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U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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 August 31, 2003.



| ̈ | 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)



|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)         |  | (Zip Code)



(949) 855-3235

(Issuers telephone number)



---



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 August 31, 2003, there were 1,549,226 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



|Part I. Financial Information |  |        
|----------------------------- |  | -------
|                              |  |        
|                              |  | Item 1.
|                              |  |        
|                              |  |        
|                              |  |        
|                              |  |        
|                              |  |        
|                              |  |        
|                              |  |        
|                              |  |        
|                              |  |        
|                              |  | Item 2.
|                              |  |        
|                              |  | Item 3.
|                              | 
|Part II. Other Information    |  | 8      
|                              |  |        
|                              |  | Item 1.
|                              |  |        
|                              |  | Item 2.
|                              |  |        
|                              |  | Item 3.
|                              |  |        
|                              |  | Item 4.
|                              |  |        
|                              |  | Item 5.
|                              |  |        
|                              |  | Item 6.





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DYNATEM, INC.



PART I. FINANCIAL INFORMATION



Item 1. Financial Statements





DYNATEM, INC.



CONDENSED BALANCE SHEETS



|                                                                                                                             |  | August 31,2003 |           |   | May 31, 2003 |  
|---------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ------------ | -
|                                                                                                                             |  | (Unaudited)    |           |   | (Audited)    |  
|ASSETS                                                                                                                       |  |                |           |   |              |  
|Current assets:                                                                                                              |  |                |           |   |              |  
|Cash and cash equivalents                                                                                                    |  | $              | 1,365,381 |   |              | $
|Accounts receivable, net                                                                                                     |  |                | 240,854   |   |              |  
|Inventories, net                                                                                                             |  |                | 539,015   |   |              |  
|Prepaid expenses                                                                                                             |  |                | 40,982    |   |              |  
|                                                                                                                             |  |                |           |   |              |  
|Total current assets                                                                                                         |  |                | 2,186,232 |   |              |  
|                                                                                                                             |  |                |           |   |              |  
|Property and equipment, net                                                                                                  |  |                | 57,904    |   |              |  
|Other assets                                                                                                                 |  |                | 40,655    |   |              |  
|                                                                                                                             |  |                |           |   |              |  
|                                                                                                                             |  | $              | 2,284,791 |   |              | $
|                                                                                                                             |  |                |           |   |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                         |  |                |           |   |              |  
|Current liabilities:                                                                                                         |  |                |           |   |              |  
|Accounts payable                                                                                                             |  | $              | 119,445   |   |              | $
|Accrued liabilities                                                                                                          |  |                | 238,115   |   |              |  
|Deferred revenue                                                                                                             |  |                |          |   |              |  
|                                                                                                                             |  |                |           |   |              |  
|Total current liabilities                                                                                                    |  |                | 357,560   |   |              |  
|                                                                                                                             |  |                |           |   |              |  
|Shareholders equity:                                                                                                        |  |                |           |   |              |  
|Common Stock no par value, 50,000,000 authorized shared; 1,549,226 and 1,519,042 shares issued and outstanding,
respectively |  |                | 2,392,781 |   |              |  
|Accumulated deficit                                                                                                          |  |                | (465,550  | ) |              |  
|                                                                                                                             |  |                |           |   |              |  
|Total shareholders equity                                                                                                   |  |                | 1,927,231 |   |              |  
|                                                                                                                             |  |                |           |   |              |  
|                                                                                                                             |  | $              | 2,284,791 |   |              | $
|                                                                                                                             |  |                |           |   |              |  



See accompanying notes
to condensed financial statements.





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DYNATEM, INC.



CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)



Three months ended August 31, 2003 and 2002



|                                                                     |  | 2003 |           |   | 2002
|-------------------------------------------------------------------- |  | ---- | --------- | - | ----
|Net sales                                                            |  | $    | 630,644   |   |     
|Cost of sales                                                        |  |      | 338,701   |   |     
|                                                                     |  |      |           |   |     
|Gross profit                                                         |  |      | 291,943   |   |     
|                                                                     |  |      |           |   |     
|Operating expenses:                                                  |  |      |           |   |     
|Selling, general and administrative                                  |  |      | 215,891   |   |     
|Research and development                                             |  |      | 127,046   |   |     
|                                                                     |  |      |           |   |     
|Total operating expenses                                             |  |      | 342,937   |   |     
|                                                                     |  |      |           |   |     
|Operating (loss) income                                              |  |      | (50,994   | ) |     
|Other income, net                                                    |  |      | 3,928     |   |     
|                                                                     |  |      |           |   |     
|Net (loss) income                                                    |  | $    | (47,066   | ) |     
|                                                                     |  |      |           |   |     
|Net (loss) income available to common shareholders per common share: |  |      |           |   |     
|Basic                                                                |  | $    | (0.03     | ) |     
|                                                                     |  |      |           |   |     
|Diluted                                                              |  | $    | (0.03     | ) |     
|                                                                     |  |      |           |   |     
|Weighted average common shares outstanding:                          |  |      |           |   |     
|Basic                                                                |  |      | 1,531,371 |   |     
|                                                                     |  |      |           |   |     
|Diluted                                                              |  |      | 1,531,371 |   |     
|                                                                     |  |      |           |   |     



See accompanying notes
to condensed financial statements.



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DYNATEM, INC.



CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)



Three months ended August 31, 2003 and 2002



|                                                                                                   |  | 2003 |           |   | 2002 |  
|-------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | -
|Cash flows from operating activities:                                                              |  |      |           |   |      |  
|Net income (loss)                                                                                  |  | $    | (47,066   | ) |      | $
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |      |           |   |      |  
|Depreciation and amortization                                                                      |  |      | 5,341     |   |      |  
|Changes in operating assets and liabilities:                                                       |  |      |           |   |      |  
|Accounts receivable                                                                                |  |      | (2,821    | ) |      |  
|Inventories                                                                                        |  |      | 33,613    |   |      |  
|Prepaid expenses                                                                                   |  |      | 11,435    |   |      |  
|Accounts payable                                                                                   |  |      | 6,237     |   |      |  
|Accrued liabilities                                                                                |  |      | 18,431    |   |      |  
|Deferred revenue                                                                                   |  |      | (156,450  | ) |      |  
|                                                                                                   |  |      |           |   |      |  
|Net cash provided by (used in) operating activities                                                |  |      | (131,280  | ) |      |  
|                                                                                                   |  |      |           |   |      |  
|Cash flows from investing activities:                                                              |  |      |           |   |      |  
|Purchases of fixed assets                                                                          |  |      | (7,392    | ) |      |  
|Changes in other assets                                                                            |  |      | (31,074   | ) |      |  
|                                                                                                   |  |      |           |   |      |  
|Net cash provided by (used in) investing activities                                                |  |      | (38,466   | ) |      |  
|                                                                                                   |  |      |           |   |      |  
|Cash lows from financing activities                                                                |  |      |           |   |      |  
|Proceeds from the issuance of common stock in connection with the exercise of stock options        |  |      | 3,696     |   |      |  
|                                                                                                   |  |      |           |   |      |  
|Net cash provided by financing activities                                                          |  |      | 3,696     |   |      |  
|                                                                                                   |  |      |           |   |      |  
|Net increase (decrease) in cash                                                                    |  |      | (166,050  | ) |      |  
|Cash and cash equivalents, beginning balance                                                       |  |      | 1,531,431 |   |      |  
|                                                                                                   |  |      |           |   |      |  
|Cash and cash equivalents, ending balance                                                          |  | $    | 1,365,381 |   |      | $
|                                                                                                   |  |      |           |   |      |  





See accompanying notes to condensed financial statements.



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DYNATEM, INC.



Notes to Condensed Financial Statements



|(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 August 31, 2003, and the results of operations and cash flows for the three months ended August 31, 2003 and 2002. Although the Company believes
that the disclosures in these condensed financial statements are adequate to make the information presented 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) | Accounting for Stock-Based Compensation
|--- | ---------------------------------------



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



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



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



At August 31, 2003, 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 August 31, 2003 and 2002. The following
table illustrates the effect on net income and earnings per common share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.



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DYNATEM, INC.



|                                                                |  | Three Months EndedAugust 31,
|--------------------------------------------------------------- |  | ----------------------------
|                                                                |  | 2003                        
|Net income (loss) available to common stockholders, as reported |  | $                           
|Pro forma compensation expense                                  |  |                             
|                                                                |  |                             
|Pro forma net income (loss) available to common stockholders    |  | $                           
|                                                                |  |                             
|Income (loss) per share, as reported                            |  |                             
|Basic                                                           |  | $                           
|                                                                |  |                             
|Diluted                                                         |  | $                           
|                                                                |  |                             
|Income (loss) per share, pro forma                              |  |                             
|Basic                                                           |  | $                           
|                                                                |  |                             
|Diluted                                                         |  | $                           
|                                                                |  |                             



|(3) | Inventories
|--- | -----------



A summary of inventories follows:



|                |  | August 31,2003 |         | May 31,2003
|--------------- |  | -------------- | ------- | -----------
|                |  | (Unaudited)    |         | (Audited)  
|Raw materials   |  | $              | 269,509 |            
|Work-in-process |  |                | 242,556 |            
|Finished goods  |  |                | 26,950  |            
|                |  |                |         |            
|                |  | $              | 539,015 |            
|                |  |                |         |            



|(4) | 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, 220,000 and 201,122 shares were potential additional common
shares as of August 31, 2003 and 2002, respectively). Pro forma per share data has been computed using the weighted average number of common shares outstanding during the periods. Because the Company had incurred net losses during the three months
ended August 31, 2003, basic and diluted loss per share are the same as additional potential common shares would be anti-dilutive.



|(5) | Common Stock
|--- | ------------



During the quarter ended August 31, 2003, the Company issued 30,184 shares of common stock (net of 3,666 shares surrendered for the option purchase price)
in connection with the exercise of certain options resulting with cash proceeds of approximately $4,000.



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DYNATEM, INC.



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



Revenues for the first quarter ended August 31, 2003, decreased by 33.9% to $630,644 compared to $953,904 in the first quarter of the prior year. The
decrease in revenues reflects a smaller sales backlog moving into the first quarter than in the prior year.



Cost of sales for the three months ended August 31, 2003, was $338,701 or 53.7% of net sales and compares to $527,694 or 55.3% of net sales in the same
period a year ago.



Selling, general and administrative
expenses for the three months ended August 31, 2003 were $215,891 compared to $201,715 in the same period a year ago. The increase of 7% was principally the result of advertisement for the new products and additional expenses incurred in adding a
new office in Escondido, California.



Research and development
expenses were $127,046 and $112,906 for the three months ended August 31, 2003, and 2002, respectively. The increase is attributed to the ongoing development of new single-board computer products utilizing advanced microprocessor technology. Also,
the Company employed new engineers in the newly opened design engineering office in Escondido, California.



The results of operations for the three months ended August 31, 2003, and 2002, reflect a net loss of $47,066 and a net income of $115,436, respectively.
The loss occurred due to the decreased sales for the period and additional expenses incurred in the areas of marketing and research and development.



Income taxes for the three months ended August 31, 2003, and 2002, are not considered material due to the utilization of net operating loss carry forwards
which will expire in various years through 2016.



At August
31, 2003, the Company had a current ratio of 6.1:1 compared to a ratio of 4.89:1 at May 31, 2003. The net worth of the Company at August 31, 2003, was $1,927,231, compared to $1,970,601 as of May 31, 2003. 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 2004. The Company has arranged for a line of credit of $500,000 with its bank and may consider other sources of capital
should the need arise.



Critical Accounting
Policies



The preparation of financial statements
and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Companys consolidated
financial statements and the accompanying notes. The amounts of assets and liabilities reported on our balance sheet and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions, which
are used for, but not limited to, the accounting for revenue recognition, accounts receivable, doubtful accounts and inventories. Actual results could differ from these estimates. The following critical accounting policies are significantly affected
by judgments, assumptions and estimates used in the preparation of the financial statements.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Significant estimates made by management are, among



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DYNATEM, INC.



others, provisions for losses on accounts receivable, realizability of long-lived assets and estimates for deferred income
tax asset valuations.



Revenue Recognition



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



In December 1999, the Securities
and Exchange Commission issued Staff Accounting Bulletin 101 (SAB 101), RevenueRecognition,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 101.



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 loss is recognized. 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 Company adopted SFAS 144 during the year ended May 31, 2003. The provisions of this pronouncement relating to assets held for sale or other disposal generally are
required to be applied prospectively after the adoption date to newly initiated commitments to plan to sell or dispose of such 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.



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



The Companys Chief Executive Officer and Chief Financial Officer (collectively, the Certifying Officers) are responsible for establishing and maintaining disclosure controls and procedures and
internal control over financial reporting for the Company. The Certifying Officers have concluded that, based upon their evaluation as of a date within 90 days of the filing of this Quarterly Report (the Evaluation Date), the
Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in this Quarterly Report is accumulated and communicated to the Companys management, including the Certifying
Officers, to allow timely decisions regarding required disclosure.



The Certifying Officers also have indicated that as of the Evaluation Date, there were no significant changes in the Companys internal controls or other factors that could significantly affect such controls subsequent to the
Evaluation Date and there were no corrective actions with regard to significant deficiencies and material weaknesses.



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DYNATEM, INC.



PART II. OTHER INFORMATION



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



|Item 6. |  | Exhibits and Reports on Form 8-K
|------- |  | --------------------------------



| | (a) | See Exhibit Index attached hereto.
| | --- | ----------------------------------



| | (b) | There has been no report on Form 8-K during the quarter ended August 31, 2003.
| | --- | ------------------------------------------------------------------------------



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.
|---------------- |  |  |  | -------------
|                 |  |  | 
|October 14, 2003 |  |  |  | By:          
|                 |  |  |  |              
|                 |  |  |  |              
|                 |  |  | 
|October 14, 2003 |  |  |  | By:          
|                 |  |  |  |              



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DYNATEM, INC.



EXHIBIT INDEX



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



|ExhibitNumber |  | Exhibit                                                        
|------------- |  | ---------------------------------------------------------------
|              | 
|3(a)          |  | Restated Articles of Incorporation of the Company (1)          
|              | 
|3(b)          |  | Bylaws of the Company (2)                                      
|              | 
|31*           |  | Certifications Pursuant to 18 U.S.C. Section 1350  Section 302
|              | 
|32*           |  | Certification Pursuant to 18 U.S.C. Section 1350  Section 906 



---

|(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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------