be filed on or before September 28, 2004 for its 2004 Annual
Meeting of Shareholders to be held on October 28, 2004, set forth under the heading ELECTION OF DIRECTORS - Relationships with Outside Firms.



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



|(a) | Exhibits.
|--- | ---------



The following is a list of Exhibits required by Item 601 of Regulation S-B. Except for those exhibits indicated by an asterisk which are filed herewith, the remaining exhibits listed below are incorporated by
reference to the exhibit previously filed by us as indicated.



|              |  |                                                                                                                                                          
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit                                                                                                                                                  
|3(a)          |  | Restated Articles of Incorporation of the Company1                                                                                                       
|              | 
|3(b)          |  | Bylaws of the Company2                                                                                                                                   
|              | 
|31.1*         |  | Certifications Pursuant to Securities Exchange Act Rules 13A  14 and 15D - 14 - Section 302, signed by Michael Horan, Chief Executive Officer           
|              | 
|31.2*         |  | Certifications Pursuant to Securities Exchange Act Rules 13A  14 and 15D - 14 - Section 302, signed by Belen Ramos, Chief Financial Officer             
|              | 
|32*           |  | Certification Pursuant to 18 U.S.C. Section 1350 - Section 906, signed by Michael Horan, Chief Executive Officer and Belen Ramos, Chief Financial Officer

---

|1 | Incorporated herein by reference to Exhibit 3(a) to the Companys Annual Report on Form
10-KSB for fiscal year ended May 31, 1997.
|- | ----------------------------------------------------------------------------------------------------------------------------------

|2 | Incorporated herein by reference to Exhibit 3(b) to the Companys Annual Report on Form 10-KSB for fiscal year ended May 31, 1997.
|- | ----------------------------------------------------------------------------------------------------------------------------------



11



---

##### Table of Contents

|(b) | Reports on Form 8-K.
|--- | --------------------



On March 4, 2003, the Company filed a Form 8-K reporting an Item 5 event relating to the receipt by the Company of a purchase order.



Item 14. Principal Accountant Fees and Services



Information concerning certain relationships and related transactions is incorporated herein
by reference to the portion of the Companys Definitive Proxy Statement, to be filed on or before September 28, 2004 for its 2004 Annual Meeting of Shareholders to be held on October 28, 2004, set forth under the heading PRINCIPAL
ACCOUNTANT FEES AND SERVICES.



12



---

##### Table of Contents

SIGNATURES



In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



|                       |  |               |  |                                                      
|---------------------- |  | ------------- |  | -----------------------------------------------------
|                       |  | DYNATEM, INC.
|                       |  |              
|Dated: August 27, 2004 |  | By:           |  | /s/ Michael Horan                                    
|                       |  |               |  | Michael Horan, President and                         
|                       |  |               |  | Chief Executive Officer (principal executive officer)
|                       |  |              
|                       |  | By:           |  | /s/ Belen Ramos                                      
|                       |  |               |  | Belen Ramos                                          
|                       |  |               |  | Chief Financial Officer (principal financial officer)



In accordance with the Exchange Act,
this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|    |  |                          |  |                                                 |  |                
|--- |  | ------------------------ |  | ----------------------------------------------- |  | ---------------
|    |  | Name                     |  | Position                                        |  | Date           
|    |  |                          | 
|By: |  | /s/ Michael Horan        |  | President, Chief Executive Officer and
Director |  | August 27, 2004
|    |  | Michael Horan            |  |                                                
|    |  |                          | 
|By: |  | /s/ Eileen Schmalbach    |  | Vice President, Secretary and Director          |  | August 27, 2004
|    |  | Eileen Schmalbach        |  |                                                
|    |  |                          | 
|By: |  | /s/ Robert Anslow        |  | Director                                        |  | August 27, 2004
|    |  | Robert Anslow,           |  |                                                
|    |  |                          | 
|By: |  | /s/ Richard Jackson      |  | Director                                        |  | August 27, 2004
|    |  | Richard Jackson          |  |                                                
|    |  |                          | 
|By: |  | /s/ Charles Spear        |  | Director                                        |  | August 27, 2004
|    |  | Charles Spear, Director  |  |                                                
|    |  |                          | 
|By: |  | /s/ H. Richard Anderson  |  | Director                                        |  | August 27, 2004
|    |  | H. Richard Anderson      |  |                                                
|    |  |                          | 
|By: |  |                          |  | Director                                        |  | August, 2004   
|    |  | Costis Toregas, Director |  |                                                



13



---

##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



|                                                        |  |    
|------------------------------------------------------- |  | ---
|Report of Independent Registered Public Accounting Firm |  | F-2
|                                                        | 
|Balance Sheet                                           |  | F-3
|                                                        | 
|Statements of Income                                    |  | F-4
|                                                        | 
|Statements of Stockholders Equity                      |  | F-5
|                                                        | 
|Statements of Cash Flows                                |  | F-6
|                                                        | 
|Notes to Financial Statements                           |  | F-7



F-1



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTNG FIRM



To the Board of Directors and Stockholders

Dynatem, Inc.



We have audited the accompanying balance sheet of
Dynatem, Inc. (the Company), as of May 31, 2004, and the related statements of income, stockholders equity and cash flows for each of the years in the two-year period then ended. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dynatem, Inc. as of May 31, 2004, and the results of its operations and its cash flows for each of the years in the two-year period then ended in conformity with accounting principles generally
accepted in the United States.



|                                          
|------------------------------------------
|/s/ Squar, Milner, Reehl & Williamson, LLP
|                                          
|Newport Beach, California                 
|July 16, 2004                             



F-2



---

##### Table of Contents

DYNATEM, INC.

BALANCE SHEET

May 31, 2004



|                                                                                                  |  |   |           |  
|------------------------------------------------------------------------------------------------- |  | - | --------- | -
|ASSETS                                                                                            |  |   |           |  
|                                                                                                  | 
|Current Assets                                                                                    |  |   |           |  
|Cash and cash equivalents                                                                         |  | $ | 1,042,600 |  
|Accounts receivable, net of allowance for doubtful accounts of $11,500                            |  |   | 994,539   |  
|Inventories, net                                                                                  |  |   | 663,439   |  
|Prepaid expenses and other current assets                                                         |  |   | 38,738    |  
|                                                                                                  |  |   |           |  
|Total current assets                                                                              |  |   | 2,739,316 |  
|                                                                                                  | 
|Property and Equipment, net                                                                       |  |   | 53,454    |  
|                                                                                                  | 
|Other Assets                                                                                      |  |   | 23,442    |  
|                                                                                                  |  |   |           |  
|                                                                                                  |  | $ | 2,816,212 |  
|                                                                                                  |  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                              |  |   |           |  
|                                                                                                  | 
|Current Liabilities                                                                               |  |   |           |  
|Accounts payable                                                                                  |  | $ | 282,899   |  
|Accrued expenses                                                                                  |  |   | 264,496   |  
|                                                                                                  |  |   |           |  
|Total current liabilities                                                                         |  |   | 547,395   |  
|Commitments and Contingencies                                                                     |  |   |           |  
|                                                                                                  | 
|Stockholders Equity                                                                              |  |   |           |  
|Common stock, no par value; 50,000,000 shares authorized; 1,519,564 shares issued and outstanding |  |   | 2,283,308 |  
|Accumulated deficit                                                                               |  |   | (14,491   | )
|                                                                                                  |  |   |           |  
|Total stockholders equity                                                                        |  |   | 2,268,817 |  
|                                                                                                  |  |   |           |  
|                                                                                                  |  | $ | 2,816,212 |  
|                                                                                                  |  |   |           |  



F-3



---

##### Table of Contents

DYNATEM, INC.

STATEMENTS OF INCOME

For the Years Ended May 31, 2004 and 2003



|                                                       |  |      |           |      |   |          
|------------------------------------------------------ |  | ---- | --------- | ---- | - | ---------
|                                                       |  | 2004 |           | 2003
|NET SALES                                              |  | $    | 4,476,685 |      | $ | 3,749,801
|                                                       |  |     
|COST OF SALES                                          |  |      | 2,565,610 |      |   | 2,023,703
|                                                       |  |      |           |      |   |          
|GROSS PROFIT                                           |  |      | 1,911,075 |      |   | 1,726,098
|                                                       |  |     
|OPERATING EXPENSES                                     |  |      |           |      |   |          
|Selling, general and administrative                    |  |      | 1,002,386 |      |   | 855,191  
|Research and development                               |  |      | 516,604   |      |   | 480,452  
|                                                       |  |      |           |      |   |          
|                                                       |  |      | 1,518,990 |      |   | 1,335,643
|                                                       |  |      |           |      |   |          
|OPERATING INCOME                                       |  |      | 392,085   |      |   | 390,455  
|                                                       |  |     
|OTHER INCOME                                           |  |      |           |      |   |          
|Interest income                                        |  |      | 12,708    |      |   | 14,199   
|                                                       |  |      |           |      |   |          
|INCOME BEFORE PROVISION FOR INCOME TAXES               |  |      | 404,793   |      |   | 404,654  
|                                                       |  |     
|PROVISION FOR INCOME TAXES                             |  |      | 800       |      |   | 800      
|                                                       |  |      |           |      |   |          
|NET INCOME                                             |  | $    | 403,993   |      | $ | 403,854  
|                                                       |  |      |           |      |   |          
|Net income available to common stockholders per share: |  |      |           |      |   |          
|Basic                                                  |  | $    | 0.26      |      | $ | 0.27     
|                                                       |  |      |           |      |   |          
|Diluted                                                |  | $    | 0.24      |      | $ | 0.24     
|                                                       |  |      |           |      |   |          
|Weighted average number of common shares outstanding:  |  |      |           |      |   |          
|Basic                                                  |  |      | 1,563,665 |      |   | 1,503,877
|                                                       |  |      |           |      |   |          
|Diluted                                                |  |      | 1,686,385 |      |   | 1,714,287
|                                                       |  |      |           |      |   |          



F-4



---

##### Table of Contents

DYNATEM, INC.

STATEMENTS OF STOCKHOLDERS EQUITY

For the Years Ended May 31, 2004 and 2003



|                                                          |  |              |   |  |                    |           |   |                          |   |          |   |  |   |           |  
|--------------------------------------------------------- |  | ------------ | - |  | ------------------ | --------- | - | ------------------------ | - | -------- | - |  | - | --------- | -
|                                                          |  | Common Stock |   |  | AccumulatedDeficit |           |   | TotalStockholdersEquity |  
|                                                          |  | Shares       |   |  | Amount             |           |   |                         
|Balance at May 31, 2002                                   |  | 1,496,264    |   |  | $                  | 2,389,085 |   |                          | $ | (822,338 | ) |  | $ | 1,566,747 |  
|Exercise of stock options                                 |  | 25,000       |   |  |                    | 5,000     |   |                          |   |         |   |  |   | 5,000     |  
|Shares surrendered for stock option exercise              |  | (2,222       | ) |  |                    | (5,000    | ) |                          |   |         |   |  |   | (5,000    | )
|Net income                                                |  |             |   |  |                    |          |   |                          |   | 403,854  |   |  |   | 403,854   |  
|                                                          |  |              |   |  |                    |           |   |                          |   |          |   |  |   |           |  
|Balance at May 31, 2003                                   |  | 1,519,042    |   |  |                    | 2,389,085 |   |                          |   | (418,484 | ) |  |   | 1,970,601 |  
|Exercise of stock options                                 |  | 88,850       |   |  |                    | 19,597    |   |                          |   |         |   |  |   | 19,597    |  
|Shares surrendered for cashless exercise of stock options |  | (3,666       | ) |  |                    | (4,400    | ) |                          |   |         |   |  |   | (4,400    | )
|Shares repurchased and retired                            |  | (84,662      | ) |  |                    | (140,574  | ) |                          |   |         |   |  |   | (140,574  | )
|Intrinsic value related to the exercise of stock options  |  |             |   |  |                    | 19,600    |   |                          |   |         |   |  |   | 19,600    |  
|Net income                                                |  |             |   |  |                    |          |   |                          |   | 403,993  |   |  |   | 403,993   |  
|                                                          |  |              |   |  |                    |           |   |                          |   |          |   |  |   |           |  
|Balance at May 31, 2004                                   |  | 1,519,564    |   |  | $                  | 2,283,308 |   |                          | $ | (14,491  | ) |  | $ | 2,268,817 |  
|                                                          |  |              |   |  |                    |           |   |                          |   |          |   |  |   |           |  



F-5



---

##### Table of Contents

DYNATEM, INC.

STATEMENTS OF CASH FLOWS

For the Years Ended May 31, 2004 and 2003



|                                                                                            |  |      |           |   |      |   |           |  
|------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                                                                            |  | 2004 |           |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                        |  |      |           |   |      |   |           |  
|Net income                                                                                  |  | $    | 403,993   |   |      | $ | 403,854   |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |      |           |   |      |   |           |  
|Depreciation and amortization                                                               |  |      | 20,951    |   |      |   | 12,047    |  
|Cashless exercise of options                                                                |  |      | 19,600    |   |      |   |          |  
|Allowance for doubtful accounts                                                             |  |      | 1,500     |   |      |   | 2,500     |  
|Reserve for obsolete inventory                                                              |  |      | 10,000    |   |      |   |          |  
|Changes in operating assets and liabilities:                                                |  |      |           |   |      |   |           |  
|Accounts receivable                                                                         |  |      | (758,006  | ) |      |   | 147,648   |  
|Inventories                                                                                 |  |      | (100,811  | ) |      |   | (102,996  | )
|Prepaid expenses and other current assets                                                   |  |      | 13,679    |   |      |   | (22,917   | )
|Other assets                                                                                |  |      | (13,861   | ) |      |   | 10,043    |  
|Accounts payable                                                                            |  |      | 169,691   |   |      |   | (36,832   | )
|Accrued expenses and deferred revenue                                                       |  |      | (111,638  | ) |      |   | 188,827   |  
|                                                                                            |  |      |           |   |      |   |           |  
|Net cash (used in) provided by operating activities                                         |  |      | (344,902  | ) |      |   | 602,174   |  
|                                                                                            |  |      |           |   |      |   |           |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |  |      |           |   |      |   |           |  
|Purchases of property and equipment                                                         |  |      | (18,552   | ) |      |   | (29,785   | )
|                                                                                            |  |      |           |   |      |   |           |  
|Net cash used in investing activities                                                       |  |      | (18,552   | ) |      |   | (29,785   | )
|                                                                                            |  |      |           |   |      |   |           |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                        |  |      |           |   |      |   |           |  
|Payments for repurchase and retirement of the Companys Common Stock                        |  |      | (140,574  | ) |      |   |          |  
|Proceeds from the exercise of stock options                                                 |  |      | 15,197    |   |      |   |          |  
|                                                                                            |  |      |           |   |      |   |           |  
|Net cash used in financing activities                                                       |  |      | (125,377  | ) |      |   |          |  
|                                                                                            |  |      |           |   |      |   |           |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                        |  |      | (488,831  | ) |      |   | 572,389   |  
|                                                                                            |  |     
|CASH AND CASH EQUIVALENTS  beginning of year                                               |  |      | 1,531,431 |   |      |   | 959,042   |  
|                                                                                            |  |      |           |   |      |   |           |  
|CASH AND CASH EQUIVALENTS  end of year                                                     |  | $    | 1,042,600 |   |      | $ | 1,531,431 |  
|                                                                                            |  |      |           |   |      |   |           |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                            |  |      |           |   |      |   |           |  
|                                                                                            |  |     
|Cash paid during the year for income taxes                                                  |  | $    | 800       |   |      | $ | 800       |  
|                                                                                            |  |      |           |   |      |   |           |  



See accompanying notes to financial
statements for additional disclosure of non-cash investing and financing activities.



F-6



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Organization and Nature of Operations



Dynatem, Inc. (the Company) was incorporated in the State of California in May 1981. The Company designs, manufactures, distributes and markets modular single board microcomputers and microcomputer-based systems and software.
These systems are used for industrial applications, including factory automation, process control, robotics, data acquisition and networking.



Concentrations of Credit Risks



Cash and cash equivalent balances are maintained at various financial institutions. The Federal Deposit Insurance Corporation (FDIC) insures accounts at each
institution for up to $100,000. From time to time, the Company maintains cash balances at certain institutions in excess of the FDIC limit. At May 31, 2004, the Company had approximately $485,000 in excess of this limit.



The Company sells products to customers throughout the United States and in several foreign
countries. The Company performs periodic credit evaluations of its customers and does not obtain collateral with which to secure its accounts receivable. The Company maintains reserves for potential credit losses based upon the Companys
historical experience related to credit losses which management believes are sufficient. Although the Company expects to collect amounts due, actual collections may differ from the estimated amounts.



During fiscal 2004, the Company had sales to three customers, which represented 59% of net
sales. During fiscal 2003, the Company had sales to two customers, which represented 37% of net sales. At May 31, 2004, one customer accounted for 87% of accounts receivable. If the relationship between the Company and these customers was altered,
the future results of operations and financial condition could be significantly affected. Additionally, during fiscal 2004 and 2003, export sales approximated 8% and 5% of net sales, respectively.



Risks and Uncertainties



The Company operates in a highly competitive industry that is subject to intense
competition, government regulation and rapid technological change. The Companys operations are subject to significant risks and uncertainties including financial, operational, technological, regulatory and other risks associated with a
technology business including the potential risk of business failure.



Use of Estimates in the Preparation of Financial Statements



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management are, among others, provisions for
losses on accounts receivable, provisions for slow moving and obsolete inventories and estimates for current and deferred taxes. Actual results could materially differ from those estimates.



F-7



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Cash Equivalents



Cash equivalents consist of highly liquid investments (certificates of deposit) with
original maturities of 90 days or less. At May 31, 2004, cash equivalent balances totaled approximately $320,000.



Inventories



Inventories are stated at the lower of cost or estimated net realizable value. Cost is determined under the average cost method. The Company operates in an industry in which its products are subject to design changes
and are manufactured based on customer specifications. Accordingly, should design requirements change significantly or customer orders be canceled or decline, the ultimate net realizable value of such products could be less than the carrying value
of such amounts. At May 31, 2004, management believes that inventories are carried at the lower of cost or net realizable value.



Property and Equipment



Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from three
to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the related asset. Maintenance and repairs are charged to expense as incurred. Significant renewals
and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.



Long-Lived Assets



Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset
(excluding interest), an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. SFAS No. 144 also requires companies to separately report discontinued
operations and extends that reporting requirement to a component of an entity that either has been disposed of (by sale, abandonment or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or the estimated fair value less costs to sell. The Company adopted SFAS No. 144 during the year ended May 31, 2003. The provisions of this pronouncement relating to assets held for sale or other disposal generally are
required to be applied prospectively after the adoption date to newly initiated commitments to plan to sell or dispose of such assets, as defined, by management. As a result, management cannot determine the potential effects that adoption of SFAS
No. 144 will have on the Companys financial statements with respect to future disposal decisions, if any.



F-8



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)



Long-Lived Assets (continued)



Management believes that no impairment loss is necessary on long-lived assets. There can be
no assurance, however, that market conditions or demand for the Companys products or services will not change which could result in future long-lived asset impairment changes in the future.



Warranties



The Company provides warranties ranging from ninety days to one year on all products sold. Estimated future warranty obligations related to
certain products and services are provided by charges to operations in the period in which the related revenue is recognized. The Company has a warranty reserve of approximately $17,500 at May 31, 2004, which is included in accrued expenses in the
accompanying balance sheet.



Revenue Recognition



Revenues from product sales are recognized at the time the product is shipped.



In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin
101 (SAB 101), Revenue Recognition, as superseded by SAB 104, which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to
revenue recognition policies in financial statements filed with the Securities and Exchange Commission. Management believes the Companys revenue recognition policy conforms to SAB 104.



Research and Development Costs



Research and development costs are expensed as incurred.



Advertising



Advertising costs are expensed as incurred. Advertising costs incurred for the years ended May 31, 2004 and 2003 approximated $40,000 and
$20,000 respectively.



Income Taxes



The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, 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 bases. 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 recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not that such assets will not be recovered.



F-9



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Foreign Currency Transactions



The Company obtains certain products from offshore facilities in Germany. Foreign currency
transaction gains or losses are included in cost of sales in the period in which the exchange rate changes or the underlying transaction settles. During fiscal 2004 and 2003, the Company had no foreign currency gains or losses.



Accounting for Stock-Based Compensation



The Company accounts for employee stock options in accordance with the Accounting Principles
Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees and related Interpretations and makes the necessary pro forma disclosures mandated by SFAS No. 123, Accounting for Stock-based
Compensation, as amended.



In March 2000, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 44, (FIN 44), Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB 25. This Interpretation clarifies (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 became effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occur after either December 15, 1998, or January
12, 2000. Management believes that the Company accounts for its employee stock based compensation in accordance with FIN 44.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123. SFAS No. 148 amends SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair-value-based method of accounting for stock-based employee compensation. It also amends the disclosure
provisions of that statement to require prominent disclosure about the effects on reported net income and earnings per share and the entitys accounting policy decisions with respect to stock-based employee compensation. Certain of the
disclosure requirements are required for all companies, regardless of whether the fair value method or intrinsic value method is used to account for stock-based employee compensation arrangements. The Company continues to account for its employee
incentive stock option plans using the intrinsic value method in accordance with the recognition and measurement principles of APB 25. SFAS No. 148 is effective for financial statements for fiscal years ended after December 15, 2002 and for interim
periods beginning after December 15, 2002. The Company adopted the disclosure provisions of this statement during the year ended May 31, 2003.



At May 31, 2003, the Company has two stock-based employee compensation plans (the Plans) (see Note 5). The Company accounts for the Plans under the
recognition and measurement principles of APB 25 and related Interpretations. The Company recorded stock-based employee compensation cost of $19,600 during the year ended May 31, 2004, in connection with the cashless exercise of employee stock
options (see Note 5). There was no stock-based employee compensation cost reflected in net income for the year ended May 31, 2003. The following table illustrates the effect on net income and earnings per common share if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee compensation.



F-10



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Accounting for Stock-Based Compensation (continued)



|                                                         |  |                    |          |   |      |   |        
|-------------------------------------------------------- |  | ------------------ | -------- | - | ---- | - | -------
|                                                         |  | Year Ended May 31,
|                                                         |  | 2004               |          |   | 2003
|Net income available to common stockholders, as reported |  | $                  | 403,993  |   |      | $ | 403,854
|P ro forma compensation expense                          |  |                    | (113,150 | ) |      |   |       
|                                                         |  |                    |          |   |      |   |        
|Pro forma net income available to common stockholders    |  | $                  | 290,843  |   |      | $ | 403,854
|                                                         |  |                    |          |   |      |   |        
|Income per share, as reported                            |  |                    |          |   |      |   |        
|Basic                                                    |  | $                  | 0.26     |   |      | $ | 0.27   
|Diluted                                                  |  | $                  | 0.24     |   |      | $ | 0.24   
|Income per share, pro forma                              |  |                    |          |   |      |   |        
|Basic                                                    |  | $                  | 0.19     |   |      | $ | 0.27   
|Diluted                                                  |  | $                  | 0.17     |   |      | $ | 0.24   



Basic and Diluted Earnings Per
Common Share



Under SFAS No. 128, Earnings per
Share, basic earnings per common share is computed based on the weighted average number of shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding assuming
all dilutive potential common shares were issued (using the treasury stock method, total additional dilutive shares totaled 122,720 and 210,410 as of May 31, 2004 and 2003, respectively) (see Note 8).



Fair Value of Financial Instruments



SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments when it is practicable to estimate that value. The carrying amount of the Companys cash and cash equivalents, receivables, accounts payable and accrued expenses
approximates their estimated fair values due to the short-term maturities of those financial instruments.



Segments of an Enterprise and Related Information



The Company has adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 changes the way public companies report information about segments of their
business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides,
the material countries in which it holds assets and reports revenues and its major customers. Segment reporting is not required as the Company currently operates in one segment as discussed above.



F-11



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Significant Recent Accounting Pronouncements



In November 2002, the FASB issued FIN No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the disclosure requirements became
applicable in 2002. The Company is complying with the disclosure requirements of FIN No. 45. The other requirements of this pronouncement did not materially affect the Companys financial statements.



SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, an amendment of FASB Statement No. 123, was issued in December 2002 and is effective for fiscal years ending after December 15, 2002. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition, this pronouncement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosure in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is complying with the disclosure requirements of SFAS No. 148.



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities, or
VIEs), and how to determine when and which business enterprise should consolidate the VIE. Management has determined that the Company does not have any VIEs.



F-12



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Significant Recent Accounting Pronouncements(continued)



In April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under
SFAS No. 133. This pronouncement is effective for contracts entered into or modified after June 30, 2003 (with certain exceptions), and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material
impact on the Companys financial statements.



In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity and is effective (except for certain mandatorily redeemable noncontrolling interests) for financial instruments entered into or modified after May 31, 2003. The Company adopted SFAS No. 150 on June 1,
2003. The adoption of this pronouncement did not have a material impact on the Companys results of operations or financial condition.



Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the
Securities and Exchange Commission did not or are not believed by management to have a material impact on the Companys present or future financial statements.



Reclassifications



Certain amounts presented in the fiscal 2003 financial statements have been reclassified to conform to the current periods presentation.



2. INVENTORIES



Inventories consist of the following at May 31, 2004:



|                                  |  |   |         |  
|--------------------------------- |  | - | ------- | -
|Raw materials and component parts |  | $ | 412,473 |  
|Work-in-process                   |  |   | 245,820 |  
|Finished goods                    |  |   | 55,146  |  
|Reserve for obsolete inventory    |  |   | (50,000 | )
|                                  |  |   |         |  
|                                  |  | $ | 663,439 |  
|                                  |  |   |         |  



F-13



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



3. PROPERTY AND EQUIPMENT



Property and equipment consist of the following at May 31, 2004:



|                                               |  |   |          |  
|---------------------------------------------- |  | - | -------- | -
|Machinery and equipment                        |  | $ | 4,336    |  
|Product tooling                                |  |   | 274,706  |  
|Furniture and fixtures                         |  |   | 124,735  |  
|Leasehold Improvements                         |  |   | 1,647    |  
|                                               |  |   |          |  
|                                               |  |   | 405,424  |  
|                                               | 
|Less accumulated depreciation and amortization |  |   | (351,970 | )
|                                               |  |   |          |  
|                                               |  | $ | 53,454   |  
|                                               |  |   |          |  



During fiscal 2004 and 2003,
depreciation and amortization expense totaled $20,951 and $12,047, respectively.



4. LINE-OF-CREDIT



The Company has a revolving line-of-credit
agreement (the Line of Credit) that permits borrowings of up to $500,000. This Line of Credit is secured by substantially all of the assets of the Company, expires on September 18, 2004, as amended, and automatically renews. Interest on
the borrowings is paid monthly at varying interest rates based on the Lenders prime rate (4.00% at May 31, 2004) plus 1.5%. There were no borrowings outstanding as of May 31, 2004.



5. STOCKHOLDERS EQUITY



Common Stock



During fiscal 2003, the Company issued 22,778 shares of common stock (net of 2,222 shares of common stock redeemed) in connection with the exercise of stock options by employees. Pursuant to the exercise, certain
stockholders redeemed 2,222 shares of common stock with a market value of $5,000 (estimated by the Company based on the closing market price on the date of exercise) for the exercise of options to purchase 25,000 shares of common stock.



During fiscal 2004, the Company issued 85,184 shares of common stock (net of 3,666 shares
of common stock redeemed) in connection with the exercise of stock options by employees. Pursuant to the exercise, certain stockholders redeemed 3,666 shares of common stock with a market value of $4,400 (estimated by the Company based on the
closing market price on the date of exercise) for the exercise of options to purchase 20,000 shares of common stock. Additionally, the Company repurchased and retired 84,662 shares of its restricted common stock for $140,574.



As mentioned above, a certain employee redeemed 3,666 shares of common stock to affect a
cashless exercise of stock options for 20,000 shares of the Companys common stock (16,334 net shares issued). As required by SFAS No. 123, and related Interpretations, the Company recorded $19,600 as stock-based employee compensation expense
in connection with this cashless exercise.



F-14



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



5. STOCKHOLDERS EQUITY (continued)



Options



On August 31, 1993, the Companys Board of Directors adopted, and the shareholders approved, the Dynatem, Inc. 1993 Stock Option Plan
(1993 Plan), which provides for the grant of options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code and for the grant of nonqualified stock options. In connection with the 1993 Plan, 200,000
shares of the Companys common stock have been reserved for issuance upon the exercise of options to be granted.



On October 7, 1998, the Companys Board of Directors adopted and the shareholders approved, the 1998 Stock Option Plan of Dynatem, Inc. (1998 Plan).
200,000 shares of the Companys common stock have been reserved for issuance upon the exercise of options to be granted under the 1998 Plan.



The following represents a summary of the stock options outstanding at May 31, 2004 and 2003 and the changes during the years then ended:



|                                               |  |                    |   |      |                              |      |         |         |   |                              |   |     
|---------------------------------------------- |  | ------------------ | - | ---- | ---------------------------- | ---- | ------- | ------- | - | ---------------------------- | - | ----
|                                               |  | Year Ended May 31,
|                                               |  | 2004               |   | 2003
|                                               |  | Options            |   |      | WeightedAverageExercisePrice |      | Options |         |   | WeightedAverageExercisePrice
|Outstanding, beginning of year                 |  | 253,850            |   |      | $                            | 0.30 |         | 278,850 |   |                              | $ | 0.29
|Granted                                        |  | 45,000             |   |      |                              | 1.80 |         |        |   |                              |   |    
|Exercised                                      |  | (88,850            | ) |      |                              | 0.22 |         | (25,000 | ) |                              |   | 0.20
|Cancelled/Forfeited                            |  | (5,000             | ) |      |                              | 0.20 |         |        |   |                              |   |    
|                                               |  |                    |   |      |                              |      |         |         |   |                              |   |     
|Outstanding, end of year                       |  | 205,000            |   |      | $                            | 0.66 |         | 253,850 |   |                              | $ | 0.30
|                                               |  |                    |   |      |                              |      |         |         |   |                              |   |     
|Exercisable, end of year                       |  | 205,000            |   |      | $                            | 0.66 |         | 253,850 |   |                              | $ | 0.30
|                                               |  |                    |   |      |                              |      |         |         |   |                              |   |     
|Weighted average fair value of options granted |  |                    |   |      | $                            | 1.80 |         |         |   |                              | $ |    
|                                               |  |                    |   |      |                              |      |         |         |   |                              |   |     



All of the options outstanding at May
31, 2004 have exercise prices between $0.20 and $1.80 and a weighted average remaining contractual life of 5.8 years. Additionally, the fair value of options granted during the year ended May 31, 2004 was calculated using the Black-Scholes
option-pricing model using the following assumptions: expected dividend yield of 0.00%; volatility of 359%; risk-free interest rate of 2.00%; and an expected life of 10 years.



F-15



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



5. STOCKHOLDERS EQUITY (continued)



Options(continued)



As of May 31, 2004, 145,000 and 60,000 options (net of 90,000 and 110,000 options exercised)
have been granted by the Company and are outstanding under the 1998 Plan and the 1993 Plan, respectively.



6. INCOME TAXES



During both fiscal
2004 and 2003, the provision for income taxes consists of the following:



|              |  |         |   |       |   |       |  |   |    
|------------- |  | ------- | - | ----- | - | ----- |  | - | ---
|              |  | Federal |   | State |   | Total
|Current       |  | $       |  |       | $ | 800   |  | $ | 800
|              |  |         |  
|Deferred      |  |         |  |       |   |      |  |   |   
|              |  |         |   |       |   |       |  |   |    
|Tax provision |  | $       |  |       | $ | 800   |  | $ | 800
|              |  |         |   |       |   |       |  |   |    



During fiscal 2004 and 2003, the
provision for income taxes differs from the amounts computed by applying the U.S. Federal income tax rate of 34% to income before provision for taxes as a result of the following:



|                                                        |  |      |          |   |      |   |          |  
|------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                        |  | 2004 |          |   | 2003 |  
|Computed expected tax expense                         |  | $    | 137,000  |   |      | $ | 137,000  |  
|                                                        |  |     
|Addition to (reduction) in income taxes resulting from: |  |      |          |   |      |   |          |  
|State income taxes, net of federal benefit              |  |      | 800      |   |      |   | 27,000   |  
|Change in valuation allowance                           |  |      | (137,000 | ) |      |   | (164,000 | )
|Other                                                   |  |      |         |   |      |   | 800      |  
|                                                        |  |      |          |   |      |   |          |  
|                                                        |  | $    | 800      |   |      | $ | 800      |  
|                                                        |  |      |          |   |      |   |          |  



F-16



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



6. INCOME TAXES (continued)



The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets at May 31, 2004 are presented below:



|                                                  |  |   |          |  
|------------------------------------------------- |  | - | -------- | -
|Deferred tax assets:                              |  |   |          |  
|Net operating loss carryforwards                  |  | $ | 8,000    |  
|Research and development credit carryforwards     |  |   | 78,000   |  
|Inventory reserve and uniform cost capitalization |  |   | 41,000   |  
|Other                                             |  |   | (14,000  | )
|                                                  |  |   |          |  
|                                                  |  |   | 113,000  |  
|                                                  | 
|Less valuation allowance                          |  |   | (113,000 | )
|                                                  |  |   |          |  
|Net deferred tax assets                           |  | $ |         |  
|                                                  |  |   |          |  



At May 31, 2004, the Company had
federal net operating loss carryforwards of approximately $23,000, which, if not utilized to offset future taxable income, will expire in various years through 2019.



At May 31, 2004, the Company had unused federal and California research and development credits of approximately $226,000 and $19,000,
respectively, which, if not used, will expire in various years through 2016.



7. COMMITMENTS AND CONTINGENCIES



Leases



The Company has entered into non-cancelable operating lease
agreements for its corporate and manufacturing facilities. In addition to monthly lease payments for the facilities, the Company is required to pay utilities and certain insurance and maintenance costs. The leases provide for annual rental increases
and a renewal option based on certain terms and conditions. The leases expire through fiscal 2006.



Future annual minimum lease payments under these leases approximate the following for the years ended May 31:



|                             |  |   |        
|---------------------------- |  | - | -------
|2005                         |  | $ | 96,000 
|2006                         |  |   | 49,000 
|                             |  |   |        
|Total minimum lease payments |  | $ | 145,000
|                             |  |   |        



During fiscal 2004 and 2003, the
Company incurred approximately $108,000 and $93,000, respectively, related to these leases, of which approximately $61,000 and $48,000 has been classified as a component of cost of sales in the accompanying statements of income.



F-17



---

##### Table of Contents

DYNATEM, INC.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended May 31, 2004 and 2003



7. COMMITMENTS AND CONTINGENCIES (continued)



Licensing Agreements



During 1997, the Company entered into two software-licensing agreements. The licensed
software will be used with various products that the Company manufactures and distributes. One of the agreements provides for a one-time licensing fee and the other agreement provides for a fixed fee on each unit of software sold. The licensing
agreements expired in fiscal 2003.



During fiscal 2004 and 2003, total
licensing expense under the licensing agreements mentioned herein approximated $0 and $4,000, respectively.



8. BASIC AND DILUTED EARNINGS PER COMMON SHARE



The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations:



|                                                              |  |      |           |      |   |          
|------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                              |  | 2004 |           | 2003
|Numerator for basic and diluted earnings per share:           |  |      |           |      |   |          
|Net income                                                    |  | $    | 403,993   |      | $ | 403,854  
|                                                              |  |      |           |      |   |          
|Denominator for basic and diluted earnings per share:         |  |      |           |      |   |          
|Weighted average shares (basic)                               |  |      | 1,563,665 |      |   | 1,503,877
|Common stock equivalents                                      |  |      | 122,720   |      |   | 210,410  
|                                                              |  |      |           |      |   |          
|Weighted average shares (dilutive)                            |  |      | 1,686,385 |      |   | 1,714,287
|                                                              |  |     
|Net income available to common shareholders per common share: |  |      |           |      |   |          
|Basic                                                         |  | $    | 0.26      |      | $ | 0.27     
|                                                              |  |      |           |      |   |          
|Diluted                                                       |  | $    | 0.24      |      | $ | 0.24     
|                                                              |  |      |           |      |   |          



9. SUBSEQUENT EVENTS



Subsequent to May 31, 2004, the Company issued 10,000 shares of common
stock for $3,500 of cash in connection with the exercise of stock options by an employee. Additionally, the Company repurchased 30,000 shares of its common stock from certain stockholders subsequent to year-end.



F-18