<PAGE>
 
                   U. S. SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                                  FORM 10-QSB

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

               FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998.

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


                        Commission file number 0-16250
                                               -------


                                 DYNATEM, INC.
                    ---------------------------------------
                    (Exact name of small business issuer as
                           specified 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)


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

                                Not Applicable
    ----------------------------------------------------------------------
    (Former name, former address and former fiscal year, if changed since 
     last report)
                                        
     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 
                                                                      ---   ---

     On December 31, 1998, there were 1,418,400 shares of the issuer's Common
Stock outstanding.

     Transitional Small Business Disclosure Format (check one):

               Yes      No   X
                   ---     ----
<PAGE>
 
                                 DYNATEM, INC.

                                     INDEX


Part I.   Financial Information
<TABLE>
<CAPTION>
    Item 1.    Financial Statements
 <S>                                                        <C>
               Balance Sheets at November 30, 1998
                 and May 31, 1998                            1
 
               Statements of Operations for the Three
                 Months Ended November 30, 1998
                 and 1997                                    2

               Statements of Operations for the Six
                 Months Ended November 30, 1998
                 and 1997                                    3

               Statements of Cash Flows for the Six
                 Months Ended November 30, 1998
                 and 1997                                    4

               Notes to Financial Statement                  5,6


    Item 2.    Management's Discussion and Analysis or
                 Plan of Operation                           7,8
 

Part II.  Other Information                                  9,10

</TABLE>
<PAGE>
 
                                 DYNATEM, INC.

                                BALANCE SHEETS
 
 
                                              NOVEMBER 30,   MAY 31,
                                                 1998         1998
                                              ------------   ----------
ASSETS
------
 
Current assets:
   Cash and cash equivalents                  $  514,825   $  600,525
   Accounts receivable, net of allowance   
      for doubtful accounts of $12,825     
      and $9,825                                 215,884      192,125
   Inventories                                   383,675      420,585
   Prepaid expenses and other                      8,762       17,330
                                              ----------   ----------
                                           
           Total current assets                1,123,146    1,230,565
                                           
Note Receivable                                    6,856        7,766
Property and equipment, net                       25,972       16,132
Other assets                                      40,919       15,533
                                              ----------   ----------

                                              $1,196,893   $1,269,996
                                              ==========   ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
 
Current Liabilities:
   Accounts payable                           $   102,195    $   112,065
   Accrued expenses                                59,526         40,512
                                              -----------    -----------
 
           Total current liabilities              161,721        152,577
                                              -----------    -----------
 
Shareholders' equity:
   Common stock, no par value, 50,000,000
      shares authorized; 1,418,400 shares
      issued and outstanding                    2,383,385      2,383,385
   Accumulated deficit                         (1,348,213)    (1,265,966)
                                              -----------    -----------
 
           Total shareholders' equity           1,035,172      1,117,419
                                              -----------    -----------
 
                                              $ 1,196,893    $ 1,269,996
                                              ===========    ===========


                See accompanying notes to financial statements.

                                       1
<PAGE>
 
                                 DYNATEM, INC.



                            STATEMENTS OF OPERATIONS
                                        
                 THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
                                        

<TABLE>
<CAPTION>
                                                        1998        1997
                                                    ----------   ----------
<S>                                                 <C>          <C>
 
Net Sales                                           $  368,031   $  488,171
Cost of Sales                                          206,176      258,561
                                                    ----------   ----------
             Gross profit                              161,855      229,610
                                                    ----------   ----------
 
Operating expenses:
      Selling, general and administrative              162,526      170,327
      Research and development                          48,436       51,941
                                                    ----------   ----------
 
             Total operating expenses                  210,962      222,268
                                                    ----------   ----------
 
             Operating income (loss)                (   49,107)       7,342
 
Other income, net                                        7,087        6,113
                                                    ----------   ----------

             Net income (loss) before taxes         (   42,020)      13,455
 
Provision for income taxes                                 800            -
                                                    ----------   ----------
 
            Net income (loss)                      ($   42,820)  $   13,455
                                                   ===========   ==========
 
Income (loss) per share                            ($      .03)  $      .01
                                                   ===========   ==========
 
Weighted average shares outstanding                  1,418,400    1,418,400
                                                   ===========   ==========
 
</TABLE>



                 See accompanying notes to financial statements

                                       2
<PAGE>
 
                                 DYNATEM, INC.


                           STATEMENTS OF OPERATIONS
                                        
                  SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997
                                        

<TABLE>
<CAPTION>
                                                        1998        1997
                                                    ----------   -----------
<S>                                                 <C>          <C> 
 
Net Sales                                           $  693,451    $  825,153
Cost of Sales                                          394,476       462,717
                                                    ----------    ----------
             Gross profit                              298,975       362,436
                                                    ----------    ----------
                                                  
Operating expenses:                               
      Selling, general and administrative              297,526       335,193
      Research and development                          94,946        95,321
                                                    ----------    ----------
                                                  
             Total operating expenses                  392,472       430,514
                                                    ----------    ----------
                                                  
             Operating loss                        (    93,497)  (    68,078)
                                                  
Other income, net                                       12,050        12,908
                                                    ----------    ----------

             Loss before income taxes              (    81,447)  (    55,170)
                                                  
Provision for income taxes                                 800           800
                                                    ----------    ----------
                                                  
             Net loss                              ($   82,247)  ($   55,970)
                                                    ==========    ==========
                                                  
Loss per share                                     ($      .06)  ($      .04)
                                                    ==========    ==========
                                                  
Weighted average shares outstanding               
                                                     1,418,400     1,418,400
                                                    ==========    ==========
 
</TABLE>



                 See accompanying notes to financial statements

                                       3
<PAGE>
 
                                 DYNATEM, INC.

                                        
                            STATEMENTS OF CASH FLOWS
                                        
                FOR SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997
                                        
<TABLE>
<CAPTION>
                                                                1998                  1997
                                                             ----------           ----------
<S>                                                          <C>                  <C>    
Cash flows from operating activities:
      Net loss                                               ($  82,247)          ($  55,970)
      Adjustments to reconcile net loss
       to net cash provided by (used in)
        operating activities: 
                    Depreciation and amortization                 4,478                5,937
         Changes in operating assets and
          liabilities:
             Accounts receivables                               (23,759)             (12,258)
             Inventories                                         36,910             (170,024)
             Prepaid expenses                                     8,568               17,922
             Accounts payable                                   ( 9,870)             254,642
             Accrued expenses                                    19,014             ( 16,727)
                                                              ---------            ---------
 
                  Total adjustments                              35,341               79,492
                                                              ---------            ---------
 
Net cash provided by (used in) operating
       activities                                               (46,906)              23,522
                                                              ---------            ---------
Cash flows from investing activities:
      Other assets                                              (25,386)               1,579
      Purchases of property & equipment                         (14,318)              (9,529)
                                                              ---------            ---------
Net cash used in investing activities                           (39,704)              (7,950)
                                                              ---------            ---------
Cash flows from financing activities:
      Repayment of notes receivable                                 910                1,690
                                                              ---------            ---------
Net increase (decrease) in cash and
      cash equivalents                                          (85,700)              17,262
 
Cash and cash equivalents, beginning balance                    600,525              561,511
                                                              ---------            ---------
 
Cash and cash equivalents, ending balance                     $ 514,825            $ 578,773
                                                              =========            =========
Supplemental disclosures of
   cash flow information:
        Cash paid during the period for:
 
        Taxes                                                 $     800            $      -
                                                              =========            =========
</TABLE>
                See accompanying notes to financial statements.

                                       4
<PAGE>
 
                                 DYNATEM, INC.


                         NOTES TO FINANCIAL STATEMENTS


(1)   Interim Accounting Policy
      -------------------------

      In the opinion of the Company's management, the accompanying unaudited
      statements include only normal, recurring adjustments necessary for a fair
      presentation of the Company's financial position and the results of
      operations and cash flows for the three and six months ended November 30,
      1998 and 1997.  Although the Company believes that the disclosures in
      these financial statements are adequate to ensure that the information
      presented is not misleading, certain information and footnote information
      normally included in financial statements prepared in accordance with
      generally accepted accounting principles have been condensed or omitted
      pursuant to the rules and regulations of the Securities and Exchange
      Commission.  Results of operations for interim periods are not necessarily
      indicative of results of operations to be expected for the full year.

(2)    Inventories
       -----------

       A summary of inventories follows:
 
                            November 30, 1998              May 31, 1998
                            -----------------              ------------
       Finished Goods           $164,643                     $153,375
       Work-in-process            41,830                       71,251
       Raw Materials             177,202                      195,959
                                --------                     --------

                                $383,675                     $420,585
                                ========                     ========
 

(3)    Income (loss) Per Share
       -----------------------
 
       Income (loss) per common share is computed based on the weighted average
       number of common shares outstanding during the periods presented. The
       potential exercise of stock options and warrants are not included in the
       computation of net income (loss) per share because their effect would not
       impact per share information or would be antidilutive.

                                       5
<PAGE>
 
                                 DYNATEM, INC.


                         NOTES TO FINANCIAL STATEMENTS
                                        


(4)    Income Taxes
       ------------

       Income tax expense for the six months ended November 30, 1998 and 1996
       are not considered material due to the utilization of net operating loss
       carryforwards.

       Significant deferred tax assets of the Company consist of the net
       operating loss carryforwards for federal purposes of approximately
       $1,565,400 at November 30, 1998, which, if not utilized to offset future
       taxable income, will expire through 2005.


(5)    Foreign Currency Transactions
       -----------------------------

       For the three months and six months ended November 30, 1998 and
       1997,transactions gains and losses are not material to the financial
       statements taken as a whole.

                                       6
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
         ---------------------------------------------------------


Revenue for the three months ended November 30, 1998, decreased by 25% to
$368,031 compared to $488,171 in the same period of the prior year. For the six
months ended November 30, 1998, net sales decreased by 16% to $693,451 compared
to $825,153 of the same period a year ago.

For the three-month and six-month period ended November 30, 1998, the net
decrease in total net sales of $120,140 and $131,702 respectively, is due to the
phase out of distributed products in favor of our own designs which represents
potentially increased margins and growth in the future.

Cost of sales for the three months ended November 30, 1998, was $206,176 or 56%
of net sales and compares to $258,561 or 53% of net sales in the same period a
year ago. The increase is due to a change in the mix of product sales for the
quarter. For the six months ended November 30, 1998, cost of sales of $394,476
represented 57% of net sales as compared to $462,717 representing 56% of net
sales the same period a year ago.

Operating expenses for the six-month period ended November 30, 1998, decreased
by 9% to $392,472 compared to $430,514 in the same period of the prior year. The
decrease is due primarily to reduced advertising and promotional expenses as
part of the Company's ongoing cost cutting program initiated by management.

The three-month and six-month periods ended November 30, 1998, reflect net
losses of $42,820 and $82,247, respectively, compared to net income of $13,455
and net loss of $55,970 for the corresponding periods a year ago. The change of
net income is attributed to lower revenues as mentioned in the preceding
paragraph.

The Company has initiated a program to evaluate the impact of the "Year 2000"
situation on its operations. This program has developed into a four-phase
process which includes the following procedures:

   1.) The Company has established communication with all customers who have
received a product, either software or hardware, which may or may not be
compliant with the Year 2000.  This communication has been exhibited in the form
of a webpage identified as www.dynatem.com/y2k_issues.html.  Those customers who
are concerned with our own compliance have been referred to this page. As of
this date, there has been no significant concern expressed by our customers.

                                       7
<PAGE>
 
   2.) The Company has advised its vendors to report on the progress of their
compliance with Year 2000 requirement. Currently, the Company is in the process
of receiving responses from its vendors and evaluating the impact it may have to
the Company. So far, the responses we have received demonstrate general
confidence by these vendors that they will be prepared for the Y2K requirement.

   3.) The primary focus of Dynatem's VMEbus product line is embedded computer
hardware. The Company has made an effort to determine which software being used
by Dynatem customers might have problems related to Y2K compliance. The
operating systems employed by our CPU modules are supplied by a number of
software vendors and in this regard, we refer our customers to the web sites of
these vendors. These web sites define potential Y2K problem areas, advise if and
how the various versions of their software products deal with them, and suggest
ways of modifying the application code to best avoid potential problems. In some
cases, software patches are offered, and in other cases upgrading to a newer
revision is strongly recommended. So far, to date, there has been no significant
concern expressed by our customers.

   4.) The Company is now in the process of initiating a computer upgrade
program for the Company's financial accounting and administrative systems in
order to better accommodate revised network software which will be compliant
with Year 2000 standards. The accounting department has already begun an
investigation into various financial system upgrades and expects to have a
decision on the implementation of this system by the end of the current fiscal
year.

At November 30, 1998, the Company had a current ratio of 6.9:1 compared to 8.1:1
as of May 31, 1998.  The Company continues to believe that its present working
capital will be sufficient for the Company's existing operating activities. The
Company will continue to develop products internally and will consider
additional expansion through an acquisition or strategic alliance.

                                       8
<PAGE>

                          PART II.  OTHER INFORMATION
                          ---------------------------

Items 1 through 3 and 5 have been omitted because there is nothing material to
report and there has been no report on Form 8-k during the quarter ended
November 30, 1998.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         ---------------------------------------------------

On October 7, 1998, the Company held its annual meeting of shareholders and took
the following actions:


ELECTION OF DIRECTORS

The following persons were duly elected to the Company's Board of Directors.
The tabulation of the votes cast for and against each director are set forth
opposite their names below.
 
      DIRECTORS          YES       NO
      ---------          ---       ---
 
Robert Anslow            945,427   3,000
 
Harry Cavanaugh          945,427   3,000
 
Eileen DeSwert           945,427   3,000
 
Richard Jackson          945,427   3,000
 
Costis Toregas           945,427   3,000
 
Charles Spear            945,427   3,000
 
H. Richard Anderson      945,427   3,000
 

APPROVAL OF 1998 STOCK OPTION PLAN

The shareholders duly approved the Company's 1998 Stock Option Plan (the "Plan")
which authorizes the grant of options by the Board of 200,000 shares of the
Company's common stock to employees and directors of, and consultants to, the
Company.  The Plan was approved by 933,727 votes and 14,700 votes either
abstained or voted against the approval of the Plan.


AMENDMENT OF THE BYLAWS

In connection with the qualification of the Plan by the California Department of
Corporations, it was required that the Bylaws of the Company be amended to
provide that directors of the Company may be removed with or without cause as
provided in the California Corporations Code (the "Amendment"). The Amendment
was approved by 933,727 votes and 14,700 votes either abstained or voted against
approval of the Amendment.

                                       9
<PAGE>
 
APPOINTMENT OF AUDITORS

The shareholders approved the appointment of the accounting firm of Corbin &
Wertz as its independent auditors for the fiscal year ending May 31, 1999.  Such
appointment was approved by 947,227 votes and 1,200 votes either abstained or
voted against approval of the appointment.


ITEM 6(A).  EXHIBITS
            --------

See attached Exhibit Index.

                                       10
<PAGE>
 
                                   SIGNATURES
                                   ----------

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



                                   DYNATEM, INC.



January 08, 1999                   By:  /s/ EILEEN DeSWERT
                                            ----------------------------- 
                                            Eileen DeSwert
                                            President and Chief
                                            Executive Officer



January 08, 1999                   By:  /s/ BELEN RAMOS
                                            -----------------------------
                                            Belen Ramos
                                            Chief Financial Officer

                                       11
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------

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

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

3(b)      Amended and Restated Bylaws of the Company

10        The Company's 1998 Stock Option Plan(2)

27        Financial Data Schedule

_________________

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

(2)  Incorporated herein by reference to Exhibit A to the Company's Definitive
     Proxy Statement filed September 17, 1998.

                                       12