**U.
S. SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 _______________
 
 **FORM
10-KSB**
 **x ANNUAL REPORT PURSUANT TO SECTION 13 OR
15** (d) **OF
THE**
 **SECURITIES
EXCHANGE ACT OF 1934**
 
 **For
the fiscal year ended December 31, 2004**
 
 **o TRANSITION REPORT PURSUANT TO SECTION 13 OR
15** (d) **OF
THE**
 **SECURITIES
EXCHANGE ACT OF 1934**
 _______________
 
 **Commission
File Number: 000-30498**
 
 **DDS
TECHNOLOGIES USA, INC.**
 **(Exact
name of registrant as specified in its charter)**
 
 **Nevada**
    **13-4253546****(State
      of incorporation)**
    **(I.R.S.
      Employer Identification No.)**
 **150
East Palmetto Park Road, Suite 510, Boca Raton, Florida
33432**
 **(Address
of principal executive offices)**
 
 **561-750-4450**
 **(Registrant's
telephone number)**
 
 **Securities
registered pursuant to Section 12(b)**  **of
the Act:**
  **None**
  **Securities
registered pursuant to Section 12(g)**  **of
the Act:**
  **Common
Stock, par value $.0001 per share**
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. o
  State
issuer's revenues for its most recent fiscal year. $0
  The
aggregate market value of the 17,804,792 shares of voting stock held by
non-affiliates of the registrant was approximately $11,573,115, based upon the
closing sale price of the common stock on March 31, 2005 of $0.65 per share as
reported by the OTC Electronic Bulletin Board. The calculation of such market
value should not be construed as an admission or conclusion by the registrant
that any person is in fact an affiliate of the registrant.
  Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
  CLASS
    OUTSTANDING
      AS OF MARCH 31, 2005Common
      Stock
    19,235,542
  ***Transitional
Small Business Disclosure Format (check one) Yes oNo x.***
 **DDS
TECHNOLOGIES USA, INC.**
  ***Cautionary
Statement Regarding Forward-Looking Statements and Future
Prospects\***
  Certain
statements made in this Annual Report on Form 10-KSB, or made by us in other
reports, filings with the Securities and Exchange Commission, press releases,
conferences or otherwise, are “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995. The forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and may
contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,”
“will be,” “will continue,” “will likely result,” “plan,” or words or phrases of
similar meaning.
  Forward-looking
statements involve risks, uncertainties or other factors which may cause actual
results to differ materially from the future results, performance or
achievements expressed or implied by the forward-looking statements. These
statements are based on our management’s beliefs and assumptions, which in turn
are based on currently available information. Certain risks, uncertainties or
other important factors are detailed in this Annual Report on Form 10-KSB and
may be detailed from time to time in other reports we file with the Securities
and Exchange Commission, including on Forms 8-K, and 10-QSB.
 
 Examples
of forward looking statements in this Annual Report on Form 10-KSB include, but
are not limited to, our expectations regarding our ability to generate operating
cash flows and to fund our working capital and capital expenditure requirements.
Important assumptions relating to the forward-looking statements include, among
others, assumptions regarding demand for our products, pricing levels, the
timing and cost of capital expenditures, outcomes of pending litigation,
competitive conditions and general economic conditions. These assumptions could
prove inaccurate. Although we believe that the estimates and projections
reflected in the forward-looking statements are reasonable, our expectations may
prove to be incorrect. Important factors that could cause actual results to
differ materially from the results and events anticipated or implied by such
forward-looking statements include:
 
 ·
    the
      risks of a development stage company;
  ·
    the
      availability of additional capital to finance our
    development;
  ·
    our
      dependence on management and need to recruit additional
      personnel;
  ·
    the
      limited trading market for our Common
Stock;
  ·
    advances
      by our competitors;
  ·
    agricultural
      risks of certain of our customers;
  ·
    foreign
      market risks; and
  ·
    other
      risks, including those described in “Risk Factors” beginning on page 3 and
      from time to time in our other Securities and Exchange Commission
      filings.
  We
operate in a very competitive and rapidly changing environment. New risks emerge
from time to time. It is not possible for us to predict all of those risks, nor
can we assess the impact of all of those risks on our business or the extent to
which any factor may cause actual results to differ materially from those
contained in any forward-looking statement. We believe these forward-looking
statements are reasonable. However, you should not place undue reliance on any
forward-looking statements, which are based on current expectations. Further,
forward-looking statements speak only as of the date they are made, and unless
required by law, we expressly disclaim any obligation or undertaking to update
publicly any of them in light of new information or future events.
  In this
annual report “Company,” “the Company,” “us,” “our” and “DDS” refer to DDS
Technologies USA, Inc., a Nevada corporation and its subsidiaries, including DDS
Technologies USA, Inc., a Delaware corporation and DDS Holdings, Inc.
 
 **DDS
TECHNOLOGIES USA, INC.**
  **TABLE
OF CONTENTS**
 
 **Page**PART
      I
    
    1Item
      1. Business
    1Item
      2. DESCRIPTION
      OF PROPERTIES
    8Item
      3. Legal Proceedings
    8Item
      4. Submission of Matters to a Vote of Security Holders
    9PART
      II
    
    99Item
      5. Market for Company’s Common Equity and Related Stockholder
      Matters
    9Item
      6. Management’s Discussion and Analysis of Financial Condition or Plan of
      Operations
    11Item
      7. Financial Statements
    15Item
      8. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosures
    15Item
      8A. Controls and Procedures
    15PART
      III
    
    15Item
      9. Directors, Executive Officers, Promoters and Control Persons;
      Compliance with Section 16(a) of the Exchange Act of the
      Company
    15Item
      10. Executive Compensation
    17Item
      11. Security Ownership of Certain Beneficial Owners and
      Management
    20Item
      12. Certain Relationships and Related Transactions
    21Item
      13. Exhibits, Financial Statement Schedules and Reports on Form
      8-K
    22Item
      14. Principal Accountant Fees and Services
    23
 
  **PART
I**
  **ITEM
1.**  **BUSINESS**
  ***General***
  The
Company commenced business in July 2002 when its founders formed DDS Holdings,
Inc. to acquire rights to a patented dry disaggregation system technology. The
founders and initial investors subsequently acquired control of Black Diamond
Industries, Inc., a Florida corporation, in a reverse merger on November 14,
2002. Thereafter, Black Diamond Industries, Inc. reincorporated into Delaware
and changed its name to DDS Technologies USA, Inc. (“DDS Delaware”). On April 4,
2003, the holders of approximately 88% of the outstanding shares of DDS Delaware
exchanged their shares for shares representing approximately 97% of the shares
of Fishtheworld Holdings, Inc., a Florida corporation, which then effected a
reincorporation merger in the State of Nevada and changed the name of the
corporation to DDS Technologies USA, Inc. (“DDS Nevada”). We intend to merge
with DDS Delaware so that DDS Holdings will become a direct wholly-owned
subsidiary of DDS Nevada and the holders of DDS Delaware will become
stockholders of DDS Nevada.
  DDS
Technologies USA, Inc. is a Nevada corporation, the address of our principal
executive office is 150 East Palmetto Park Road Suite 510 Boca Raton, Florida
33432, and our telephone number at that address is (561) 750-4450. DDS
Technologies USA, Inc. was formed in July 2002 for the purpose of
commercializing our dry disaggregation technology. During the third quarter of
2004, the Company entered into a series of Agreements pursuant to which the
Company acquired ownership of the patent rights for the dry disaggregation
technology, which the Company had previously licensed. The Company also acquired
ownership of two prototype machines.
  Following
the assignment of the patent, the Company filed the assignment with the United
States Patent and Trademark Office. Subsequently, the United States Patent and
Trademark Office issued the Company a patent, U.S. Patent No. 6,848,582, for its
dry disaggregation system (Micrometric Separator Technology). The Company is
also in the process of filing the assignment in the corresponding offices in the
foreign jurisdictions where the patent has been applied for or
obtained.
  The
patent relates to the Longitudinal Micrometric Separator for Classifying Solid
Particulate Materials. The Company’s Management believes that this dry
disaggregation technology is a unique process, in which fragments of organic and
inorganic matter are "crushed to collision" enduring violent accelerations and
decelerations causing the disaggregation of the material’s structure. The
proprietary dry disaggregation technology utilizes a longitudinal micrometric
separator, along with other technologies, to separate various fractions
(proteins, fibers, starch, etc.) into value added products for further
processing or resale. This technology and its end results are believed by the
various companies that the Company has contacted to have tremendous potential
value both economically and nutritionally. Management of the Company believes
that the results obtained utilizing the dry disaggregation technology is
unattainable with any other currently available technology .
  The
Company is currently a development stage company with no revenues to date. To
date, the Company has entered into a contract with a Canadian company to supply
them with dry disaggregation machine(s) and have granted them an exclusive
license for the processing and extraction of sulfur and sulfur derivative
materials in North America. The Company also has a memorandum of understanding
with Ingenio Riopaila S.A. and Central Castilla S.A., one the largest sugar
refiners in South America, for the Company to employ its proprietary dry
disaggregation technology process to convert biomass waste into consumable
nutrients for sale to a variety of industries. The Company has never been
subject to any bankruptcy, receivership or similar proceedings. Currently the
Company has a total of four employees, all of which are full time employees and
dedicated to either administration or sales.
  Initial
analysis of the production version of the Company’s dry disaggregation machine
by the Company’s consulting engineers has revealed that it does not fully
disaggregate organic material to the extent that a prototype research machine
does, and therefore requires additional development work. However, the
production version does micronize effectively to particle sizes of between 5 and
50 microns which provides application opportunities and commercial potential in
a number of industries.
  The
Company intends to fully commercialize its technology. The technology is
expected to produce, as a final product, either highly micronized particles,
based on customers requirements or various fractions of separated materials.
  1
 ***Description
of the Dry Disaggregation Technology***
  The dry
disaggregation technology is the result of research that began in 1964 by a
prestigious group of technical research analysts and scientists in the
alimentary field. Engineer Umberto Manola, a former member of our Board of
Directors, developed a system of “disaggregation” of structures, called
“crushing to collision,” through which the fragments of matter, both organic and
inorganic, endure violent accelerations and decelerations, which cause the
disaggregation of the structure. The particles are separated as a function of
their specific weight. Although research on the technology began over 35 years
ago, only in the last few years has it been developed by Engineer Manola to the
point of potential commercial application. Engineer Manola filed with the
European Patent Office an application covering the central aspects of the
technology, which was assigned to HSF, which in turn, was licensed and
ultimately transferred to the Company. The Company has recently been granted a
U.S. patent for this technology. Management believes that the results obtained
utilizing the dry disaggregation technology cannot be attained with any other
currently available technology, because all available methods modify (in some
cases drastically) the natural property of the product originally introduced.
  The dry
disaggregation technology processes dry ingredients and reduces the size to
between 5 and 50 microns. This micronization allows for the finished ingredients
to be “milled” to a size that heretofore was not readily attainable. In
addition, it is believed that by using different specific weights for output,
the dry disaggregation technology will be able to “fractionalize” products in a
way that will allow the components of the raw material inputs to be sorted into
homogeneous materials. By separating the various components of agricultural
materials (protein, starch, fiber, etc.) the technology offers versatility and
economic gains for processors. Many waste materials that were once thought too
expensive to process can be economically converted to usable
products.
  ***Potential
Applications and Marketing Plan***
  The
Company intends to concentrate its marketing/sales efforts on the following
market segments in which the Company believes that the Company can achieve quick
penetration. These markets segments are:
  Contaminated
sulfur processing
  In
February 2005 the Company entered into an exclusive licensing agreement with
Knoll Ventures of Calgary, Canada for the application of the dry disaggregation
technology to the processing and extraction of sulfur and sulfur derivative
products in North America and other authorized territories. The sulfur to be
processed, initially in the province of Alberta, Canada, is the by-product of
natural gas purification and it has been estimated that approximately 3 million
tons of sulfur are currently stored in open-air pits or dumps where it has
become contaminated. Under this agreement Knoll Ventures will order one dry
disaggregation machine immediately and initiate a test and development program
in Calgary to adapt the technology to the environment and specific application.
If the test and development program is completed and the initial machine
performs to Knoll Ventures’ good faith satisfaction, Knoll Ventures will be
required to place orders with the Company for additional machines, commensurate
with the size of the contracts Knoll Ventures is negotiating with gas companies
in the province of Alberta, Canada for the processing of contaminated
sulfur.
  Ethanol
  Our
technology process could have significant applications in the biomass
waste-to-ethanol industry. This industry includes corn, stover and other
associated waste streams. Our process allows us to convert solid waste into
starch or cellulose and other consumable nutrients. Starch or cellulose could be
employed as feedstock in ethanol plants producing ethanol. Given the optimal
nature of the waste feedstock created by our technology, the productivity of the
ethanol fermentation process can be significantly improved. Our technology
offers environmental benefits by utilizing waste materials which would otherwise
be left in the fields contributing to carbon dioxide emissions.
  Animal
Feed
  Our
technology could have application in the market for both livestock and domestic
pets. The technology allows the feed products, derived from a variety of raw
materials, to be tailored to the specific nutritional requirements of each
different type of animal. Preliminary tests have indicated that the livestock
and pet industries can achieve cost savings as a result of the improved
nutritional value derived from using the dry disaggregation technology.
  2
 Other
Organic Product Industries
  The
Company’s technology has potential application in a number of other industries
which are under consideration, including wine, soy bean, rice, sugar, tobacco
and coffee.
  Primarily,
our intended customers are relatively large processors of human and animal feed.
While the Company has had significant discussions with a number of these
potential customers, selling to these companies involves a relatively long sales
cycle with significant due diligence and testing on the part of the customers. A
prototype machine is currently located in Marietta, Georgia, where the Company
is utilizing it for research and development work as well as a demonstration
machine for potential customers. As of the date of this filing,  the
Company has entered into a five year license agreement for the processing of
sulfur and sulfur derivative materials for North America, however there can be
no assurance that the Company will achieve profitable operations.
  ***Revenue
Model***
  Our
business plan contemplates that the Company will sell or lease machinery
employing the dry disaggregation technology, and obtain a royalty based on the
amount or value of the product processed through the dry disaggregation
technology as is the case in the contaminated sulfur purification project
entered into with Knoll Ventures of Calgary, Canada. The Company may also enter
into joint venture or strategic partner arrangements in which the Company will
retain an equity interest in the profits from the sale of products processed
with our machinery. While the Company is in discussions with a number of other
potential customers, the Company may be required to alter its revenue model if
the Company is unsuccessful in signing contracts with these and other potential
customers. In addition, our preferred revenue model may require us to obtain
substantial additional financing and if the Company is unable to raise
sufficient financing the Company may need to revise its business model or reduce
its expectations.
  ***Manufacturing***
  Currently,
the Company does not manufacture the DDS machines but has entered into an
agreement to purchase the equipment directly from an Italian manufacturer. It is
the Company’s intention to transfer the manufacturing to North America in the
near future. The Company currently has three machines on order for which the
Company has made partial payments.
  ***C*** ***ompetition***
  As of the
date of this filing, the Company is unaware of any competitor which is focused
on similar methods of increasing yields in food processing. However, there are
numerous methods of increasing raw material yields using dissimilar processes
and the Company will need to show attractive cost-savings to our customers in
order to compete effectively.
  Our
primary competitors in the moleculerization market, manufacture milling
equipment and are substantially larger and better capitalized than the Company.
However, our process provides unique benefits and may provide superior results
to traditional milling practices. The dry disaggregation technology permits the
milling of products, primarily food products, at ambient temperature while
traditional milling equipment generates heat in the milling process thus having
the potential to “cook” the milled products. The “cooking” of the products, we
believe, results in reduced nutritional value. In addition, the dry
disaggregation technology is able to “mill” product to between 5 and 50 microns,
which is well below the size of the traditionally milled products. It is
believed that the smaller particles will be able to be absorbed more easily than
the traditionally milled products.
  ***Patents
and Proprietary Protection***
  The
Company relies on a combination of our patent, trade secrets and know-how to
establish and protect our proprietary rights to our technologies and products.
The Company has obtained the exclusive ownership of the pending patent, #
02425336.1, which was filed with the European patent office on May 28, 2002, and
also the patent granted by the U.S. Patent and Trademark Office, Patent No.
6,848,582 in February 2005. The Company is in the process of filing for
protection of the patent assignment in the corresponding offices in the foreign
jurisdictions. The patent relates to the Longitudinal Micrometric Separator for
Classifying Solid Particulate Materials. The Company is particularly sensitive
to the protection of trade secrets and requires its customers, executives,
technical employees, consultants and other parties to execute confidentiality
agreements. These agreements prohibit disclosure of confidential information to
third parties except in specified circumstances. These agreements also generally
provide that all confidential information relating to our business is the
exclusive property of the Company.
 
 3
 ***Governmental
Regulations***
  The
Company is subject to various state and federal laws, regulations and guidelines
relating to safe working conditions and sales practices. While our customers are
generally subject to extensive regulation by the U.S. Food and Drug
Administration, which may affect their specifications for products supplied by
the Company, the Company’s products and operations are not directly subject to
such regulation. Furthermore, our operations are such that the Company is not
directly subject to any local, state or federal environmental laws.
  ***Risk
Factors***
  An
investment in the shares of our common stock involves a high degree of risk. You
should carefully consider the following factors and other information presented
or incorporated by reference in this Annual Report on Form 10-KSB before
deciding to invest in our common stock. The risks and uncertainties described
below are not the only ones the Company faces. Additional risks and
uncertainties not presently known to us may also impair our operations and
business. If the Company does not successfully address any one or more of the
risks described below, there could be a material adverse effect on our financial
condition, operating results and business. The Company cannot assure you that
the Company will successfully address these risks.
  **RISKS
RELATED TO OUR BUSINESS**
  ***We
will need additional sources of funding in the future which may not be available
to us.***
  The
development of our business will require significant additional capital in the
future to, among other things, fund our operations, acquire machines to lease or
employ in joint ventures and finance future acquisitions and investments. We
have historically relied upon private sales of our equity to fund our
operations. When we seek additional capital, we may seek to sell additional
equity or debt securities or to obtain a credit facility, which we may not be
able to do on favorable terms, or at all. The sale of additional equity or
convertible debt securities would result in additional dilution to our
stockholders. If additional funds are raised through a credit facility or the
issuance of debt securities or preferred stock, lenders under the credit
facility or holders of these debt securities or preferred stock would likely
have rights that are senior to the rights of holders of our common stock, and
any credit facility or additional securities could contain covenants that would
restrict our operations. These sources of financing, or alternative sources, may
not be available on terms favorable to us, or at all. Our ability to obtain
additional financing will be subject to a number of factors, including market
conditions, our operating performance and investor sentiment. These factors may
make the timing, amount, terms and conditions or additional financings
unattractive to us. If we are unable to raise additional capital, our growth
will be impeded and we may never be able to generate revenue.
  ***We
are a development stage company and our operating history is
limited.***
  We are in
the development stage and our proposed operations are subject to all of the
risks inherent in the establishment of a new business enterprise including the
absence of an operating history. The likelihood of our success must be
considered in light of the problems, expenses, difficulties, complications, and
delays frequently encountered in connection with the formation of a new business
and the competitive environment in which we will operate. We have had no
operating revenues to date and we may not achieve future revenues. As a result
of the start-up nature of our business and the fact that we are incurring
start-up expenses, we have sustained operating losses to date and we expect, at
least until our equipment employing dry disaggregation technology is ready for
commercialization, to continue to sustain operating losses. Equipment
incorporating our technology may not be commercially viable. Further, we will
continue to incur costs to:
  ·
    invest
      in the research and development of equipment incorporating our technology,
      a significant amount of which may be
unforeseen;
  ·
    increase
      our marketing and selling activities for our
equipment;
  ·
    prosecute
      patents and continue to protect our intellectual property
      rights;
  ·
    establish
      strategic partnerships and marketing and distribution relationships;
      and
  ·
    develop
      additional infrastructure and hire additional management and other
      employees to keep pace with our growth.
  4
 We expect
that these activities will result in operating losses for the foreseeable
future, at least until we are able to commercialize equipment incorporating our
technology.
  ***If
equipment incorporating our dry disaggregation technology is not commercially
successful, we may never become profitable.***
  Our
business is dependent on market acceptance of our technology and equipment. We
may not realize contracts with target companies to provide our technology or
equipment. Initial testing on a production version dry disaggregation machine by
our consulting engineers has revealed that it does not fully disaggregate
organic material to consistent quality and purity output levels demanded by the
intended markets. Additional development work and testing is necessary. Such
additional development work and testing may prove fruitless, and our production
machine may never achieve satisfactory output levels. A number of other factors
may also limit the market acceptance of our technology or equipment,
including:
  ·
    the
      timing of market entry of our equipment, as compared to competitive
      equipment;
  ·
    the
      effectiveness of our equipment;
  ·
    the
      competitive features of our equipment, including price, as compared to
      other similar equipment;
  ·
    the
      extent and success of our sales and marketing efforts;
  and
  ·
    unfavorable
      publicity concerning our technology or equipment or any similar technology
      or equipment.
  ***Our
technology is new and unproven.***
  Our
business plan, based on a new technology, is relatively unproven. The market for
the dry disaggregation technology is new. Our business plan depends upon
obtaining revenues generated from market acceptance of the technology. The sale
of equipment incorporating this technology is an unproven business. Many of our
potential target customers may not have considered how dry disaggregation
technology may benefit them. They may not find the technology beneficial to
their businesses. To be successful, the technology must achieve market
acceptance.
  ***We
depend on patents and other proprietary rights and we may not be able to protect
our proprietary information.***
  Because
we are developing equipment that relies on advanced and innovative technology,
our success may depend in large part on our ability to protect our patents, and
to obtain and effectively use patents and operate without infringing upon the
proprietary rights of others. It is often costly to enforce intellectual
property rights against infringing parties and effective intellectual property
protection may be unavailable or limited in some foreign countries in which we
intend to market our equipment and technology. Other risks related to our patent
rights include the following:
  ·
    challenge,
      invalidation or circumvention of issued patents owned by
    us;
  ·
    rejection
      by the foreign patent authorities of our pending patent
      applications;
  ·
    failure
      of the rights granted under our patents to provide sufficient
      protection;
  ·
    failure
      by us to obtain additional patents;
  ·
    infringement
      by one or more of our technologies on the intellectual property rights of
      others;
  ·
    ability
      of third parties to circumvent patents issued to
us;
  ·
    claims
      by third parties that we have exceeded the scope of our permitted use or
      field of use that is specified for some of our intellectual property
      rights; and
  ·
    claims
      by our consultants, key employees or other third parties that our
      equipment and technology are the result of technological advances
      independently developed by them and, therefore, not owned by
      us;
  5
 If any of
these risks materialize, it may be difficult for us to commercialize, and
generate revenues from, our technology.
  ***We
may not be able to protect our trade secrets and proprietary and confidential
information and, therefore, may lose any competitive advantage that our
proprietary rights provide.***
  In the
operation of our business and development of our equipment, we rely, among other
things, on trade secret protection for our proprietary and confidential
information. However, trade secrets are difficult to protect and we cannot
guarantee that others will not gain access to our trade secrets or disclose our
technology, or that we can meaningfully protect our rights to unpatented trade
secrets. Our agreements with our employees, consultants, advisors and strategic
partners restricting the disclosure and use of trade secrets, inventions and
proprietary and confidential information owned by us or developed for us may not
provide meaningful protection for our proprietary and confidential information
in the event of unauthorized use or disclosure of the information. In many
instances, our research collaborators may have relationships with other
commercial entities, which could or do compete with us. Therefore, these
collaborators could quickly disseminate our proprietary and confidential
information to our competitors. The dissemination of our proprietary and
confidential information could have a material adverse effect on our business
and may allow others to gain a competitive advantage over us or with respect to
our technology or equipment. Also, trade secret laws do not protect against
independent development by a third party, and we cannot guarantee that a third
party will not independently develop technology that is the same or
substantially the same as our proprietary technology. Such independent
development by a third party could have a material adverse effect on our
business.
  ***Infringement
claims by third parties could result in costly litigation, divert management’s
attention and otherwise harm our business.***
  From time
to time, third parties may assert that our equipment or technology infringes
upon their proprietary rights. It is virtually impossible for us to be certain
that no infringement exists, particularly where, as is the case with our
equipment and technology, the specific equipment and processes to be
commercialized have not yet been fully developed. These claims of infringement
may result in:
  ·
    protracted
      and costly litigation that could divert the time and energy of our
      management and technical personnel from other business
      activities;
  ·
    a
      judgment requiring us to pay substantial damages, including punitive
      damages and our adversaries’ attorneys’ fees, or requiring us to indemnify
      our customers and licensors;
  ·
    the
      issuance of an injunction halting sales or use of our equipment;
      or
  ·
    a
      need to redesign our equipment or enter into royalty or licensing
      agreements with the third parties claiming
infringement.
  Any of
the results described above would harm our business. Any claims against us, with
or without merit, can be time-consuming, requiring our management team to
dedicate substantial time to addressing the issues presented and substantial
funds to defend our rights. Furthermore, many of the parties bringing claims may
have greater resources than we do.
  ***We
will be dependent on third-party manufacturers.***
  We will
rely on third parties to manufacture our equipment. If our manufacturing and
distribution agreements are not satisfactory, we may not be able to develop or
commercialize our equipment as planned. In addition, we may not be able to
contract with third parties to manufacture our equipment in an economical
manner. Furthermore, third-party manufacturers may not adequately perform their
obligations, which may impair our competitive position. If a manufacturer fails
to perform, we could experience significant time delays or we may be unable to
commercialize or continue to market our equipment. Changes in our manufacturers
could require costly testing and facility inspections. Because of these and
other factors, we may not be able to replace our manufacturing capacity quickly
or efficiently in the event that our manufacturers are unable to manufacture our
equipment. As a result, the sale and marketing of our equipment could be delayed
or we could be forced to develop our own manufacturing capacity, which would
require substantial additional funds and personnel.
  6
 ***Sales
of substantial amounts of shares eligible for future sale may adversely affect
our stock price.***
  The
market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market after the closing
of this offering, or the perception that these sales could occur. In addition,
these factors could make it more difficult for us to raise funds through future
offerings of common stock.
  ***We
are dependent on key personnel and the loss of these key personnel or our
inability to recruit new personnel could have a material adverse effect on our
success.***
  We are
dependent upon the efforts of Mr. Spencer Sterling, Ms. Kerin Franklin and Mr.
Joseph Fasciglione, our president and chief executive officer, chief technology
officer and chief financial officer. We have employment agreements only with Mr.
Sterling and Ms. Franklin. We do not have any “key-person” insurance. In
addition, if we are to be successful, we will need to recruit additional
management depth as well as sales, marketing and technical personnel. If we are
unable to recruit personnel, it may have an adverse effect on our business.
  ***If
we are unable to find new applications for the licensed technology our business
could be adversely affected.***
  Our
success is based, in part, on our ability to discover new markets and
applications of our dry disaggregation technology, which customers will be able
to utilize economically. As a result, we continue to invest in market
development in order to enable us to identify new markets and applications of
the technology to meet consumer demands. Despite investments and efforts in this
area, we may not discover new markets or applications that will be accepted by
our potential customers.
  ***Penny
Stock Securities Law Considerations***
  Our
common stock is considered penny stock and subject to the penny stock rules
under the Securities Exchange Act of 1934. The penny stock rules require
broker-dealers to take steps under certain circumstances prior to executing any
penny stock transactions in customer accounts. A broker must advise the
purchaser of penny stock of the lowest offer and highest bid. A broker or dealer
must disclose the broker's compensation for penny stock transactions. A broker
who recommends penny stocks to persons other than established customers must
make a special written suitability determination and receive the purchaser's
prior agreement. The effect of these regulations may be to delay transactions in
stocks that are penny stocks. This could have an adverse impact on the market
liquidity for our common stock.
  ***The
volatility of the stock market may have an adverse affect on our stock
price.***
  The stock
market in recent periods has experienced and continues to experience significant
price and volume fluctuations, which have affected the market price of the stock
of many companies and which have often been unrelated or disproportionate to the
operating performance of these companies. These fluctuations, as well as a
shortfall in sales or earnings compared to securities analysts’ expectations,
changes in analysts’ recommendations or projections or general economic and
market conditions, may adversely affect the market price of our common stock.
  ***We
may not be able to fully exploit our technology in*** ***Europe, Asia and Oceania*** ***.***
  In
connection with the transactions, pursuant to which we acquired the patent for
our technology, we entered into a Technology License Agreement with High Speed
Fragmentation B.V. (“HSF”), pursuant to which we granted a non-exclusive license
for our dry disaggregation technology to HSF. Under the Technology License
Agreement, HSF may sell, license, rent, and distribute products embodying the
technology throughout Europe, Asia and Oceania. IF HSF is
able to develop a commercially viable new product that may be manufactured or
derived through the use of our technology, HSF shall have the exclusive right
for a period ninety days, to market the product and, enter into a bona fide
binding agreement for the sale of the product in Europe, Asia or Oceania.
Thereafter, we and HSF may market the product in Europe, Asia and Oceania. Thus, we
may not be able to fully exploit the technology in
Europe, Asia and Oceania .
  ***Pending
litigation may have a material adverse effect on us*** *.*
  As
disclosed in Item 3: Litigation Proceedings below, the Company is party to
certain legal proceedings, any one of which, if determined against us, could
have a material adverse effect on our business, prospects and results of
operations.
  7
 **RISKS
RELATED TO OUR INDUSTRY**
  ***Technological
advances by competitors could have an adverse effect on our
business.***
  We face
competition due to technological advances by competitors employing alternative
methods of processing byproducts of agricultural processes. Although the dry
disaggregation technology employs a unique process, many other companies have
substantially greater resources than us and may develop competing technology
using alternative processes.
  In order
to remain competitive we need to continue to strive to promote the advantages of
our technology over others in the market. However, if a competitor introduces a
competitively successful technology, it could have a material adverse effect on
our business, results of operations or financial condition.
  ***A
majority of our customers are in the agricultural industry. Agricultural risks
experienced by our customers may have an adverse effect on our
business.***
  Many of
our potential customers for dry disaggregation technology are in the
agricultural industry, and thus, the demand for the technology is subject to a
variety of agricultural risks. Extreme weather conditions, disease, insects and
pests can materially and adversely affect the quality and quantity of
agricultural products produced by some of our potential customers. These factors
may affect a substantial portion of our production facilities in any year and
have a material adverse effect on our business, results of operations or
financial conditions.
  ***International
operations subject us to risks associated with operating in foreign
countries.***
  We intend
to market our equipment and technology outside of the United States. As a result
of international operations, we will be subject to risk associated with
operating in foreign countries, including:
  ·
    devaluation
      and fluctuations in currency exchange
rates;
  ·
    imposition
      of limitations on conversions of foreign currencies into dollars or
      remittance of dividends and other payments by our foreign
      presences;
  ·
    imposition
      or increase of withholding and other taxes on remittances and other
      payments by our foreign presences;
  ·
    trade
      barriers;
  ·
    political
      risks, including political instability;
  ·
    reliance
      on third parties to distribute our
equipment;
  ·
    hyperinflation;
      and
  ·
    imposition
      of increased investment and other restrictions by foreign
      governments.
  **ITEM
2. DESCRIPTION OF PROPERTIES**
 The
Company owns no real property and currently leases all of its office space. The
Company leases the office space that houses its executive offices in Boca Raton,
Florida, totaling approximately 1950 square feet. The lease expires in January
2007. The Company uses this facility for its executive, marketing,
administrative, finance and management personnel.
  **ITEM
3. LEGAL PROCEEDINGS**
  The
Company is a defendant in a lawsuit whereby the plaintiff contends that it is
entitled to a commission for allegedly procuring financing for a transaction.
The Company filed an Answer and Affirmative Defenses. The plaintiff seeks
damages totaling $175,584, plus interest from December 31, 2002. The Company
believes the suit is without merit and is vigorously defending its position. In
the opinion of management, this suit will not have a material adverse effect on
the Company's consolidated financial position or results of
operations.
  8
 The
Company received a potential claim from two shareholders alleging that the
Company failed to register their shares for re-sale in the Company’s last
registration statement, filed on Form S-1 under the Securities Act of 1933, as
amended on November 12, 2003 and an amendment thereto on December 13, 2003. In
addition, these shareholders have alleged that they were induced erroneously
into surrendering shares of DDS Holdings, Inc. in connection with the
reorganization into Black Diamond Industries, Inc. Although the Company believes
that it has defenses to these alleged actions, the Company is attempting to
reach an amicable settlement for these claims. There can be no assurance that
these disputes will be favorably resolved, if at all, or that these claims will
not have a material adverse effect on the Company. The Company does not believe
a provision is necessary at December 31, 2004 for this matter.
  The
Company is a defendant in a lawsuit whereby a stockholder and former president
of the Company contends that it is entitled to receive consulting fees under a
consulting agreement (See Note 3 to the Company’s Financial Statements). The
Company suspended payments and terminated the consulting agreement due to non
compliance by the plaintiff with the terms of the agreement. The Company has
filed a counterclaim against the plaintiff for breach of contract and breach of
fiduciary duty.
  On August
1, 2003, the Company entered into a nonbinding Pre-Formation Agreement with
Xethanol Corporation (“Xethanol”), a company involved in the biomass
waste-to-ethanol industry. In May 2004 the Company delivered one of its dry
disaggregation machines to Xethanol's plant in Iowa, for testing. The Company
subsequently delivered to Xethanol a notice of termination with respect to the
nonbinding Pre-Formation Agreement and demanded a return of its machine.
Xethanol refused to return the machine. On October 22, 2004, the Company filed a
Verified Complaint for injunctive relief. Amongst various requests, the
Complaint requested the return of the machine to the Company. Xethanol filed a
petition for arbitration with the American Arbitration Association (the “AAA”)
in late October 2004. The petition seeks money damages for breach of contract,
tortuous interference with a contract, fraud, and declaratory judgment. The
Company believes that the petition for arbitration is groundless. On November 3,
2004, the Company filed a response opposing Xethanol’s arbitration petition. In
December 2004 the Company filed an amended Verified Complaint for injunctive
relief. Arbitration hearing has been set to commence in the end of June,
2005.
  **ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  No
matters were submitted to a vote of the Company’s security holders during the
year ended December 31, 2004.
  **PART
II**
  **ITEM
5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS**
  ***Price
Range of Common Stock***
  Our
common stock is traded on the OTC Bulletin Board under the symbol “DDSU.OB.” The
first trading activity in our common stock was April 10, 2003. The following
table sets forth the high and low sales prices per share of our common stock for
the periods indicated.
  Quarter
      Ended
    
    High
    
    LowMarch
      31, 2004
    
    $
    6.00
    
    $
    2.00June
      30, 2004
    
    $
    3.65
    
    $
    1.70September
      30, 2004
    
    $
    2.80
    
    $
    0.75December
      31, 2004
    
    $
    1.00
    
    $
    0.34Through
      March 31, 2005
    
    $
    1.15
    
    $
    0.65
  The high
and low prices in the table reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions.
  9
 ***Stockholders***
  The
approximate number of holders of record of our common stock as of March 31, 2005
is 206, inclusive of those brokerage firms and/or clearing houses holding shares
of common stock for their clientele (with each such brokerage house and/or
clearing house being considered as one holder).
  ***Dividends***
  The
Company has not declared or paid any dividends on our shares of common stock.
The Company intends to retain future earnings, if any, that may be generated
from our operations to finance our future operations and expansion and does not
plan for the reasonably foreseeable future to pay dividends to holders of our
common stock. Any decision as to the future payment of dividends will depend on
our results of operations and financial position and such other factors as our
Board of Directors in its discretion deems relevant.
  ***Securities
Authorized for Issuance Under Equity Compensation
Plans***
  The
following table sets forth the securities the Company has issued through equity
compensation plans:
  **Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights**
      **(a)**
    **Weighted
      - average exercise price of outstanding options, warrants and
      rights**
      **(b)**
    **Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))**
      **(c)**Equity
      compensation plans approved by security holders
    n/a
    n/a
    n/aEquity
      compensation plans not approved by security holders (1)
    1,800,000
    5.23
    1,200,000Total
    1,800,000
    5.23
    1,200,000
 
 (1) The
Company intends to submit its 2003 Stock Option Plan to its shareholders at its
next annual meeting of shareholders.
 
 ***Recent
Sales of Unregistered Securities***
  On May
28, 2004 the Company completed a private placement with certain investors
pursuant to which the Company raised $1,618,450 in exchange for (i) the issuance
of 490,439 shares of our common stock and (ii) warrants providing the right to
holders to purchase up to an additional 490,439 shares of common stock at $3.75
per share, exercisable until May 28, 2007. All of
the investors were at the time of the offer and sale of the securities
‘accredited investors’ as such term is defined in Rule 501(a) of Regulation D
under the Securities Act of 1933, as amended (the “1933 Act”) and such offer and
sale to these investors was made in
reliance upon the exemption from registration under Section 4(2) of the 1933 Act
and Rule 506 adopted there under. The
principal placement agent for the transaction was The Shemano Group, Inc.
Pursuant to a one-year agreement the Company entered into with them on April 23,
2003, their compensation for the May 28, 2004 transaction was $161,845 in fees
and commissions and warrants to
purchase 24,522 shares of common stock of the Company at $3.75 per share,
exercisable until May 28, 2007 .
  On April
12, 2005, the Company entered into a Securities Purchase Agreement (the
“Purchase Agreement”) with certain purchasers party thereto (the “Purchasers”).
Pursuant to the Purchase Agreement, the Company issued to the Purchasers 2,175
shares of its Series A Convertible Preferred Stock (the “Series A Preferred
Stock”), stated value of $1,000 per share for a purchase price of $2,175,000 and
the Company may raise up to an additional $1,825,000 through the sale of
additional shares of Series A Preferred Stock. The Series A Preferred Stock is
initially convertible into approximately 3.1 million shares of the Company’s
Common Stock, $.0001 par value per share (“Common Stock”), at a conversion rate
of $.70 per share and has a 6% annual dividend rate payable quarterly in arrears
in cash or, subject to standard equity conditions, in Common Stock, at the
Company’s option.
 
 10
 Each
Purchaser also received two warrants, a long term warrant (the “Long Term
Warrants”) exercisable for a period of five years to acquire shares of Common
Stock and a short term warrant (the “Short Term Warrants”) exercisable for a
period of one year to acquire additional shares of Series A Preferred Stock and
Long Term Warrants. The Long Term Warrants in the aggregate are exercisable for
approximately 2.3 million shares of Common Stock at a price of $.875 per share.
The Short Term Warrants in the aggregate are exercisable for (i) the same number
of shares of convertible preferred stock (the “Short Term Warrant Preferred
Stock”) as shares of Series A Preferred Stock were issued in the offering and
(ii) Long Term Warrants for a number of shares of Common Stock equal to 35% of
the number of shares of Common Stock issuable upon conversion of the Short Term
Warrant Preferred Stock. The Short Term Warrant exercise price is $1,000 per
share of Short Term Warrant Preferred Stock together with the accompanying Long
Term Warrants. The Short Term Warrant Preferred Stock has the same rights and
preferences as the Series A Preferred Stock, except the conversion price of the
Short Term Warrant Preferred Stock is initially $0.85 per share.
 
 The
Company paid an aggregate of $217,500 and issued an aggregate 155,357 Long Term
Warrants to The Shemano Group who acted as the selling agent.
 
 The
shares of Series A Preferred Stock, Long Term Warrants and Short Term Warrants
were issued in the offering in reliance upon the exemption from registration
contained in Regulation D, Rule 506 of the Securities Act of 1933, as
amended. The Company determined that this exemption was available because of the
nature of the Purchasers. In making this determination the Company relied in
part upon representations made by each Purchaser.
 
 Also on
April 12, 2005, the Company entered into a Registration Rights Agreement (the
“Registration Rights Agreement”) with the Purchasers, pursuant to which the
Company agreed to within 30 days following the date thereof, prepare and file
with the Securities and Exchange Commission a registration statement covering
the resale of the shares of Common Stock issuable upon conversion of the Series
A Preferred Stock or exercise of the Long Term Warrants.
 
 Four of
the Company’s directors, James R. von der Heydt, Dr. Marc J. Mallis, Leo Paul
Koulos and Charles F. Kuoni III purchased $25,000, $20,000, $20,000 and $20,000,
respectively, of Series A Preferred Stock, Long Term Warrants and Short Term
Warrants in the offering.
  **ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATIONS**
  ***Background***
  DDS
Technologies USA, Inc. (formerly Fishtheworld Holdings, Inc.) and subsidiary is
a development stage company with no revenues since its inception on July 17,
2002. The Company had been engaged in the process of obtaining the license
rights and exclusive marketing rights for a dry disaggregation technology for
North, South and Central America, the Caribbean (excluding Cuba) and
Africa.
  On
November 14, 2002, Black Diamond Industries, Inc., (“Black Diamond”) a public
Florida corporation, conducting no business other than to seek a suitable
acquisition partner, acquired all of the outstanding shares of common stock of
DDS Holdings, Inc., a Nevada company pursuant to a securities exchange agreement
dated October 27, 2002. Under the terms of the securities exchange agreement,
the stockholders of DDS Holdings, Inc. agreed to transfer all of the issued and
outstanding shares of common stock in exchange for an aggregate of 12,915,525
shares of common stock, or approximately 93% of Black Diamond. Immediately prior
to, and in conjunction with the transaction, the sole director and officer and
majority shareholder of Black Diamond returned 13,564,350 shares of common stock
to treasury.
  In
December 2002, the Company changed its name to DDS Technologies USA, Inc. and
reincorporated in the state of Delaware. Under a share exchange agreement
entered into on April 4, 2003, Fishtheworld Holdings, Inc. (“Fishtheworld”), a
public Florida corporation conducting no business other than to seek a suitable
acquisition partner, acquired 88.5% of DDS Technologies USA, Inc. in exchange
for 15,367,255 shares of common stock or approximately 97% of the then issued
and outstanding shares of Fishtheworld. Immediately prior to the share exchange,
the majority shareholder of Fishtheworld returned 8,571,000 shares to treasury
and resigned as the sole director and officer of the company. The members of the
Board of Directors of the Company became members of the Board of Directors of
Fishtheworld.
  In May
2003, Fishtheworld changed its name to DDS Technologies, USA, Inc. and
reincorporated in the state of Nevada. Generally accepted accounting principles
in the United States of America require that a company whose stockholders retain
a majority interest in a business combination be treated as the acquirer for
accounting purposes. Since Black Diamond and Fishtheworld were public shells and
DDS Holdings, Inc. is a development stage company with no revenues, the
transactions were treated as recapitalizations of the Company.
  11
 DDS
Technologies USA, Inc. is a Nevada corporation, the address of our principal
executive office is 150 East Palmetto Park Road Suite 510 Boca Raton, Florida
33432, and our telephone number at that address is (561) 750-4450. DDS
Technologies USA, Inc. was formed in July 2002 for the purpose of
commercializing our dry disaggregation technology. During the third quarter of
2004, the Company entered into a series of Agreements pursuant to which the
Company acquired ownership of the patent rights for the dry disaggregation
technology, which the Company had previously licensed. The Company also acquired
ownership of two prototype machines.
  Following
the assignment of the patent, the Company filed the assignment with the United
States Patent and Trademark Office. Subsequently, the United States Patent and
Trademark Office issued the Company a patent, U.S. Patent No. 6,848,582, for its
dry disaggregation system (Micrometric Separator Technology). The Company is
also in the process of filing the assignment in the corresponding offices in the
foreign jurisdictions where the patent has been applied for or
obtained.
 
 The
patent relates to the Longitudinal Micrometric Separator for Classifying Solid
Particulate Materials. The Company’s Management believes that this DDS
technology is a unique process, in which fragments of organic and inorganic
matter are "crushed to collision" enduring violent accelerations and
decelerations causing the disaggregation of the material’s structure. The
proprietary DDS technology utilizes a longitudinal micrometric separator, along
with other technologies, to separate various fractions (proteins, fibers,
starch, etc.) into value added products for further processing or resale. This
technology and its end results are believed by the various companies that the
Company has contacted to have tremendous potential value both economically and
nutritionally. Management of the Company believes that the results obtained
utilizing the DDS technology are unattainable with any other currently available
technology .
  Initial
work on the production version of the Company’s dry disaggregation machine by
the Company’s consulting engineers has revealed that it does not fully
disaggregate organic material to the extent that a prototype research machine
does, and therefore requires additional development work. However, the
production version does micronize very effectively to particle sizes of between
1 and 5 microns which provides application opportunities and commercial
potential in a number of industries.
  ***Critical
Accounting Policies***
  The
Securities and Exchange Commission issued Financial Reporting Release No. 60,
“Cautionary Advice Regarding Disclosure About Critical Accounting Policies”
suggesting that companies provide additional disclosure and commentary on their
most critical accounting policies. In Financial Reporting Release No. 60, the
Securities and Exchange Commission has defined the most critical accounting
policies as the ones that are most important to the portrayal of a company’s
financial condition and operating results, and require management to make its
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition,
the Company has identified the following significant policies as critical to the
understanding of our consolidated financial statements. The preparation of our
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of expenses during the reporting
periods. Areas where significant estimation judgments are made and where actual
results could differ materially from these estimates are:
  A.
    The carrying amount of our
patent.
 
 B.
    The
      assumptions used in calculating the fair value of our stock options and
      warrants issued using the Black-Scholes pricing
model.
  The
Company believes the following is among the most critical accounting policies
that impact our consolidated financial statements. The Company suggests that our
significant accounting policies, as described in our consolidated financial
statements in the Summary of Significant Accounting Policies and Organization,
be read in conjunction with this Management’s Discussion and Analysis of
Financial Condition or Plan of Operations:
  12
 A.
    The
      Company evaluates impairment of our long-lived assets by applying the
      provisions of SFAS No. 144. In applying those provisions, the Company has
      recognized an impairment charge of $2,602,775 on our long-lived
      assets.
   ***Year
Ended December 31, 2004***
  **Results
of Operations**
 
 From July
17, 2002 (inception) through December 31, 2004 the Company has incurred an
accumulated deficit of $12,068,876. To date, the Company has yet to achieve
revenues. During the twelve months ended December 31, 2004 the Company incurred
a net loss of $6,990,752 in comparison to a net loss of $4,670,321 for the prior
twelve months ended December 31, 2003. There are a few key reasons for the
increase in the net loss. In 2004 the Company recorded a machinery and deposits
impairment charge of $2,602,775. Additionally, professional fees decreased in
2004 due to a nonrecurring charge of $465,000 recorded in 2003 as well as a
settlement in 2004 reducing legal fees by approximately $350,000. Salaries and
related taxes and benefits increased by approximately $390,000 due to full
impact of 2003 new hires and implementation of medical insurance benefits.
General and administrative costs increased primarily due to full impact of
general insurance. The Company anticipates that losses from operations will
continue for the remainder of the year 2005 primarily due to the relatively long
sales cycle and significant due diligence and testing on the part of the
customers. Testing includes the preparation of various sample products for
processing using our proprietary technology process through our testing facility
and submitting our analysis of results to third party labs for independent
verification as well as reviewing the results with the prospective client.
However, if the Company is not able to successfully implement our business
model, the Company may not be able to achieve profitability.
  The
Company has marketed its technology to various large U.S. and Latin American
companies resulting in Memoranda of Understanding and has recently signed one
contract and anticipates that other contracts may be signed soon. The contract
signed is a five year licensing agreement with a Canadian firm for the purpose
of processing and extracting sulfur and sulfur derivative materials in North
America. However there can be no assurance that the Dry Disaggregation System
technology will achieve market acceptance or that sufficient revenues will be
generated to allow us to operate profitably.
  ***Liquidity
and Capital Resources***
  The
Company had funded our losses to date and patent acquisitions through the
private placements of our common stock and financing from accredited investors.
The Company believes that it can continue to do so until the Company achieves
positive cash flow from operations. Since inception, the Company raised net
proceeds of $10,556,970 from the sale of 2,597,487 shares of our common stock.
As a result of the Company’s net loss, the Company's cash balance at December
31, 2004 was $442,762. On April 12, 2005, as described above, the Company
entered into a Securities Purchase Agreement. As a result of the net funds
received of $1,957,500 from the sale of these securities, the Company believes
that it will have sufficient liquidity and capital resources to meet its
obligations in the coming year. While Management believes that the Company may
be able to raise additional capital in the event that the need arises, there can
be no assurance that the Company will be successful in raising additional
capital.
 ******
 ***Plan
of Operations***
  For the
fiscal year ended December 31, 2004, the Company plan of operations focused on
three primary objectives:
  1.
    Raising
      capital through private offerings;
 2.
    working
      with the Company’s consultants to develop and enhance the Company’s
      technology; and
 3.
    finding
      customers to purchase or lease from us machinery which employs the dry
      disaggregation technology or enter into joint venture or strategic partner
      arrangements with us based on their use of our
  machinery.
 
 During
2005, the Company intends to continue efforts to improve and enhance its
technology through ongoing research and development. The Company also intends to
continue to develop potential customers, testing of customer’s products and
prepare for the commencement of commercial operations. The Company plans on
purchasing machines throughout the year based on customer demands. Management
plans on paying for the machines by receiving deposits from our customers for
each machine ordered, subsequent progress payments, royalty payments received
and capital raised through the sale of securities as described above.
  13
 ***Off-Balance
Sheet Arrangements***
  None
  ***Recent
Accounting Pronouncements***
 
 In
December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment”. SFAS No.
123 (R) revises SFAS No. 123, “Accounting for Stock-Based Compensation” and
supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS
No. 123 (R) focuses primarily on the accounting for transactions in which an
entity obtains employee services in share-based payment transactions. SFAS No.
123 (R) requires companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity instruments based
on the grant-date fair value of those awards (with limited exceptions). SFAS No.
123 (R) is effective as of the first interim or annual reporting period that
begins after June 15, 2005 for non-small business issuers and after December 15,
2005 for small business issuers. Accordingly, the Company will adopt SFAS No.
123 (R) in its quarter ending March 31, 2006. The Company is currently
evaluating the provisions of SFAS No. 123 (R) and has not yet determined the
impact, if any, that SFAS No. 123 (R) will have on its financial statement
presentation or disclosures.
  In
November 2004, the FASB issued SFAS No. 151 “Inventory Costs”. SFAS No. 151
amends the guidance in Accounting Research Bulletin No. 43, Chapter 4,
“Inventory Pricing”, to classify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). In
addition, SFAS No. 151 requires that allocation of fixed production overhead to
the costs of conversion be based on the normal capacity of the production
facilities. The provisions of SFAS No. 151 will be effective for the Company
beginning in 2005.
  In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-Monetary Assets,
an Amendment of Accounting Principles Board (“APB”) No. 29”. This statement
amends APB Opinion No. 29, “Accounting for Nonmonetary
Transactions”.
  Earlier
guidance had been based on the principle that exchanges of nonmonetary assets
should be based on fair value of the assets exchanged and APB No. 29 included
certain exceptions to this principle. However, FASB 153 eliminated the specific
exceptions for nonmonetary exchanges with a general exception rule for all
exchanges of nonmonetary assets that do not have commercial and economic
substance. A nonmonetary exchange has commercial substance only if the future
cash flows of the entity is expected to change significantly as a result of the
exchange. This statement is effective for nonmonetary exchanges occurring in
fiscal periods beginning after June 15, 2005.
  14
 Management
does not expect the implementation of these recent pronouncements to have a
material effect on the Company's consolidated financial position or results of
operations.
  **ITEM
7. FINANCIAL STATEMENTS** ****
  Financial
information required in response to this Item 7 of Form 10-KSB is set forth at
pages F-1 through F-27 of this annual report.
 
 **ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES**
  None
  **ITEM
8A. CONTROLS AND PROCEDURES**
  Under the
supervision and with the participation of the Company’s management, including
its Chief Executive Officer and its Chief Financial Officer, the Company
conducted an evaluation of its disclosure controls and procedures as such term
is defined under Rule 13a-15(e) promulgated under the Securities Act of 1934, as
amended, as of the end of the reporting period. Based on such evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures are effective. There have been no
significant changes (including corrective actions with regard to significant
deficiencies or material weaknesses) in the Company’s internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referenced above.
  **PART
III**
  
 **ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(** **a** **)
OF THE EXCHANGE ACT OF THE COMPANY**
  ***Background
of Directors and Executive Officers***
  The
following is a description of the business experience of each of our directors
and executive officers:
  ***Spencer
L. Sterling, President, Chief Executive Officer and
Director***
  Spencer
L. Sterling, aged 70, joined the company as President, Chief Executive Officer
and Director in October 2003. Prior to joining us Mr. Sterling held senior
management positions with the Ford Motor Company in South Africa, Australia,
Canada, Europe and the United States; and with the Sigma Motor Corporation, a
wholly owned subsidiary of the Anglo American Corporation in South
Africa.
  Mr.
Sterling was a senior management member of Ford Motor Company’s Engine Division,
in Detroit. During this time, he spearheaded the building of strategic
manufacturing facilities for the company in Mexico and Taiwan. He was Managing
Director of the Sigma Motor Corporation that merged with Ford South Africa, in
1985, to form the South African Motor Corporation (SAMCOR). Mr. Sterling was
appointed Group Managing Director and Chairman of subsidiaries. In 1992 he was
appointed Chairman of the SAMCOR Board and a Director of The Anglo American
Industrial Corporation.
  Mr.
Sterling has served as President of the National Association of Automobile
Manufacturers of South Africa (NAAMSA), President of the South African Chamber
of Business and is a former member of the Corporate Forum, a society for senior
businessmen. He has been awarded an Honorary Professorship in the Faculty of
Engineering by the University of Pretoria and has served on the Council of the
University and on the Advisory Council, Faculty of Engineering, of the
University of Stellenbosch in South Africa.
  15
 Mr.
Sterling is a graduate of Maritzburg College and holds a BSc. degree in
Metallurgy and Engineering from Pretoria University and an MBS from the Wits
Graduate School of Business in South Africa.
  ***Kerin
Franklin, Chief Technology Officer***
  Kerin
Franklin, aged 39, joined the Company in May 2003 as Chief Technology Officer.
Prior to joining us, Ms. Franklin was General Manager and CEO of FoodWave (a
start-up business involving new technology in milling and grinding food stuff)
and Senior Vice President of Research and Development and QA for Frontier
Natural Brands (2001 to 2003), Vice President of Research and Development,
Celestial Seasonings Inc., (1999 to 2001 and 1995 to 1998) and Senior Director
of Research and Development, the Daily Wellness Company. Ms. Franklin has an
M.S. Degree in Food Science and Human Nutrition from Colorado State
University.
  ***Joseph
Fasciglione, Chief Financial Officer***
  Joseph
Fasciglione, aged 52, joined the Company in October 2002. Prior to joining us he
held the position of President of Alliance Financial Services, a financial
consulting company providing services to small and medium sized businesses. From
1998 until 2000 Mr. Fasciglione was employed as a business analyst for AT&T
Wireless Services where he provided financing analysis related to local cluster
operations. From 1995 to 1997, Mr. Fasciglione acted as Director of Business
Operations for AT&T Wireless Services during which time he held primary
responsibility for budget preparations, forecasting and various financial
analysis. From 1993 until 1994, Mr. Fasciglione acted as Operations Manager also
for AT&T Wireless Services. From 1990 to 1992, he held the position of CFO
for Professional Reimbursement Solutions of Dallas, Texas, where he was
responsible for all financial and administrative functions for a large closely
held operation. From 1983 until 1990, Mr. Fasciglione held at different times
the positions of Regional Business Manager & Controller, Assistant
Controller and Manager of Budgeting and Internal Reporting for Metromedia Paging
of Dallas, Texas. From 1981 until 1983 he acted as Corporate Accounting Manager
for Homequity Relocation Services, Inc. of Wilton, Connecticut. Mr. Fasciglione
acted as Corporate Budget manager for Frank B. Hall & Company, Inc., a major
international commercial insurance brokerage firm from 1979-1981 and as Senior
Internal Auditor for Levitt Homes, Inc. from 1976 until 1979. Mr. Fasciglione
also served as a Staff Auditor for Grant Thornton Accountants and Management
Consultants from 1975 to 1976. Mr. Fasciglione holds a BBA in Accounting from
Iona College, New Rochelle, New York, and a CPA designation from New
York.
  ***James
R. von der Heydt, Chairman of the Board***
  James R.
von der Heydt, aged 52, joined the Board of Directors in October 2003. From 2002
to present, Mr. von der Heydt has served as a president and founder of
Inno-Ventures, LLC, a consulting firm dedicated to strategic planning and
capital raising for life science start-ups. Prior to founding Inno-Ventures,
LLC, Mr. von der Heydt held senior executive positions with Ralston Purina
Company including Executive Vice President, Global R & D and New Products
(2001 - 2002), Executive Vice President, Business Development and Worldwide
Innovation (1996 - 2001), and Executive Vice President, Pet Food Marketing and R
& D (1994-1996). Mr. von der Heydt is Vice President, Humane Society of
Missouri and is a member of the Board of Trustees of the St. Louis Zoo and the
Center for Business Ethics at St. Louis University.
  ***Leo
Paul Koulos, Director***
  Leo Paul
Koulos, aged 71, joined the Board in October 2003. Prior to the sale of his
company, Mr. Koulos was President and Chief Executive Officer of National Coupon
Redemption Service, Inc., a national clearinghouse for manufacturers’ cents-off
coupons and, served as Chairman and Chief Executive Officer of Coupon Processing
Associates, Inc., of Texas, and its Mexican affiliate, Enlace Vital, S.A. de.
C.V. Mr. Koulos is currently Chairman of International Outsourcing Services,
LLC, its successor company. Mr. Koulos received a Bachelor’s degree from the
University of San Francisco. Mr. Koulos serves on the Board of Directors of
Zindart, Ltd., a leading, publicly traded, manufacturer of high-quality,
die-cast and injection-molded products. He also sits on the Advisory Board of
Chinavest, Inc., an investment banking firm.
  Previously,
Mr. Koulos was a Board member of Synergex Corporation, a major national
wholesaler of pharmaceuticals which was acquired by Bergen Brunswig and was a
founding director of The Pacific Bank, N.A. in San Francisco, a publicly traded
banking institution.
  16
 ***Charles
F. Kuoni III, Director***
  Charles
F. Kuoni III, aged 53, joined the Board of Directors in October 2004. Mr. Kuoni
is president, and CEO of Met-Coil Systems, LLC, a wholly-owned subsidiary of
Mestek, Inc., an NYSE listed company since 2003. From 1998 to 2003 Mr. Kuoni was
a Managing Director for Nightingale & Associates, LLC, a privately held
consulting firm. Prior to 1998, Mr. Kuoni held various senior level management
positions in the healthcare, travel and consulting industries. Mr. Kuoni is a
graduate of Texas Christian University and holds a Masters in Management from
Northwestern Kellogg Graduate School of Management. Mr. Kuoni was an auditor
with Arthur Anderson & Company and is a certified public accountant from
Illinois.
  **Dr.
Marc Mallis, M.D., Director**
  Dr.
Mallis, aged 54, joined the Board of Directors in August 2002. Dr. Mallis is a
principal with Retina Vitreous Associates of Florida Agia, Mallis and Pautler
P.A. Inc., from 1980 to the present, where he is engaged in the practice of
medicine with a specialty in ophthalmology.
  Dr.
Mallis graduated from New York Medical College and attended the Ophthalmology
Course of Stanford University School of Medicine. Dr. Mallis interned at
Geisinger Medical Center, Department of Ophthalmology in Danville, Pennsylvania,
performed his residency at New York Medical College, Department of
Ophthalmology, Valhalla, New York, and received a Vitreo-Retinal fellowship at
Ohio State University, Columbus, Ohio.
  ***Robert
J. Rosen, Director***
  Robert J.
Rosen, aged 56, joined the Board of Directors in May 2004. Mr. Rosen is a
managing member of Greyhawke Capital Advisors, LLC since 1998. Prior to 1990,
Mr. Rosen practiced real estate and securities law as a partner at Hertzog
Calamari and Gleason, and Rosen Hacker and Nierenberg. Mr. Rosen graduated from
the University of Massachusetts and was a Harlan Fiske Stone Scholar and a
graduate of Columbia Law School.
  **SECTION
16(** **a** **)
REPORTING REQUIREMENTS**
  Under
Section 16(a) of the Securities Exchange Act of 1934, directors and executive
officers of the Company and persons who beneficially own more than 10% of the
Company’s common stock, are required to make certain filings on a timely basis
with the Securities and Exchange Commission. Reporting persons are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
filed by them. Based on its review of the copies of Section 16(a) forms received
by it, and on written representations from reporting persons concerning the
necessity of filing a Form 5 - Annual Statement of Changes in Beneficial
Ownership, the Company believes that, during the fiscal year ended December 31,
2004, all filing requirements applicable to reporting persons were met, except
with respect to the following:
  Robert
Rosen filed Forms 3 and 4 on April 15, 2005, and Charles F. Kuoni III filed a
Form 3 on December 29, 2004 and a Form 4 on April 15, 2005, which forms were due
to be filed prior to their actual filing during the year ended December 31,
2004. The filing of such reports was inadvertently omitted by Messrs. Rosen and
Kuoni.
  ***Audit
Committee***
  The
Company has an audit committee established by the Board of Directors. The
committee consists of Charles F. Kuoni III, Leo Paul Koulos, and Dr. Marc
Mallis. Each of the members of the audit committee meets the independence and
experience requirements of the applicable laws and regulations including the
Sarbanes-Oxley Act **.** Mr. Kuoni
is the chairman of the audit committee and meets the definition of “audit
committee financial expert”, as defined under Item 401(e) of Regulation S-B of
the Securities Exchange Act of 1934. The Company believes that the current
members of our audit committee provide an acceptable level of business and
financial experience and expertise.
  The audit
committee makes recommendations concerning the engagement of independent
auditors, reviews with the independent auditors the plans and results of the
audit engagement, approves professional services provided by the independent
auditors, reviews the independence of the independent auditors, considers the
range of audit and non-audit fees and reviews the adequacy of the Company’s
internal accounting controls. The audit committee met on four occasions during
the fiscal year ended December 31, 2004 with all members present at each meeting
with the exception of Mr. Kuoni who joined the Board in October 2004.
  17
 **Compensation
and Corporate Governance Committees**
  On March
20, 2004, the Board of Directors established a compensation committee and a
separate corporate governance committee, both consisting of Leo Paul Koulos,
James R. von der Heydt and Dr. Marc Mallis. The Compensation Committee met on
four occasions in the year ended December 31, 2004.
  ***Code
of Ethics***
  The
Company has adopted a Code of Ethics which applies to the Company’s officers,
directors and employees.
  **I** **TEM
10. EXECUTIVE COMPENSATION**
  **SUMMARY
      COMPENSATION TABLE****Annual
      Compensation**
    **Long-Term
      Compensation****Awards**
    **Payouts****Name
      and Principal Position**
    **Year**
    **Salary**
      **($)**
    **Bonus**
      **($)**
    **Other
      Annual Compensation**
      **($)**
    **Restricted
      Stock Award(s)**
      **($)**
    **Securities
      Under-lying Options**
    **LTIP
      Payouts**
      **($)**
    **All
      Other Compensation**
      **($)**Spencer
      L. Sterling
      President
      & Chief Financial Executive Officer (1)
    **2004**
    **147,130**
    **50,000**
    
    
    **400,000****2003**
    **25,000**
    
    **28,900**
  (1)  Mr.
Sterling has served as President and Chief Executive officer since
October 30, 2003.
 
  ***Stock
Option Plan***
  The
Company has established a Stock Option Plan (the "Plan") to attract, retain and
motivate key employees, to provide an incentive for them to achieve long-range
performance goals and to enable them to participate in the long-term growth of
the Company. Options granted under the Plan may include non-qualified stock
options as well as incentive stock option intended to qualify under Section 422A
of the Internal Revenue Code. The aggregate number of shares that may be issued
under the Plan or exercise of options must not exceed three million shares. Each
stock option agreement specifies when all or any installment of the option
becomes exercisable.
  In May
and October 2003, the Company granted stock options to two executive employees.
The Company applies Accounting Principles Board ("APB") Opinion 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for
option granted to employees. Under APB Opinion 25, if the exercise price of the
Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation cost is recognized. For
the option granted in May 2003, the exercise price of each option equaled the
market price of the Company's stock on the date of grant and an option expires
in 10 years. For the option granted in October 2003, the exercise price of each
option granted equaled the market price of the Company's stock on the date of
grant and the options are fully vested three years from the date of
grant.
  In
October 2003, the Company also granted stock options to the members of its Board
of Directors. Each member was issued as compensation for his services, a stock
option to purchase 50,000 shares at an exercise price of $8.00 per
share.
  In March
2004, the Company also granted stock options to the members of its Board of
Directors. Each member was issued a stock option to purchase 50,000 shares at an
exercise price of $3.96 per share exercisable one year from grant date and
expiring in March, 2015.
  18
 In May
2004, the Company granted a one time stock option to the outside members of its
Board of Directors. Each member was issued a stock option to purchase 100,000
shares at an exercise price of $3.40 per share exercisable one year from grant
date and expiring in May, 2015.
  In May
2004 and October 2004, the Company granted stock options to two new Board
members. In May 2004, the Company issued stock options to purchase 50,000 shares
at an exercise price of $3.40 per share exercisable one year from grant date and
expiring in May 2015. In October 2004, the Company issued stock options to
purchase 50,000 shares at an exercise price of $0.63 per share exercisable one
year from grant date and expiring in October, 2015.
  ***Employment
Agreements***
  On March
29, 2005 the Company entered into a five year employment agreement with Spencer
Sterling as President and Chief Executive Officer. Mr. Sterling will be
compensated with an annual base salary of $150,000. Mr. Sterling’s salary will
be reviewed at least annually for merit increases and may, by action and in the
discretion of the Board, be increased at any time or from time to time. The base
salary also shall be reviewed within 45 days after the Company raises additional
capital of at least $2,000,000 on or before June 1, 2005.
  Mr.
Sterling will be permitted to participate in pension, profit sharing, bonus,
life insurance, medical and other employee benefit programs offered by us. He is
additionally granted the option to purchase up to 400,000 shares of our common
stock at an exercise price of $1.00 per share subject to the terms and
conditions of the option agreement.
  In May
2003, the Company entered into an employment agreement with Kerin Franklin as
our Chief Technology Officer. For her services, Ms. Franklin will be compensated
with an annual base salary of $84,000 and is eligible to receive an annual bonus
at the discretion of the Board of Directors. Ms. Franklin is also entitled to a
commission, payable quarterly, equal to 5% of the prior quarter’s net cash
receipts attributable to business she secured.
  Ms.
Franklin will be permitted to participate in pension, profit sharing, bonus,
life insurance, medical and other employee benefit programs offered by us. She
is additionally granted pursuant to the Plan, the option to purchase up to
600,000 shares of our common stock at an exercise price of $5.00 per share. Ms.
Franklin will also be offered an office allowance for expenses. Upon her
termination for “Good Reason” or other than “For Cause” under the agreement, Ms.
Franklin will be paid a lump sum severance payment equal to her basic
compensation, including her salary, bonuses and benefits, for the greater of 18
months or until May 15, 2008.
  **OPTION
      GRANTS IN LAST FISCAL YEAR****(Individual
      Grants)****Number
      of**
    **Percent
      Of**
    **Exercise  Price**
    **Expiration
      Date******Securities****
    ****Total****
    **(S/Sh)****Underlying**
    **Options****Options
      Granted**
    ****Granted
      to******Name**
    **(=)**
    **Employees****In
      Fiscal****Year**Spencer
      L. Sterling
      President
      & Chief Financial Executive
      Officer
    **50,000**
    **7.7**%****
    **3.96**
    **03/02/2015**
  19
  **AGGREGATED
      OPTION EXERCISES IN LAST FISCAL YEAR AND FINANCIAL
      YEAR-END**
      **OPTION
      VALUES****Name**
    **Shares
      Acquired on Exercise (#)**
    **Value
      Realized ($)**
    **Number
      of Securities Underlying Unexercised Options at FY-End (#)
      Exercisable/Unexercisable**
    **Value
      of Unexercised In-The-Money Options At FY-End ($)
      Exercisable/Unexercisable**Spencer
      L. Sterling
      President
      & Chief Financial Executive Officer
    **0**
    **—**
    **50,000/
      450,000**
    **0
      / 0**
  **ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMEN** **T**
  ***Beneficial
Ownership of Capital Stock***
  The
following table sets forth information regarding beneficial ownership of our
capital stock as of March 31, 2005 for:
  (i)
    each
      person, or group of affiliated persons, known by us to own beneficially 5%
      or more of our capital stock;
  (ii)
    each
      of our directors;
  (iii)
    each
      of our named executive officers; and
  (iv)
    all
      directors and executive officers as a group;
  The
percentage of beneficial ownership is based on 19,235,542 shares of our common
stock outstanding as of March 31, 2005.
  Beneficial
ownership is determined in accordance with the rules and regulations of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage of ownership of that person, (i) shares of common stock subject to
options held by that person that are currently exercisable or become exercisable
within 60 days of March 31, 2005 are considered to be beneficially owned by such
person and (ii) shares of common stock which can be acquired upon the exercise
of all outstanding warrants within 60 days of March 31, 2005 are considered to
be beneficially owned by such person. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person.
  **Shares
      Beneficially Owned (1)****Common
      Stock****Name**
    
    **#
      of Shares**
    
    **%
      of Total**Spencer
      L. Sterling
      (President,
      Chief Executive Officer and Director)
      c/o
      DDS Technologies USA, Inc.
      150
      E. Palmetto Park Road, Suite 510
      Boca
      Raton, FL 33432
    
    
    150,000
      (2
    )
    
    *
    %Joseph
      Fasciglione
      (Secretary,
      Treasurer and Chief Financial Officer)
      150
      E. Palmetto Park Road, Suite 510
      Boca
      Raton, FL 33432
    
    
    102,250
    
    
    *
    %Kerin
      Franklin
      (Chief
      Technology Officer)
      c/o
      DDS Technologies USA, Inc.
      150
      E. Palmetto Park Road, Suite 510
      Boca
      Raton, FL 33432
    
    
    600,000
      (3
    )
    
    3.0
    %
   20
 DDS
      Technologies Ltd. (4)
      c/o
      DDS Technologies USA, Inc.
      150
      East Palmetto Park Road, Suite 510
      Boca
      Raton, FL 33432
    
    
    4,000,000
    
    
    20.1
    %Dr.
      Marc Mallis (5)
      (Director)
      2975
      Rolling Woods Drive
      Palm
      Harbor, FL 34683
      and
      Mallis
      Limited Partnership (5)
      2975
      Rolling Woods Drive
      Palm
      Harbor, FL 34683
    
    
    1,245,500
      (2
    )
    
    6.5
    %James
      R. von der Heydt
      (Director)
      603
      West Polo Drive
      Clayton,
      MO 63105
    
    
    60,000
      (2
    )
    
    *
    %Robert
      J. Rosen
      (Director)
      c/o
      DDS Technologies USA, Inc.
      150
      East Palmetto Park Road, Suite 510
      Boca
      Raton, FL 33432
    
    
    7,500
    
    
    *
    %Leo
      Paul Koulos
      (Director)
      821
      Marina Blvd
      San
      Francisco, CA 94123
    
    
    60,000(2
    )
    
    *
    %Charles
      F. Kuoni III
      (Director)
      c/o
      DDS Technologies USA, Inc.
      150
      East Palmetto Park Road, Suite 510
      Boca
      Raton, FL 33432
    
    
    5,500
    
    
    0
    %Mr.
      & Mrs. Lee Rosen (6)
      17698
      Foxborough Lane
      Boca
      Raton, FL. 33496
    
    
    1,179,000
    
    
    6.1
    %Directors
      and Executive Officers as a Group
    
    
    2,230,750
    
    
    11.1
    %
  * Less
than 1% of the outstanding shares of common stock of the Company.
  (1)  Unless
otherwise stated, all shares of common stock are directly held with sole voting
and dispositive power.
  (2)  Includes
options to purchase 50,000 shares of common stock of the Company at an exercise
price of $8.00 per share, which are exercisable within 60 days.
  (3)  Kerin
Franklin holds options to purchase 600,000 shares of common stock of the Company
at an exercise price of $5.00 per share, all of which are exercisable.
  21
 (4)  DDS
Technologies Ltd. held the patent for the dry disaggregation system technology
which was subsequently assigned to the Company. Umberto Manola holds 60% of the
outstanding shares of common stock of DDS Technologies Ltd.
  (5)  Dr. Marc
Mallis, MD is the General Partner of The Mallis Limited Partnership and serves
on the Board of Directors of the Company. Shares held by The Mallis Limited
Partnership are owned beneficially by Dr. Mallis.
  (6)  Of these
1,179,000 shares of common stock of the Company, 604,000 shares are owned by Lee
Rosen and 575,000 shares are owned of record by Julia Rosen. Lee Rosen is a
founder of, and consultant to, the Company and brother to Robert J.
Rosen.
  **ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
  Except as
set forth hereafter, there have been no material transactions, series of similar
transactions or currently proposed transactions during 2004, or subsequent
thereto to which the Company or any of our subsidiaries was or is to be a party,
in which the amount involved exceeded $60,000 and in which any director or
executive officer or any security holder who is known to us to own of record or
beneficially more than 5% of our common stock, or any member of the immediate
family of any of the foregoing persons, had a material interest.
  Dr.
Mallis has participated in a number of our private placement transactions and
his purchase. Lee Rosen, a founder of the Company, provides consulting services
to the Company pursuant to a consulting agreement dated March 30, 2004 and
expiring on June, 2010 with compensation of $15,000 per month. This replaces a
consulting agreement dated October 1, 2002 whereby Mr. Rosen provided consulting
services to the Company for compensation of $30,000 per month. Robert J. Rosen,
a director is the brother of Lee Rosen.
  Four of
the Company’s directors, James R. von der Heydt, Dr. Marc J. Mallis, Leo Paul
Koulos and Charles F. Kuoni III purchased $25,000, $20,000, $20,000 and $20,000,
respectively, of Series A Preferred Stock, Long Term Warrants and Short Term
Warrants in the Company’s offering recent offering of Series A Preferred Stock
on April 12, 2005 see Item 5 Recent Sales of Unregistered
Securities.
  ***Indebtedness
Of Management***
  No
officer, director or security holder known to us to own of record or
beneficially more than 5% of our common stock or any member of the immediate
family of any of the foregoing persons is indebted to the Company.
  **ITE** **M
13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K**
  ***Financial
Statements Incorporated by Reference***
 
 The
Company’s financial statements and the report of Weinberg & Company, P.A.
which are set forth in the contents to the Consolidated Financial statements on
pages F-1 through F-28 of this annual report are filed as a part of this annual
report.
 Page
    
    Financial
      Statement or ReportF-3
    
    Report
      of Independent Registered Public Accounting
    FirmF-4
    
    Consolidated
      Balance Sheets as of December 31, 2004 and 2003F-5
    
    Consolidated
      Statements of Operations for the years ended December 31, 2004 and 2003
      and for the period from July 17, 2002 (inception) through December 31,
      2004.F-6-8
    
    Consolidated
      Statement of Stockholders' Equity for the period from July 17, 2002
      (inception) through December 31, 2004F-9
    
    Consolidated
      Statements of Cash Flows for the years ended December 31, 2004 and 2003
      and for the period from December 17, 2002 (inception) through December 31,
      2004.F-10-28
    
    Notes
      to Consolidated Financial Statements as of December 31, 2004 and
      2003.
 ******
 22
 ***Exhibits***
 **
 **Exhibit**
    
    **Description**3.11
    
    Articles
      of Incorporation of DDS Technologies USA, Inc.3.21
    
    By-laws
      of DDS Technologies USA, Inc.4.1
    
    The
      rights of the holders of shares of the Company’s Common Stock, par value
      $.0001, are set forth in the Company’s Articles of Incorporation as
      referenced in Exhibit 3.1 hereto.4.2
    
    The
      rights of the holders of shares of the Company’s Series A Preferred Stock,
      par value $.0001, are set forth in the Certificate of Designation of
      Preferences, Rights and Limitations of Series A 6% Convertible Preferred
      Stock dated April 13, 2005 (incorporated by reference to Exhibit 4.2 of
      the Company’s Form 8-K filed April 14, 2005).4.3
    
    Form
      of Long term Warrant (incorporated by reference to Exhibit 4.3 of the
      Company’s Form 8-K filed April 14, 2005).4.4
    
    Form
      of Short Term Warrant (incorporated by reference to Exhibit 4.4 of the
      Company’s Form 8-K filed April 14, 2005).4.5
    
    Securities
      Purchase Agreement, dated as of April 12, 2005, by and among DDS
      Technologies USA, Inc. and the Purchasers party thereto (incorporated by
      reference to Exhibit 4.1 of the Company’s Form 8-K filed April 14,
      2005).10.1
    
    Registration
      Rights Agreement by and among DDS Technologies USA, Inc. and certain
      shareholders
      (incorporated
      by reference to Exhibit 10.2 of the Company’s Form 8-K filed July 15,
      2003).10.2
    
    Securities
      Exchange Agreement by and among Fishtheworld Holdings, Inc., a Florida
      corporation, and the shareholders of DDS Technologies USA, Inc., a
      Delaware corporation (incorporated by reference to Exhibit 10.3 of the
      Company’s Schedule 13D filed April 14, 2003).10.3
    
    Agreement
      and Plan of Merger by and between Fishtheworld, Inc. and DDS Technologies
      USA, Inc. (incorporated by reference to Exhibit 2.3 to the Company’s Form
      8-K filed on June 6, 2003).10.4
    
    Share
      Purchase Agreement by and among the Company and Worthington Growth L.P.,
      CD Investment Partners Ltd., EDJ Limited, Porter Partners, L.P., Nob Hill
      Capital Partners L.P., Adams Select and Choice Investment Management,
      Omicron Master Trust dated June 30, 2003 (incorporated by reference to
      Exhibit 10.1 to the Company’s Form 8-K filed July 15,
    2003).10.5
    
    Registration
      Rights Agreement by and among the Company and Worthington Growth L.P., CD
      Investment Partners Ltd., EDJ Limited, Porter Partners, L.P., Nob Hill
      Capital Partners L.P., Adams Select and Choice Investment Management,
      Omicron Master Trust (incorporated by reference to Exhibit 10.2 to the
      Company’s Form 8-K filed on July 15, 2003).10.6
    
    Securities
      Purchase Agreement by and among the Company and Platinum Partners Value
      Arbitrage Fund L.P., Dolphin Offshore Partners LP, Torrey Pines Master
      Fund, Crescent International Ltd., Castle Creek Technology Partners LLC,
      Choice Investment Management, Vertical Ventures Investment LLC, Otape
      Investments LLC, CD Capital, Paul J. Duggan, Storestreet LP, Greenwich
      Growth Fund Ltd., Omicron Master Fund, Micro Capital Fund Ltd., Micro
      Capital Fund LP, dated October 22, 2003 (incorporated by reference to
      Exhibit 10.1 to the Company’s Form 8-K filed October 24,
      2003).10.7
    
    Registration
      Rights Agreement by and among the Company and Platinum Partners Value
      Arbitrage Fund L.P., Dolphin Offshore Partners LP, Torrey Pines Master
      Fund, Crescent International Ltd., Castle Creek Technology Partners LLC,
      Choice Investment Management, Vertical Ventures Investment LLC, Otape
      Investments LLC, CD Capital, Paul J. Duggan, Storestreet LP, Greenwich
      Growth Fund Ltd., Omicron Master Fund, Micro Capital Fund Ltd., Micro
      Capital Fund LP (incorporated by reference to Exhibit 10.2 to the
      Company’s Form 8-K filed on October 24, 2003).10.8
    
    Employment
      agreement by and between DDS Technologies USA, Inc. and Spencer Sterling
      dated as of March 29, 2005 (incorporated by reference to Exhibit 10.1 to
      the Company’s Form 8-K filed on March 31, 2005).10.9
    
    Stock
      option agreement by and between DDS Technologies USA, Inc. and Spencer
      Sterling dated as of March 29, 2005 (incorporated by reference to Exhibit
      10.2 to the Company’s Form 8-K filed on March 31,
2005).10.10
    
    Employment
      agreement by and between DDS Technologies USA, Inc. and Kerin Franklin
      dated May 15, 2003 (incorporated
      by reference to Exhibit 10.9 filed with the Company’s Registration
      Statement on Form S-1, as amended (Reg. No.333-110409)).
  23
 10.11
    
    First
      Amended and Restated Consulting Services Agreement, by and between DDS
      Technologies USA, Inc. and Lee Rosen, dated March 30, 2004. (incorporated
      by reference to Exhibit 10.10 to the Company’s Form 10-KSB filed on April
      14, 2004).10.12
    
    Registration
      Rights Agreement, dated as of April 12, 2005, by and among DDS
      Technologies USA, Inc. and the Purchasers party thereto (incorporated by
      reference to Exhibit 10.1 of the Company’s Form 8-K filed April 14,
      2005).10.13
    
    Memorandum
      of Understanding among the Company and High Speed Fragmentation B.V. Intel
      Trust S.A., a Switzerland trust, Haras Engineering Corp., a Panama entity,
      Giancarlo Lo Fiego, and Adriano Zapparoli (executed only by the Company,
      Mr. Lo Fiego and Mr. Zapparoli)(incorporated
      by reference to Exhibit 10.1 of the Company’s Form 8-K filed August 4,
      2004).10.14
    
    Memorandum
      of Understanding among the Company, Umberto Manola, Haras Engineering
      Corp., High Speed Fragmentation B.V., and Intel Trust S.A.(incorporated
      by reference to Exhibit 10.1 of the Company’s Form 8-K filed August 19,
      2004).10.15
    
    Mutual
      Release between the Company and Umberto Manola(incorporated
      by reference to Exhibit 10.1 of the Company’s Form 8-K filed November 8,
      2004).10.16
    
    Deed
      of Sale among the Company, Umberto Manola and High Speed Fragmentation
      B.V.(incorporated
      by reference to Exhibit 10.2 of the Company’s Form 8-K filed November 8,
      2004).10.17
    
    Mutual
      Release among the Company, Haras Engineering Corp., High Speed
      Fragmentation B.V., Intel Trust S.A., Giancarlo Lo Fiego and Adriano
      Zapparoli(incorporated
      by reference to Exhibit 10.3 of the Company’s Form 8-K filed November 8,
      2004).10.18
    
    Standstill
      Agreement between the Company and High Speed Fragmentation B.V.(incorporated
      by reference to Exhibit 10.4 of the Company’s Form 8-K filed November 8,
      2004).10.19
    
    Technology
      License Agreement between the Company and High Speed Fragmentation B.V.(incorporated
      by reference to Exhibit 10.5 of the Company’s Form 8-K filed November 8,
      2004).10.20
    
    Notice
      of Voluntary Dismissal filed by the Company in The United States District
      Court for the Southern District of Florida with respect to case number
      04-80695-CIV-Middlebrooks/Johnson(incorporated
      by reference to Exhibit 10.6 of the Company’s Form 8-K filed November 8,
      2004).10.21
    
    Exclusive
      License Agreement dated February 18, 2005 by and among Sulfur Solutions,
      Inc., Knoll Ventures, Inc., and DDS Technologies USA, Inc.(incorporated
      by reference to Exhibit 10.6 of the Company’s Form 8-K filed March 2,
      2005).14.1
    
    Code
      of Ethics (incorporated by reference to Exhibit 14.1 to the Company’s Form
      10-KSB filed on April 14, 2004).21.11
    
    Subsidiaries
      of the Company.31.1
    
    Certification
      of Chief Financial Officer, pursuant to Rule 13a-14(a).31.2
    
    Certification
      of Chief Executive Officer, pursuant to Rule 13a-14(a).32.1
    
    Certification
      of Chief Executive Officer and Chief Financial Officer, pursuant to 19
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
  1.
Incorporated by reference to the corresponding Exhibit filed with the Company’s
Registration Statement on Form S-1, as amended (Reg. No. 333-110409) .
 
 ***Reports
on Form 8-K in the Fourth Quarter of 2004***
 
 Form 8-K
filed on November 8, 2004 to report the following:
  Mutual
      Release between the Company and Umberto Manola.
 
 Deed
      of Sale among the Company, Umberto Manola and High Speed Fragmentation
      B.V.
 
 Mutual
      Release among the Company, Haras Engineering Corp., High Speed
      Fragmentation B.V., Intel Trust S.A., Giancarlo Lo Fiego and Adriano
      Zapparoli.
 
 Standstill
      Agreement between the Company and High Speed Fragmentation
      B.V.
 
 Technology
      License Agreement between the Company and High Speed Fragmentation
      B.V.
 
 Notice
      of Voluntary Dismissal filed by the Company in The United States District
      Court for the Southern District of Florida with respect to case number
      04-80695-CIV-Middlebrooks/Johnson.
 
 24
  **ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**
  (1)  Audit
Fees
  The
aggregate fees billed for each of the last two fiscal years for professional
services rendered by the principal accountant for our audits of our consolidated
financial statements as of December 31, 2003 and December 31, 2004 and for the
periods then ended, and reviews of our consolidated financials statements
included in our Form 10-KSBs and 10-QSBs, or services that are normally provided
by the accountants in connection with statutory and regulatory filings or
engagements for those fiscal years were:
  2004:  $63,000  Weinberg
& Company, P.A.
  2003:  $63,000  Weinberg
& Company, P.A.
  The
aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountants that are reasonably related to the
performance of the audit and review of our consolidated financial statements and
are not reported in the preceding paragraph that relate to reviews of the
Company’s SEC Registration Statements were:
  2004:  $27,500  Weinberg
& Company, P.A.
  2003:  $2,400  Weinberg
& Company, P.A.
  25
 **SIGNATURES**
  Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
  
 **DDS
      TECHNOLOGIES USA, INC.**By:SPENCER
      L. STERLINGSpencer
      L. Sterling
      President,
      Chief Executive Officer and Director
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
  
 SIGNATURE
    TITLE
    DATE/s/
      SPENCER L. STERLING
    President,
      Chief Executive
    April
      [__], 2005Spencer
      L. Sterling
    Officer,
      Director/s/
      JOSEPH FASCIGLIONE
    Chief
      Financial Officer,
    April
      [__], 2005Joseph
      Fasciglione/s/
      JAMES R. VON DER HEYDT
    Director
    April
      [__], 2005James
      R. von der Heydt/s/
      LEO PAUL KOULOS
    Director
    April
      [__], 2005Leo
      Paul Koulos/s/CHARLES
      F. KUONI III
    Director
    April
      [__], 2005Charles
      F. Kuoni III/s/
      DR. MARC MALLIS, M.D.
    Director
    April
      [__], 2005Dr.
      Marc Mallis, M.D./s/
      ROBERT ROSEN
    Director
    April
      [__], 2005Robert
      Rosen
 
 26
 
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
FINANCIAL STATEMENTS**
 **AS
OF AND FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
 
 
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
  **CONTENTS**
 
 
 PAGE
    F-3
    REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMPAGE
    F-4
    CONSOLIDATED
      BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003.PAGE
    F-5
    CONSOLIDATED
      STATEMENTS OF OPERATIONSFOR
      THE YEARS ENDED DECEMBER 31, 2004 AND 2003 AND FOR THE PERIOD FROM JULY
      17, 2002 (INCEPTION) THROUGH DECEMBER 31, 2004.PAGES
    F-6
      - F-8
    CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM JULY 17, 2002
      (INCEPTION) THROUGH DECEMBER 31, 2004.PAGE
    F-9
    CONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE YEARS ENDED DECEMBER 31, 2004 AND 2003 AND FOR THE PERIOD FROM JULY
      17, 2002 (INCEPTION) THROUGH DECEMBER 31, 2004.PAGES
    F-10
      - F-28
    NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2004 AND
      2003.
  
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To the
Board of Directors and shareholders of:
DDS
Technologies U.S.A., Inc. and Subsidiary

We have
audited the accompanying consolidated balance sheets of DDS Technologies
U.S.A., Inc. and Subsidiary as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for the years then ended and for the period from July 17, 2002 (inception)
through December 31, 2004. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.


We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.


In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DDS
Technologies U.S.A., Inc. and Subsidiary as of December 31, 2004 and 2003, and
the consolidated results of their operations, and their cash flows for the years
then ended and for the period from July 17, 2002 (inception) through
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.



WEINBERG
& COMPANY, P.A.

Boca
Raton, Florida
February
17, 2005, except for Note 15 which is as of April 14, 2005
 
 F-3
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
BALANCE SHEETS**
 **ASSETS**December
      31,
    
    December
      31,2004
    
    2003**CURRENT
      ASSETS**Cash
      and cash equivalents
    
    $
    442,762
    
    $
    1,174,281Inventory,
      net
    
    
    220,536
    
    
    —Prepaid
      expenses
    
    
    253,560
    
    
    318,871Total
      Current Assets
    
    
    916,858
    
    
    1,493,152**FIXED
      ASSETS, NET**
    
    
    39,666
    
    
    24,277**PATENT**
    
    
    4,935,000
    
    
    4,700,000**DEPOSITS
      ON PURCHASE OF MACHINERY**
    
    
    575,714
    
    
    4,000,976**OTHER
      ASSETS**
    
    
    —
    
    
    7,977**TOTAL
      ASSETS**
    
    $
    6,467,238
    
    $
    10,226,382**LIABILITIES
      AND STOCKHOLDERS’ EQUITY****CURRENT
      LIABILITIES**Accounts
      payable and accrued expenses
    
    
    358,474
    
    
    238,831Accrued
      professional fees
    
    $
    77,009
    
    $
    311,048Total
      Current Liabilities
    
    
    435,483
    
    
    549,879**COMMITMENTS
      AND CONTINGENCIES****STOCKHOLDERS’
      EQUITY**Preferred
      stock, $.0001 par value, 1,000,000 shares authorized, noshares
      issued and outstanding
    
    
    —
    
    
    —Common
      stock, $.0001 par value, 25,000,000 shares authorized,19,235,542
      and 18,715,103 shares issued and outstanding,respectively
    
    
    1,923
    
    
    1,871Additional
      paid-in capital
    
    
    18,171,587
    
    
    16,347,363Deferred
      consulting expense
    
    
    (72,879
    
    
    (1,356,533
    )Note
      receivable - related party
    
    
    —
    
    
    (235,000
    )Interest
      receivable - related party
    
    
    —
    
    
    (3,074
    )Deficit
      accumulated during development stage
    
    
    (12,068,876
    )
    
    (5,078,124
    )Total
      Stockholders' Equity
    
    
    6,031,755
    
    
    9,676,503**TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY**
    
    $
    6,467,238
    
    $
    10,226,382
  See
accompanying notes to the consolidated financial statements.
 F-4
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 For
      the Year Ended December 31,
      2004
    
    For
      the Year Ended
      December
      31, 2003
    
    For
      the Period From
      July
      17, 2002 (Inception) Through December 31, 2004**REVENUES**
    
    $
    —
    
    $
    —
    
    $
    —**EXPENSES**Professional
      fees
    
    
    2,724,110
    
    
    3,673,263
    
    
    6,722,591Salaries
      and related taxes
    
    
    628,416
    
    
    233,240
    
    
    861,656General
      and administrative
    
    
    906,588
    
    
    566,892
    
    
    1,556,066Research
      and development
    
    
    135,108
    
    
    —
    
    
    135,108Merger
      costs
    
    
    —
    
    
    200,000
    
    
    200,000Machinery
      impairment
    
    
    2,602,775
    
    
    —
    
    
    2,602,775Total
      Expenses
    
    
    6,996,997
    
    
    4,673,395
    
    
    12,078,196**OTHER
      INCOME**Interest
      income
    
    
    6,245
    
    
    3,074
    
    
    9,320Total
      Other Income
    
    
    6,245
    
    
    3,074
    
    
    9,320**NET
      LOSS**
    
    $
    (6,990,752
    )
    $
    (4,670,321
    )
    $
    (12,068,876
    )NET
      LOSS PER SHARE - BASIC AND DILUTED
    
    $
    (0.37
    )
    $
    (0.26
    )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED
    
    
    19,030,597
    
    
    17,817,664
  
 See accompanying notes to the consolidated financial
statements.
 F-5
 
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY**
 **FOR
THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH DECEMBER 31,
2004**
 Common
      StockShares
    
    Amount
    
    Additional
      Paid-In
      Capital
    
    Subscriptions
      Receivable
    
    Deferred
      Consulting
      Expense
    
    Note
      Receivable Related Party
    
    Interest
      Receivable Related Party
    
    Accumulated
      Deficit
    
    TotalCommon
      stock issued for cash at inception
    
    
    10,944,055
    
    $
    1,095
    
    $
    957,310
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    958,405Common
      stock issued for license valued at $1.00 per share
    
    
    3,500,000
    
    
    350
    
    
    3,499,650
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    3,500,000Common
      stock issued for cash in December 2002 at $1.00 per share
    
    
    100,000
    
    
    10
    
    
    99,990
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    100,000Net
      loss, July 17, 2002 (inception) through December 31, 2002
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (407,803
    )
    
    (407,803
    )Common
      stock issued for cash in January 2003 at $1.00 per share
    
    
    200,000
    
    
    20
    
    
    199,980
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    200,000Common
      stock issued for license in January 2003 at $1.00 per
      share
    
    
    500,000
    
    
    50
    
    
    499,950
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    500,000Note
      receivable - related party in February 2003
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (235,000
    )
    
    —
    
    
    —
    
    
    (235,000
    )Interest
      receivable - related party
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (3,074
    )
    
    —
    
    
    (3,074
    )Common
      stock issued for cash in February, March and April 2003 at $1.00 per
      share
    
    
    800,000
    
    
    80
    
    
    799,920
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    800,000Recapitalization
      for merger in April 2003
    
    
    429,000
    
    
    43
    
    
    (43
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Common
      stock issued for cash in May 2003 at $1.00 per share
    
    
    100,000
    
    
    10
    
    
    99,990
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    100,000Common
      stock subscribed at $1.00 per share
    
    
    1,500,000
    
    
    150
    
    
    1,499,850
    
    
    (1,500,000
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Collection
      of subscription receivable in July 2003
    
    
    —
    
    
    —
    
    
    —
    
    
    500,000
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    500,000Warrants
      issued for consulting expense in April 2003
    
    
    —
    
    
    —
    
    
    1,274,848
    
    
    —
    
    
    (1,274,848
    )
    
    —
    
    
    —
    
    
    —
    
    
    —Common
      stock issued for cash in July and August 2003 at $3.50 per share,
      net
    
    
    502,714
    
    
    50
    
    
    1,020,444
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    1,020,494
 See accompanying notes to the consolidated financial
statements.
 F-6
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY**
 **FOR
THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH DECEMBER 31,
2004**
 Common
      StockShares
    
    Amount
    
    Additional
      Paid-In
      Capital
    
    Subscriptions
      Receivable
    
    Deferred
      Consulting
      Expense
    
    Note
      Receivable Related Party
    
    Interest
      Receivable Related Party
    
    Accumulated
      Deficit
    
    Total
 Warrants
      issued with the sale of common stock in July and August
    2003
    
    
    —
    
    
    —
    
    
    563,056
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    563,056Common
      stock issued for services in August and September 2003
    
    
    175,000
    
    
    17
    
    
    1,298,233
    
    
    —
    
    
    (1,298,250
    )
    
    —
    
    
    —
    
    
    —
    
    
    —Common
      stock issued for settlement
    
    
    60,000
    
    
    6
    
    
    464,994
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    465,000Cancellation
      of subscription receivable
    
    
    (1,000,000
    )
    
    (100
    )
    
    (999,900
    )
    
    1,000,000
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Common
      stock issued for cash in October 2003 at $6.00 per share,
    net
    
    
    904,334
    
    
    90
    
    
    2,896,206
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    2,896,296Warrants
      issued with the sale of common stock in October 2003
    
    
    —
    
    
    —
    
    
    1,962,114
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    1,962,114Warrants
      issued for consulting expense in December 2003
    
    
    —
    
    
    —
    
    
    29,761
    
    
    —
    
    
    (29,761
    )
    
    —
    
    
    —
    
    
    —
    
    
    —Options
      issued for consulting services in August and November 2003
    
    
    —
    
    
    —
    
    
    181,010
    
    
    —
    
    
    (181,010
    )
    
    —
    
    
    —
    
    
    —
    
    
    —Amortization
      of deferred consulting expenses in 2003
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    1,427,336
    
    
    —
    
    
    —
    
    
    —
    
    
    1,427,336Net
      loss, year ended December 31, 2003
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (4,670,321
    )
    
    (4,670,321
    )BALANCE,
      December 31, 2003
    
    
    18,715,103
    
    
    1,871
    
    
    16,347,363
    
    
    —
    
    
    (1,356,533
    )
    
    (235,000
    )
    
    (3,074
    )
    
    (5,078,124
    )
    
    (9,676,503
    )Common
      stock issued for accrued professional fees in February 2004 at $7.45 per
      share
    
    
    10,000
    
    
    1
    
    
    74,499
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    74,500Common
      stock issued for services in February 2004 at $4.30 per
    share
    
    
    10,000
    
    
    1
    
    
    42,999
    
    
    —
    
    
    (43,000
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
 
  See accompanying notes to the consolidated financial
statements.
 
 F-7
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY**
 **FOR
THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH DECEMBER 31,
2004**
 Common
      StockShares
    
    Amount
    
    Additional
      Paid-In
      Capital
    
    Subscriptions
      Receivable
    
    Deferred
      Consulting
      Expense
    
    Note
      Receivable Related Party
    
    Interest
      Receivable Related Party
    
    Accumulated
      Deficit
    
    Total
 Warrants
      issued for consulting expense in February 2004
    
    
    —
    
    
    —
    
    
    42,454
    
    
    —
    
    
    (42,454
    )
    
    —
    
    
    —
    
    
    —
    
    
    —Warrants
      issued for consulting expense in April 2004
    
    
    —
    
    
    —
    
    
    170,052
    
    
    —
    
    
    (170,052
    )
    
    —
    
    
    —
    
    
    —
    
    
    —Common
      stock issued for services in May 2004 at $2.55 per share
    
    
    10,000
    
    
    1
    
    
    25,499
    
    
    —
    
    
    (25,500
    )
    
    —
    
    
    —
    
    
    —
    
    
    —Warrants
      issued for consulting expense in May 2004
    
    
    —
    
    
    —
    
    
    12,165
    
    
    —
    
    
    (12,165
    )
    
    —
    
    
    —
    
    
    —
    
    
    —Common
      stock issued for cash in May 2004 at $3.30 per share, net
    
    
    490,439
    
    
    49
    
    
    741,680
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    741,729Warrants
      issued with the sale of common stock in May 2004
    
    
    —
    
    
    —
    
    
    714,876
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    714,876Amortization
      of deferred consulting expenses in 2004
    
    
    —
    
    
    —
    
    
    —
    
    
    
    
    
    1,576,825
    
    
    —
    
    
    —
    
    
    —
    
    
    1,576,825Interest
      receivable related party in 2004
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (1,844
    )
    
    —
    
    
    (1,844
    )Forgiveness
      of note and interest receivable in July 2004
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    235,000
    
    
    4,918
    
    
    —
    
    
    239,918Net
      loss, year ended December 31, 2004
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (6,990,752
    )
    
    (6,990,752
    )**BALANCE,
      December 31, 2004**
    
    
    19,235,542
    
    $
    1,923
    
    $
    18,171,587
    
    $
    —
    
    $
    (72,879
    )
    $
    —
    
    $
    —
    
    $
    (12,068,876
    )
    $
    6,031,755
 
  See
accompanying notes to the consolidated financial
statements.
 F-8
  **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **AS
OF DECEMBER 31, 2004**
 For
      the Year Ended
      December
      31, 2004
    
    For
      the Year Ended December 31, 2003
    
    For
      the Period From
      July
      17, 2002 (Inception) Through
      December
      31, 2004**CASH
      FLOWS FROM OPERATING ACTIVITIES:**Net
      loss
    
    $
    (6,990,752
    )
    $
    (4,670,321
    )
    $
    (12,068,876
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      expense
    
    
    5,777
    
    
    3,447
    
    
    9,793Machinery
      and deposits impairment
    
    
    2,602,775
    
    
    —
    
    
    2,602,775Amortization
      of deferred consulting expense
    
    
    1,576,825
    
    
    1,427,336
    
    
    3,004,161Settlement
      on legal payable
    
    
    (350,000
    )
    
    —
    
    
    (350,000
    )Forgiveness
      of interest receivable
    
    
    3,074
    
    
    —
    
    
    3,074Common
      stock issued for services
    
    
    —
    
    
    465,000
    
    
    465,000Other
      non - cash expenses
    
    
    —
    
    
    4,112
    
    
    —Changes
      in operating assets and liabilities:Prepaid
      expenses
    
    
    65,310
    
    
    (313,894
    )
    
    (253,560
    )Other
      assets
    
    
    7,977
    
    
    (7,977
    )
    
    —Accrued
      professional fees
    
    
    190,461
    
    
    311,048
    
    
    501,509Accounts
      payable and accrued expenses
    
    
    119,643
    
    
    238,831
    
    
    358,474Net
      Cash Used In Operating Activities
    
    
    (2,768,910
    )
    
    (2,542,418
    )
    
    (5,727,650
    )**CASH
      FLOWS FROM INVESTING ACTIVITIES:**Deposit
      on purchase of machinery
    
    
    (11,000
    )
    
    (4,000,976
    )
    
    (4,011,976
    )Refund
      of deposit on purchase of machinery
    
    
    741,000
    
    
    —
    
    
    741,000Purchases
      of fixed assets
    
    
    (149,214
    )
    
    (11,317
    )
    
    (177,508
    )Acquisition
      of license/Patent
    
    
    —
    
    
    (200,000
    )
    
    (700,000
    )Note
      receivable and accrued interest -related party
    
    
    —
    
    
    (238,074
    )
    
    (238,074
    )Net
      Cash Provided by (Used In) Investing Activities
    
    
    580,786
    
    
    (4,450,367
    )
    
    (4,386,558
    )**CASH
      FLOWS FROM FINANCING ACTIVITIES:**Sales
      of common stock and warrants
    
    
    1,456,605
    
    
    8,041,961
    
    
    10,556,970Net
      Cash Provided By Financing Activities
    
    
    1,456,605
    
    
    8,041,961
    
    
    10,556,970**NET
      INCREASE (DECREASE) IN CASH**
    
    
    (731,519
    )
    
    1,049,176
    
    
    442,762**CASH
      AND CASH EQUIVALENTS - BEGINNING OF PERIOD**
    
    
    1,174,281
    
    
    125,105
    
    
    —**CASH
      AND CASH EQUIVALENTS - END OF PERIOD**
    
    $
    442,762
    
    $
    1,174,281
    
    $
    442,762**NON
      CASH INVESTING AND FINANCING ACTIVITIES:**Common
      stock issued for license valued at $1.00 per share
    
    $
    —
    
    $
    500,000
    
    $
    4,000,000Warrants
      issued for deferred consulting services
    
    $
    —
    
    $
    1,284,848
    
    $
    1,509,519Common
      stock issued for deferred consulting expenses
    
    $
    —
    
    $
    1,308,250
    
    $
    1,308,250Common
      stock issued for accrued consulting expenses
    
    $
    74,500
    
    $
    —
    
    $
    74,500Options
      issued for deferred consulting services
    
    $
    —
    
    $
    99,636
    
    $
    99,636Common
      stock issued to consultant to settle contract dispute
    
    $
    —
    
    $
    60,000
    
    $
    60,000Deposits
      transferred into fixed assets and inventory
    
    $
    1,307,087
    
    $
    —
    
    $
    1,307,087Forgiveness
      and reclassification of note receivable to acquisition of
      patent
    
    $
    235,000
    
    $
    —
    
    $
    235,000
  
  See accompanying notes to the consolidated financial
statements.
 
 
 F-9
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
OF DECEMBER 31, 2004**
 **NOTE
      1**
    **BACKGROUND
      AND BASIS OF PRESENTATION**
 
 DDS
Technologies USA, Inc. and subsidiary (the "Company") is a development
stage company with no revenues since its inception on July 17, 2002. The
Company has obtained the patent rights on a world wide basis for a dry
disaggregation and micronization system that converts certain waste into value
added products for further processing or resale.
 
 Since its
inception, the Company has been dependent upon the receipt of capital investment
to fund its continuing activities. In addition to the normal risks associated
with a new business venture, there can be no assurance that the Company's
product development will be successfully completed or that it will be a
commercial success. The Company's ability to execute its business plan will
depend on its ability to obtain additional financing and achieve a profitable
level of operations. There can be no assurance that sufficient financing will be
obtained. Nor can the Company give any assurance that it will generate
substantial revenues or that its business operations will prove to be
profitable.
 
 On
November 14, 2002, Black Diamond Industries, Inc., ("Black Diamond") a public
Florida corporation, conducting no business other than to seek a suitable
acquisition partner, acquired all of the outstanding shares of common stock of
DDS Holdings, Inc., a Nevada company pursuant to a securities exchange agreement
dated October 27, 2002. Under the terms of the securities exchange agreement,
the stockholders of DDS Holdings, Inc. agreed to transfer all of the issued and
outstanding shares of common stock in exchange for an aggregate of 12,915,525
shares of common stock, or approximately 93% of Black Diamond. Immediately prior
to, and in conjunction with the transaction, the sole director and officer and
majority shareholder of Black Diamond returned 13,564,350 shares of common stock
to treasury.
 
 In
December 2002, the Company changed its name to DDS Technologies USA, Inc. and
reincorporated in the state of Delaware.
 
 Under a
share exchange agreement entered into on April 4, 2003, Fishtheworld
Holdings, Inc. ("Fishtheworld") a public Florida corporation conducting no
business other than to seek a suitable acquisition partner, acquired 88.5% of
DDS Technologies USA, Inc. in exchange for 15,367,255 shares of common stock or
approximately 97% of the then issued and outstanding shares of Fishtheworld. DDS
Technologies USA, Inc. also paid a cash consideration of $200,000 to the
shareholders of Fishtheworld, which has been accounted for as merger costs in
the December 31, 2003 statement of operations. Immediately prior to the share
exchange, the majority shareholder of Fishtheworld returned 8,571,000 shares to
treasury and resigned as the sole director and officer of Fishtheworld. The
members of the Board of Directors of the
  F-10
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
OF DECEMBER 31, 2004**
 Company
became members of the Board of Directors of Fishtheworld. DDS Technologies USA,
Inc. adopted the December 31 st year-end
of Fishtheworld. In May 2003, Fishtheworld changed its name to DDS Technologies,
USA, Inc. and reincorporated in the state of Nevada. As a result of the
reincorporation, the Company’s par value for its preferred and common stock
changed to $.0001 per share.
 
 Generally
accepted accounting principles in the United States of America require that a
company whose stockholders retain a majority interest in a business combination
be treated as the acquirer for accounting purposes. Since Black Diamond and
Fishtheworld were public shells and DDS Technologies USA, Inc., is a development
stage company with no revenues, the transactions were treated as
recapitalizations of the Company.
 ****
 **NOTE
      2**
    **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES AND
  ORGANIZATION**
  ***(A)
Principles of Consolidation***
 
 The
accompanying consolidated financial statements include the accounts of DDS
Technologies USA, Inc. and its wholly owned subsidiary. All material
intracompany accounts and transactions have been eliminated.
 
 ***(B)
Fair Value of Financial Instruments***
 
 The
carrying amounts of the Company’s financial instruments, including cash and cash
equivalents, accounts payable and accrued expenses at December 2004, approximate
their fair value because of their relatively short-term nature.
 
 ***(C)
Cash and cash equivalents***
 
 For
purposes of the cash flow statements, the Company considers all highly liquid
investments with original maturities of three months or less at the time of
purchase to be cash equivalents.
 
 ***(D)
Inventory***
 
 Inventory
at December 31, 2004 consists of a dry disaggregation machine located in
Marietta, Georgia. In connection with the machine the Company reclassified
$651,972 from deposit on purchase of machinery to inventory, plus capitalized a
final payment of $74,208 to the manufacturer, $30,660 of shipping costs and
$15,007 of installation costs. The value of the machine was written down as a
result of impairment charges taken for the year ended December 31, 2004 (See
Note 14).
 
 F-11
  **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
OF DECEMBER 31, 2004**
 ***(E)
Fixed Assets***
 
 Machinery
and office and computer equipment are recorded at cost and are depreciated using
the straight-line method over their estimated life of five years. The cost of
additions and betterments are capitalized, and repairs and maintenance costs are
charged to operations in the periods incurred. When depreciable assets are
retired or sold, the cost and related allowances for depreciation are removed
from the accounts and the gain or loss is recognized.
 
 ***(F)
Patent***
 
 The
patent is recorded at its acquisition cost as described in Note 5. The
acquisition cost represents the cost of the license transferred to the patent of
$4,700,000 and the forgiveness of the note receivable with the former owners of
$235,000. Also see Note 3. The patent has a 20-year life, which expires in May
2022, and will be amortized over the expiration term when the Company commences
operations which generate revenues.
 
 ***(G)
Research and Development***
 
 Research
and development, consists of $135,108 in consulting fees incurred on the
development of the technology, are expensed as incurred (See Note 4).
 
 ***(H)
Use of Estimates***
 
 The
preparation of the consolidated 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 of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
 ***(I)
Impairment of Long-Lived Assets***
 
 In August
2001, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 144, *Accounting
for the Impairment or Disposal of Long-Lived Assets* . This
pronouncement superceded SFAS No. 121, *Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of* and was
required to be adopted on January 1, 2002. SFAS No. 144 retained the fundamental
provisions of SFAS No. 121 as it related to assets to be held and used and
assets to be sold. SFAS No. 144 requires impairment losses to be recorded on
assets to be held and used by the Company when indicators of impairment are
present and the
   F-12
 
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
OF DECEMBER 31, 2004**
 undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amount of the assets. When an impairment loss is required for assets to be held
and used by the Company, the related assets are adjusted to their estimated fair
value. Fair value represents the amount at which an asset could be bought or
sold in a current transaction between willing parties, that is, other than a
forced or liquidation sale.
 
 The
estimation process involved in determining if assets have been impaired and in
the determination of fair value is inherently uncertain because it requires
estimates of current market yields as well as future events and conditions. Such
future events and conditions include economic and market conditions, as well as
availability of suitable financing to fund acquisition and development
activities. The realization of the Company's revenue producing assets is
dependent upon future uncertain events and conditions, and accordingly, the
actual timing and amounts realized by the Company may be materially different
from their estimated value.
 
 During
the fourth quarter of 2004, the Company's management determined that there was
impairment of the carrying amount of its machinery and related deposits, and
accordingly recorded an impairment charge for the year ended December 31, 2004
(See Notes 2(D), 4, 6 and 14).
 
 ***(J)
Loss Per Common Share***
 
 Net loss
per common share (basic and diluted) is based on the net loss divided by the
weighted average number of common shares outstanding during each period. Common
stock equivalents were not included in the calculation of diluted loss per share
as their effect would be anti-dilutive.
 
 ***(K)
Income Taxes***
 
 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. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
 
 ***(L)
Stock-Based Compensation***
 
 The
Company accounts for its stock-based employee compensation plans using the
intrinsic value based method, under which compensation cost is measured as the
excess
   F-13
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
OF DECEMBER 31, 2004**
 of the
stock's market price at the grant date over the amount an employee must pay to
acquire the stock. Stock options and warrants issued to non-employees are
accounted for using the
fair value based method, under which the expense is measured as the fair value
of the security at the date of grant based on the Black-Scholes pricing model.
 
 SFAS No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, requires
the Company to provide pro forma information regarding net income and earnings
per share for each period presented as if compensation cost for the Company's
stock options had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option pricing model with
the following weighted average assumptions; no dividend yield for all years;
expected volatility of 74%; risk-free interest rate of 3%, and an expected life
from 5 to 10 years.
 
 Under the
accounting provisions of SFAS No. 123, as amended by SFAS No. 148, the Company's
net loss and net loss per common share would have been as follows:
 
 For
      the Year Ended
      December
      31, 2004
    
    For
      the Year Ended
      December
      31, 2003Net
      loss
    As
      Reported
    $
    6,990,752
    $
    4,670,321Pro
      Forma
    $
    8,818,775
    $
    5,776,232Net
      loss per common
    As
      Reported
    $
    (.37)
    $
    (.26)share
      - basic and diluted
    Pro
      Forma
    $
    (.46)
    $
    (.32)
 
 ***(M)
Recent Accounting Pronouncements***
 
 In
December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment”. SFAS No.
123 (R) revises SFAS No. 123, “Accounting for Stock-Based Compensation” and
supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS
No. 123 (R) focuses primarily on the accounting for transactions in which an
entity obtains employee services in share-based payment transactions. SFAS No.
123 (R) requires companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity instruments based
on the grant-date fair value of those awards (with limited exceptions). SFAS No.
123 (R) is effective as of the first interim or annual reporting period that
begins after June 15, 2005 for non-small business issuers and after December 15,
2005 for small business issuers. Accordingly, the Company will adopt SFAS No.
123 (R) in its quarter ending March 31, 2006. The Company is currently
evaluating the provisions of SFAS No. 123 (R) and has not yet determined the
impact, if any, that SFAS No. 123 (R) will have on its financial statement
presentation or disclosures.
  F-14
 **DDS
TECHNOLOGIES USA, INC.**
 **AND
SUBSIDIARY**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
OF DECEMBER 31, 2004**
 In
November 2004, the FASB issued SFAS No. 151 “Inventory Costs”. SFAS No. 151
amends the guidance in Accounting Research Bulletin No. 43, Chapter 4,
“Inventory Pricing”, to classify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). In
addition, SFAS No. 151 requires that allocation of fixed production overhead to
the costs of conversion be based on the normal capacity of the production
facilities. The provisions of SFAS No. 151 will be effective for the Company
beginning in 2005.
 
 In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-Monetary Assets,
an Amendment of Accounting Principles Board (“APB”) No. 29”. This statement
amends APB Opinion No. 29, “Accounting for Nonmonetary
Transactions”.
 
 Earlier
guidance had been based on the principle that exchanges of nonmonetary assets
should be based on fair value of the assets exchanged and APB No. 29 included
certain exceptions to this principle. However, FASB 153 eliminated the specific
exceptions for nonmonetary exchanges with a general exception rule for all
exchanges of nonmonetary assets that do not have commercial and economic
substance. A nonmonetary exchange has commercial substance only if the future
cash flows of the entity is expected to change significantly as a result of the
exchange. This statement is effective for nonmonetary exchanges occurring in
fiscal periods beginning after June 15, 2005.
 
 ***(N)*** **** ***Concentrations***
 
 The
Company maintains the majority of its cash balances in a financial institution
located in Boca Raton, Florida. The balance in the institution is insured by the
Federal Deposit Insurance Corporation up to $100,000. At December 31, 2004, the
Company’s uninsured cash amounted to $395,692.
 
 The
Company utilized one manufacturer to manufacture and assemble its machinery. The
Company is currently exploring other potential manufacturers in North
America.
 
 ***(O
) Reclassifications***
 
 Certain
amounts from prior year have been reclassified to conform to current year
presentation.
 
 **NOTE
      3**
    **RELATED
      PARTY TRANSACTIONS**
 
 In
February 2003 the Company entered into a $235,000 short-term loan agreement with
DDS Technologies LTD, a United Kingdom corporation. DDS Technologies LTD is an
approximate 21% stockholder of the Company. The loan was for a maximum period of
 
 F-15
 **DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**


ninety days to be repaid with interest at a rate of 1.57% per
annum. In the event that DDS Technologies LTD failed to repay the full amount
due within 120 days, the Company had the right to demand issuance of shares of
DDS Technologies LTD amounting to ten percent of their issued and outstanding
shares. The Company has not demanded payment on the note nor have they demanded
the issuance of shares of common stock of DDS
Technologies LTD.
Pursuant to the terms of a Memorandum of Understanding, dated July 31, 2004 see
Note 5, the loan was forgiven and reclassified to the acquisition cost of the
patent.

For the
year ended December 31, 2004 and 2003, and for the period from July 17, 2002
(inception) through December 31, 2004, the Company incurred consulting expenses
from stockholders of the Company of $322,500, $537,000, and $926,500
respectively.

In
connection with the consulting services aforementioned, in April 2004, the
Company entered into a consulting agreement with a stockholder and former
president of the Company.

Pursuant
to the terms of this agreement, the Company would pay him a monthly fee of
$15,000 for a period of three years. In July 2004, the Company terminated this
agreement and it is now the subject of litigation. see Note 11 (C).

In
connection with the consulting services aforementioned, in March 2004, the
Company entered into a revised consulting agreement with one of its stockholders
whereby the Company pays a monthly fee of $15,000 per month for a period of
seven years. This replaced a previous consulting agreement, dated October 1,
2002, that required the Company to pay the consultant $30,000 per month for a
period of five years.

**NOTE
      4**
    **FIXED
      ASSETS**

In May
2004, the Company installed its first commercial dry disaggregation machine in a
production plant of an Iowa ethanol producer which the Company entered into a
pre-formation agreement with in August 2003. In connection with the
installation, the Company reclassified $651,972 from deposit on purchase of
machinery to fixed assets, in addition to capitalizing $31,496 of shipping
costs. The machine is currently the subject of litigation. See Note 11 (C). As
the result of this ongoing litigation, the Company has not been able to visually
inspect the machine or gain access to it. Accordingly, the Company has decided
to adjust the book value of the machine to scrap value of $20,000. The amount is
included in fixed assets. Also see Note 14.

F-16
**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**


As of
December 31, 2004 and 2003 fixed assets consist of:

2004
    
    2003Machinery
      / Equipment, net of impairment charge
    
    $
    20,000
    
    $
    —Computer
      equipment
    
    
    23,311
    
    
    23,311Office
      equipment
    
    
    6,148
    
    
    4,98249,459
    
    
    28,293Less
      accumulated depreciation
    
    
    (9,793
    )
    
    (4,016
    )Fixed
      Assets, Net
    
    $
    39,666
    
    $
    24,277

Depreciation
expense for the years ended December 31, 2004 and 2003 and for the period from
July 17, 2002 (inception) through December 31, 2004 amounted to $5,777, $3,447
and $9,793, respectively.

**NOTE
      5**
    **PATENT
      FOR DRY DISAGGREGATION TECHNOLOGY**

On August
29, 2002, the Company (the licensee) entered into an exclusive license agreement
with DDS Technologies LTD. The initial license agreement, which expires on May
28, 2022, provides for the exclusive North, South, Central American and
Caribbean (excluding Cuba) rights to the pending patent, #02425336.1, which was
filed with the European patent office on May 28, 2002. The patent relates to the
Longitudinal Micrometric Separator for Classifying Solid Particulate Materials.
The terms of the agreement required the Company to pay at the time of signing
$500,000 and 3,500,000 shares of the common stock of the Company, which were
paid during 2002.

For the
year ended December 31, 2003, the Company paid an additional $200,000 and issued
an additional 500,000 shares of common stock valued at $1.00 per share to DDS
Technologies LTD. for an extension of the license to include Africa, subject to
certain exceptions. The 4,000,000 shares of common stock owned by DDS
Technologies LTD represents approximately a 22% ownership in the Company. During
2003, DDS Technologies LTD transferred its rights and obligations relating to
the note receivable, license agreement and common stock ownership to High Speed
Fragmentation B.V. (“HSF”) (See Note 3).

In
accordance with the agreement, the Company was required to pay the licensor: (1)
49% of the net profits derived from the sale of productsembodying
the technology, (2) 24%
of the net profits derived from the licensing and rental of products embodying
the technology, and (3) 49% of the net profits derived from the sale of
materials that are produced by machines embodying the technology and
subsequently sold for use in producing certain value added products.
Additionally, the Company is required to pay


F-17
**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**
2% of the
net profits derived in (1) through (3) above to a charity designated by the
licensor.

The
Company previously entered into a Memorandum of Understanding, dated July 31,
2004, with Umberto Manola (“Manola”), Haras Engineering Corp. (“HEC”), High
Speed Fragmentation B.V. (“HSF”), and Intel Trust S.A. (“Intel”) and an Amended
and Restated Memorandum of Understanding, dated as of July 31, 2004 with HEC,
HSF, Intel, Giancarlo Lo Fiego (“Lo Fiego”) and Adriano Zapparoli (“Zapparoli”).

Pursuant
to terms of the Memorandum of Understanding, dated July 31, 2004, the Company,
whose original license to the dry disaggregation technology was previously
restricted to North, South and Central America, the Caribbean (excluding Cuba)
and Africa, has acquired the patents underlying the dry disaggregation
technology. Following the assignment to the Company of the patents, the Company
filed the assignments with the United States Patent and trademark Office. The
Company also plans to file the assignments in the corresponding offices in the
foreign jurisdictions where the patents have been applied for or obtained.

Pursuant
to the original licensing agreement dated August 2002, and amendment dated
January 2003, the Company paid a total of $4,700,000 in cash and stock for the
licensing rights to the technology. As part of the Memorandum of Understanding
dated July 31, 2004, the Company forgave a note receivable from the licensor in
the amount of $235,000 and applied it towards the acquisition cost of the
patent. Additionally, as part of the above mentioned MOU, the Company received a
refund of approximately $741,000 of payments it had made towards the deposits
for the purchase of five machines embodied with the DDS technology.

**NOTE
      6**
    **DEPOSITS
      ON PURCHASE OF MACHINERY**

Pursuant
to the Sale and Purchase Agreement with HSF, to purchase disaggregation
machines, which embodies the dry disaggregation technology discussed in Note 5,
the Company advanced a non-refundable deposit of $4,000,976 towards the
purchase, delivery and installation of five initial units on order.

Pursuant
to the terms of a Memorandum of Understanding (See Note 13), the Company
received a refund of approximately $741,000 on the advances made which was
applied to the deposits on purchase of machinery.

Two
machines were delivered in 2004 and the Company reclassified $1,303,944 to fixed
assets and inventory (See Notes 2(D) and 4). Subsequently, pursuant to the MOU
settlement above, the Company recorded an impairment charge for the deposits on
the


F-18
**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**
purchase
of machinery of $1,573,889. This charge reflects the current fair value of the
machines. See Note 14.

**NOTE
      7**
    **INCOME
      TAXES**

No
provision for Federal and state income taxes has been recorded as the Company
has start up costs and net operating loss carryforwards of approximately
$12,000,000 to offset any future taxable income. Such carryforwards begin to
expire in 2022. Under the Tax Reform Act of 1986, the amounts of and benefits
from net operating losses and capital losses carried forward may be impaired or
limited in certain circumstances. Events, which may cause limitations in the
amount of net operating losses that the Company may utilize in any one year,
include, but are not limited to, a cumulative ownership change of more than 50%
over a three-year period.

The
deferred tax asset as of December 31, 2004, consisting primarily of the tax
effect of net operating loss carryforwards amounted to approximately $4,080,000.
The Company has provided a full valuation allowance on the deferred tax asset as
of December 31, 2004 to reduce such deferred tax assets to zero, as it is
management's belief that realization of such amounts is not considered more
likely than not.

**NOTE
      8**
    **STOCK
      OPTIONS**

The
Company has established a Stock Option Plan (the "Plan") to attract, retain and
motivate key employees, to provide an incentive for them to achieve long-range
performance goals and to enable them to participate in the long-term growth of
the Company. Options granted under the Plan may include non-qualified stock
options as well as incentive stock option intended to qualify under Section 422A
of the Internal Revenue Code. The aggregate number of shares that may be issued
under the Plan or exercise of options must not exceed three million shares. Each
stock option agreement specifies when all or any installment of the option
becomes exercisable.

In May
and October 2003, the Company granted stock options to two executive employees.
The Company applies Accounting Principles Board ("APB") Opinion 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for
option granted to employees. Under APB Opinion 25, if the exercise price of the
Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation cost is recognized. For
the option granted in May 2003, the exercise price of each option equaled the
market price of the Company's stock on the date of grant and an option expires
in 10 years. For the option granted in October 2003, the exercise price of each
option granted equaled the market price of the Company's stock on the date of
grant and the options are fully vested three years from the date of
grant.

F-19
**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**
In
October 2003, the Company also granted stock options to the members of its Board
of Directors. Each member was issued as compensation for their services, a stock
option to purchase 50,000 shares at an exercise price of $8.00 per share
exercisable one year from grant date and expiring in October 2014.

In March
2004, the Company also granted stock options to the members of its Board of
Directors. Each member was issued a stock option to purchase 50,000 shares at an
exercise price of $3.96 per share exercisable one year from grant date and
expiring in March 2015.

In May
2004, the Company granted a one time stock option to the outside members of its
Board of Directors. Each member was issued a stock option to purchase 100,000
shares at an exercise price of $3.40 per share exercisable one year from grant
date and expiring in May 2015.

In May
2004 and October 2004, the Company granted stock options to two new Board
members. In May 2004, the Company issued stock options to purchase 50,000 shares
at an exercise price of $3.40 per share exercisable one year from grant date and
expiring in May 2015. In October 2004, the Company issued stock options to
purchase 50,000 shares at an exercise price of $0.63 per share exercisable one
year from grant date and expiring in October 2015.

A summary
of the status of the Company’s option plans as of December 31, 2004 and the
changes during the year ending on that date is presented below:

Shares
    
    Weighted
      Average Exercise PriceOutstanding
      at December 31, 2002
    
    
    —
    
    
    —Granted
    
    
    1,350,000
    
    $
    6.37Outstanding
      at December 31, 2003
    
    
    1,350,000
    
    $
    6.37Granted
    
    
    650,000
    
    $
    3.40Forfeited
    
    
    (200,000
    )
    $
    6.99Outstanding
      at December 31, 2004
    
    
    1,800,000
    
    $
    5.23Options
      exercisable at December 31, 2004
    
    
    600,000Weighted
      average fair value of options granted to employees during the period from
      July 17, 2002 (Inception) through December 31, 2004
    
    $
    3.49

F-20
**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**
The
following table summarizes information about the stock options outstanding at
December 31, 2004:

Options
      Outstanding
    
    Options
      ExercisableExercise
      Price
    
    Number
      Outstanding at December 31, 2004
    
    Weighted
      Average Remaining Contractual Life
    
    Weighted
      Average Exercise Price
    
    Number
      Exercisable at December 31, 2004
    
    Weighted
      Average Exercise Price$
    3.40
    
    
    300,000
    
    
    10.50
    
    $
    3.40
    
    
    —
    
    $
    3.40$
    3.96
    
    
    200,000
    
    
    10.25
    
    $
    3.96
    
    
    —
    
    $
    3.96$
    5.00
    
    
    600,000
    
    
    8.33
    
    $
    5.00
    
    
    600,000
    
    $
    5.00$
    7.00
    
    
    400,000
    
    
    2.83
    
    $
    7.00
    
    
    —
    
    $
    7.00$
    8.00
    
    
    200,000
    
    
    8.83
    
    $
    8.00
    
    
    —
    
    $
    8.00$
    3.40
    
    
    50,000
    
    
    9.50
    
    $
    3.40
    
    
    —
    
    $
    3.40$
    0.63
    
    
    50,000
    
    
    9.75
    
    $
    0.63
    
    
    —
    
    $
    0.63

**NOTE
      9**
    **SALES
      OF COMMON STOCK**

(A)
    In
      April and June 2003, the Company signed various subscription agreements
      for the sale of 1,500,000 shares of common stock at $1.00 per share
      aggregating $1,500,000. On July 23, 2003, the Company collected $500,000
      in connection with the subscriptions receivable. In October 2003, the
      Company cancelled the remaining subscription agreement due to non-payment
      and it subsequently cancelled the related
shares.

(B)
    In
      July and August 2003, the Company entered into stock purchase agreements
      with several accredited investors for additional equity capital. The
      Company raised a total of $1,759,500 ($1,583,550 net of commissions). The
      agreements provide for the purchase of the Company's common stock at $3.50
      per share plus warrants equal to one-half of the number of shares
      purchased. The warrants are exercisable at any time for a period of 3
      years at an exercise price of $7.00 per share. The total shares issued
      were 502,714 and warrants for another 251,357 shares. The warrants were
      valued using the Black-Scholes pricing model and resulted in a fair value
      of $563,056. The net proceeds of $1,583,550 were allocated between the
      fair value of the warrants issued with the common stock ($563,056) and the
      common stock ($1,020,494). The Company granted registration rights to the
      investors and incurred penalties for late registration (See Note 11(B)).

(C)
    On
      October 17, 2003 the Company entered into stock purchase agreements with
      several accredited investors for the sale of common stock. The Company
      sold 904,334 shares and raised a total of $5,426,004 ($4,858,410 net of
      commissions).


F-21
**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**
The
agreement provides for the purchase of Company shares at $6.00 per share plus
warrants equal to one-half of the number of shares purchased. The warrants are
exercisable at any time for a period of three years at a strike price of $8.00
per share. The total shares issued were 904,334 and warrants for another 452,167
shares. The warrants were valued using the Black-Scholes pricing model and
resulted in a fair value of $1,962,114. The net proceeds of $4,858,410 were
allocated between the fair value of the warrants issued with the common stock
($1,962,114) and the common stock ($2,896,206).

(D)
    In
      May 2004, the Company entered into stock purchase agreements with several
      accredited investors for the sale of common stock. The Company sold
      490,439 shares and warrants for $1,618,450 ($1,456,605 net of
      commissions). The agreements provide for the purchase of shares at $3.30
      per share plus warrants for an equal number of shares purchased. The
      warrants are exercisable at any time for a period of three years at an
      exercise price of $3.75 per share. The 490,439 warrants were valued using
      the Black-Scholes pricing model and resulted in a fair value of $714,876.
      The net proceeds of $1,456,605 were allocated between the fair value of
      the warrants issued with the common stock ($714,876) and the common stock
      ($741,729).

**NOTE
      10**
    **CONSULTING
      AND MARKETING AGEEMENTS**

(A)
    On
      April 23, 2003, the Company entered into a one-year agreement with a
      consulting company for investment banking and other related services.
      Pursuant to this agreement, the Company issued to the consulting company a
      stock purchase warrant exercisable for a period of five years to acquire
      500,000 shares of the Company's common stock at an exercise price of $6.50
      per share. The warrant was valued using the Black-Scholes pricing model
      and resulted in a fair value of $1,274,848. The amount is being amortized
      over the life of the agreement resulting in consulting expense of $424,949
      and $849,899 for the years ended December 31, 2004 and December 31, 2003,
      respectively. There is no remaining unamortized balance as of December 31,
      2004 relating to the warrants. The agreement also provides that when the
      consulting company serves as a placement agent for the issuance and sale
      of securities, the Company will pay 10% of the money raised and also issue
      warrants to purchase common stock equal to 5% of the number of shares of
      common stock sold. The exercise price of the warrants will be the same
      price that the investors purchased the common stock for. In connection
      with the stock sold in the year ended December 31, 2003, the Company paid
      a $743,550 in commissions to the consulting company and issued stock
      purchase warrants in July and October of 2003 exercisable for three years
      to acquire 25,000 and 36,000 shares, respectively of the Company's common
      stock at an exercise price of $7.00 and $8.00 per share, respectively. The
      warrants were valued using the Black-Scholes pricing model and resulted in
      a fair


F-22
**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**
****
value of
$56,002 and $142,585, respectively. The value of the warrants is included in
additional paid-in capital.

(B)
    On
      August 14, 2003, the Company entered into a one-year agreement with a
      marketing company. As part of the agreement, the marketing company
      provides business advisory and various other investment and marketing
      services. For these services, the Company pays $5,000 monthly. In
      addition, the Company is required to issue 10,000 shares of restricted
      common stock per quarter. The first 10,000 shares were issued upon signing
      the agreement and 10,000 shares were issued in December 31, 2003, February
      2004 and in May 2004. Based on the closing market price of the Company’s
      common stock on the contractual dates of the agreement, $68,500 and
      $126,500 was expensed to consulting fees for the years ended December 31,
      2004 and December 31, 2003 respectively. There is no remaining unamortized
      balance as of December 31, 2004 relating to the issuances of the common
      stock. Additionally, 10,000 shares of common stock due to this marketing
      company valued at $74,500 were accrued for in 2003 and issued in 2004,
      resulting in an increase to stockholders equity in 2004. The Company
      further agreed to issue 35,000 stock options per quarter with a strike
      price of $8.00 per share, expiring 3 years from the date of grant. The
      Company issued all 105,000 stock options under the agreement in 2003. The
      Company estimated the fair value of the stock options at the grant dates
      by using the Black-Scholes option-pricing model with the following
      weighted average assumptions: no dividend yield for all years; expected
      volatility of 83%; risk-free interest rate of 3% and an expected life of 3
      years, resulting in a fair value of $235,629. The amount is being
      amortized over the life of the agreement resulting in consulting expense
      of $112,806 and $122,823 for the year ended in December 31, 2004 and
      December 31, 2003 respectively. There is no remaining unamortized balance
      as of December 31, 2004 relating to the stock option
      issuances.

(C)
    On
      August 15, 2003 the Company entered into a six-month agreement with an
      investment consulting company. As part of the agreement, this consulting
      company will disseminate information about the Company to its investors,
      brokerage firms and others in the financial community. As compensation for
      these services, the Company paid cash consideration of $10,000 upon
      signing and will pay $5,000 per month thereafter. In addition the Company
      has issued 15,000 restricted shares of the Company’s common stock. Based
      on the closing market price of the Company’s common stock on date of
      agreement, the Company has recognized $19,320 and $57,931 in consulting
      fee expense for the years ended December 31, 2004 and December 31, 2003
      respectively. There is no remaining unamortized balance as of December 31,
      2004 relating to the cash and stock-based
compensation.


F-23
**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**
(D)
    On
      September 12, 2003 the Company entered into a one-year agreement with a
      financial consulting firm. As part of the agreement, the consulting firm
      will provide analytical review of the Company's financial information and
      will assist the Company as its financial advisor and investment banker. As
      compensation for these services, the Company has issued 100,000 restricted
      shares of common stock. Based on the closing market price of the Company’s
      common stock on the date of the agreement, the Company has recognized
      $548,275 and $225,725 in consulting fee expense for the years ended
      December 31, 2004 and December 31, 2003 respectively. There is no
      remaining unamortized balance as of December 31, 2004 relating to the
      common stock issuances.

(E)
    On
      September 19, 2003 the Company entered into a one-year agreement with an
      individual. As part of the agreement, the individual will provide a list
      of names of potential investors as well as provide other services for the
      Company. As compensation for these services the Company has issued 50,000
      shares of restricted common stock. Based on the closing market price of
      the Company’s common stock on the date of the agreement, the Company has
      recognized $279,826 and $115,174 in consulting fee expense for the years
      ended December 31, 2004 and December 31, 2003 respectively. There is no
      remaining unamortized balance as of December 31, 2004 relating to the
      common stock issuances.

(F)
    On
      December 8, 2003 the Company entered into an eight-month agreement with a
      marketing company. As part of the agreement, the marketing company will be
      responsible to provide business advisory and various other investment and
      marketing services. For these services, the Company is paying monthly cash
      consideration of $5,000. In addition, the Company is contractually
      committed to issue warrants for the purchase of 10,000 shares of common
      stock at an exercise price of $9.00 per share. The warrants are
      exercisable until December 7, 2005. The warrants were valued using the
      Black-Scholes pricing model and resulted in a fair value of $29,761. The
      amount is amortized over the life of the agreement resulting in consulting
      expense of $26,041 and $3,720 for the years ended December 31, 2004 and
      December 31, 2003 respectively. There is no remaining unamortized balance
      as of December 31, 2004 relating to the warrants.

(G)
    On
      April 26, 2004, the Company entered into a 14 month agreement with a
      marketing company. The marketing company provides business advisory and
      various other investment and marketing services to the Company. The
      Company paid the marketing company $25,000 upon signing the agreement and
      pays a monthly fee of $5,000. In addition, the Company issued warrants for
      the purchase of 400,000 shares of common stock at exercise prices of $3.75
      and $4.25 per share. The warrants are exercisable until April 26, 2007.
      The warrants were valued using the


F-24
**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**
Black-Scholes
pricing model and resulted in a fair value of $170,052. The amount is amortized
over the life of the agreement resulting in consulting expense of $97,173 for
the year ended December 31, 2004. The remaining unamortized balance of $72,879
is presented in the consolidated balance sheet as deferred consulting
expense.

**NOTE 11**
    **COMMITMENT AND
      CONTINGENCIES**

***(A)
Lease Commitment***

The
Company leases its office space under a non-cancelable operating lease agreement
for a five-year term ending in December 2007. Minimum future lease payments for
the next three years are as follows:

Years
      Ending December 31,2005
    
    
    55,7882006
    
    
    57,4082007
    
    
    14,760$
    127,956

Rent
expense for the years ended December 31, 2004 and 2003 amounted to $65,018 and
$44,027, respectively.

***(B)
Contingencies***

The
Company granted registration rights to certain investors in the July 2, 2003
private placement of securities (See Note 9(B)). Under those rights, if the
Company did not file a registration statement within 45 days of closing, the
Company owes the investors an aggregate of approximately $13,000 per month in
penalties. The Company began incurring those penalties on August 16, 2003. The
registration statement was filed on November 12, 2003. The Company has accrued
$37,611 of penalties for the year ended December 31, 2003, which are included in
accrued expenses at December 31, 2004 and 2003.

***(C)
Litigation***

The
Company is a defendant in a lawsuit whereby the plaintiff contends that it is
entitled to a commission for allegedly procuring financing for a transaction.
The Company filed an Answer and Affirmative Defenses. The plaintiff seeks
damages totaling $175,584, plus interest from December 31, 2002. The Company
believes the suit is without merit and is vigorously defending its position. In
the opinion of management, this suit will not

F-25

**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**

have a
material adverse effect on the Company's consolidated financial position or
results of operations.

The
Company received a potential claim from two shareholders alleging that the
Company failed to register their shares for re-sale in the Company’s last
registration statement, filed on Form S-1 under the Securities Act of 1933, as
amended on November 12, 2003 and an amendment thereto on December 13, 2003. In
addition, these shareholders have alleged that they were induced erroneously
into surrendering shares of DDS Holdings, Inc. in connection with the
reorganization into Black Diamond Industries, Inc. Although the Company believes
that it has defenses to these alleged actions, the Company is attempting to
reach an amicable settlement for these claims. There can be no assurance that
these disputes will be favorably resolved, if at all, or that these claims will
not have a material adverse effect on the Company. The Company does not believe
a provision is necessary at December 31, 2004 for this matter.

The
Company is a defendant in a lawsuit whereby a stockholder and former president
of the Company contends that it is entitled to receive consulting fees under a
consulting agreement (See Note 3). The Company suspended payments and terminated
the consulting agreement due to non compliance by the plaintiff with the terms
of the agreement. The Company has filed a counterclaim against the plaintiff for
breach of contract and breach of fiduciary duty.

On August
1, 2003, the Company entered into a nonbinding Pre-Formation Agreement with
Xethanol Corporation (“Xethanol”), a company involved in the biomass
waste-to-ethanol industry. In May 2004 the Company delivered one of its dry
disaggregation machines to Xethanol's plant in Iowa, for testing. The Company
subsequently delivered to Xethanol a notice of termination with respect to the
nonbinding Pre-Formation Agreement and demanded a return of its machine.
Xethanol refused to return the machine. On October 22, 2004, the Company filed a
Verified Complaint for injunctive relief. Amongst various requests, the
Complaint requested the return of the machine to the Company. Xethanol filed a
petition for arbitration with the American Arbitration Association (the “AAA”)
in late October 2004. The petition seeks money damages for breach of contract,
tortuous interference with a contract, fraud, and declaratory judgment. The
Company believes that the petition for arbitration is groundless. On November 3,
2004, the Company filed a response opposing Xethanol’s arbitration petition. In
December 2004 the Company filed an amended Verified Complaint for injunctive
relief. Arbitration hearing has been set to commence in the end of June,
2005.

***(D)
Commitments***

The
Company has a commitment to make a final payment for each remaining machine for
which it will take delivery. While the final amount per machine is not
determinable at


F-26
**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**
this
time, it is expected that the final payment, per machine, may range between
$125,000 and $200,000. Currently there are three additional machines that are
due to be delivered at a future time to be determined by the
Company.

**NOTE
      12**
    **SETTLEMENT
      AGREEMENTS**

In
October 2003, the Company settled a contract dispute with a consultant by
issuing 60,000 shares of common stock. The settlement value was $465,000 and was
determined based on the closing price of the Company's common stock on the
settlement date. The amount is included in professional fees in the accompanying
consolidated statements of operations for the year ended December 31,
2003.

In
September 2004, the Company entered into a Settlement Agreement and Agreement of
Mutual Release with it’s prior legal counsel. Pursuant to the agreement, the
Company was no longer obligated for the payment of approximately $350,000
previously recorded by the Company. The amount was recorded as a reduction of
professional expenses in the accompanying statement of operations for the year
ended December 31, 2004.

**NOTE
      13**
    **OTHER
      AGREEMENTS**

On
January 9, 2004, the Company entered into a Memorandum of Understanding (“MOU”)
with a large Colombian sugar producer. Under the terms of the MOU, a joint
venture pilot program could be developed in which the Company would provide and
install one of its dry disaggregation technology machines for the production of
ethanol in the sugar producer’s facility in Colombia. Currently, further testing
and development work of the disaggregation application is being conducted.
Successful completion of this work is necessary prior to any further development
of this agreement.

**NOTE
      14**
    **MACHINERY
      IMPAIRMENT**

Machinery
and deposits on purchase of machinery were being recorded based on the Company’s
original equipment purchase agreement with HSF. Pursuant to a Memorandum of
Understanding dated July 31, 2004, between the Company, HSF and all other
related parties, the equipment purchase agreement was terminated and the Company
began dealing directly with the equipment manufacturer. Based on the current
estimated selling price of the machines and other factors, the Company
determined that the fair market value of each machine is $232,143. As a result
of this revaluation, the Company recorded and impairment charge of $816,743 for
the year ended December 31, 2004. Additionally, the Company recorded another
impairment charge of $212,143 on the first machine received since this machine
is subject to ongoing litigation (See Notes 2 (D), 4 and 6).

F-27
**DDS
TECHNOLOGIES USA, INC.**
**AND
SUBSIDIARY**
**(A
DEVELOPMENT STAGE COMPANY)**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
**AS
OF DECEMBER 31, 2004**
**NOTE
      15**
    **SUBSEQUENT
      EVENTS**

On
February 18, 2005 the Company entered into a five year agreement with a Canadian
company whereby the Company granted an exclusive license to the Canadian company
for the purpose of processing and extracting sulfur and sulfur derivative
materials in North America. If the machine operates within certain parameters,
the Company will be paid a negotiated purchase price plus royalties. Additional
machines will be purchased at a negotiated higher price.

On April
12, 2005, the Company entered into a Securities Purchase Agreement with certain
accredited investors for the sale of Series A convertible preferred stock. The
Company issued 2,175 shares of its Series A Convertible Preferred Stock for a
purchase price of $2,175,000 ($1,957,500 net of commissions) and the Company may
raise up to an additional $1.8 million through the sale of additional shares of
Series A Preferred Stock. The proceeds were received through April 14, 2005 by
the Company. The Series A Preferred Stock is initially convertible into
approximately 3.1 million shares of the Company’s common stock at a conversion
rate of $.70 per share and has a 6% annual dividend rate payable quarterly in
arrears in cash or, subject to standard equity conditions, in common stock, at
the Company’s option.

Each
investor also received two warrants, a long-term warrant exercisable for a
period of five years to acquire shares of common stock and a short-term warrant
exercisable for a period of one year to acquire additional shares of Series A
Preferred Stock and long term warrants. The long term warrants in the aggregate
are exercisable for approximately 2.3 million shares of common stock at a price
of $.875 per share. The short term warrants in the aggregate are exercisable for
(i) the same number of shares of convertible preferred stock (the “Short Term
Warrant Preferred Stock”) as shares of Series A Preferred Stock were issued in
the offering and (ii) long term warrants for a number of shares of common stock
equal to 35% of the number of shares of common stock issuable upon conversion of
the short term warrant preferred stock. The Short Term Warrant exercise price is
$1,000 per share of Short Term Warrant Preferred Stock together with the
accompanying long term warrants. The Short Term Warrant Preferred Stock has the
same rights and preferences as the Series A Preferred Stock, except the
conversion price of the Short Term Warrant Preferred Stock is initially $0.85
per share.

F-28
**EXHIBIT
INDEX**
 
 **Exhibit**
    
    **Description**31.1
    
    Certification
      of Chief Financial Officer, pursuant to Rule 13a-14(a).31.2
    
    Certification
      of Chief Executive Officer, pursuant to Rule 13a-14(a).32.1
    
    Certification
      of Chief Executive Officer and Chief Financial Officer, pursuant to 19
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
  27