UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-QSB

(Mark One)

|X|   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

|_|   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
             FOR THE TRANSITION PERIOD FROM __________ TO __________
             COMMISSION FILE NUMBER ________________________________

                          SCIENCE DYNAMICS CORPORATION
        -----------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

           Delaware                                       22-2011859
-------------------------------                ---------------------------------
(State or other jurisdiction of                (IRS Employer Identification No.)
 incorporation or organization)

                      7150 N. Pennsauken, New Jersey 08109
                    ----------------------------------------
                    (Address of principal executive offices)

                    Issuer's telephone Number: (856) 910-1166

                                 WITH COPIES TO:
                             Gregory Sichenzia, Esq.
                       Sichenzia Ross Friedman Ference LLP
                           1065 Avenue of the Americas
                            New York, New York 10018
                                 (212) 930-9700

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |_| No
|X|

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

      State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of November 19, 2006,
the issuer had 166,980,767 outstanding shares of Common Stock.

      Transitional Small Business Disclosure Format (check one): Yes |_| No |X|

<PAGE>

                                TABLE OF CONTENTS

                                                                            Page

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements...................................................1
Item 2. Management's Discussion and Analysis or Plan of Operation.............18
Item 3. Controls and Procedures...............................................25

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings.....................................................25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........25
Item 3. Defaults Upon Senior Securities.......................................26
Item 4. Submission of Matters to a Vote of Security Holders...................26
Item 5. Other Information.....................................................26
Item 6. Exhibits..............................................................26

SIGNATURES....................................................................27

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

                  SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                   September30, 2006  December 31, 2005
                                                       Unaudited           Audited
                                                   -----------------  -----------------
<S>                                                  <C>                 <C>
ASSETS

Current assets:
   Cash and cash equivalents                         $    392,406        $     53,997
   Accounts receivable - trade                          1,788,608             706,255
   Inventories                                             86,006               6,049
   Other current assets                                   965,776             190,581
                                                     ------------        ------------
      Total current assets                              3,232,796             956,882
                                                     ------------        ------------

Property and equipment, net                                 1,698              35,279
Goodwill                                                9,043,302           2,063,833
Other Intangibles, net                                    907,040           1,077,110
Other assets                                              122,779              19,213
                                                     ------------        ------------
      Total assets                                   $ 13,307,615        $  4,152,317
                                                     ============        ============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Customer deposits                                 $     15,000        $    150,199
   Accounts payable                                       680,863             986,505
   Accrued expenses                                       972,720           1,084,555
   Deferred Revenue                                       137,493                  --
   Current maturities notes payable                     1,794,775           2,667,942
   Derivative Liability                                23,028,141             462,462
                                                     ------------        ------------
      Total current liabilities                        26,628,992           5,351,663

Minority Interest                                         108,554              78,316

Shareholders' equity - (Deficit)
   Preferred stock - .01 par value
       10,000,000 shares authorized                            --                  --
        No shares issued
   Common stock - .01 par value,
      200,000,000 shares authorized,
      167,106,567 and 89,841,498 issued
      166,980,767 and 89,715,698 outstanding
      in 2006 and 2005 respectively                     1,671,066             898,415

   Additional paid-in capital                          23,205,643          18,800,980

   (Deficit)                                          (37,908,807)        (20,579,224)
                                                     ------------        ------------
                                                      (13,032,098)           (879,829)
   Common stock held in treasury, at cost                (397,833)           (397,833)
                                                     ------------        ------------
   Total shareholders' equity (Deficit)               (13,429,931)         (1,277,662)
                                                     ------------        ------------
   Total liabilities and shareholders'
   Equity                                            $ 13,307,615        $  4,152,317
                                                     ============        ============
</TABLE>

   The accompanying notes are an integral part of these consolidated financial
                                   statements.


                                       1
<PAGE>

                  SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                          Nine Months Ended               Three Months Ended
                                                             September 30,                    September 30,
                                                       2006               2005           2006             2005
                                                                     "As Restated"                   "As Restated"
<S>                                                <C>                <C>            <C>              <C>
Sales - Technology Products ....................   $   1,134,690      $ 1,027,779    $     332.804    $     272,565
Sales - Technology Services ....................       3,044,670        2,220,920        1,161,995          846,570
                                                   -------------      -----------    -------------    -------------
            Total Sales ........................       4,179,360        3,248,699        1,494,799        1,119,135

Cost of Sales - Technology  Products ...........         400,253          334,663          130,433          120,657
Cost of Sales - Technology  Services ...........       1,432,116        1,277,563          508,192          517,322
                                                   -------------      -----------    -------------    -------------
            Total Cost of Sales: ...............       1,832,369        1,612,226          638,625          637,979

             Total Gross Profit ................       2,346,991        1,636,473          856,174          481,156

Operating Expenses:
             Research and development ..........         327,474          323,063          109,205          127,097
             Selling, general and administrative       1,716,505        1,930,264          655,309          647,085
                                                   -------------      -----------    -------------    -------------
                                                       2,043,979        2,253,327          764,514          774,182

Operating Income (Loss) before other income ....         303,012         (616,854)          91,660         (293,026)
(expenses)

Other income (expenses):
            Interest Expense ...................        (409,510)        (373,727)        (144,756)        (148,599)
            Settlement of events of default ....              --         (262,667)              --         (120,000)
            Extinguishment Loss ................        (158,266)              --         (158,266)              --
            Derivative income (expense) ........     (16,921,159)         516,661      (16,934,604)         756,353
            Other Income .......................          13,505               --               --               --
            Finance Expense ....................        (126,927)              --         (110,618)              --
            Minority interest ..................         (30,238)          13,717          (16,217)              --
                                                   -------------      -----------    -------------    -------------
                 Total Other Expense ...........     (17,632,595)        (106,016)     (17,364,461)         487,754
                                                   -------------      -----------    -------------    -------------
Net(Loss) ......................................   $ (17,329,583)   $    (722,870)   $ (17,272,801)   $     194,728
                                                   -------------      -----------    -------------    -------------

Net Loss per Common Share -Basic ...............   $       (0.17)   $       (0.01)   $       (0.14)   $        0.00
Net Loss per Common Share -Diluted .............   $       (0.17)   $       (0.01)   $       (0.14)   $        0.00

Weighted average shares outstanding -Basic .....     102,351,898       82,537,162      119,628,787       89,016,140
Weighted average shares outstanding -Diluted ...     102,351,898       82,537,162      119,628,787       92,577,140
</TABLE>

   The accompanying notes are an integral part of these consolidated financial
                                   statements.


                                       2
<PAGE>

                  SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               Nine Months Ended September  30,
                                                                                   2006               2005
                                                                               ------------        ------------
<S>                                                                            <C>                 <C>
Cash flows from operating activities:
   Net (Loss)                                                                  $(17,329,583)       $   (722,870)
                                                                               ------------        ------------

Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
   Depreciation                                                                     205,124              91,023
   Financing expense non cash                                                       126,927                  --
   Settlement of events of default                                                       --             262,667
   Minority interest                                                                 30,238             (13,717)
   Derivative income & expense including interest expense
           attributed to Derivatives                                             16,921,159            (370,541)
   Extinguishment Gains & losses                                                    158,266                  --
   Amortization of Debt Discount                                                     47,025                  --
   Stock Based Compensation                                                          44,908                  --
Changes in operating assets and liabilities:
   (Increase) decrease in:
    Accounts receivable                                                            (195,291)            416,039
    Inventories                                                                      (1,587)             48,018
    Other assets                                                                   (323,632)            (51,771)
     Increase (decrease) in:
     Accounts Payable and
        accrued expenses                                                           (375,386)            406,537
        Deferred Income                                                             137,493                  --
        Customer Deposits                                                          (135,199)                 --
                                                                               ------------        ------------
Total adjustments                                                                16,640,045             788,255
                                                                               ------------        ------------

Net cash provided by

  operating activities                                                             (689,538)             65,385
                                                                               ------------        ------------
Cash flows used in investing activities:
 Investment in SMEI                                                                      --          (1,655,325)
 Acquired Cash RTI & SMEI respectively                                              156,772               5,159
 Investment in RTI                                                               (3,665,000)                 --
 Purchase of property and equipment                                                      --              (7,875)
                                                                               ------------        ------------
   Net cash (used) in investing activities                                       (3,508,228)         (1,658,041)
                                                                               ------------        ------------
Cash flows from financing activities:
  Payment of Convertible Debt                                                    (1,000,000)                 --
  Issuance of Convertible Debt net of fees                                               --           1,870,292
  Barrons financing                                                               4,450,000                  --
  Issuance of Common shares, net of fees                                          1,293,906                  --
  Short term notes payable                                                         (209,000)           (130,463)
  Revolving AR Credit facility                                                        1,269            (334,000)
                                                                               ------------        ------------
   Net cash provided by (used in) financing activities                            4,536,175           1,405,829
                                                                               ------------        ------------
   Net increase (decrease) in                                                       338,409            (186,827)
   cash and cash equivalents
Cash and cash equivalents -                                                          53,997             192,681
                                                                               ------------        ------------
 beginning of period

Cash and cash equivalents -
 end of period                                                                 $    392,406        $      5,854
                                                                               ============        ============
</TABLE>


                                       3
<PAGE>

                  SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                              Nine months ended
                                                                September 30,
                                                          2006                2005
                                                       ------------        ------------
<S>                                                    <C>                       <C>
Supplemental disclosure of cash flow information:
     Cash paid during the years for:
        Interest                                       $    156,905              86,998
        Income taxes                                   $         -0-                 -0-
</TABLE>

   The accompanying notes are an integral part of these consolidated financial
                                   statements.


                                       4
<PAGE>

                  SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

Note 1- Organization and Summary of Significant Accounting Policies

a) Organization

Science Dynamics Corporation (the "Company", "SciDyn" or "Science Dynamics") was
incorporated in the State of Delaware May 1973 and commenced operations in July
1977. The Company began as a provider of specialized solutions to the telecom
industry. Currently SciDyn provides advanced solutions for several vertical
markets. The greatest change in operations is in the shift from being a
component manufacturer to a solutions provider focused on developing
applications through software on its core platform technology. To further its
strategy of becoming a solutions provider, the Company acquired a majority
interest in "SMEI" in February 2005. On September 19, 2006, the Company
purchased all of the issued and outstanding shares of the common stock of
Ricciardi Technologies Inc. ("RTI"). RTI was founded in 1992 and provides
software consulting and development services for the command and control of
biological sensors and other Department of Defense requirements to United States
federal governmental agencies either directly or though prime contractors of
such governmental agencies. RTI's proprietary products include SensorView, which
provides clients with the capability to command, control and monitor multiple
distributed chemical, biological, nuclear, explosive and hazardous material
sensors.

b) Basis of Financial Statement Presentation

The accompanying unaudited financial statements include the accounts of Science
Dynamics Corporation and its majority owned subsidiaries (The Company) and have
been prepared by management in accordance with generally accepted accounting
principles in the United States of America for interim financial information and
with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. The
financial information furnished herein reflects all adjustments, which in the
opinion of management are necessary for a fair presentation of the Company's
financial position, the results of operations and the cash flows for the periods
presented.

Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed, or omitted, pursuant to such rules and regulations.

These interim statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2005. The Company presumes
that users of the interim financial information herein have read or have access
to the audited financial statements for the preceding fiscal year and that the
adequacy of additional disclosure needed for a fair presentation may be
determined in that context. The results of operations for any interim period are
not necessarily indicative of the results for the full year.

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has generated
significant losses and is unable to predict profitability for the future. These
factors indicate that the Company's continuation, as a going concern is
dependent upon its ability to obtain adequate financing grow sales. With the
acquisition of RTI the Barron's financing the Company believes that it has been
successful in replacing debt with equity and continuing to grow the company with
profitable sales both organically and through acquisitions. Management believes
that these recent transactions will ultimately lead to the removal of the going
concern comment from our audited financials.

The accompanying financial statements include the operating results of Systems
Management Engineering Systems, Inc. (SMEI), a majority owned (86%) subsidiary
of Science Dynamics acquired February 14, 2005. On February 14, 2005 the Company
recorded on its Balance Sheet a Minority Interest Liability of $171,995
representing the net asset value not acquired by the Company. The carrying value
of the minority interest of $171,995 has since been reduced by $108,554 at
September 30, 2006 giving effect to the SMEI's net operating results. The
carrying value increased by $30,218 in the nine months ended September 30, 2006
giving effect to the portion of SMEI's net operating profit allocable to
minority shareholders.


                                       5
<PAGE>

The accompanying financial statement include the operating results of RTI a 100%
owned subsidiary from the date of acquisition September 19, 2006.

c) Principles of Consolidation:

The consolidated financial statements included the accounts of the Company and
all of its subsidiaries in which a controlling interest is maintained. All
significant inter-company accounts and transactions have been eliminated in
consolidation. For those consolidated subsidiaries where Company ownership is
less than 100%, the outside stockholders' interests are shown as minority
interests.

d) Use of Estimates:

The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States (US GAAP). The preparation of
these financial statements requires management to make estimates and assumptions
that affect the reported amounts in the financial statements and accompanying
notes. These estimates form the basis for judgments made about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Estimates and judgments are based on historical experience and on
various other assumptions that the Company believes are reasonable under the
circumstances. However, future events are subject to change and the best
estimates and judgments routinely require adjustment. US GAAP requires estimates
and judgments in several areas, including those related to impairment of
goodwill and equity investments, revenue recognition, recoverability of
inventory and receivables, the useful lives long lived assets such as property
and equipment, the future realization of deferred income tax benefits and the
recording of various accruals. The ultimate outcome and actual results could
differ from the estimates and assumptions used.

e) Fair Value Disclosures:

Derivative Financial Instruments

The Company generally does not use derivative financial instruments to hedge
exposures to cash-flow or market risks. However, certain other financial
instruments, such as warrants and embedded conversion features that are indexed
to the Company's common stock, are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or (b) physical or net-share
settlement is not within the control of the Company. In such instances, net-cash
settlement is assumed for financial accounting and reporting, even when the
terms of the underlying contracts do not provide for net-cash settlement. Such
financial instruments are initially recorded at fair value and subsequently
adjusted to fair value at the close of each reporting period.

f) Stock-Based Compensation

On January 1, 2006, the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123(R), Accounting for Stock-Based Compensation, to
account for compensation costs under its stock option plans. The Company
previously utilized the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (as amended) ("APB
25"). Under the intrinsic value method prescribed by APB 25, no compensation
costs were recognized for the Company's stock options because the option
exercise price in its plans equals or is greater than the market price on the
date of grant. Prior to January 1, 2006, the Company only disclosed the pro
forma effects on net income and earnings per share as if the fair value
recognition provisions of SFAS 123(R) had been utilized.


                                       6
<PAGE>

In adopting SFAS No. 123(R ), the Company elected to use the modified
prospective method to account for the transition from the intrinsic value method
to the fair value recognition method. Under the modified prospective method,
compensation cost is recognized from the adoption date forward for all new stock
options granted and for any outstanding unvested awards as if the fair value
method had been applied to those awards as of the date of grant. See Note 11 for
assumptions used to estimate the grant-date per share fair value of the options
in the table below. The following table illustrates the effect on net income and
earnings per share as if the fair value based method had been applied to all
outstanding and unvested awards in each period.

<TABLE>
<CAPTION>
                                                          For the Nine Months                For the Three Months
                                                          Ended September 30,                Ended September 30,
                                                    --------------------------------   --------------------------------
                                                         2006              2005             2006              2005
                                                    --------------    --------------   --------------    --------------
<S>                                                 <C>               <C>              <C>               <C>
Net income (loss), as reported                      $  (17,329,583)   $     (722,870)  $  (17,272,801)   $      194,728
Add: Stock-based employee compensation expense
   included in reported net income (loss)                   44,907                             44,907

Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method
   for all awards,                                         (44,907)         (293,997)         (44,907)           (3,999)
                                                    --------------    --------------   --------------    --------------

Pro forma net income (loss) including stock-based
compensation cost based on fair-value method        $  (17,329,583)   $   (1,016,867)  $  (17,272,801)   $      190,729
                                                    ==============    ==============   ==============    ==============
Earnings  (loss) per share:                         $        (0.17)   $        (0.01)  $        (0.14)   $         0.00
   Basic - as reported                              $        (0.17)   $        (0.01)  $        (0.14)   $         0.00
   Diluted - as reported                            ==============    ==============   ==============    ==============
   Basic - pro forma                                $        (0.17)   $        (0.01)  $        (0.14)   $         0.00
   Diluted - pro forma                              $        (0.17)   $        (0.01)  $        (0.14)   $         0.00
                                                    ==============    ==============   ==============    ==============
</TABLE>

g) Impairment of Long-Lived Assets:

We review property, intangible assets and certain other assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The determination of recoverability is made based upon
the estimated undiscounted future net cash flows, excluding interest expense.
The amount of impairment loss, if any is determined by comparing the fair value,
as determined by a discounted cash flow analysis, with the carrying value of the
related assets.

Note 2- Acquisition of "RTI" Stock

On September 19, 2006 , Science Dynamics Corporation, closed on its Stock
Purchase Agreement with Ricciardi Technologies Inc. (RTI) and the holders of all
of the outstanding common stock of RTI. The Company completed the acquisition of
19,685 shares of the outstanding common stock of RTI which shares constitute
100% of the issued and outstanding shares of capital stock of RTI on a fully
diluted basis. As consideration for such shares of RTI the Company issued (i)
$3,500,000 in cash, (ii) 50,000,000 shares of common stock, (iii) a $500,000
promissory note payable in full twelve months from the closing, and (iv)


                                       7
<PAGE>

1,000,000 shares of the Company's Series B Convertible Preferred stock. Each
share of Series B Preferred Stock will automatically convert into common stock
on September 18, 2007, at the conversion rate of 8 1/3 shares of common stock,
subject to adjustment in the event of stock dividends, splits and other
distributions. The Company may at any time until September 18, 2007 redeem the
Series B Preferred Stock at a redemption price of $0.50 per share. To secure the
indemnification obligations of the former RTI stockholder, a portion of the
purchase price, consisting of $350,000 and 5,833,333 shares of common stock was
placed in escrow for a period of 18 months.

As part of the purchase price the Company agreed to pay the former RTI
stockholders up to an additional $1,500,000 depending on RTI's EBITDA for the
twelve-month period ending on the first anniversary of the Closing date. If
RTI's EBITDA is at least $2,250,000 but less than $2,500,000, the former RTI
stockholders receive $750,000 and if the EBITDA for such twelve month period is
at least $2,500,000, they will receive $1,500,000.

Pursuant to the RTI agreement the Company is to deliver to the RTI employees
incentive stock options to purchase 2,000,0000 shares of common stock at an
exercise price of $0.06 . In addition, during the two years following the
closing, the Company shall grant the RTI employees an additional 500,000 shares
in each year of the two year period at an exercise price equal to the market
price on the date of issuance. These options have three year vesting and a ten
year life.

The transaction was accounted for under the purchase method of accounting. The
Company purchased $1,237,000 in assets and assumed $500,831 in liabilities and
recorded goodwill of $6,979,469. This is a preliminary purchase price
allocation, which is subject to adjustment.

The following unaudited pro-forma information for the nine months ended
September 30, 2006 is presented as if the acquisition took place as of January
1, 2006:

                                        Nine Months Ended September  30,

                                                      2006
                                                 -------------

 NET SALES                                       $   7,819,536
                                                 -------------

Net Income (Loss)                                $ (16,821,841)
                                                 -------------

Net Income (loss) per common share Basic and
      Diluted                                    $       (0.16)
                                                 -------------

Weighted average shares outstanding Basic
       And Diluted                                 102,351,898
                                                 -------------


                                       8
<PAGE>

Note 3- Segment Reporting

Management views its business as two operating units, Technology Products and
Technology Services.

<TABLE>
<CAPTION>
                                                 Nine Months Ended          Nine Months Ended
                                                 September 30, 2006        September 30, 2005
                                                                              "As restated"
                                                 ------------------        ------------------
<S>                                                 <C>                        <C>
Revenue
                        Technology Products         $1,134,690                   1,027,779
                        Technology Services          3,044,670   (b)             2,220,920    (a)
                                                    ---------------            -----------------
                   Total Consolidated Revenue       $4,179,360   (b)           $ 3,248,699    (a)
                                                    ---------------            -----------------

Gross Profit
                        Technology Products            734,437                     693,116
                        Technology Services          1,612,554  (b)                943,357    (a)

                                                   ---------------            -----------------
         Total Gross Profit                          2,346,991  (b)              1,636,473   (a)
                                                   ---------------            -----------------
</TABLE>

(a)   - Revenue and Gross Profit for the Nine months ended September 30, 2005
      reflects SMEI's operating results for the period from February 14, 2005,
      the date of the SMEI acquisition, to September 30, 2005

(b)   Revenue and Gross Profit for the Nine months ended September 30, 2006
      reflects RTI's operating results for the period from September 19, 2006,
      the date of the RTI acquisition, to September 30, 2006

Note 4 - Employment Contracts

On September 19, 2006 in connection with the RTI acquisition the Company signed
a three year employment contract with Michael Ricciardi the former majority
shareholder of RTI. He will become the chief operating officer of the Company.
His base salary is $165,000 annually, plus bonuses of not less than 30% of his
base salary if established revenue and personal goals are achieved. In addition
he will be granted an incentive stock option to purchase 1,250,000 shares of the
Company's common stock at a price of $0.06 per share, pursuant to the Employer's
2002 incentive option plan. The options will have a ten year life and will vest
annually over a three year period.

On August 28, 2006 the Company amended Mr. Paul Burgess's 2003 employment
contract as follows: Mr. Burgess will receive an incentive bonus of 5% of the
before tax net income of the most recent twelve month period of any acquisition
closed by the Company during the term of this contract. On November 3, 2006, the
Board of Directors approved a bonus in connection with the RTI acquisition and
Barron's financing of $52,500.The bonus was recorded in general and
administrative expenses.

Mr. Paul Burgess CEO & President of the Company has waived his right to the base
salary of $112,500 for the first half of this year.


                                       9
<PAGE>

Note 5 - Notes payable

Notes payable consists of the following as of September 30, 2006 and December
31, 2005:

<TABLE>
<CAPTION>
                                                                                   2006           2005
                                                                                --------------------------
<S>                                                                             <C>            <C>
Face value $2,000,000, variable rate (8.0% at December 31, 2005) Secured
Convertible Term Note, due in monthly payments of $60,606 commencing June 30,
2005 (a)                                                                        $        --    $ 1,442,462

$400,000, 8.0% Secured Convertible Keshet Term Note (b)                                  --        400,000
8% Secured Convertible Laurus Term Note, originally due May 21, 2003 (b)                 --             --
Revolving credit facility (c)                                                       454,120        202,851
Notes Payable - Stockholders/Officers (d)                                           178,301        388,629
Short term notes payable (e)                                                      1,115,329        234,000
Convertible note (f)                                                                 47,025             --
                                                                                --------------------------
   Total notes payable                                                            1,794,775      2,667,942
Less current maturities, associated with notes payable                           (1,794,775)    (2,667,942)
                                                                                --------------------------

Long-term debt                                                                  $        --    $        --
                                                                                ==========================
</TABLE>

(a) 2005 Laurus Agreements:

On February 14, 2005, the Company entered into a Securities Purchase Agreement,
dated February 11, 2005, with Laurus Master Fund, Ltd. ("Laurus") for the sale
of a $2,000,000 principal amount Secured Convertible Term Note (the "Note")
convertible at $0.10 per share and a Common Stock Purchase Warrant to purchase
6,000,000 shares of the Company's common stock at $0.11 that expire February 11,
2012. The sale of the Note and the Warrant were made pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), and Regulation D under the Securities Act.

The Company received net proceeds of $1,867,500 from the sale of the Note and
the Warrant. The Company may only use such proceeds for (i) general working
capital purposes, (ii) no less than 80% of the equity interests of Systems
Management Engineering, Inc. ("SMEI") pursuant to the Stock Purchase Agreement,
as amended, dated as of December 16, 2004 by and among the Company, SMEI and the
shareholders of SMEI identified therein, and (iii) the acquisition of 100% of
the remaining equity interests of SMEI pursuant to a transaction in form and
substance reasonably satisfactory to Laurus.

The Note bore interest at a rate per annum equal to the prime rate published in
The Wall Street Journal from time to time, plus 3%, but not less than 8%. The
interest terms included a monthly reset feature that provided for decreases in
interest rates pro-rata for certain increases in the Company's common stock
above the conversion rate; such features would not become effective until the
underlying common shares are registered. Otherwise, interest was payable monthly
in arrears commencing March 1, 2005 and on the first business day of each
consecutive calendar month thereafter until the maturity date, February 11, 2008
(each a "Repayment Date"). Amortizing payments of the aggregate principal amount
outstanding under the Note were required to begin on June 1, 2005 and recur on
the first business day of each succeeding month thereafter until the maturity
date (each an "Amortization Date"). Beginning on the first Amortization Date,
the Company was required to make monthly payments to Laurus on each Repayment
Date, each in the amount of $60,606.06, together with any accrued and unpaid
interest to date on such portion of the principal amount plus any and all other
amounts which are then owing under the Note, the Purchase Agreement or any other
related agreement but have not been paid (collectively, the "Monthly Amount").


                                       10
<PAGE>

In order to secure payment of all amounts due under the Note, as well as the
Company's other obligations to Laurus: (i) the Company granted Laurus a lien on
all of the Company's assets and also on all assets of the Company's
subsidiaries; (ii) the Company pledged all of the capital stock that it owns of
each of its subsidiaries; and (iii) each of the Company's subsidiaries executed
a Subsidiary Guaranty of such obligations.

Pursuant to the terms of a registration rights agreement, the Company agreed to
include the shares of common stock issuable upon conversion of the Note and
Warrants in a registration statement to be filed not later than March 13, 2005
and to use its reasonable commercial efforts to cause such registration
statement to be declared effective no later than May 12, 2005. Failure to file
or become effective results in liquidating damages penalties of 2% per month of
the face value of the Note. The Company has been in default on the note by not
becoming effective on the registration statement by the required date and by not
making the required monthly principal payments to Laurus since June 1, 2005. On
November 21, 2005, the Company signed an amendment and waiver with Laurus
waiving each Event of Default for our failure to pay accrued interest, and
principal through November 1, 2005 and the failure to timely file a Registration
Statement with the SEC. As consideration of the waiver, the Company issued to
Laurus a seven year warrant to purchase 3,000,000 shares of the common stock of
the Company with an exercise price of $0.075 per share. The Company further
agreed to file a Registration Statement to register the shares of Common Stock
that may be issued upon exercise of the Additional Warrant within 90 days of the
date of the waiver. The Amendment and Waiver agreement was effective November
22, 2005 when the Company paid Laurus $32,236.25 of overdue interest under the
secured convertible term note and issued Laurus the Additional Warrant. The
Company allocated the fair value of the Additional Warrant to deferred finance
costs ($42,275) and derivative expense ($5,725) on a relative fair value basis.
The additional deferred finance costs is being amortized through periodic
charges to interest expense using the effective interest method which commenced
in the fourth fiscal quarter of 2005.

In accordance with EITF 00-19 "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock," the basis from
the 2005 Laurus Agreements was allocated to embedded derivative features indexed
to the Company's common stock (consisting of the conversion and interest reset
features) in the amount of $444,920, and the Warrant, in the amount, in the
amount of $270,000. See Derivative Financial Instruments, below. These discounts
resulted in an initial carrying value of the Secured Convertible Term Note of
$1,285,080. The debt is being amortized through charges to interest expense over
the debt term using the effective method. Amortization during the nine months
ended September 30, 2006 amounted to $107,311.

On July 21, 2006, the Company entered into a Forbearance Agreement with Laurus
Master Fund, Ltd. ("Laurus") waiving each Event of Default for our failure to
pay accrued interest, and principal through November 1, 2005 and the failure to
timely file a Registration Statement with the SEC. As consideration of the
waiver, the Company paid $500,000 and issued 1,000,000 shares of its common
stock to Laurus. In accordance with EITF 96-19, "Debtor's Accounting for a
Modification or Exchange of Debt Instruments" the Company performed an analysis
to determine if the Forbearance Agreement caused an extinguishment of debt. The
Company recorded a loss on extinguishment of approximately $121,000 related to
this transaction. The Company allocated the fair value of the Common Stock to
deferred finance costs ($52,578) and derivative expense ($5,922) on a relative
fair value basis. The additional deferred finance costs are being amortized
through periodic charges to interest expense using the effective interest
method.

On September 18, 2006, the Company entered into an Omnibus Amendment and Waiver
Agreement with Laurus. Under the terms of the amendment, in exchange for full
and complete satisfaction of the $2,000,000 note, the Company i) paid Laurus
$500,000 ii) issued a seven year warrant to purchase up to 14,583,333 shares of
common stock for an exercise price of $0.01 per share and iii) entered into a
Term Note for $250,000 with Laurus. The Term Note bears interest at a rate per
annum equal to the prime rate published in The Wall Street Journal from time to
time, plus 3%, but shall not be less than 8%. Interest payments are due monthly,
in arrears, commencing on August 1, 2006 and ending on the maturity date which
is September 18, 2007. In the third quarter, the Company recognized a loss on
extinguishment of approximately $529,000 related to this transaction.


                                       11
<PAGE>

(b) 2001 Laurus and Keshet Financing Agreements

On May 21, 2001, the Company entered into concurrent financing arrangements,
each bearing similar terms and conditions, with Laurus and Keshet Capital for
$1,000,000 and $400,000, respectively. The notes bore interest at 8% and were
due and payable in May 2003. The notes were convertible into the Company's
common stock at 85% of the average trading market price over a period of twenty
days preceding conversion. In addition, the notes were issued with detachable
warrants to purchase 727,273 (relative to the Laurus arrangement) and 290,908
(relative to the Keshet Arrangement) shares of common stock. The warrants had
terms of five years and fixed strike prices of $1.43. In accordance with EITF
00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," the basis from the 2001 Laurus
Agreements was allocated to embedded derivative feature indexed to the Company's
common stock (consisting of the conversion feature) in the amount of $634,501,
and the Warrant, in the amount, in the amount of $334,546. These discounts
resulted in an initial carrying value of the Secured Convertible Term Note of
$30,953. The debt discount was amortized through charges to interest expense
over the term using the effective method at effective interest rate of 99.07%
perannum. The basis from the 2001 Keshet Agreements was allocated to embedded
derivative features indexed to the Company's common stock (consisting of the
conversion feature) in the amount of $253,800, and the Warrant, in the amount,
in the amount of $133,818. These discounts resulted in an initial carrying value
of the Secured Convertible Term Note of $12,382. The debt discount was amortized
through charges to interest expense over the term using the effective method at
effective interest rate of 99.07% perannum.

Pursuant to an agreement dated September 18, 2006 between the Company and Keshet
Capital, the Company agreed to issue 3,000,000 shares of common stock in
consideration for cancellation of all payment obligations arising under the
convertible notes. As a result, according to the provisions of FAS 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", the Company recognized a gain on extinguishment of
approximately $492,000 in the third quarter of 2006.

(c) Revolving Line of credit

On November 7, 2005 the Company opened a Line of Credit with Presidential
Financial Group. The Line of Credit with Presidential is for a period of 12
months and is a credit facility up to $1,000,000 and is secured by SMEI's
accounts receivables. The Advance Rate on the Company's government receivables
is 85%. Interest on the line will be charged at the rate of prime plus 2% on the
average daily loan balance with a minimum monthly loan balance requirement of
$200,000. Additionally, a monthly service charge will be charged at a rate of
1.00% of the average daily loan balance. The total outstanding balance on this
facility as of September 30, 2006 was $204,120.

As part of the RTI acquisition the Company assumed a revolving line of credit.
The line of Credit is for a period of twelve months and is a credit facility up
to $250,000. The Interest on the line is the bank's prime rate. The outstanding
balance as of September 30, 2006 is $250,000. Subsequent to September 30 2006
the line has been repaid in full and closed.

On November 10, 2006, the Company secured a Line of Credit facility with Greater
Bay Business Funding ("GBBF") for $2,000,000. The line is primarily secured by
the Company's accounts receivables. The Advance Rate is 85%. Interest on the
line will be charged at the rate of prime plus 6%. Upon securing the line with
GBBF, the Company repaid in full and closed out the credit facility with
Presidential Financial Group.


                                       12
<PAGE>

(d) Notes Payable Stockholders/officers

The Company has other short-term loans payable to various stockholders and
officers of the Company amounting to $178,301, these notes bear interest ranging
from 8% to 18% per annum. The notes are unsecured demand notes.

(e) Short term notes

At September 30, 2006 the Company has a total of $365,329 in short term notes.
This includes a $100,000 note collateralized by the future sale of the New
Jersey Net Operating Loss in 2006. The remaining notes are unsecured.

As part of the RTI acquisition the Company issued a note in the amount of
$500,000 to the former Stockholders of RTI as part of the purchase price. The
note is payable no later than September 17, 2007 and bears an interest rate of
10% per annum.

In connection with the September 18, 2006 omnibus amendment and waiver agreement
with Laurus the Company entered into a Term Note for $250,000 with Laurus. The
Term Note bears interest at a rate per annum equal to the prime rate published
in The Wall Street Journal from time to time, plus 3%, but shall not be less
than 8%. Interest payments are due monthly, in arrears, commencing on August 1,
2006 and ending on the maturity date which is September 18, 2007.

(f) 2006 Barron Securities Agreement

Convertible Promissory Notes

On September 19, 2006, the Company entered into a securities purchase
arrangement that provided for the issuance of $4,500,000, 6.0% Convertible
Promissory Notes, due May 31, 2007, and warrants to purchase 250,000,000 shares
of common stock. Proceeds, which were net of $289,851 in cash financing costs,
amounted to $4,160,149. The Company and Barron entered into a registration
rights agreement pursuant to which the Company agreed to file, within 60 days
after the closing, a registration statement covering the common stock issuable
upon conversion of the Series A Preferred Stock and exercise of the Warrants.
The failure of the Company to meet this schedule and other timetables provided
in the registration rights agreement would result in the imposition of
liquidated damages, which are payable through the issuance of additional shares
of Series A Preferred Stock at the rate of 4,288 shares of Series A Preferred
Stock for each day, based on the proposed registration of all of the underlying
shares of common stock, with a maximum of 1,565,200 shares of Series A Preferred
Stock. Barron has agreed that the filing of the registration statement may be
delayed. Proceeds from this financing arrangement were allocated to the fair
value of the conversion option and warrants, based upon their fair values,
because share-settlement of these instruments is not within the Company's
control. The following table reflects the components of the initial allocation:

      Financial instrument:

         Warrant derivative                                      $   13,895,090
         Compound derivative                                          8,113,451
         Convertible notes payable                                           --
         Financing costs, net of cash costs of
            $404,851                                                   (752,357)
         Day-one derivative loss                                    (17,096,035)
                                                                 --------------
                                                                 $    4,160,149
                                                                 ==============

The derivative warrants were issued in two traunches, each having terms of five
years. The traunches have exercise prices of $0.05 and $0.12, respectively. The
Company fair valued the derivative warrants using the Black-Scholes-Merton
Technique using a volatility factor of 90.76% and a risk free interest rate of
$4.69%. The Company uses the Black-Scholes-Merton valuation technique for
warrants because this technique embodies all of the assumptions necessary to
fair value non-complex instruments.

The compound derivative comprises certain derivative features embedded in the
host convertible note payable contract including the conversion feature,
anti-dilution protections and certain redemption features. These instruments
were combined into one compound derivative and bifurcated from the host
instrument at fair value. The Company applied the Monte-Carlo valuation
technique to fair value this derivative because Monte Carle embodies all
assumptions (including credit risk, interest rate risk, conversion/redemption
behaviors) necessary to fair value complex, compound derivative financial
instruments.


                                       13
<PAGE>

Since the derivative financial instruments are required to be recorded, both
initially and subsequently at fair values, there were insufficient proceeds to
allocate any amount to the Convertible Notes Payable and, accordingly, it has no
carrying value on the inception date. In addition, proceeds were insufficient to
record the fair values of the derivative financial instruments, resulting in a
day-one derivative loss of $17,096,035. It should be noted that derivative
instruments will be adjusted to fair value at each reporting date. Fair values
are highly influenced by our trading stock price and volatility, changes in our
credit risk and market interest rates.

The Company amortizes the discount on the Convertible Notes Payable resulting
from the initial allocation over the term of the debt instrument using the
effective method. Amortization expense, including amortization of deferred
financing costs, arising from this method during the period from inception to
September 30, 2006 amounted to $157,643, of which, $47,025 represented
amortization of debt discount.

Note 6 - Derivative Financial Instruments

The balance sheet caption derivative liabilities consist of (i) embedded
conversion features and (ii) the Warrants, issued in connection with the 2005
Laurus Financing Arrangement and the 2001 Keshet Financing Arrangement. These
derivative financial instruments are indexed to an aggregate of 9,290,908 and
57,831,524 shares of the Company's common stock as of September 30, 2006 and
2005, respectively, and are carried at fair value. The following tabular
presentation reflects the income (expense) associated with adjustments recorded
to reflect the aforementioned derivatives at fair value for the three and nine
months ended September 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                   Three months     Three months      Nine months     Nine months
                                      ended            ended             Ended           ended
Derivative income (expense)        September 30,    September 30,    September 30,    September 30,
                                       2006             2005             2006             2005
                                   ----------------------------------------------------------------
<S>                                <C>             <C>               <C>              <C>
   Conversion features             $     99,031    $    504,353      $    112,476     $    354,388
                                   ===============================================================
   Warrant derivative              $     62,400    $    252,000      $     62,400     $    168,000
                                   ===============================================================

<CAPTION>
Liabilities                        September 30,   September 30,
                                       2006             2005
                                   -----------------------------
<S>                                <C>             <C>
   Compound derivative             ($ 8,113,451)   ($   165,826)
                                   ============================-
   Warrant derivative              ($14,914,690)   ($   102,000)
                                   ============================-
</TABLE>

Freestanding derivative instruments, consisting of warrants and options that
arose from the Laurus financing are valued using the Black-Scholes-Merton
valuation methodology because that model embodies all of the relevant
assumptions that address the features underlying these instruments. Significant
assumptions used in the Black Scholes models included: conversion or strike
prices ranging from $0.06--$0.11; volatility factors ranging from 35.50% -
41.88% based upon forward terms of instruments; terms-remaining term for all
instruments; and a risk free rate of 4.88%. Fair value for forward-based
features (principally the interest reset feature) is determined using the income
approach; generally discounted cash flows.

Embedded derivative instruments consist of multiple individual features that
were embedded in the convertible debt instruments. The Company evaluated all
significant features of the hybrid instruments and, where required under current
accounting standards, bifurcated features for separate report classification.
These features were, as attributable to each convertible note, aggregated into
one compound derivative financial instrument for financial reporting purposes.
The compound embedded derivative instruments are valued using the Flexible Monte
Carlo methodology because that model embodies certain relevant assumptions
(including, but not limited to, interest rate risk, credit risk, and
Company-controlled redemption privileges) that are necessary to value these
complex derivatives. Significant assumptions included in the Flexible Monte
Carlo included: conversion or strike prices ranging from $0.06--$0.10;
volatility factors ranging from 40.70% to 41.88% based upon forward terms of
instruments; terms-remaining term for all instruments; equivalent interest rate
risk ranging from 3.10% to 3.41% and equivalent yield rate ranging from 12.15%
to 13.15%


                                       14
<PAGE>

Equivalent amounts reflect the net results of multiple modeling simulations that
the Monte Carlo Simulation methodology applies to underlying assumptions.

Note 7 - Restatements

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                  For the Nine months      For the three months
                                                                         ended                     ended
                                                                   September 30, 2005       September 30, 2005
---------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                      <C>
Net Loss Applicable to Stockholders,  as previously reported           ($1,093,411)             ( $501,417)
                                                                       -----------              ----------
---------------------------------------------------------------------------------------------------------------
Adjustments:
---------------------------------------------------------------------------------------------------------------
Derivative income (expense)                                                370,541                 696,145
                                                                       -----------              ----------
---------------------------------------------------------------------------------------------------------------
Net Loss Applicable to Stockholders, as restated                          (722,870)                194,728
                                                                       -----------              ----------
---------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss per Common Share (as previously                      ($0.01)                 ($0.01)
reported)                                                              -----------              ----------
---------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss per Common Share (as Restated)                       ($0.01)                  $0.00
                                                                       -----------              ----------
---------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------
</TABLE>

The Company corrected its accounting for derivative financial instruments to
conform to the requirements of Statements of Financial Accounting Standards No.
133, as amended. Embedded conversion features that meet the definition of
derivative financial instruments have, where applicable, been bifurcated from
host instruments and, in all instances; derivative financial instruments have
been recorded as liabilities and are carried at fair value. Other instruments,
such as warrants, where physical or net-share settlement is not within the
Company's control are recorded as liabilities and carried at fair value.
Finally, instruments that were initially recorded as equity were reclassified to
liabilities at the time that the Company no longer possessed the ability to
settle the instruments on a physical or net-share basis.

The Fair Value adjustments included in the restated consolidated statement of
operations for the Nine month's ended September 30,2005 are as follows:

--------------------------------------------------------------------------------
                                         For the nine           For the three
                                          months ended           months ended
                                       September 30, 2005     September 30, 2005
--------------------------------------------------------------------------------
Interest expense                          ($146,120)               ($60,208)
--------------------------------------------------------------------------------
Derivative income (expense)               $516,661                 $756,353
--------------------------------------------------------------------------------
Net Adjustment                            $370,541                 $696,145
--------------------------------------------------------------------------------


                                       15
<PAGE>

The interest expense adjustment is included under the caption interest expense
and the derivative expense is reflected as a separate caption on the 2005
restated consolidated statement of operations.

Note 8 - Private Placement - Equity Financing

      Between April 14, 2006 and May 11, 2006 the Company sold 23,231,733 shares
of common stock and 11,615,867 warrants to purchase additional shares of common
stock to various accredited investors in a private placement The Company
received $1,293,906 and converted $100,000 of accrued expenses for a total of
$1,393,906.. Each unit is comprised of 100 shares and 50 warrants to purchase
one shares of common stock with an exercise price of $0.12 per share exercisable
for five years. Each 100 shares of common stock and one common stock purchase
warrant were sold for a per-unit price of $6.00, or $0.06 per share.

Note 9 Common Stock

On September 19, 2006 pursuant to the Barron's securities purchase agreement the
Company's board of directors approved, subject to stockholder approval, a
restated certificate of incorporation which requires a one-for-ten reverse split
in the Company's common stock Based upon the 167,106,567 shares of common stock
outstanding on the Record Date, the reverse split would decrease the outstanding
shares of common stock by 90%, and, upon the effectiveness of the reverse split,
approximately 16,710,657 shares of new common stock would be outstanding.

In connection with the purchase of all of the issued and outstanding shares of
RTI's common stock, the Company issued 1,000,000 shares of its Series "B"
Convertible Preferred Stock. Each shares of Series "B" Convertible Preferred
will automatically be converted into the Company's common stock on September 18,
2007 at a rate of 8 1/3 shares of common stock subject to adjustment in the
event of dividends, splits and other distributions, combinations of shares or
reverse splits or other recapitalizations.

      As previously stated, on September 19, 2006, the Company sold a note in
the principal amount of $4,500,000 to Barron Partners LP. In connection with the
sale of the note, Company's board of directors approved, subject to stockholder
approval, a restated certificate of incorporation which, among other provisions,
affects a one-for-ten reverse split in the Company's common stock, and agreed to
submit the restated certificate of incorporation to the stockholders for their
approval.

      Upon the filing of the restated certificate of incorporation with the
State of Delaware, principal and interest due on the note shall be automatically
converted into such number of shares of the Company's Series A Preferred Stock
as is determined by dividing the principal amount of the note by the Conversion
Price, which initially is $.575. Prior to such filing, the note is convertible
at the Conversion Price at the option of the holder.

      Each share of Series A Preferred Stock is convertible into 25 shares of
common stock subject to adjustment in certain instances, including the issuance
by the Company of common stock at a price which is less than the conversion
price applicable to the Series A Preferred Stock, which is initially $.023 per
share, subject to adjustment.

Note 10 - Recent Accounting Pronouncements.

The Company believes that any new accounting pronouncements since December 31,
2005, will not have an affect on the Company's financial statements.


                                       16
<PAGE>

Note 11-Stock Based Compensation

a) 2002 Employee Stock option plan

      On January 1, 2006 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No.123 (Revised 2004), "Share Based Payment," ("SFAS 123R"),
using the modified prospective method. In accordance with SFAS 123R, the Company
measures the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. That cost is
recognized over the period during which an employee is required to provide
service in exchange for the award - the requisite service period. The Company
determines the grant-date fair value of employee share options using the
Black-Scholes option-pricing model.

      Under the modified prospective approach, SFAS 123R applies to new awards
and to awards that were outstanding on January 1, 2006 that are subsequently
modified, repurchased or cancelled. Under the modified prospective approach,
compensation cost recognized for the first quarter of fiscal 2006 includes
compensation cost for all share-based payments granted prior to, but not yet
vested on, January 1, 2006, based on the grant-date fair value estimated in
accordance with the pro forma provisions of SFAS 123, and compensation cost for
all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
Prior periods were not restated to reflect the impact of adopting the new
standard. During the nine month periods ended September 30, 2006, the Company
recorded $44,908, in non-cash stock-based compensation expense related to the
implementation of SFAS 123R

      The fair value of stock options at date of grant was estimated using the
Black-Scholes model with the following assumptions: expected volatility ranging
from 99%, expected term of 10 years, risk-free interest rate ranging from 4.69%
to 4.88%, and expected dividend yield of 0%. Expected volatility is based on the
historical volatilities of the Company's common stock. The expected life of
employee stock options is determined using historical data of employee exercises
and represents the period of time that stock options are expected to be
outstanding. The risk free interest rate is based on U.S. Treasury constant
maturing for the expected life of the stock option.

      The following table summarizes the stock option transactions during the
nine months ended September 30, 2006:

<TABLE>
<CAPTION>
                                                                    Weighted -         Weighted -
                                                  Number of          Average            Average
                                                   Shares         Exercise Price    Contractual Life
                                                  ----------    ----------------    ----------------
<S>                                               <C>           <C>                            <C>
Options outstanding December 31, 2005             10,360,000    $           0.10                7.0
Granted                                            3,250,000                0.06               10.0
Exercised                                                -0-                0.00                  -
Cancelled                                                -0-                0.00                  -
                                                  ----------    ----------------    ----------------
Options outstanding September 30, 2006            13,610,000                0.09               7.48
                                                  ----------

Options exercisable at September 30, 2006          2,539,166               0.098                7.0
                                                  ==========
</TABLE>

Note 12 - Subsequent Events

Line of Credit:

On November 10, 2006, the Company secured a Line of Credit facility with Greater
Bay Business Funding ("GBBF") for $2,000,000. The line is primarily secured by
the Company's accounts receivables. The Advance Rate is 85%. Interest on the
line will be charged at the rate of prime plus 6%. Upon securing the line with
GBBF, the Company closed the line of credit and repaid in full the outstanding
balance with Presidential Financial Group.


                                       17
<PAGE>

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

FORWARD LOOKING STATEMENTS

      This Form 10-QSB includes forward-looking statements relating to the
business of Science Dynamics Corporation (the "Company" or "Science Dynamics").
Forward-looking statements contained herein or in other statements made by
Science Dynamics are made based on management's expectations and beliefs
concerning future events impacting the Company and are subject to uncertainties
and factors relating to the Company's operations and business environment, all
of which are difficult to predict and many of which are beyond the control of
the Company, that could cause actual results of the Company to differ materially
from those matters expressed in or implied by forward-looking statements. The
Company believes that the following factors, among others, could affect its
future performance and cause actual results of the Company to differ materially
from those expressed in or implied by forward-looking statements made by or on
behalf of the Company: (a) the effect of technological changes; (b) increases in
or unexpected losses; (c) increased competition; (d) fluctuations in the costs
to operate the business; (e) uninsurable risks; and (f) general economic
conditions.

GENERAL OVERVIEW

      Science Dynamics Corporation was incorporated in the State of Delaware in
May 1973 and commenced operations in July 1977. We have been developing and
delivering secure technologically advanced communication solutions for over
twenty-five years and recently expanded our product offering to include IT
solutions with the acquisition of 86% of Systems Management Engineering, Inc.
("SMEI") on February 14, 2005.

      During 2006 the company has continued to demonstrate improved bottom line
performance. The positive Adjusted EBITDA (earnings before interest, taxes,
depreciation and amortization and share-based compensation) of $193,259 in the
third quarter of 2006 is the third consecutive quarter the company has been
EBITDA positive. These results are especially encouraging when compared to the
same period a year ago at which time the company had an EBITDA loss of
($262,980). The company's improved results are a direct reflection of the
company's efforts to manage our costs effectively and continue to build on our
existing contracts.

      The Company's management believes Adjusted "EBITDA", a non-GAAP financial
measure, is an important financial metric to monitor operating performance. The
Company also believes Adjusted "EBITDA" provides meaningful insight to its
investors in understanding the Company's operating performance.

      For the three and nine months ended September 30, 2006 and 2005, the
Company's EBITDA reconciles to reported operating income as follows :

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                           For the nine months ended           For the three months ended
                                                                September 30,                        September 30,
-----------------------------------------------------------------------------------------------------------------------------
                                                                 2006             2005             2006               2005
                                                                 ----             ----             ----               ----
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>                <C>               <C>
Net Operating Income (Loss)                                    $303,012        ($616,854)         $ 91,661          ($293,026)
                                                                                                  --------
-----------------------------------------------------------------------------------------------------------------------------
Add-back:
-----------------------------------------------------------------------------------------------------------------------------
Non-cash Depreciation & Amortization expenses                  $205,124         $  91,025         $ 56,690           $ 30,046
-----------------------------------------------------------------------------------------------------------------------------
Share-based Compensation                                       $ 44,908                --         $ 44,908                 --
                                                               --------        ----------         --------          ---------
-----------------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------------
Adjusted EBITDA (Loss)                                         $553,044        ($525,829)         $193,259          ($262,980)
                                                               --------                           --------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       18
<PAGE>

      We intend to continue the expansion of our sales efforts both within the
federal government secure software solutions space and commercial accounts. We
continue to build upon our recent success in these markets by expanding our
marketing efforts through our direct sales strategy. Our strong contract backlog
has given us an opportunity to expand our existing revenue base. Our team is
driven to increase shareholder value through both organic growth and
acquisitions throughout the year. With regards to our acquisition strategy, we
will continue to pursue profitable companies with proprietary products and
services we can sell to our existing customers and which have synergies with our
existing business.

      In September 2006, pursuant to a Stock Purchase Agreement, dated as of
September 12, 2006 (the "RTI Agreement"), the Company purchased all of the
issued and outstanding shares of the common stock of Ricciardi Technologies Inc.
("RTI"). RTI was founded in 1992 and provides software consulting and
development services for the command and control of biological sensors and other
Department of Defense requirements to United States federal governmental
agencies either directly or though prime contractors of such governmental
agencies RTI's proprietary products include SensorView, which provides clients
with the capability to command, control and monitor multiple distributed
chemical, biological, nuclear, explosive and hazardous material sensors. RTI is
Headquartered in Manassas, Virginia. The purchase of RTI's common stock was
completed on September 19, 2006.

      Pursuant to the RTI Agreement, the consideration for stock of RTI
consisted of (a) $3,500,000, which was paid from the proceeds of the sale of the
Note and Warrants to Barron, (b) 50,000,000 shares of common stock, (c) a
$500,000 promissory note (the "RTI Note"), which if not paid sooner must be paid
in full on the earlier of (i) twelve months from the closing date, or (ii) the
consummation of a transfer of all or substantially all of the assets or equity
securities of the Company to a third party, and (b) 1,000,000 shares of the
Company's Series B Convertible Preferred Stock. To secure the indemnification
obligations of the former RTI stockholders, a portion of the purchase price,
consisting of $350,000 and 5,833,333 shares of common stock was placed in escrow
for a period of 18 months, subject to any claims that may arise under the
agreement during the 18-month warranty survival period.

      Each share of Series B Preferred Stock will automatically convert into
common stock on September 18, 2007, at the conversion rate of 8 1/3 shares of
commons stock, subject to adjustment in the event of stock dividends, splits and
other distributions, combinations of shares or reverse splits or other
recapitalizations. The Company may at any time until September 18, 2007, redeem
the Series B Preferred Stock at a redemption price of $0.50 per share.

      Except as otherwise provided by law, the holders of the Series B Preferred
Stock do not have voting rights. However, the vote of the holders of a majority
of the outstanding shares of Series B Preferred Stock shall be required for any
amendment to the statement of designations setting forth the rights,
preferences, privileges and limitations of the holders thereof. If, and only if,
the vote of the holders of the Series B Preferred Stock is required by law in
connection with any merger or consolidation or a sale of all or substantially
all of the Company's business and assets, the holders of the Series B Preferred
Stock shall vote with the holders of the Common Stock (and any other classes or
series of capital stock that have similar voting rights) on an "as-if converted"
basis.

      The separate vote of the holders of the Series B Preferred Stock shall not
be required to increase or decrease the number of authorized shares of Preferred
Stock.

      As part of the purchase price for price for RTI stock, the Company agreed
to pay the former RTI stockholders up to an additional $1,500,000 depending on
RTI's EBITDA for the twelve-month period ending on the first anniversary of the
Closing Date. If RTI's EBITDA is at least $2,250,000 but less than $2,500,000,
the former RTI stockholders receive $750,000, and if the EBITDA for such twelve
month period is at least $2,500,000, the former RTI stockholders will receive
$1,500,000.

      Pursuant to the RTI Agreement, the Company is to deliver to the RTI's
employees incentive stock options to purchase 2,000,000 shares of common stock
at an exercise price equal to the greater of: (i) the market price on the
closing date and (ii) the volume-weighted average price per share for the
fifteen (15) days prior to the Closing Date. The grant of the options shall be
subject to approval by the Company, with approval not to be unreasonably
withheld. During to two years following the closing, the Company shall grant the
RTI employees incentive stock options to purchase 500,000 shares in each year of
the two year period. These options shall have an exercise price equal to the
greater of: (i) the closing market price and (ii) the volume-weighted average
price per share for the fifteen (15) days prior to the date of each such grant.
The options will have a ten-year term and shall vest equally in each year in
first three years and such vesting shall accelerate if (i) such employee is
terminated without cause or without good reason or (ii) upon a change of control
of the Company.


                                       19
<PAGE>

      Pursuant to the RTI Agreement, to secure the Company's payment obligations
under the RTI Note, the Company and each owner of the issued and outstanding
shares of RTI's capital stock executed a Pledge Agreement. Pursuant to the
Pledge Agreement, 15.24% of the share of RTI's capital stock purchased by the
Company is being held in escrow until the payment in full by the Company' of the
RTI Note.

      The RTI transaction was financed through a private placement with Barron
Partners LP, a private investment partnership based in New York. Science
Dynamics sold Barron a convertible subordinated promissory note in the principal
amount of $4.5 million (the "Note"), a warrant to purchase up to 125 million
shares of the company's common stock at an exercise price of $0.05 per share and
a warrant to purchase up to 125 million shares of the company's common stock at
an exercise price of $0.125 per share which expire in Sept, 2011. The private
placement closed on September 19, 2006.

      Pursuant to the purchase agreement between the Company and Barron (the
"Purchase Agreement") , the Company's board of directors approved, subject to
stockholder approval, a restated certificate of incorporation which, among other
provisions, effects a one-for-ten reverse split in the Company's common stock,
and agreed to submit the restated certificate of incorporation to the
stockholders for their approval.

      Upon the filing of the restated certificate of incorporation with the
State of Delaware, principal and interest due on the Note shall be automatically
converted into such number of shares of the Company's Series A Preferred Stock
as is determined by dividing the principal amount of the Note by the Conversion
Price, which initially is $.575. Prior to such filing, the Note is convertible
at the Conversion Price at the option of the holder.

      Each share of Series A Preferred Stock is convertible into 25 shares of
common stock subject to adjustment in certain instances, including the issuance
by the Company of common stock at a price which is less than the conversion
price applicable to the Series A Preferred Stock (the "Series A Conversion
Price"), which is initially $.023 per share, subject to adjustment.

      In the event that the Company does not file the restated certificate of
incorporation within 150 days of the Closing Date, the Series A Conversion Price
and the exercise price of the Warrants are each reduced by 6% for each whole or
partial month that elapses between the 150th day and the date that the restated
certificate of incorporation is filed with the Secretary of State of Delaware.

      The Purchase Agreement as well as the certificate of designation for the
Series A Preferred Stock and Warrants provide for an adjustment in the
conversion price of the note and Series A Preferred Stock and the exercise price
of the Warrants if the Company's earnings before interest, taxes, depreciation
and amortization is less than a specified amount per share, on a fully-diluted
basis, with a maximum reduction of 30% for each year. The target EBITDA per
share is $.0019 for 2006 and $.00549 for 2007. The amount of reduction per year
is the percentage shortfall. Thus, a 15% shortfall will result in a 15%
reduction in the applicable conversion or exercise price then in effect. For
purpose of determining fully-diluted, all shares of Common Stock issuable upon
conversion of convertible securities and upon exercise of warrants and options
shall be deemed to be outstanding, regardless of whether (i) such shares are
treated as outstanding for determining diluted earnings per share under GAAP,
(ii) such securities are "in the money," or (iii) such shares may be issued as a
result of the 4.9% Limitation. The per share amounts are adjusted in accordance
with GAAP to reflect any stock dividend, split, distribution, reverse split or
combination of shares or other recapitalization, including the reverse split
effected by the restated certificate of incorporation.

      The following table sets forth the initial conversion price of the Series
A Preferred Stock, which is issuable upon conversion of the Note, and the
exercise price of the and the adjusted numbers if (a) the EBITDA per share for
both 2006 and 2007 is 15% below the respective targets (a "15% shortfall") and
(b) the EBITDA per share for 2007 is 50% or more below the target (a "50%
shortfall"). The number of shares reflects the number of shares of common stock
issuable upon conversion of the series A preferred stock, and are based on the
assumption that no notes or preferred stock are converted into common stock
until the adjustment has been made. There is no adjustment in the number of
shares issuable upon exercise of the warrants. The number of issuable upon
conversion reflects the number of shares issuable upon the conversion of all of
the shares of series A preferred stock that are issuable upon conversion of the
note.


                                       20
<PAGE>

<TABLE>
<CAPTION>
                                      Shares Issuable      $.05 Warrant      $.125 Warrant
                  Conversion Price    Upon Conversion    Exercise Price     Exercise Price
------------------------------------------------------------------------------------------
<S>               <C>                     <C>            <C>                <C>
Unadjusted        $           .023        195,652,174    $          .05     $         .125
15% shortfall     $          .0166        270,798,856    $        .0361     $        .0903
30% shortfall     $          .0113        399,290,151    $        .0245     $        .0612
</TABLE>

      The Series A Preferred Stock has no voting rights, except as required by
law. However, so long as any shares of Series A Preferred Stock are outstanding,
the Company shall not, without the affirmative approval of the holders of 75% of
the shares of the Series A Preferred stock then outstanding, (a) alter or change
adversely the powers, preferences or rights given to the Series A Preferred
Stock or alter or amend the certificate of designation relating to the Series A
Preferred Stock, (b) authorize or create any class of stock ranking as to
dividends or distribution of assets upon liquidation senior to or otherwise pari
passu with the Series A Preferred Stock, or any of preferred stock possessing
greater voting rights or the right to convert at a more favorable price than the
Series A Preferred Stock, (c) amend its certificate of incorporation or other
charter documents in breach of any of these provisions, (d) increase the
authorized number of shares of Series A Preferred Stock, or (e) enter into any
agreement with respect to the foregoing.

The Purchase Agreement, the certificate of designation for the Series A
Preferred Stock and the Warrants provide that the notes or Series A Preferred
Stock cannot be converted and the warrants cannot be exercised to the extent
that such conversion or exercise would result in the investor and its or his
affiliates owning beneficially more than 4.9% of our common stock. Beneficial
ownership is determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. These
provisions cannot be modified.

      The Company entered into a Omnibus Amendment and Waiver Agreement with
Laurus Master Fund, LTD ("Laurus"), dated September 18, 2006 (the "Laurus
Agreement") for the purpose of amending, restating and waiving certain terms of
(i) the Amended and Restated Secured Convertible Term Note, issued as of
February 11, 2005 and amended and restated as of July 21, 2006 (as amended and
restated, amended, modified and supplemented from time to time, the "Term Note")
by the Company to Laurus, (ii) the Securities Purchase Agreement, dated as of
February 11, 2005 (as amended, modified or supplemented from time to time, the
"Purchase Agreement") by and between the Company and Laurus, (iii) the Common
Stock Purchase Warrant, issued as of February 11, 2005 by the Company to Laurus
(as amended and restated, amended, modified and supplemented from time to time,
the "Initial Warrant"), (iv) the Common Stock Purchase Warrant, issued as of
November 18, 2005 by the Company to Laurus (as amended and restated, amended,
modified and supplemented from time to time, the "Additional Warrant") and (v)
the Forbearance Agreement, dated as of July 21, 2006 between the Company and
Laurus (as amended, modified or supplemented from time to time, the "Forbearance
Agreement" and, together with the Term Note, the Purchase Agreement, the Initial
Warrant, the Additional Warrant and each other Related Agreement as defined in
the Purchase Agreement, collectively, the "Documents" and each, a "Document").

      Pursuant to the Laurus Agreement, on September 19, 2006, Laurus waived
each Event of Default that may have arisen under Section 4.1 of the Term Note
and Section 3 of the Forbearance Agreement solely as a result of the failure by
the Company to make the $32,656.25 in interest payments due to Laurus on
September 1, 2006.

      Pursuant to Laurus Agreement, on September 19, 2006, in exchange for the
cancellation of the term note in the principal amount of $ 2,000,000, the
Company (a) paid $500,000 in principal amount of the Term Note, (b) issued an
amendment and restated note in the principal amount of $250,000, and (c) issued
a warrant to purchase up to 14,583,333 shares of common stock (subject to
adjustment), upon the cashless exercise by the holder thereof for an imputed
exercise price of $0.01 per share.

      In connection with the Laurus Agreement, Laurus also executed a Lock up
agreement, pursuant to which it agreed that, provided the Company is not in
default on the note, it will not without the written consent of the Company
sell, offer, contract or grant any option to sell (including without limitation
any short sale), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934,


                                       21
<PAGE>

as amended, or otherwise dispose of the Shares or publicly announce an intention
to do any of the foregoing, for a period of five (5) months from September 19,
2006. Additionally, pursuant to an Irrevocable Proxy, Laurus also gave the
Company a proxy to vote all shares of Common Stock of the Company, now or in the
future owned by Laurus to the extent such shares are issued to Laurus upon its
exercise of its warrant to purchase 14,583,333 shares of common stock. Upon the
sale or other transfer of the Shares, in whole or in part, or the assignment of
the Warrant, the proxy shall automatically terminate (x) with respect to such
sold or transferred shares at the time of such sale and/or transfer, or (y) with
respect to all shares in the case of an assignment of the Warrant, at the time
of such assignment, in each case, without any further action required by any
person.

      Pursuant to a letter agreement between the Company and the Keshet Fund LP
and Keshet L.P. (collectively the "Keshet"), the Company agreed to issue
3,000,000 shares of common stock in consideration for the cancellation of all
payment obligations arising under the convertible notes issued to Keshet by the
Company. Additionally, the Keshet will, at the Company's expense, terminate all
of its agreements with the Company, other than in respect of (x) indemnification
and expense reimbursement provisions of such agreements and such other
provisions thereof as expressly survive the payment in full of the Obligations
and (y) any options and/or warrants received by Keshet from the Company.

RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED
TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005

Revenues:

      Total revenues for the three months ended September 30, 2006 increased
$375,664 or 33.6% to $1,494,799 from $1,119,135 for the three months ended
September 30, 2005. Product revenues represented approximately 22.3% and 24.4%
of total revenues during the three months ended September 30, 2006 and 2005,
respectively.

      Product revenues increased $60,239 or 22.1% during the three months ended
September 30, 2006 compared to the same period in fiscal 2005.

      Service revenues increased $315,425 or 37.3% to $1,161,955 during the
three months ended September 30, 2006 compared to the same period in fiscal
2005. The increase in revenues included $219,784 in incremental revenues related
to the RTI acquisition. The RTI acquisition was finalized September 19, 2006,
therefore, the three months ended September 30, 2006 included a partial month of
revenue attributable to RTI.

      Total revenues for the nine months ended September 30, 2006 increased
28.6% to $4,179,360 compared to $3,248,699 for the nine months ended September
30, 2005. The increase in revenues included $219,784 and $400,379 in incremental
revenues related to the RTI and SMEI acquisitions respectively. The SMEI
acquisition closed February 14, 2005.

Gross Margin:

      Overall gross margin, as a percent of revenues, for the three months ended
September 30, 2006 improved to 57.3% from 42.9% in the comparable year ago
period. Overall gross margin was favorably affected by a higher gross margin
percentage in Technology Services. The gross margin percentage for services
increased to 56.3% from 38.9% in 2005. The primary factors driving higher
service margins included a shift towards in-house labor as opposed to lower
margin subcontractors coupled with a shift towards higher margin fixed price
contracts from time and material based contracts. The gross margin percentage
for Technology Products increased to 60.8% from 55.7% in 2005. The higher margin
percentage for Products was driven by a higher component of application
development. Application development revenues carry higher margins when coupled
with a product or system sale.

      Overall gross margin, as a percent of revenues, for the nine months ended
September 30, 2006 increased to 56.2% from 50.4% in the comparable year ago
period.


                                       22
<PAGE>

Research and Development Expenses:

      Research and development expenses consist primarily of salaries, related
personnel costs, and consulting fees associated with product development.

      For the three months ended September 30, 2006, Research and development
expenses decreased to $109,205 compared to $127,097 in 2005.

      Research and development expenses increased slightly to $327,474 for the
nine months ended September 30, 2006 compared to $323,063 for the nine months
ended September 30, 2005. Management believes that continual enhancements of the
Company's products will be required to enable Science Dynamics to maintain its
competitive position. Science Dynamics will have to focus its principal future
product development and resources on developing new, innovative, technical
products and updating existing products.

Selling, General and Administrative Expenses:

      Selling, General and administrative expenses consist primarily of expenses
for management, finance and administrative personnel, legal, accounting,
consulting fees, sales commissions and marketing, and facilities costs.

      For the three months ended September 30, 2006 SG&A expenses increased
slightly to $655,308 compared to $647,085 for the comparative three months ended
September 30, 2005. SG&A, as a percent of revenues improved to 43.8% from 57.8%
in the year ago period.

      For the nine months ended September 30, 2006, SG&A expenses decreased to
$1,716,505, a reduction of $213,759 from $1,930,264 for the comparative nine
months ended September 30, 2005. The decrease was primarily attributable to cost
cutting measures undertaken in the latter part of 2005 and into the first half
of 2006 coupled with the synergy savings in administrative costs by combining
subsidiary operations (SMEI) with that of Science Dynamic's.

Interest Expense:

      Interest Expense decreased to $144,756 for the three months ended
September 30, 2006 compared to $148,599 for the three months ended September 30,
2005. Interest Expense increased to $409,510 for the nine months ended September
30, 2006 compared to $373,727 for the nine months ended September 30, 2006.

LIQUIDITY AND CAPITAL RESOURCES

      For the nine months period ended September 30, 2006, cash and cash
equivalents increased to $392,406 from $53,997 at December 31, 2005. Net cash
used by operating activities was $689,538 for the nine months ended September
30, 2006 compared to net cash provided by operating activities of $65,385 in the
corresponding nine month period ended September 30, 2005. The net cash used by
operating activities of $689,538 consisted of a net loss of $(17,329,583), an
increase in our accounts receivable of ($195,291), an increase in other assets
of ($323,632), an increase in deferred income of 137,493, a decrease in customer
deposits of ($135,199), a decrease in the Company's accounts payable and accrued
expenses of ($375,386) offset by non-cash items (depreciation, amortization of
intangibles, stock-based compensation, minority interest, derivative interest
and financing cost) amounting to $17,533,647.

      Net cash used in investment activities was $3,508,228 for the nine months
ended September 30, 2006 compared to $1,658,041 in the corresponding nine months
ended September 30, 2005. The investment was the cash component of the RTI
purchase price combined with direct acquisition costs, net of acquired cash.

      Net cash provided by financing activities was $4,536,175 for the nine
months ended September 30, 2006 compared to $1,405,829 in the corresponding nine
months ended September 30, 2005. This consisted of $4,450,000 of cash proceeds
from the Barron financing on September 19, 2006 and $1,293,906 from the private
placement in May of 2006 partially offset by the repayment of $1,000,000 on the
Laurus convertible note and repayment of $209,000 for short term notes.

      The net proceeds from the Barron financing of $4,450,000 was used to pay;
(i) $404,851 in transaction and financing fees, (ii) $541,563 to repay a portion
of the Laurus debenture plus accrued interest and (iii) $3,500,000 cash to the
former owners of Ricciardi Technologies', Inc. ("RTI"). The Company received
$3,586 from this transaction.


                                       23
<PAGE>

      Between April 14, 2006 and May 11, 2006 the Company sold 23,231,733 shares
of common stock and 11,615,867 warrants to purchase additional shares of common
stock to various accredited investors in a private placement The Company
received proceeds of $1,293,906 and converted $100,000 of accrued expenses for a
total of $1,393,906. The Company used these proceeds for working capital
purposes and to reduce short term debt.

      The outstanding balance on the Company's line with Presidential Financial
as of September 30, 2006 was $204,120 compared to $202,851 at December 31, 2005.
On November 10, 2006, the Company secured a Line of Credit facility with Greater
Bay Business Funding ("GBBF") for $2,000,000. The line is primarily secured by
the Company's accounts receivables. The Advance Rate is 85%. Interest on the
line will be charged at the rate of prime plus 6%. Upon securing the line with
GBBF, the Company closed the line of credit and repaid in full the outstanding
balance with Presidential Financial Group.

      The Company's current liabilities include derivative liabilities totaling
$23,028,141, of which $22,008,541 relates to the valuation of the $4,500,000
convertible note, 250,000,000 warrants and the associated embedded derivatives
(see Notes 5f and 6) issued to Barron and $1,019,600 related to warrants issued
to Laurus Capital. The Company expects the $22,008,541 derivative liability to
reverse with the Barron note being reclassified to equity upon the Company's
10:1 reverse split taking effect (see Note 9 Common Stock).

      The Company believes with its current cash position, its anticipated
operating cash flow, together with the availability on its new line of credit
facility with "GBBF" that it has sufficient liquidity to meet its cash
requirements over the next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

      The Company does not have any off balance sheet arrangements that are
reasonably likely to have a current or future effect on our financial condition,
revenues, results of operations, liquidity or capital expenditures.

CRITICAL ACCOUNTING POLICIES

Use of Estimates -The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (US GAAP). The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. These estimates form the basis for judgments made about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Estimates and judgments are based on historical experience and on
various other assumptions that the Company believes are reasonable under the
circumstances. However, future events are subject to change and the best
estimates and judgments routinely require adjustment. US GAAP requires estimates
and judgments in several areas, including those related to impairment of
goodwill and equity investments, revenue recognition, recoverability of
inventory and receivables, the useful lives long lived assets such as property
and equipment, the future realization of deferred income tax benefits and the
recording of various accruals. The ultimate outcome and actual results could
differ from the estimates and assumptions used.

Basis of Financial Statement Presentation -The accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The Company has generated significant losses and is unable to predict
profitability for the future. These factors indicate that the Company's
continuation, as a going concern is dependent upon its ability to obtain
adequate financing. The Company plans to address the going concern by replacing
debt with equity and continuing to grow the company with profitable sales both
organically and through acquisitions. Management believes successfully executing
these tasks will lead to the removal of the going concern comment from our
audited financials.

Principles of Consolidation- The consolidated financial statements included the
accounts of the Company and all of its subsidiaries in which a controlling
interest is maintained. All significant inter-company accounts and transactions
have been eliminated in consolidation. For those consolidated subsidiaries where
Company ownership is less than 100%, the outside stockholders' interests are
shown as minority interests.


                                       24
<PAGE>

ITEM 3. CONTROLS AND PROCEDURES.

      As of the end of the period covered by this report, the Company conducted
an evaluation, under the supervision and with the participation of its Chief
Executive Officer and Chief Financial Officer of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the
Exchange Act). Based upon this evaluation, the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is:
(1) accumulated and communicated to the Company's management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure; and (2) recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. There was no change to the Company's internal controls or in
other factors that could affect these controls during the Company's last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, its internal control over financial reporting.

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

      The Company is not a party to any pending legal proceeding, nor is the
Company's property the subject of a pending legal proceeding, that is not in the
ordinary course of business or otherwise material to the financial condition of
its business. None of the Company's directors, officers or affiliates is
involved in a proceeding adverse to the Company's business or has a material
interest adverse to the Company's business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

      On September 19, the Company sold to Barron Partners LP for $4,500,000 a
Note (the "Note") in the principal amount of $4,500,000 and warrants to purchase
125,000,000 shares at $.05 per share and 125,000,000 shares at $.125 per share.
Pursuant to the Purchase Agreement, the Company's board of directors approved,
subject to stockholder approval, a restated certificate of incorporation which,
among other provisions, effects a one-for-ten reverse split in the Company's
common stock, and agreed to submit the restated certificate of incorporation to
the stockholders for their approval. Upon the filing of the restated certificate
of incorporation with the State of Delaware, principal and interest due on the
Note shall be automatically converted into such number of shares of the
Company's Series A Preferred Stock as is determined by dividing the principal
amount of the Note by the Conversion Price, which initially is $.575. Prior to
such filing, the Note is convertible at the Conversion Price at the option of
the holder.

      Each share of Series A Preferred Stock is convertible into 25 shares of
common stock subject to adjustment in certain instances, including the issuance
by the Company of common stock at a price which is less than the conversion
price applicable to the Series A Preferred Stock, which is initially $.023 per
share, subject to adjustment.

      In connection with the sale of the Note and warrants, Dragonfly Capital
Partners, LLC acted as a placement agent. The Company paid or accrued brokerage
fees of $234,000 to Dragonfly Capital Partners, LLC, of which $134,000 was paid
at closing and the remaining $100,000 is deferred. In addition, the Company
issued to Dragonfly warrants to purchase 4,891,000 share of common stock at $.05
per share, and 4,891,000 shares of common stock at an exercise price of $.125.

      On September 19, 2006, in payment of the purchase price of the purchase of
all of the issued and outstanding shares of the Common Stock of Ricciardi
Technologies Inc., the Company issued 50,000,000 shares of common stock, a
$500,000 promissory note, and 1,000,000 shares of the Company's Series B
Convertible Preferred Stock. Each share of Series B Preferred Stock will
automatically convert into 8 1/3 shares of common Stock on January 18, 2007,
which is the conversion rate. The conversion rate is subject to adjustment in
the event any stock dividend, split and other distribution, combination of
shares or reverse split or other recapitalization. In connection with the RTI
transaction the company paid Watergate Holding LLC a brokerage fee in the amount
of $125,000.


                                       25
<PAGE>

            As previously stated, the Company entered into an Omnibus Amendment
and Waiver Agreement with Laurus Master Fund, LTD, dated September 18, 2006.
Pursuant to the agreement with Laurus, the Company issued Laurus a note in the
principal amount of $500,000 and warrants to purchase up to 14,583,333 shares of
common stock on a cashless exercise basis using an imputed exercise price of
$0.01 per share.

      In September 2006, pursuant to a letter agreement between the Company and
the Keshet Fund LP and Keshet L.P. (collectively the "Keshet"), the Company
issued Keshet 3,000,000 shares of common stock in consideration for the
cancellation of all payment obligations arising under the convertible notes
issued to Keshet by the Company.

      The issuances of securities described above are exempt from registration
under the Securities Act of 1933, pursuant to Section 4(2) or Rule 506 of the
SEC thereunder as transactions not involving a public offering.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

      Not applicable.

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

      Not applicable.

ITEM 5. OTHER INFORMATION.

      Not applicable.

ITEM 6. EXHIBITS.

Exhibit
Number      Description
--------------------------------------------------------------------------------

31.1        Certification by Chief Executive Officer, required by Rule 13a-14(a)
            or Rule 15d-14(a) of the Exchange Act.

31.2        Certification by Chief Financial Officer, required by Rule 13a-14(a)
            or Rule 15d-14(a) of the Exchange Act.

32.1        Certification by Chief Executive Officer, required by Rule 13a-14(b)
            or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63
            of Title 18 of the United States Code.

32.2        Certification by Chief Financial Officer, required by Rule 13a-14(b)
            or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63
            of Title 18 of the United States Code.


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<PAGE>

                                   SIGNATURES

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

                                                    SCIENCE DYNAMICS CORPORATION


           Date: November 20, 2006                  By: /s/ Paul Burgess
                                                        ------------------------
                                                        Paul Burgess
                                                        Chief Executive Officer

           Date: November 20, 2006                  By: /s/ Joe Noto
                                                        ------------------------
                                                        Joe Noto
                                                        Chief Financial Officer


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