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U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended February 28, 2007.



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number 0-16250



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DYNATEM, INC.

(Exact name of small
business issuer as specified in its charter)



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



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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 April 1, 2007, there were 1,459,564 shares of the issuers Common Stock
outstanding.

Transitional Small Business Disclosure Format (check one):    Yes ̈No  x



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DYNATEM, INC.

INDEX



| |  |                               |  |         |  |                                                                                                       |  |     
| |  | ----------------------------- |  | ------- |  | ----------------------------------------------------------------------------------------------------- |  | ----
| |  |                               |  |         |  |                                                                                                       |  | Page
| |  |                              
| |  | Part I. Financial Information |  |        
| |  |                               |  |        
| |  |                               |  | Item 1. |  | Financial Statements                                                                                  |  |     
| |  |                               |  |        
| |  |                               |  |         |  | Condensed Balance Sheets at February 28, 2007 and May 31, 2006                                        |  | 1   
| |  |                               |  |        
| |  |                               |  |         |  | Condensed Statements of Operations for the Three Months Ended February 28, 2007 and February 28, 2006 |  | 2   
| |  |                               |  |        
| |  |                               |  |         |  | Condensed Statements of Operations for the Nine Months Ended February 28, 2007 and February 28, 2006  |  | 3   
| |  |                               |  |        
| |  |                               |  |         |  | Condensed Statements of Cash Flows for the Nine Months Ended February 28, 2007 and February 28, 2006  |  | 4   
| |  |                               |  |        
| |  |                               |  |         |  | Notes to Condensed Financial Statements                                                               |  | 5   
| |  |                               |  |        
| |  |                               |  | Item 2. |  | Managements Discussion and Analysis or Plan of Operation                                             |  | 7   
| |  |                               |  |        
| |  |                               |  | Item 3. |  | Controls and Procedures                                                                               |  | 10  
| |  |                              
| |  | Part II. Other Information    |  | 10     
| |  |                               |  |        
| |  |                               |  | Item 6. |  | Exhibit Index                                                                                         |  | 12  



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CONDENSED BALANCE SHEETS (UNAUDITED)



|                                                                                                  |  |                  |            |   |             |   |           |  
|------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ----------- | - | --------- | -
|                                                                                                  |  | February 28,2007 |            |   | May 31,2006 |  
|ASSETS                                                                                            |  |                  |            |   |             |   |           |  
|Current assets:                                                                                   |  |                  |            |   |             |   |           |  
|Cash and cash equivalents                                                                         |  | $                | 373,187    |   |             | $ | 287,847   |  
|Accounts receivable, net                                                                          |  |                  | 231,068    |   |             |   | 653,644   |  
|Inventories, net                                                                                  |  |                  | 1,054,065  |   |             |   | 821,504   |  
|Prepaid expenses                                                                                  |  |                  | 48,350     |   |             |   | 46,896    |  
|                                                                                                  |  |                  |            |   |             |   |           |  
|Total current assets                                                                              |  |                  | 1,706,670  |   |             |   | 1,809,891 |  
|                                                                                                  |  |                 
|Property and equipment, net                                                                       |  |                  | 65,990     |   |             |   | 67,565    |  
|Other assets                                                                                      |  |                  | 39,137     |   |             |   | 11,646    |  
|                                                                                                  |  |                  |            |   |             |   |           |  
|                                                                                                  |  | $                | 1,811,797  |   |             | $ | 1,889,102 |  
|                                                                                                  |  |                  |            |   |             |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                              |  |                  |            |   |             |   |           |  
|Current liabilities:                                                                              |  |                  |            |   |             |   |           |  
|Accounts payable                                                                                  |  | $                | 405,494    |   |             | $ | 186,622   |  
|Deferred revenue                                                                                  |  |                  | 99,000     |   |             |   |          |  
|Accrued liabilities                                                                               |  |                  | 244,246    |   |             |   | 220,979   |  
|                                                                                                  |  |                  |            |   |             |   |           |  
|Total current liabilities                                                                         |  |                  | 748,740    |   |             |   | 407,601   |  
|                                                                                                  |  |                  |            |   |             |   |           |  
|Stockholders equity                                                                              |  |                  |            |   |             |   |           |  
|Common stock, no par value, 50,000,000 shares authorized; 1,459,564 shares issued and outstanding |  |                  | 2,172,108  |   |             |   | 2,172,108 |  
|Accumulated deficit                                                                               |  |                  | (1,109,051 | ) |             |   | (690,607  | )
|                                                                                                  |  |                  |            |   |             |   |           |  
|Total stockholders equity                                                                        |  |                  | 1,063,057  |   |             |   | 1,481,501 |  
|                                                                                                  |  |                  |            |   |             |   |           |  
|                                                                                                  |  | $                | 1,811,797  |   |             | $ | 1,889,102 |  
|                                                                                                  |  |                  |            |   |             |   |           |  

See accompanying notes to condensed financial statements.



1



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CONDENSED STATEMENTS OF OPERATION (UNAUDITED)

Three months ended February 28, 2007 and
February 28, 2006



|                                              |  |      |           |   |      |   |           |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                              |  | 2007 |           |   | 2006 |  
|Net sales                                     |  | $    | 699,460   |   |      | $ | 645,998   |  
|Cost of sales                                 |  |      | 485,393   |   |      |   | 422,519   |  
|                                              |  |      |           |   |      |   |           |  
|Gross profit                                  |  |      | 214,067   |   |      |   | 223,479   |  
|                                              |  |      |           |   |      |   |           |  
|Operating expenses:                           |  |      |           |   |      |   |           |  
|Selling, general and administrative           |  |      | 199,339   |   |      |   | 278,632   |  
|Research and development                      |  |      | 117,548   |   |      |   | 130,540   |  
|                                              |  |      |           |   |      |   |           |  
|Total operating expenses                      |  |      | 316,887   |   |      |   | 409,172   |  
|                                              |  |      |           |   |      |   |           |  
|Operating loss                                |  |      | (102,820  | ) |      |   | (185,693  | )
|                                              |  |     
|Other income                                  |  |      | 2,925     |   |      |   | 2,967     |  
|                                              |  |      |           |   |      |   |           |  
|Net loss                                      |  | $    | (99,895   | ) |      | $ | (182,726  | )
|                                              |  |      |           |   |      |   |           |  
|Basic loss per share                          |  | $    | (0.07     | ) |      | $ | (0.13     | )
|                                              |  |      |           |   |      |   |           |  
|Diluted loss per share                        |  | $    | (0.07     | ) |      | $ | (0.13     | )
|                                              |  |      |           |   |      |   |           |  
|Weighted average shares outstanding  basic   |  |      | 1,459,564 |   |      |   | 1,462,696 |  
|                                              |  |      |           |   |      |   |           |  
|Weighted average shares outstanding  diluted |  |      | 1,459,564 |   |      |   | 1,462,696 |  
|                                              |  |      |           |   |      |   |           |  

See accompanying notes to condensed financial statements



2



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CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

Nine months ended February 28, 2007 and
February 28, 2006



|                                              |  |      |           |   |      |   |           |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                              |  | 2007 |           |   | 2006 |  
|Net sales                                     |  | $    | 1,896,272 |   |      | $ | 2,690,322 |  
|Cost of sales                                 |  |      | 1,271,847 |   |      |   | 1,540,555 |  
|                                              |  |      |           |   |      |   |           |  
|Gross profit                                  |  |      | 624,425   |   |      |   | 1,149,767 |  
|                                              |  |      |           |   |      |   |           |  
|Operating expenses:                           |  |      |           |   |      |   |           |  
|Selling, general and administrative           |  |      | 678,486   |   |      |   | 862,472   |  
|Research and development                      |  |      | 369,438   |   |      |   | 396,265   |  
|                                              |  |      |           |   |      |   |           |  
|Total operating expenses                      |  |      | 1,047,924 |   |      |   | 1,258,737 |  
|                                              |  |      |           |   |      |   |           |  
|Operating loss                                |  |      | (423,499  | ) |      |   | (108,970  | )
|                                              |  |     
|Other income, net                             |  |      | 5,855     |   |      |   | 9,597     |  
|                                              |  |      |           |   |      |   |           |  
|Net loss before taxes                         |  |      | (417,644  | ) |      |   | (99,373   | )
|                                              |  |     
|Provision for income taxes                    |  |      | 800       |   |      |   | 800       |  
|                                              |  |      |           |   |      |   |           |  
|Net loss                                      |  | $    | (418,444  | ) |      | $ | (100,173  | )
|                                              |  |      |           |   |      |   |           |  
|Basic loss per share                          |  | $    | (0.29     | ) |      | $ | (0.07     | )
|                                              |  |      |           |   |      |   |           |  
|Diluted loss per share                        |  | $    | (0.29     | ) |      | $ | (0.07     | )
|                                              |  |      |           |   |      |   |           |  
|Weighted average shares outstanding  basic   |  |      | 1,459,564 |   |      |   | 1,467,275 |  
|                                              |  |      |           |   |      |   |           |  
|Weighted average shares outstanding  diluted |  |      | 1,459,564 |   |      |   | 1,467,275 |  
|                                              |  |      |           |   |      |   |           |  

See accompanying notes to condensed financial statements



3



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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

For nine months ended February 28, 2007 and
February 28, 2006



|                                                                                          |  |      |          |   |      |   |          |  
|----------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                          |  | 2007 |          |   | 2006 |  
|Cash flows from operating activities:                                                     |  |      |          |   |      |   |          |  
|Net loss                                                                                  |  | $    | (418,444 | ) |      | $ | (100,173 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |      |          |   |      |   |          |  
|Depreciation and amortization                                                             |  |      | 17,999   |   |      |   | 5,595    |  
|Bad debt expense                                                                          |  |      | 41,850   |   |      |   |         |  
|Changes in operating assets and liabilities:                                              |  |      |          |   |      |   |          |  
|Accounts receivable                                                                       |  |      | 380,726  |   |      |   | (131,764 | )
|Inventories                                                                               |  |      | (232,561 | ) |      |   | (175,092 | )
|Prepaid expenses                                                                          |  |      | (1,454   | ) |      |   | (1,622   | )
|Other assets                                                                              |  |      | (1,251   | ) |      |   |         |  
|Accounts payable                                                                          |  |      | 218,872  |   |      |   | 70,303   |  
|Deferred revenue                                                                          |  |      | 99,000   |   |      |   |         |  
|Accrued liabilities                                                                       |  |      | 23,267   |   |      |   | (21,589  | )
|                                                                                          |  |      |          |   |      |   |          |  
|Net cash provided by (used in) operating activities                                       |  |      | 128,004  |   |      |   | (354,342 | )
|                                                                                          |  |      |          |   |      |   |          |  
|Cash flows from investing activities:                                                     |  |      |          |   |      |   |          |  
|Purchases of fixed assets                                                                 |  |      | (12,763  | ) |      |   |         |  
|Changes in other assets                                                                   |  |      | (29,901  | ) |      |   | (7,137   | )
|                                                                                          |  |      |          |   |      |   |          |  
|Net cash used in investing activities                                                     |  |      | (42,664  | ) |      |   | (7,137   | )
|                                                                                          |  |      |          |   |      |   |          |  
|Cash flows from financing activities:                                                     |  |      |          |   |      |   |          |  
|Proceeds from credit line advance                                                         |  |      |         |   |      |   | 109,500  |  
|Payment of credit line advance                                                            |  |      |         |   |      |   | (59,500  | )
|Repurchase of common stock                                                                |  |      |         |   |      |   | (13,300  | )
|                                                                                          |  |      |          |   |      |   |          |  
|Net cash provided by financing activities                                                 |  |      |         |   |      |   | 36,700   |  
|                                                                                          |  |      |          |   |      |   |          |  
|Net increase (decrease) in cash                                                           |  |      | 85,340   |   |      |   | (324,779 | )
|                                                                                          |  |     
|Cash and cash equivalents, beginning balance                                              |  |      | 287,847  |   |      |   | 720,046  |  
|                                                                                          |  |      |          |   |      |   |          |  
|Cash and cash equivalents, ending balance                                                 |  | $    | 373,187  |   |      | $ | 395,267  |  
|                                                                                          |  |      |          |   |      |   |          |  
|Supplemental disclosures of cash flow information:                                        |  |      |          |   |      |   |          |  
|Cash paid during the period for taxes:                                                    |  | $    | 800      |   |      | $ | 800      |  
|                                                                                          |  |      |          |   |      |   |          |  

See accompanying notes to condensed financial statements.



4



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Notes to Condensed Financial Statements

February 28, 2007



(1) Interim Accounting Policy

In the opinion of the management of Dynatem, Inc. (the Company), the accompanying unaudited financial statements include only normal recurring adjustments necessary for a fair presentation of the
Companys financial position as of February 28, 2007 and the results of operations and cash flows for the three and nine months ended February 28, 2007 and February 28, 2006, respectively. 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 accounting
principles generally accepted in the United States of America, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying unaudited condensed financial statements should be read
in conjunction with the audited financial statements and notes thereto which are included in Dynatem, Inc.s Form 10-KSB filed with the Securities and Exchange Commission (SEC) on August 28, 2006. Results of operations for
interim periods are not necessarily indicative of results of operations to be expected for the full year.

(2) Recent Accounting
Standards

Effective June 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share Based Payment, (SFAS No. 123(R)). See Accounting For Stock-Based Compensation below for more information regarding the effects of adopting this standard.

Other recent accounting pronouncements discussed in the notes to the May 31, 2006 audited financial statements, filed previously with the Securities and Exchange
Commission in form 10-KSB, that were required to be adopted during the year ending May 31, 2007, did not have or are not expected to have a significant impact on the Companys 2007 financial statements.

(3) Accounting for Stock-Based Compensation

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

On October 7, 1998, the Companys Board of Directors adopted and the shareholders approved, the 1998 Stock Option Plan of
Dynatem, Inc. (1998 Plan). 400,000 shares of the Companys common stock have been reserved for issuance upon the exercise of options to be granted under the 1998 Plan.

Prior to June 1, 2006, the Company accounted for grants for these plans under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees (APB
25) and related interpretations, and applied SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, for
disclosure purposes only. Under APB 25, stock-based compensation cost related to stock options was not recognized in net income since the options underlying those plans had exercise prices greater than or equal to the market value of the underlying
stock on the date of the grant.

Effective June 1, 2006, the Company adopted SFAS No. 123(R), which revises SFAS No. 123 and supersedes APB
25. SFAS No. 123(R) requires that all share-based payments to employees be recognized in the financial statements based on their fair values at the date of grant. The calculated fair value is recognized as expense (net of any capitalization)
over the requisite service period, net of estimated forfeitures, using the straight-line method under SFAS No. 123(R). The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and
historical experience. The statement was adopted using the modified prospective method of application which requires compensation expense to be



5



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Notes to Condensed Financial Statements

February 28, 2007



recognized in the financial statements for all unvested stock options beginning in the quarter of adoption. No adjustments to prior periods have been made as
a result of adopting SFAS No. 123(R). Under this transition method, compensation expense for share-based awards granted prior to June 1, 2006, but not yet vested as of such date, will be recognized in the Companys financial
statements over their remaining service period. The cost was based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123. As required by SFAS No. 123(R), compensation expense recognized in future
periods for share-based compensation granted prior to adoption of the standard will be adjusted for the effects of estimated forfeitures.

For the three
and nine months ended February 28, 2007, the impact of adopting SFAS No. 123(R) on the Companys condensed statements of operations was nil as there were no unvested options at June 1, 2006 and no additional options were granted
during the three month and nine months ended February 28, 2007. There was no material impact on the Companys basic and diluted net income per share as a result of the adoption of SFAS No. 123(R). The adoption of SFAS No. 123(R)
had no significant effect on net cash flow.

There was no stock-based employee compensation cost reflected in the results of operations for the quarters
ended February 28, 2007 and 2006. Additionally, if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation in fiscal 2007, there would have been no change to net income or
earnings per share for the three and nine months ended February 28, 2006.

(4) Inventories

A summary of inventories follows:



|                |  |                   |           |              |   |        
|--------------- |  | ----------------- | --------- | ------------ | - | -------
|                |  | February 28, 2007 |           | May 31, 2006
|Raw materials   |  | $                 | 645,223   |              | $ | 518,383
|Work-in-process |  |                   | 315,983   |              |   | 193,654
|Finished goods  |  |                   | 92,858    |              |   | 109,467
|                |  |                   |           |              |   |        
|                |  | $                 | 1,054,064 |              | $ | 821,504
|                |  |                   |           |              |   |        

(5) Stock Repurchase Plan

On October 26, 2006, the Board of Directors formally adopted a resolution to take effect after November 1, 2006, to discontinue the Companys Stock Repurchase Plan, originally initiated on
October 1, 2003, (the Repurchase Plan). The Company was authorized to acquire shares of the Companys common stock with an aggregate purchase price not to exceed $300,000. There were no repurchase transactions during the nine
months ended February 28, 2007.

(6) Earnings (Loss) Per Share

Under SFAS No. 128 Earnings Per Share, basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares assumed to be
outstanding during the period of computation. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if
the potential common shares had been issued and if the additional common shares were dilutive using the treasury stock method. The Company had a net loss for the three and nine month periods ended February 28, 2007 and 2006. As a result, all
shares of common stock issuable upon exercise of stock options have been excluded from the calculation of diluted loss per share for the three and nine month periods ended February 28, 2007 and 2006 because their inclusion would be
antidilutive.



6



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Notes to Condensed Financial Statements

February 28, 2007



The following is a reconciliation of the shares used in the computation of basic and diluted (loss) earnings per
share for the three and nine month periods ended February 28, 2007 and 2006, respectively:



|                                                                                                                     |  |              |  |             |  |              |  |            
|-------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ----------- |  | ------------ |  | -----------
|                                                                                                                     |  | 2007         |  | 2006       
|                                                                                                                     |  | Three-Months |  | Nine-Months |  | Three-Months |  | Nine-Months
|Basic (loss) earnings per share - weighted-average number of common shares outstanding                               |  | 1,459,564    |  | 1,459,564   |  | 1,462,696    |  | 1,467,275  
|Effect of dilutive potential common shares - stock options outstanding                                               |  |             |  |            |  |             |  |           
|                                                                                                                     |  |              |  |             |  |              |  |            
|Diluted (loss) earnings per share - weighted-average number of common shares and potential common shares outstanding |  | 1,459,564    |  | 1,459,564   |  | 1,462,696    |  | 1,467,275  
|                                                                                                                     |  |              |  |             |  |              |  |            

(7) Line of Credit

The Company had a revolving line of credit agreement (the Line of Credit) that permitted borrowings up to $500,000. This Line of Credit matured July 18, 2006. The Company has not renewed such
Line of Credit.

(8) Deferred Revenues

During the three months ended February 28, 2007, the Company received a prepayment totaling $99,000 for a product order. Such amount is included in deferred revenues in the accompanying condensed balance sheets.



|Item 2. | Managements Discussion and Analysis or Plan of Operation
|------- | ---------------------------------------------------------

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE COMPANYS FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL
RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW. SEE ALSO THE COMPANYS ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MAY 31, 2006.

Net sales for the three months ended February 28, 2007, increased 8.3% to $699,460 compared to net sales of $645,998 in the same period a year ago. For the nine months ended February 28, 2007, net sales were
$1,896,272, $794,051 lower than the corresponding period in the previous fiscal year, for a decrease of 29.5%. The decrease in total net sales is attributed to the end of life of the DPC2 product line combined with the slow ramp up of newer designs.

Cost of sales for the three months ended February 28, 2007, was $485,393 or 69.4% of net sales compared to $422,519 or 65.5% of net sales in the same
period a year ago. For the nine months ended February 28, 2007, cost of sales of $1,271,847 represented 67.1% of net sales compared to $1,540,555, representing 57.3% of net sales for the same period a year ago. The increase of cost of sales as
a percentage of net sales was the consequence of spreading of fixed production cost over reduced unit production, and also to changes in product mix such as the introduction of new products with high initial cost as a result of low initial sales
volume.

Selling, general and administrative expenses for the three-month and nine-month periods ended February 28, 2007, were $199,339 and $678,486,
respectively, as compared to $278,632 and $862,472, respectively, for the same periods a year ago. Selling, general and administrative expenses for three and nine month periods decreased by 28.5% and 21.3%, respectively, as compared to prior year.
The decrease is primarily the result of staff reductions and reduced expenses in some areas like salaries, advertisement, directors and officers insurance, medical group insurance, etc.



7



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Research and development expenses for the three-month and nine-month periods ended February 28, 2007 were $117,548
and $369,438, respectively, as compared to $130,540 and $396,265, respectively, for the same periods a year ago. Research and development expenses for the three and nine month periods were lower by 10.1% and 6.8%, respectively, as compared to prior
year. The decrease in research and development expenses is the result of the lower cost of new product introductions attributed to the ability to leverage design databases into new products.

Liquidity and Capital Resources

As of
February 28, 2007, the Companys working capital, which is current assets less current liabilities, was $957,930 and the Companys current ratio, which is current assets divided by current liabilities, was 2.3:1 compared to $1,402,290
and a ratio of 4.4:1 as of May 31, 2006. 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 2007. The Company will consider
other sources of capital should the need arise.

Critical Accounting Policies

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



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



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



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

Revenue Recognition

Revenue is recognized at the time the product is shipped.

SEC Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition, outlines the basic criteria that must be met to recognize
revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the Securities and Exchange Commission. Management believes the Companys revenue
recognition policy conforms to SAB 104.

VME

The VME product group is the Companys principal product group. This product group consists of hardware only. A customer will place an order. The Company then fills the order and ships the product to the customer FOB shipping point,
with a one-year warranty. Revenue is recognized at the time the product is shipped.

CPU Boards  The Company manufactures boards classified as
hardware products and recognizes revenue upon shipment.

Hardware  The Company manufactures computer hardware as noted above and recognizes
revenue upon shipment of the product.



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Support Services  The Company does not provide support services. It provides a hardware warranty. If the
product does not work, the Company repairs or replaces the product. After the warranty period expires, the Company continues to provide repair services for all its products regardless of the age of the product, subject to availability of spare
parts.

Custom Designed Products and Software  The Company occasionally provides custom designed hardware products, but generally builds
single board products for sale to its general customer base.

Software

The Company sells software drivers specific to its hardware and software it has purchased from other suppliers (operating system software for resale). The volume of resale software is minimal and typically only
involves installing an operating system in order to pre-install software drivers in situations where customers request pre-installation (the drivers cannot be installed unless there is an operating system). The software drivers are sold with the
related hardware as an off the shelf product. Software resale represents off the shelf operating systems designed, maintained, and supported by the original software manufacturer. The Company provides support to its customers
under the terms of its warranty and does not supply software support services billed separately. There are no multiple element software sales as described in SOP 97-2. The Companys software sale activities are incidental to the core hardware
products sold and the Company is not in the business of selling software; rather, it is necessary for the Company to supply integration of the various hardware products it sells. Such integration is done by software drivers, which in effect are part
of the hardware.

Systems and Software  The Company does not develop operating system software and is not in this line of business. The
Company sells hardware systems and related software drivers.

Software Drivers  The Company develops and sells software drivers with its
hardware products. Revenue is recognized upon shipment of the related hardware products.

Resale of Other Manufacturers Software  The
Company is not in the business of selling software and rarely sells an operating system (such as Windows XP) in order for pre-installation of drivers. The Company recognizes the revenue upon shipment of the related hardware products. Software sales
of this type are very minor.

Microsys

The
Company is a distributor of Microsys GmbH products and purchases such products from Microsys as needed. The Company reports the related revenue on a gross revenue basis under EITF 99-19 because the Company is (1) the primary obligor
in the arrangement, (2) has the general inventory risk, (3) has reasonable latitude to establish the price with the customer, (4) changes the mix of the products between Microsys and Company products as required, (5) determines
the customer needs, (6) has physical loss inventory risk, and finally (7) has the credit risk. Revenue is recognized upon shipment of the Microsys product as noted herein in accordance with EITF 99-19.

Valuation of deferred tax assets

The Company accounts
for income taxes under SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized.

Estimation of the allowance for doubtful 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.



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Important Factors Related to Forward-Looking Statements and Associated Risks.

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the Exchange Act) and we intend that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include our plans and objectives of management for future
operations, including plans and objectives relating to the products and our future economic performance. The forward-looking statements included herein are based upon current expectations that involve a number of risks and uncertainties. These
forward-looking statements are based upon assumptions that we will design, manufacture, market and ship new products on a timely basis, that competitive conditions within the computer and electronic markets will not change materially or adversely,
that the computer and electronic markets will continue to experience growth, that demand for our products will increase, that we will obtain and/or retain existing development partners and key management personnel, that future inventory risks due to
shifts in market demand will be minimized, that our forecasts will accurately anticipate market demand and that there will be no material adverse change in our operations or business. Assumptions relating to the foregoing involve judgments with
respect, among other things, to future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the
assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking information will be realized. In addition,
as disclosed above, our business and operations are subject to substantial risks which increase the uncertainty inherent in such forward-looking statements. Any of the other factors disclosed above could cause our net sales or net income (or loss),
or our growth in net sales or net income (or loss), to differ materially from prior results. Growth in absolute amounts of costs of sales and selling and administrative expenses or the occurrence of extraordinary events could cause actual results to
vary materially from the results contemplated in the forward-looking statements. Budgeting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and
business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our results of operations. In light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.



|Item 3. | Controls and Procedures.
|------- | ------------------------

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed under the
Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

We carried out an evaluation under the supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of February 28, 2007, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of February 28, 2007.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended February 28, 2007 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Items 1 through 5 have been omitted because there is nothing material to report.



|Item 6. | Exhibits.
|------- | ---------

See Exhibit Index
attached hereto.



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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.
|               |  |              
|April 13, 2007 |  | By            |  | /s/ Michael Horan                  
|               |  |               |  | Michael Horan                      
|               |  |               |  | President & Chief Executive Officer
|               |  |              
|April 13, 2007 |  | By:           |  | /s/ Belen Ramos                    
|               |  |               |  | Belen Ramos                        
|               |  |               |  | Chief Financial Officer            



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EXHIBIT INDEX

The following is a list of Exhibits required by Item 601 of Regulation S-B. Except for these exhibits
indicated by an asterisk which are filed herewith, the remaining exhibits 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 Company1                                                                                                       
|               | 
|3(b)           |  | Bylaws of the Company2                                                                                                                                   
|               | 
|31.1*          |  | Certifications Pursuant to Securities Exchange Act Rules 13A  14 and 15D -14 - Section 302, signed by Michael Horan, Chief Executive Officer            
|               | 
|31.2*          |  | Certifications Pursuant to Securities Exchange Act Rules 13A  14 and 15D -14 - Section 302, signed by Belen Ramos, Chief Financial Officer              
|               | 
|32*            |  | Certification Pursuant to 18 U.S.C. Section 1350 - Section 906, signed by Michael Horan, Chief Executive Officer and Belen Ramos, Chief Financial Officer

---

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

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



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