<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-KSB

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

      For the fiscal year ended May 31, 2002

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


                           Commission File No. 0-16250

                                  DYNATEM, INC.
                                  -------------
                 (Name of small business issuer in its charter)


         California                                              95-3627099
--------------------------------                             -------------------
(State or other jurisdiction of                               (I.R.S. Employer
Incorporation or organization)                               Identification No.)

23263 Madero, Suite C
Mission Viejo, California                                             92691
----------------------------------------                         ----------
(Address of principal executive offices)                         (Zip Code)

Issuer's telephone number: (949) 855-3235

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

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


         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. _____

         The issuer's revenues for its most recent fiscal year were $2,915,797.

         The aggregate market value of voting stock held by nonaffiliates of the
registrant was $799,224 on August 1, 2002.

         On August 1, 2002, there were 1,496,264 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 September 27, 2002, are
incorporated herein by reference into Part III hereof, to the extent indicated
herein.

Transitional Small Business Disclosure Format  Yes ___  No  X
                                                           ---

<PAGE>

                                     PART I

This report contains forward-looking statements that relate to future events or
future financial performance. These statements, which may be identified by term
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, with its 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.

                                       1

<PAGE>

One new area of design effort has been 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 new 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 Compact PCI
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.

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
         --------        ----------       ------------------------

           2002           $251,574                    9%
           2001           $375,315                   12%

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.

                                       2

<PAGE>

         The addition of the Microsys line to the Dynatem line has had the
         effect of augmenting 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 Compact PCI designs
         based upon Motorola's Power PC family of processors.

         Among new products offered, the Company is selling Pentium III based
         Compact PCI modules and very small stand-alone PCs for embedded
         applications. The embedded PC is excellent for situations where
         Original Equipment Manufacturers (OEMs) need full PC functionality with
         the complexity of the VMEbus or even the Compact PCI bus.

         Over the past three years, the Company has continued to develop new low
         cost versions of its D360 board for use in higher volume traffic and
         OEM applications. The D2070 traffic controller, based on the 68360
         processor, has been designed into traffic controllers on a few large
         programs.

         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.

                                       3

<PAGE>

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, 2002 and 2001, were $308,775 and $243,192,
respectively. Increases in R&D expenditures reflect the increased emphasis on
new product development and additional engineering staff.

In the last fiscal year, the Company introduced a CPU board product to replace
and surpass the DRC1, the Company's Pentium II based VMEbus single-board
computer. A companion product, the CPC2, was also introduced for the Compact PCI
market. This product also utilizes the features of the DPC2 such as a faster
processor (Pentium III), more memory and large I/O capability.

Two important new VME processor modules will be introduced in the 2/nd/ quarter
of the 2003 fiscal year. The first will be the highest performance X86 family
processor board ever introduced on the VMEbus, using the most advanced Intel
architecture. The second board is a Pentium III VMEbus CPU board targeted to the
OEM who needs the most configuration flexibility at the lowest price. Both of
these products will also be offered in CompactPCI versions. In combination with
the DPC2 and CPC2 introduced last year, Dynatem will have a full range of
embedded processor boards compatible with the X86 processor family.

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 17 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 very good.

                                       4

<PAGE>

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, and is currently
adequate to meet the Company's needs.

Item 3.    Legal Proceedings.

Not applicable

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

Not applicable

                                       5

<PAGE>

                                     PART II

Item 5.   Market for Common Equity and Related Stockholder Matters.

There is a limited trading market for the Company's Common Stock. Set forth
below is the high and low sale price 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. Trading in the Company's Common Stock is limited in
volume and may not be a reliable indicator of its market value.

<TABLE>
<CAPTION>
                                                                       Fiscal Years Ended May 31,
                                                              2002                                     2001
                                              -------------------------------------    -------------------------------------
                                                   High                 Low                 High                 Low
                                              ----------------    -----------------    ----------------    -----------------
         <S>                                  <C>                 <C>                  <C>                 <C>
         First Quarter                             2.0000            0.8000                0.7500               0.6250
         Second Quarter                            2.0000            1.8000                1.0000               0.6875
         Third Quarter                             1.9000            1.5000                0.6875               0.6875
         Fourth Quarter                            2.0000            1.1500                1.0000               0.6500
</TABLE>

As of August 1, 2002, there were approximately 203 shareholders reported to the
Company by Continental Stock Transfer and Trust Company, the Company's Transfer
Agent, and ADP Investor Communications Services, the firm which 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.

The following table sets forth as of May 31, 2002, information on the Company's
equity Compensation plans in effect as of that date:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                              (a)                        (b)                       (c)
--------------------------------------------------------------------------------------------------------------------------
<S>                           <C>                        <C>                       <C>
Plan category                 Number of securities to    Weighted-average          Number of securities remaining
--------------
                              be issued upon exercise    exercise price of         available for future issuance under
                              of outstanding options,    outstanding options,      equity compensation plans (excluding
                              warrants and rights(1)     warrants and rights       securities reflected in column (a)
--------------------------------------------------------------------------------------------------------------------------
Equity compensation                  278,850                   $0.29                           35,000
plans approved by
security holders
--------------------------------------------------------------------------------------------------------------------------
Equity compensation                    N/A                       N/A                             N/A
plans not approved by
security holders
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

     (1)  Net of 86,150 options exercised during fiscal 2002.

                                       6

<PAGE>

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, 2002 decreased 9.7% to
$2,915,797 as compared to net sales of $3,228,639 in fiscal year 2001. The
decrease in total net sales is attributed to delayed shipment of approximately
$432,000. This is principally the result of longer than anticipated approvals of
special boards by the customers. As of August 1, 2002, the approvals have been
received and shipments of the delayed products has begun and will be completed
during the first and second quarters of fiscal year 2003. Export sales amounted
to $251,574, representing 9 % of the total net sales for the fiscal year ended
May 31, 2002.

Gross profit as a percentage of sales increased from 44% in fiscal year 2001 to
46% in the fiscal year ended May 31, 2002, reflecting the continued growth of
sales of Dynatem designed single-board computer products which contribute to
higher margins.

Selling, general and administrative expenses were $848,823 for fiscal year 2002
compared to $698,053 for fiscal year 2001, a 22 % increase. The increase was
principally the result of adding new staff to cope with the increased level of
business and providing more competitive salaries, wages and benefits to assist
in retaining personnel.

Research and development costs were $308,775 in fiscal year 2002 compared to
$243,192 in fiscal year 2001, a 27% increase. The increase is attributable to
development of new single-board computer products utilizing advanced
microprocessor technology, based on recommendations from our customers. These
units include the DMC1 and DPC4 product lines and are planned for introduction
in the second quarter of fiscal 2003. 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, 2002, the Company does not expect to pay significant income taxes due
to its utilization of net operating loss carry forwards and tax credits, which
will expire on various dates through the year 2019.

Net income in fiscal year 2002 and 2001 was $207,482 and $477,687, respectively.
The decrease in net income was primarily due to the factors mentioned above.

                                       7

<PAGE>

Liquidity and Capital Resources

As of May 31, 2002, the Company's working capital was $1,509,008 and its current
ratio was 5.47 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 2003. The Company has arranged for a line of
credit of $500,000 with its bank and may consider other sources of capital
should the need arise.

Future Trends

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

Relationships with system integrators who are reselling Company products, have
already created some potentially good opportunities. These new sales channels
are expected to expand over the next year.

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 this year 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.

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).

                                       8

<PAGE>

Item 7.   Financial Statements.

                                  DYNATEM, INC.

                              FINANCIAL STATEMENTS

                              MAY 31, 2002 and 2001



                                      INDEX

Independent Auditors' Reports ..................................   F-1 - F-2


Balance Sheet as of May 31, 2002 ...............................         F-3


Statements of Operations for the years ended
 May 31, 2002 and 2001 .........................................         F-4


Statements of Stockholders' Equity for the
 years ended May 31, 2002 and 2001 .............................         F-5


Statements of Cash Flows for the years
 ended May 31, 2002 and 2001 ...................................         F-6


Notes to Financial Statements for the years
 ended May 31, 2002 and 2001 ...................................  F-7 - F-19

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Dynatem, Inc.

We have audited the accompanying balance sheet of Dynatem, Inc. (the "Company"),
as of May 31, 2002, and the related statements of operations, stockholders'
equity and cash flows for the year 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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,
2002, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.



Squar, Milner, Reehl & Williamson, LLP
Newport Beach, California
July 23, 2002

                                       F-1

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Dynatem, Inc.

We have audited the accompanying statements of operations, stockholders' equity
and cash flows of Dynatem, Inc. (the "Company") for the year ended May 31, 2001.
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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Dynatem, Inc.
for the year ended May 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.



CORBIN & WERTZ
Irvine, California
July 20, 2001

                                       F-2

<PAGE>

                                 DYNATEM, INC.
                                 BALANCE SHEET
                                  MAY 31, 2002

<TABLE>
<S>                                                                       <C>
                                        ASSETS

Current Assets
     Cash and cash equivalents                                            $   959,042
     Accounts receivable, net of allowance for doubtful
         accounts of approximately $7,500                                     388,181
     Inventories, net                                                         469,632
     Prepaid expenses and other current assets                                 29,500
                                                                          -----------

         Total current assets                                               1,846,355

Property and Equipment, net                                                    38,115

Other Assets                                                                   19,624
                                                                          -----------

                                                                          $ 1,904,094
                                                                          ===========

                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
     Accounts payable                                                     $   150,040
     Accrued expenses                                                         187,307
                                                                          -----------

                  Total current liabilities                                   337,347
                                                                          -----------


Commitments and Contingencies

Stockholders' Equity
     Common stock, no par value; 50,000,000 shares
         authorized; 1,496,264 shares issued and outstanding                2,389,085
     Accumulated deficit                                                     (822,338)
                                                                          -----------

         Total stockholders' equity                                         1,566,747
                                                                          -----------

                                                                          $ 1,904,094
                                                                          ===========
</TABLE>

   See independent auditors' reports and notes to these financial statements.

                                       F-3

<PAGE>

                                 DYNATEM, INC.
                            STATEMENTS OF OPERATIONS
                   For the Years Ended May 31, 2002 and 2001

                                                            2002         2001
                                                         ----------   ----------

NET SALES                                                $2,915,797   $3,228,639

COST OF SALES                                             1,568,706    1,820,140
                                                         ----------   ----------

GROSS PROFIT                                              1,347,091    1,408,499
                                                         ----------   ----------

OPERATING EXPENSES
     Selling, general and administrative                    848,823      698,053
     Research and development                               308,775      243,192
                                                         ----------   ----------
                                                          1,157,598      941,245
                                                         ----------   ----------

OPERATING INCOME                                            189,493      467,254
                                                         ----------   ----------

OTHER INCOME
     Interest income                                         18,789       11,233
                                                         ----------   ----------

INCOME BEFORE PROVISION FOR INCOME TAXES                    208,282      478,487

PROVISION FOR INCOME TAXES                                      800          800
                                                         ----------   ----------

NET INCOME                                               $  207,482   $  477,687
                                                         ==========   ==========

Net income available to common stockholders per share:
     Basic                                               $     0.14   $     0.34
                                                         ==========   ==========

     Diluted                                             $     0.12   $     0.31
                                                         ==========   ==========

Weighted average number of common shares outstanding:
     Basic                                                1,435,627    1,418,400
                                                         ==========   ==========

     Diluted                                              1,710,546    1,530,794
                                                         ==========   ==========

   See independent auditors' reports and notes to these financial statements.

                                       F-4

<PAGE>

                                 DYNATEM, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY
                   For the Years Ended May 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                                Total
                                      Common Stock           Accumulated    Stockholders'
                               --------------------------
                                 Shares         Amount         Deficit         Equity
                               -----------    -----------    -----------    -------------
<S>                              <C>          <C>            <C>            <C>
Balance at June 1, 2000          1,418,400    $ 2,383,385    $(1,507,507)   $     875,878
Net income                               -              -        477,687          477,687
                               -----------    -----------    -----------    -------------
Balance at May 31, 2001          1,418,400      2,383,385     (1,029,820)       1,353,565
Exercise of stock options           86,150         18,653              -           18,653
Shares surrendered for stock
     option exercise                (8,286)       (12,953)             -          (12,953)
Net income                               -              -        207,482          207,482
                               -----------    -----------    -----------    -------------
Balance at May 31, 2002          1,496,264    $ 2,389,085    $  (822,338)   $   1,566,747
                               ===========    ===========    ===========    =============
</TABLE>

   See independent auditors' reports and notes to these financial statements.

                                      F-5

<PAGE>

                                  DYNATEM, INC.
                            STATEMENTS OF CASH FLOWS
                    For the Years Ended May 31, 2002 and 2001


<TABLE>
<CAPTION>
                                                                  2002         2001
                                                                ---------    ---------
<S>                                                             <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income                                                 $ 207,482    $ 477,687
     Adjustments to reconcile net income to net cash provided
         by operating activities:
              Depreciation and amortization                        17,629       29,444
              Allowance for doubtful accounts                      (3,000)         500
              Changes in operating assets and liabilities:
                      Accounts receivable                          37,697      (89,205)
                      Inventories                                  99,343     (109,541)
                      Prepaid expenses and other                   (2,634)      (4,219)
                      Accounts payable                            (74,077)      14,561
                      Accrued expenses                            (27,766)     143,384
                                                                ----------   ---------

Net cash provided by operating activities                         254,674      462,611
                                                                ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of property and equipment                           (8,903)     (19,999)
     Principal repayments on note receivable                            -        2,046
     Change in other assets                                         2,726       (5,078)
                                                                ---------    ---------

Net cash used in investing activities                              (6,177)     (23,031)
                                                                ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from the issuance of common stock in
       connection with the exercise of stock options                5,700            -
                                                                ---------    ---------
Net cash provided by financing activities                           5,700            -
                                                                ---------    ---------

NET INCREASE IN CASH                                              254,197      439,580

CASH AND CASH EQUIVALENTS - beginning of year
                                                                  704,845      265,265
                                                                ---------    ---------
CASH AND CASH EQUIVALENTS - end of year                         $ 959,042    $ 704,845
                                                                =========    =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the year for:

     Interest                                                   $       -    $       -
                                                                =========    =========

     Income taxes                                               $     800    $     800
                                                                =========    =========
</TABLE>

   See independent auditors' reports and notes to these financial statements.

                                       F-6

<PAGE>

                                 DYNATEM, INC.
                         NOTES TO FINANCIAL STATEMENTS
                   For the Years Ended May 31, 2002 and 2001

NOTE 1 - ORGANIZATION AND 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, 2002, the Company had approximately $340,000 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 2002, the Company had sales to two customers, which represented
48% of net sales. During fiscal 2001, the Company had sales to five customers,
which represented 63% of net sales. At May 31, 2002, two customers accounted for
73% of accounts receivable. If the relationships between the Company and these
customers become altered, the future results of operations and financial
condition could be significantly affected. Additionally, during fiscal 2002 and
2001, export sales represented 9% and 12% 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.

                                       F-7

<PAGE>

                                 DYNATEM, INC.
                         NOTES TO FINANCIAL STATEMENTS
                   For the Years Ended May 31, 2002 and 2001

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

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 of America 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 period. 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.

Cash Equivalents

Cash equivalents consist of highly liquid investments (Certificates of Deposits)
with original maturities of 90 days or less. At May 31, 2002, cash equivalent
balances totaled approximately $219,000.

Inventories

Inventories are stated at the lower of cost or 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, 2002, management believes that inventories are carried at
their 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. 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.

                                      F-8

<PAGE>

                                 DYNATEM, INC.
                         NOTES TO FINANCIAL STATEMENTS
                   For the Years Ended May 31, 2002 and 2001

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Long-Lived Assets

The Company's management assesses the recoverability of its long-lived assets by
determining whether the depreciation and amortization of long-lived assets over
their remaining lives can be recovered through projected undiscounted future
cash flows. The amount of long-lived asset impairment, if any, is measured based
on fair value and is charged to operations in the period in which long-lived
asset impairment is determined by management. At May 31, 2002, the Company's
management believes there is no impairment of its long-lived assets. There can
be no assurance, however, that market conditions will not change or demands for
the Company's service or products will continue which could result in impairment
of long-lived assets.

Warranties

The Company provides warranties ranging from ninety days to one year on all
products sold. Estimated future warranty obligations related to certain product
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, which is recorded under accrued expenses in the
accompanying balance sheet at May 31, 2002.

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," 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 policies
conform to SAB 101.

Research and Development Costs

Research and development costs are expensed as incurred.

Advertising

Advertising costs are expensed as incurred. The advertising costs incurred for
the years ended May 31, 2002 and 2001 totaled approximately $55,000 and $9,000,
respectively.

                                      F-9

<PAGE>

                                 DYNATEM, INC.
                         NOTES TO FINANCIAL STATEMENTS
                   For the Years Ended May 31, 2002 and 2001

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Income Taxes

The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 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.

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 2002 and 2001, the Company had no foreign currency gains.

Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by APB Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25"). Under the intrinsic value based method,
compensation is the excess, if any, of the fair value of the stock at the grant
date over the amount an employee must pay to acquire the stock. Compensation, if
any, is recognized over the applicable service period, which is usually the
vesting period.

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"). This standard, if fully adopted, changes the method of accounting for
employee stock-based compensation plans to the fair value based method. For
stock options and warrants, fair value is determined using an option pricing
model that takes into account the stock price at the grant date, the exercise
price, the expected life of the option or warrant and the annual rate of
quarterly dividends. Compensation expense, if any, is recognized over the
applicable service period, which is usually the vesting period.

                                      F-10

<PAGE>

                                 DYNATEM, INC.
                         NOTES TO FINANCIAL STATEMENTS
                   For the Years Ended May 31, 2002 and 2001

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Accounting for Stock-Based Compensation (continued)

The adoption of the accounting methodology of SFAS 123 is optional and the
Company has elected to continue accounting for stock-based compensation issued
to employees using APB 25; however, pro forma disclosures, as if the Company
adopted the cost recognition requirements under SFAS 123, are required to be
presented (see Note 5).

In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions involving Stock Compensation," an interpretation of APB 25.
FIN 44 clarifies the application of APB 25 for (a) the definition of employee
for purposes of applying APB 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence for 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.

Basic and Diluted Earnings Per Common Share

Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128") changes the methodology of calculating earnings per common share. Under
SFAS 128, 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, dilutive shares totaled 274,919 and 112,394 as of May 31, 2002 and
2001, respectively) (see Note 8).

Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107 ("SFAS 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, receivables, trade payables
and accrued expenses approximates their estimated fair values due to the
short-term maturities of those financial instruments.

                                      F-11

<PAGE>

                                 DYNATEM, INC.
                         NOTES TO FINANCIAL STATEMENTS
                   For the Years Ended May 31, 2002 and 2001

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Comprehensive Income

Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income" establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 130 has not materially impacted the Company's
financial position or results of operations as the Company has no items of
comprehensive income.

Segments of an Enterprise and Related Information

Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information" 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.
SFAS 131 has not materially impacted the Company's financial position or results
of operations as the Company currently operates in one segment.

Derivative Instruments

Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities on the
balance sheet at their fair value. This statement was effective for financial
statements for all fiscal quarters of all fiscal years beginning after June 15,
2000 (as amended by SFAS 137 and 138). The adoption of this standard did not
have a material impact on the Company's results of operations, financial
position or cash flows as it currently does not engage in any derivative or
hedging activities.

                                      F-12

<PAGE>

                                 DYNATEM, INC.
                         NOTES TO FINANCIAL STATEMENTS
                   For the Years Ended May 31, 2002 and 2001

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statements No.
141, "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 supersedes APB Opinion No. 16,
"Business Combinations" and SFAS No. 38, "Accounting for Pre-acquisition
Contingencies of Purchased Enterprises". SFAS 141 is effective for fiscal years
beginning after June 30, 2001 and requires that all business combinations be
accounted for by the purchase method. SFAS 142 supersedes APB Opinion No. 17,
"Intangible Assets". SFAS 142 is effective for fiscal years beginning after
December 15, 2001 and provides that all existing and newly acquired goodwill and
intangible assets will no longer be amortized but will be tested for impairment
at least annually and written down only when impaired. Management does not
believe that the requirements of such pronouncements will have a significant
impact on the Company's future financial statements.

Additionally, the Financial Accounting Standards Board has recently issued
Statements No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143")
and No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs, and is effective for financial statements
issued for fiscal years beginning after June 15, 2002. SFAS 144 supersedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, including
accounting for a segment of a business accounted for as a discontinued
operation. SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. Management does not believe that the
requirements of such pronouncements will have a significant impact on the
Company's future financial statements.

NOTE 2 - INVENTORIES

Inventories consist of the following at May 31, 2002:

Raw materials and component parts                       $ 230,529
Work-in-process                                           215,933
Finished goods                                             23,170
                                                        ---------
                                                        $ 469,632
                                                        =========

                                      F-13

<PAGE>

                                  DYNATEM, INC.
                          NOTES TO FINANCIAL STATEMENTS
                    For the Years Ended May 31, 2002 and 2001

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following at May 31, 2002:

Product tooling                        $ 253,382
Furniture and fixtures                   103,156
Machinery and equipment                    1,210
                                       ---------
                                         357,748

Less accumulated depreciation           (319,633)
                                       ---------

                                       $  38,115
                                       =========

During fiscal 2002 and 2001, depreciation expense totaled $17,629 and $14,674,
respectively.

NOTE 4 - LINE-OF-CREDIT

The Company has a revolving line-of-credit agreement (the "Line-of-Credit") with
a financial institution that permits borrowings of up to $500,000. This
Line-of-Credit is secured by substantially all of the assets of the Company and
expires on March 18, 2003. Interest on the borrowings is paid monthly at varying
interest rates based on the Lender's prime rate (4.75% at May 31, 2002) plus 2%.
There were no borrowings outstanding as of May 31, 2002.

NOTE 5 - STOCKHOLDERS' EQUITY

Common Stock

During fiscal 2002, the Company issued 77,864 shares of common stock (net of
8,286 shares of common stock redeemed) for the exercise of stock options.
Pursuant to the exercise, certain stockholders redeemed 8,286 shares of common
stock with a market value of $12,953 (estimated by the Company based on the
closing market price on the date of exercise) for the exercise of options to
purchase 61,150 shares of common stock. In addition, the Company issued 25,000
shares of common stock for $5,700 in cash for the exercise of stock options.

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

                                      F-14

<PAGE>

                                  DYNATEM, INC.
                          NOTES TO FINANCIAL STATEMENTS
                    For the Years Ended May 31, 2002 and 2001

options to be granted.

NOTE 5 - STOCKHOLDERS' EQUITY (continued)

Options (continued)

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,
2002 and 2001 and the changes during the years then ended:

<TABLE>
<CAPTION>
                                                   Year Ended May 31,
                                 -------------------------------------------------
                                          2002                       2001
                                 ----------------------     ----------------------
                                               Weighted                   Weighted
                                               Average                    Average
                                               Exercise                   Exercise
                                  Options        Price       Options        Price
                                 ---------     --------     ---------     --------
<S>                                <C>         <C>            <C>         <C>
Outstanding, beginning of year     365,000     $   0.27       345,000     $   0.25
      Granted                            -            -        20,000         0.80
      Exercised                    (86,150)       (0.22)            -            -
      Cancelled/Forfeited                -            -             -            -
                                 ---------     --------     ---------     --------

Outstanding, end of year           278,850     $   0.29       365,000     $   0.27
                                 =========     ========     =========     ========

Exercisable, end of year           278,850     $   0.29       365,000     $   0.27
                                 =========     ========     =========     ========

Weighted average fair
  value of options granted                     $      -                   $   0.80
                                               ========                   ========
</TABLE>

All of the options outstanding at May 31, 2002 have exercise prices between
$0.20 and $0.80 and a weighted average remaining contractual life of 5.2 years.

All of the options issued for fiscal year 2001 were issued to employees and had
exercise prices approximating the fair market value of the Company's common
stock on the dates of grant; therefore, no compensation expense was recognized
under APB 25 for the granting of these options.

As of May 31, 2002, 143,850 and 135,000 options (net of 56,150 and 30,000
options exercised, respectively) have been granted by the Company and are
outstanding under the 1998 Plan and the 1993 Plan, respectively.

                                      F-15

<PAGE>

                                  DYNATEM, INC.
                          NOTES TO FINANCIAL STATEMENTS
                    For the Years Ended May 31, 2002 and 2001

NOTE 5 - STOCKHOLDERS' EQUITY (continued)

Pro Forma Stock Option Information

Pro forma information regarding net income is required by SFAS 123 and is
determined as if the Company had accounted for its employee stock options under
the fair value method pursuant to SFAS 123, rather than the method pursuant to
APB 25 as discussed in Note 1. The fair value of these options is estimated at
the date of grant based on the Black-Scholes options pricing model (the "Model")
with the following assumptions for the year ended May 31, 2001: risk free
interest rate of 5.39%; expected dividend yield of 0%; expected life of the
options of 5 years; and volatility factor of the expected market price of the
Company's common stock of 297%. No options were granted in fiscal 2002.

The Model was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition, the
Model requires the input of highly subjective assumptions including the expected
stock price volatility. The Company's employee stock options have
characteristics significantly different from those of traded options; changes in
the subjective input assumptions can materially affect the fair value estimate.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option vesting period. Adjustments are made for
options forfeited prior to vesting. The effect on compensation expense and net
income had compensation cost for the Company's stock option issuances been
determined based on fair value on the date of grant consistent with the
provisions of SFAS 123 is as follows for the years ended May 31:

<TABLE>
<CAPTION>
                                                                            2002               2001
                                                                      ----------------   ----------------
<S>                                                                   <C>                <C>
Net income, as reported                                               $        207,482   $        477,687

Additional compensation expense under SFAS 123                                       -            (16,000)
                                                                      ----------------   ----------------

Pro forma net income                                                  $        207,482   $        461,687
                                                                      ================   ================

Net income per share, as reported:
     Basic                                                            $           0.14   $           0.34
                                                                      ================   ================
     Diluted                                                          $           0.12   $           0.31
                                                                      ================   ================

Pro forma net income per share:
     Basic                                                            $           0.14   $           0.33
                                                                      ================   ================
     Diluted                                                          $           0.12   $           0.30
                                                                      ================   ================
</TABLE>

                                      F-16

<PAGE>

                                  DYNATEM, INC.
                          NOTES TO FINANCIAL STATEMENTS
                    For the Years Ended May 31, 2002 and 2001

NOTE 6 - INCOME TAXES

During both fiscal 2002 and 2001, the provision for taxes consists of the
following:

                                        Federal       State            Total
                                      ----------   -----------------------------

Current                               $        -   $        800     $        800

Deferred                                       -              -                -
                                      ----------   -----------------------------

                                      $        -   $        800     $        800
                                      ==========   =============================

During fiscal 2002 and 2001, the provision for 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:

                                                             2002        2001
                                                          ---------   ---------
Computed "expected" tax expense                           $  71,000   $ 162,700

Addition to (reduction) in income taxes resulting from:
    State income taxes, net of federal benefit               15,000      27,900
    Change in valuation allowance                           (86,000)   (190,400)
    Other                                                       800         600
                                                          ---------   ---------

                                                          $     800   $     800
                                                          =========   =========

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at May 31, 2002 are presented below:

Deferred tax assets:
    Net operating loss carry forwards                $ 330,000
    Research and development credit carry forwards     200,000
    Other                                               16,000
                                                     ---------

                                                       546,000

        Less valuation allowance                      (546,000)
                                                     ---------

        Net deferred tax assets                      $       -
                                                     =========

                                      F-17

<PAGE>

                                  DYNATEM, INC.
                          NOTES TO FINANCIAL STATEMENTS
                    For the Years Ended May 31, 2002 and 2001

NOTE 6 - INCOME TAXES (continued)

At May 31, 2002, the Company had federal net operating loss carry forwards of
approximately $970,000, which, if not utilized to offset future taxable income,
will expire in various years through 2019.

At May 31, 2002, the Company had unused federal and California research and
development credits of approximately $165,000 and $35,000, respectively, which,
if not used, will expire in various years through 2017.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

Leases

The Company has entered into a non-cancelable operating lease agreement for its
corporate and manufacturing facility. In addition to monthly lease payments for
the facility, the Company is required to pay utilities and certain insurance and
maintenance costs. The lease provides for annual rental increases and a
five-year renewal option based on certain terms and conditions. The lease
expires in fiscal 2006.

Future annual minimum lease payments under this lease are as follows:

Years Ending May 31;
2003                                    $        77,000
2004                                             80,000
2005                                             83,000
2006                                             49,000
                                        ---------------

Total minimum lease payments            $       289,000
                                        ===============

During fiscal 2002 and 2001, the Company incurred approximately $87,000 and
$79,000, respectively, related to this lease, of which approximately $44,000 and
$39,000 has been classified as a component of cost of sales in the accompanying
statements of operations.

                                      F-18

<PAGE>

                                  DYNATEM, INC.
                          NOTES TO FINANCIAL STATEMENTS
                    For the Years Ended May 31, 2002 and 2001

NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)

Royalty and Licensing Agreements

The Company is a party to a royalty agreement that requires it to pay royalties
of 25% of sales of a select hardware product and 50% of sales of a select
software product, as defined. The Company is also a party to another royalty
agreement that requires it to pay royalties of 50% of the gross profit earned by
the Company on sales of certain hardware products, as defined.

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.

During fiscal 2002 and 2001, total royalty and licensing expense for the royalty
and licensing agreements mentioned herein totaled approximately $16,000 and
$19,900, respectively.

NOTE 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:

<TABLE>
<CAPTION>
                                                                   2002         2001
                                                                ----------   ----------
<S>                                                             <C>          <C>
Numerator for basic and diluted earnings per share:
     Net income                                                 $  207,482   $  477,687
                                                                ----------   ----------

Denominator for basic and diluted earnings per share:
     Weighted average shares (basic)                             1,435,627    1,418,400
     Common stock equivalents                                      274,919      112,394
                                                                ----------   ----------
         Weighted average shares (dilutive)                      1,710,546    1,530,794

Net income available to common shareholders per common share:
     Basic                                                      $     0.14   $     0.34
                                                                ==========   ==========

     Diluted                                                    $     0.12   $     0.31
                                                                ==========   ==========
</TABLE>

                                      F-19

<PAGE>

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

On March 6, 2002, Corbin & Wertz resigned as the independent accountants for the
Company. Neither of the reports of Corbin & Wertz on the Company's financial
statements for the two most recent fiscal years contained an adverse opinion or
a disclaimer of opinion, nor was either such report qualified or modified as to
uncertainty, audit scope or accounting principles.

During the Company's two most recent fiscal years and through March 6, 2002,
there were no disagreements with Corbin & Wertz on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Corbin &
Wertz, would have caused them to make a reference thereto in their report on the
financial statements for such years.

The Company engaged Squar, Milner, Reehl & Williamson LLP as its new independent
accountants as of March 6, 2002.

During the Company's two most recent fiscal years and through March 6, 2002,
neither the Company, nor anyone on its behalf, consulted with Squar, Milner,
Reehl & Williamson LLP regarding either the application of accounting principles
to a specified transaction, either completed or proposed or the type of audit
opinion that might be rendered on the Company's financial statements.

The resignation of Corbin & Wertz and the appointment of Squar, Milner, Reehl &
Williamson LLP was approved by the Company's Board of Directors.

                                    PART III

Item 9.    Directors, Executive Officers, Promoters and Control Persons;
           Compliance with Section 16(a) of the Exchange Act.

Information concerning the Company's directors and executive officers and
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 for its 2002 Annual Meeting of Shareholders to be held on September 27,
2002, 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 for its 2002 Annual Meeting of Shareholders to be held on September 27,
2002, set forth under the heading "ELECTION OF DIRECTORS - Compensation of
Executive Officers."

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

                                        9

<PAGE>

be filed for its 2002 Annual Meeting of Shareholders to be held on September 27,
2002, 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 for its 2002 Annual Meeting of Shareholders to be
held on September 27, 2002, set forth under the heading "ELECTION OF DIRECTORS -
Relationships with Outside Firms."

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

(a)      Exhibits.

Reference is made to the Exhibit Index preceding the exhibits attached hereto
for a list of all exhibits filed as part of this Report.

(b)      Reports on Form 8-K.

On March 12, 2002, the Company filed a Form 8-K to Securities and Exchange
Commission with regard to a change in independent accountants as set forth in
Item 8. above.

                                       10

<PAGE>

                                   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.


August 15, 2002                     By:  /s/ Michael Horan
                                         ------------------------------------
                                         Michael Horan, President and
                                         Chief Executive Officer

                                    By:  /s/ Belen Ramos
                                         ------------------------------------
                                         Belen Ramos
                                         Chief 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.

By:      /s/ Michael Horan                                    August 15, 2002
         --------------------------------------------
         Michael Horan, Director

By:      /s/ Eileen DeSwert                                   August 15, 2002
         --------------------------------------------
         Eileen DeSwert, Director

By:      /s/ Robert Anslow                                    August 15, 2002
         --------------------------------------------
         Robert Anslow, Director

By:      /s/ Harry Cavanaugh                                  August 15, 2002
         --------------------------------------------
         Harry Cavanaugh, Director

By:      /s/ Richard Jackson                                  August 15, 2002
         --------------------------------------------
         Richard Jackson, Director

By:      /s/ Charles Spear                                    August 15, 2002
         --------------------------------------------
         Charles Spear, Director

By:      /s/ H. Richard Anderson                              August 15, 2002
         --------------------------------------------
         H. Richard Anderson, Director

By:      /s/ Costis Toregas                                   August 15, 2002
         --------------------------------------------
         Costis Toregas, Director

                                       11

<PAGE>

                                  EXHIBIT INDEX

     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.

Exhibit
Number            Exhibit
------            -------

3(a)              Restated Articles of Incorporation of the Company (1)

3(b)              Bylaws of the Company (2)

10(a)             Business Security Agreement with U.S. Bank N.A.

10(b)             Stand-Alone Revolving Note with U.S. Bank N.A.

16                Letter from Corbin & Wertz Regarding Change in Accountants

99                Certification Pursuant to 18 U.S.C. Section 1350

------------------------------

(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.

                                       12