---

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 February 28, 2006.



| ̈ | 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 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)

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 ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes ̈No  x

On
April 1, 2006, there were 1,459,564 shares of the issuers Common Stock outstanding.

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



---



---

DYNATEM, INC.

INDEX



|                                                                                                      |  |   
|----------------------------------------------------------------------------------------------------- |  | --
|Part I. Financial Information                                                                         |  |   
|                                                                                                      | 
|Item 1. Financial Statements                                                                          |  |   
|                                                                                                      | 
|Condensed Balance Sheets at February 28, 2006 and May 31, 2005                                        |  | 1 
|                                                                                                      | 
|Condensed Statements of Operations for the Three Months Ended February 28, 2006 and February 28, 2005 |  | 2 
|                                                                                                      | 
|Condensed Statements of Operations for the Nine Months Ended February 28, 2006 and February 28, 2005  |  | 3 
|                                                                                                      | 
|Condensed Statements of Cash Flows for the Nine Months Ended February 28, 2006 and February 28, 2005  |  | 4 
|                                                                                                      | 
|Notes to Condensed Financial Statements                                                               |  | 5 
|                                                                                                      | 
|Item 2. Managements Discussion and Analysis or Plan of Operation                                     |  | 8 
|                                                                                                      | 
|Item 3. Controls and Procedures                                                                       |  | 11
|                                                                                                      | 
|Part II. Other Information                                                                            |  | 12



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DYNATEM, INC.

CONDENSED BALANCE SHEETS (UNAUDITED)



|                                                                                                                                                                   |  |                  |           |   |             |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | --------- | - | ----------- | - | --------- | -
|                                                                                                                                                                   |  | February 28,2006 |           |   | May 31,2005 |  
|ASSETS                                                                                                                                                             |  |                  |           |   |             |   |           |  
|Current assets:                                                                                                                                                    |  |                  |           |   |             |   |           |  
|Cash and cash equivalents                                                                                                                                          |  | $                | 395,267   |   |             | $ | 720,046   |  
|Accounts receivable, net                                                                                                                                           |  |                  | 412,210   |   |             |   | 280,446   |  
|Inventories, net                                                                                                                                                   |  |                  | 989,767   |   |             |   | 814,675   |  
|Prepaid expenses                                                                                                                                                   |  |                  | 47,174    |   |             |   | 43,506    |  
|                                                                                                                                                                   |  |                  |           |   |             |   |           |  
|Total current assets                                                                                                                                               |  |                  | 1,844,418 |   |             |   | 1,858,673 |  
|Property and equipment, net                                                                                                                                        |  |                  | 54,585    |   |             |   | 53,043    |  
|Other assets                                                                                                                                                       |  |                  | 10,206    |   |             |   | 12,252    |  
|                                                                                                                                                                   |  |                  |           |   |             |   |           |  
|                                                                                                                                                                   |  | $                | 1,909,209 |   |             | $ | 1,923,968 |  
|                                                                                                                                                                   |  |                  |           |   |             |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |  |                  |           |   |             |   |           |  
|Current liabilities:                                                                                                                                               |  |                  |           |   |             |   |           |  
|Accounts payable                                                                                                                                                   |  | $                | 290,270   |   |             | $ | 219,967   |  
|Credit line advances                                                                                                                                               |  |                  | 50,000    |   |             |   |          |  
|Accrued liabilities                                                                                                                                                |  |                  | 256,645   |   |             |   | 278,234   |  
|                                                                                                                                                                   |  |                  |           |   |             |   |           |  
|Total current liabilities                                                                                                                                          |  |                  | 596,915   |   |             |   | 498,201   |  
|                                                                                                                                                                   |  |                  |           |   |             |   |           |  
|Commitments & Contingencies                                                                                                                                        |  |                  |           |   |             |   |           |  
|Stockholders equity                                                                                                                                               |  |                  |           |   |             |   |           |  
|Common stock, no par value, 50,000,000 shares authorized; 1,459,564 and 1,469,564 shares issued and outstanding at February 28, 2006 and
May 31, 2005 respectively |  |                  | 2,172,108 |   |             |   | 2,185,408 |  
|Accumulated deficit                                                                                                                                                |  |                  | (859,814  | ) |             |   | (759,641  | )
|                                                                                                                                                                   |  |                  |           |   |             |   |           |  
|Total stockholders equity                                                                                                                                         |  |                  | 1,312,294 |   |             |   | 1,425,767 |  
|                                                                                                                                                                   |  |                  |           |   |             |   |           |  
|                                                                                                                                                                   |  | $                | 1,909,209 |   |             | $ | 1,923,968 |  
|                                                                                                                                                                   |  |                  |           |   |             |   |           |  

See accompanying notes to condensed financial statements.



1



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DYNATEM, INC.

CONDENSED STATEMENTS OF OPERATION (UNAUDITED)

Three months ended February 28, 2006 and February 28, 2005



|                                              |  |      |           |   |      |   |           |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                              |  | 2006 |           |   | 2005 |  
|Net sales                                     |  | $    | 645,998   |   |      | $ | 424,880   |  
|Cost of sales                                 |  |      | 422,519   |   |      |   | 331,549   |  
|                                              |  |      |           |   |      |   |           |  
|Gross profit                                  |  |      | 223,479   |   |      |   | 93,331    |  
|                                              |  |      |           |   |      |   |           |  
|Operating expenses:                           |  |      |           |   |      |   |           |  
|Selling, general and administrative           |  |      | 278,632   |   |      |   | 275,292   |  
|Research and development                      |  |      | 130,540   |   |      |   | 150,936   |  
|                                              |  |      |           |   |      |   |           |  
|Total operating expenses                      |  |      | 409,172   |   |      |   | 426,228   |  
|                                              |  |      |           |   |      |   |           |  
|Operating loss                                |  |      | (185,693  | ) |      |   | (332,897  | )
|Other income, net                             |  |      | 2,967     |   |      |   | 3,835     |  
|                                              |  |      |           |   |      |   |           |  
|Net loss                                      |  | $    | (182,726  | ) |      | $ | (329,062  | )
|                                              |  |      |           |   |      |   |           |  
|Basic loss per share                          |  | $    | (0.13     | ) |      | $ | (0.22     | )
|                                              |  |      |           |   |      |   |           |  
|Diluted loss per share                        |  | $    | (0.13     | ) |      | $ | (0.22     | )
|                                              |  |      |           |   |      |   |           |  
|Weighted average shares outstanding  basic   |  |      | 1,462,696 |   |      |   | 1,469,564 |  
|                                              |  |      |           |   |      |   |           |  
|Weighted average shares outstanding  diluted |  |      | 1,462,696 |   |      |   | 1,469,564 |  
|                                              |  |      |           |   |      |   |           |  

See accompanying notes to condensed financial statements



2



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DYNATEM, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

Nine months ended February 28, 2006 and February 28, 2005



|                                              |  |      |           |   |      |   |           |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                              |  | 2006 |           |   | 2005 |  
|Net sales                                     |  | $    | 2,690,322 |   |      | $ | 1,760,417 |  
|Cost of sales                                 |  |      | 1,540,555 |   |      |   | 1,199,911 |  
|                                              |  |      |           |   |      |   |           |  
|Gross profit                                  |  |      | 1,149,767 |   |      |   | 560,506   |  
|                                              |  |      |           |   |      |   |           |  
|Operating expenses:                           |  |      |           |   |      |   |           |  
|Selling, general and administrative           |  |      | 862,472   |   |      |   | 796,825   |  
|Research and development                      |  |      | 396,265   |   |      |   | 422,910   |  
|                                              |  |      |           |   |      |   |           |  
|Total operating expenses                      |  |      | 1,258,737 |   |      |   | 1,219,735 |  
|                                              |  |      |           |   |      |   |           |  
|Operating loss                                |  |      | (108,970  | ) |      |   | (659,229  | )
|Other income, net                             |  |      | 9,597     |   |      |   | 10,217    |  
|                                              |  |      |           |   |      |   |           |  
|Net loss before taxes                         |  |      | (99,373   | ) |      |   | (649,012  | )
|Provision for income taxes                    |  |      | 800       |   |      |   | 800       |  
|                                              |  |      |           |   |      |   |           |  
|Net loss                                      |  | $    | (100,173  | ) |      | $ | (649,812  | )
|                                              |  |      |           |   |      |   |           |  
|Basic loss per share                          |  | $    | (0.07     | ) |      | $ | (0.44     | )
|                                              |  |      |           |   |      |   |           |  
|Diluted loss per share                        |  | $    | (0.07     | ) |      | $ | (0.44     | )
|                                              |  |      |           |   |      |   |           |  
|Weighted average shares outstanding  basic   |  |      | 1,467,275 |   |      |   | 1,483,337 |  
|                                              |  |      |           |   |      |   |           |  
|Weighted average shares outstanding  diluted |  |      | 1,467,275 |   |      |   | 1,483,337 |  
|                                              |  |      |           |   |      |   |           |  

See accompanying notes to condensed financial statements



3



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DYNATEM, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

For nine months ended February 28, 2006 and February 28, 2005



|                                                                                        |  |      |          |   |      |   |           |  
|--------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | --------- | -
|                                                                                        |  | 2006 |          |   | 2005 |  
|Cash flows from operating activities:                                                   |  |      |          |   |      |   |           |  
|Net loss                                                                                |  | $    | (100,173 | ) |      | $ | (649,812  | )
|Adjustments to reconcile net loss to net cash used in operating activities:             |  |      |          |   |      |   |           |  
|Depreciation and amortization                                                           |  |      | 5,595    |   |      |   | 9,465     |  
|Changes in operating assets and liabilities:                                            |  |      |          |   |      |   |           |  
|Accounts receivable                                                                     |  |      | (131,764 | ) |      |   | 822,719   |  
|Inventories                                                                             |  |      | (175,092 | ) |      |   | (65,349   | )
|Prepaid expenses and other                                                              |  |      | (1,622   | ) |      |   | (10,187   | )
|Accounts payable                                                                        |  |      | 70,303   |   |      |   | (72,886   | )
|Accrued liabilities                                                                     |  |      | (21,589  | ) |      |   | (57,462   | )
|                                                                                        |  |      |          |   |      |   |           |  
|Net cash used in operating activities                                                   |  |      | (354,342 | ) |      |   | (23,512   | )
|                                                                                        |  |      |          |   |      |   |           |  
|Cash flows from investing activities:                                                   |  |      |          |   |      |   |           |  
|Purchases of property and equipment                                                     |  |      | (7,137   | ) |      |   | (8,269    | )
|                                                                                        |  |      |          |   |      |   |           |  
|Net cash used in investing activities                                                   |  |      | (7,137   | ) |      |   | (8,269    | )
|                                                                                        |  |      |          |   |      |   |           |  
|Cash flows from financing activities:                                                   |  |      |          |   |      |   |           |  
|Proceeds from credit line advance                                                       |  |      | 109,500  |   |      |   |          |  
|Proceeds from issuance of common stock in connection with the exercise of stock options |  |      |         |   |      |   | 3,500     |  
|Payment of credit line advance                                                          |  |      | (59,500  | ) |      |   |           |  
|Repurchase of common stock                                                              |  |      | (13,300  | ) |      |   | (101,400  | )
|                                                                                        |  |      |          |   |      |   |           |  
|Net cash provided by (used in) financing activities                                     |  |      | 36,700   |   |      |   | (97,900   | )
|                                                                                        |  |      |          |   |      |   |           |  
|Net decrease in cash                                                                    |  |      | (324,779 | ) |      |   | (129,681  | )
|Cash and cash equivalents, beginning balance                                            |  |      | 720,046  |   |      |   | 1,042,600 |  
|                                                                                        |  |      |          |   |      |   |           |  
|Cash and cash equivalents, ending balance                                               |  | $    | 395,267  |   |      | $ | 912,919   |  
|                                                                                        |  |      |          |   |      |   |           |  
|Supplemental disclosures of cash flow information:                                      |  |      |          |   |      |   |           |  
|Cash paid during the period for taxes:                                                  |  | $    | 800      |   |      | $ | 800       |  
|                                                                                        |  |      |          |   |      |   |           |  
|Cash paid during the period for interest:                                               |  | $    | (1,103   | ) |      | $ |          |  
|                                                                                        |  |      |          |   |      |   |           |  

See accompanying notes to condensed financial statements.



4



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DYNATEM, INC.

Notes to Condensed Financial Statements

February 28, 2006



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

In the opinion of the
management of Dynatem, Inc. (the Company), the accompanying unaudited condensed financial statements include only normal recurring adjustments necessary for a fair presentation of the Companys financial position as of
February 28, 2006 and the results of operations and cash flows for the three and nine months ended February 28, 2006 and 2005. 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. Results of operations for interim periods are not necessarily indicative of results of operations to be expected for the full year.



|(2) | Significant Recently Issued Accounting Pronouncements
|--- | -----------------------------------------------------

In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an amendment of ARB No. 43, Chapter 4, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted
material. In Chapter 4 of ARB 43, paragraph 5 previously stated that under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as
current period charges. SFAS No. 151 requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of so abnormal (an undefined term). This pronouncement also requires that
allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred in years beginning after June 15, 2005.

In December 2004, the FASB issued SFAS No. 123-R, Share-Based Payment, which requires that the compensation cost relating to share-based payment
transactions (including the cost of all employee stock options) be recognized in the financial statements. That cost will be measured based on the estimated fair value of the equity or liability instruments issued. SFAS No. 123-R as interpreted
by SEC Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No. 123-R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. As originally issued, SFAS No. 123 established as a preferable fair-value-based method of accounting for share-based payment transactions with employees. However, that pronouncement
permitted entities to continue applying the intrinsic-value model of APB Opinion 25, provided that the financial statements disclosed the pro forma net income or loss based on the preferable fair-value method. Small Business Issuers are required to
apply SFAS No. 123-R in the first interim period of the first annual reporting period that begins after December 15, 2005.



5



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DYNATEM, INC.

Notes to Condensed Financial Statements

February 28, 2006

Management is presently evaluating the potential effect, if any, the above pronouncements might have on its future financial statements.



|(3) | Accounting for Stock-Based Compensation
|--- | ---------------------------------------

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

At
February 28, 2006, the Company has two stock-based employee compensation plans (the Plans). The Company accounts for the Plans under the recognition and measurement principles of APB 25 and related Interpretations. There was no
stock-based employee compensation cost reflected in net income for the periods ended February 28, 2006, and 2005 under APB 25. If the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation, the effect would be insignificant. The effects of applying SFAS No. 123 are not likely to be a representation of the pro forma effect on reported net income (loss) for future periods.



|(4) | Inventories
|--- | -----------

A summary of inventories follows:



|                |  |                   |         |   |              |   |         |  
|--------------- |  | ----------------- | ------- | - | ------------ | - | ------- | -
|                |  | February 28, 2005 |         |   | May 31, 2005 |  
|Raw materials   |  | $                 | 715,811 |   |              | $ | 534,626 |  
|Work-in-process |  |                   | 259,896 |   |              |   | 253,435 |  
|Finished goods  |  |                   | 84,560  |   |              |   | 86,614  |  
|Reserve         |  |                   | (70,500 | ) |              |   | (60,000 | )
|                |  |                   |         |   |              |   |         |  
|                |  | $                 | 989,767 |   |              | $ | 814,675 |  



6



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DYNATEM, INC.

Notes to Condensed Financial Statements

February 28, 2006



|(5) | 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 month and nine month periods ended February 28, 2006 and 2005. 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 those periods because their inclusion would be antidilutive.



|(6) | Credit Line Agreement
|--- | ---------------------

The Company has a revolving
line-of-credit agreement that permits borrowings of up to $500,000, which will expire on April 18, 2006. The Company is currently negotiating an extension to the agreement. During the nine months ending February 28, 2006, the Company has
not complied with one of the restrictive financial covenants under the Line of Credit, and it has not received a waiver from the lender. Such default could restrict the availability of funds to the Company in the future; however, during the nine
month period ended February 28, 2006, the bank applied certain cash overdrafts against the line-of-credit. As of February 28, 2006 the line-of-credit balance was $50,000.



|(7) | Stock Repurchase Plan
|--- | ---------------------

On October 27, 2005, the
Board of Directors formally adopted a resolution to continue the Companys Stock Repurchase Plan, originally initiated on October 1, 2003, (the Repurchase Plan). Pursuant to the resolution, the Company is authorized to acquire
shares of the Companys common stock with an aggregate repurchase price not to exceed $300,000, expiring November 1, 2006. During the nine months ended February 28, 2006, the Company repurchased 10,000 shares of common stock resulting
in a cash outlay of $13,300.



|(8) | Lease Agreement
|--- | ---------------

On November 15, 2005 the
Company has renewed the lease agreement for the premises located at 23263 Madero, Suite C, Mission Viejo, California for another five years starting January 1, 2006 and ending December 31, 2010 with minimum annual payments as follows:



|                                          |  |   |       
|----------------------------------------- |  | - | ------
|January 1, 2006 through December 31, 2006 |  | $ | 86,196
|January 1, 2007 through December 31, 2007 |  | $ | 88,116
|January 1, 2008 through December 31, 2008 |  | $ | 92,340
|January 1, 2009 through December 31, 2009 |  | $ | 95,568
|January 1, 2010 through December 31, 2010 |  | $ | 98,916

Pursuant to the lease agreement, common area operating expenses will not increase by more than five (5%) per
year cumulative. The base year for this limitation is calendar year 2005.

In connection with the renewal of the lease agreement, the landlord has granted
Dynatem an allowance toward tenant improvements not to exceed $48,000.

On December 27, 2005 the Company initiated a leasehold improvement program to
develop office space for future employees, as well as to enhance the working environment. The cost is estimated to be approximately $75,000, of which the landlord will pay $48,000 per terms of lease agreement. As of February 28, 2006, work is
still in progress.



7



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DYNATEM, INC.



|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, 2005.

Net sales for the three months ended February 28, 2006, increased 56.4% to $645,998 compared to net sales of $424,880 in the same period a year ago. For the nine
months ended February 28, 2006, net sales were $2,690,322, $929,905 higher than the corresponding period in the previous fiscal year, for an increase of 52.8%. The increase in total net sales is the result of the receipts of orders for ongoing
programs that were delayed last year and shipped this year.

Cost of sales for the three months ended February 28, 2006, was $422,519 or 65.5% of net
sales compared to $331,549 or 78% of net sales in the same period a year ago. For the nine months ended February 28, 2006, cost of sales of $1,540,555 represented 57.3% of net sales compared to $1,199,911, representing 68.2% of net sales for
the same period a year ago. The nine-month decrease of cost of sales as a percentage of net sales was the consequence of the Companys higher sales volume of its own manufactured products for which it realizes a higher margin than from sales of
its distributed products.

Selling, general and administrative expenses for the three-month and nine-month periods ended February 28, 2006, were
$278,632 and $862,472, respectively, as compared to $275,292 and $796,825, respectively, for the same periods a year ago. The increase in selling, general and administrative expenses is primarily the result of increase cost due to general monetary
inflation, most notably in the escalation of rents, insurance rates, salaries, legal and audit fees.

Research and development expenses for the three-month
and nine-month periods ended February 28, 2006, were $130,540 and $396,265, respectively, as compared to $150,936 and $422,910, respectively, for the same periods a year ago. The decrease in research and development expenses is attributed to
the closing of the Companys Escondido design center towards the end of the 2005 fiscal year.

Liquidity and Capital Resources

As of February 28, 2006, the Companys working capital, which is current assets less current liabilities, was $1,247,503 and the
Companys current ratio, which is current assets divided by current liabilities, was 3.1:1 compared to $1,360,472 and a ratio of 3.7:1 as of May 31, 2005. 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 2006.

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;
| | - |  | --------------------



8



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DYNATEM, INC.



| |  |  | 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.

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

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.

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.



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DYNATEM, INC.

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.

Long-Lived Assets

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

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



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DYNATEM, INC.

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 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 Securities Exchange Act of 1934, as amended (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 SEC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 the design and operation of our disclosure controls and procedures as of February 28, 2006, 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, 2006.

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, 2006 that materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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DYNATEM, INC.

PART II. OTHER INFORMATION

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



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

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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DYNATEM, INC.

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 12, 2006 |  |  |  | By            |  | /s/ Michael Horan
|               |  |  |  |               |  |                   |  | Michael Horan                      
|               |  |  |  |               |  |                   |  | President & Chief Executive Officer



|               |  |  |  |     |  |                 |  |                        
|-------------- |  |  |  | --- |  | --------------- |  | -----------------------
|               |  |  | 
|April 12, 2006 |  |  |  | By: |  | /s/ Belen Ramos
|               |  |  |  |     |  |                 |  | Belen Ramos            
|               |  |  |  |     |  |                 |  | Chief Financial Officer



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