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

                                   Form 10-KSB

(Mark One)

[X] ANNUAL  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

[_] TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

                         FOR THE TRANSITION PERIOD FROM __________ TO __________
                         COMMISSION FILE NUMBER ________________________________

                          SCIENCE DYNAMICS CORPORATION
                          ----------------------------
                 (Name of small business issuer in its charter)

              DELAWARE                                   22-2011859
 -------------------------------           ----------------------------------
 (State or other jurisdiction of          (I.R.S. Employer Identification No.)
  incorporation or organization)

              7150 N. Park Drive, Suite 500, Pennsauken, N.J. 08109
               (Address of principal executive offices) (Zip Code)

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

Securities registered under Section 12(b) of the Exchange Act: None

Securities  registered  under Section  12(g) of the Exchange Act:  Common Stock,
$.01 par value

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

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]

     State issuer's revenues for its most recent fiscal year. $1,609,717

     The aggregate market value of the voting and non-voting  common equity held
by  non-affiliates,  computed by reference to the average bid and asked price of
such common equity as of March 28, 2005, was $8,944,276.65.

     As of March 28,  2005,  the issuer  had  96,180,202  outstanding  shares of
Common Stock.

                    DOCUMENTS INCORPORATED BY REFERENCE: NONE

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



<PAGE>

<TABLE>
<CAPTION>
                               TABLE OF CONTENTS


                                              PART I                                                        Page

<S>                                          <C>                                                              <C>
Item 1.       Description of Business......................................................................1
Item 2.       Description of Property......................................................................8
Item 3.       Legal Proceedings............................................................................8
Item 4.       Submission of Matters to a Vote of Security Holders..........................................8

                                                  PART II

Item 5.       Market for Common Equity and Related Stockholder Matters.....................................9
Item 6.       Management's Discussion and Analysis or Plan of Operation....................................11
Item 7.       Financial Statements.........................................................................16
Item 8.       Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.........16
Item 8A.    Controls and Procedures........................................................................16
Item 8B.    Other Information..............................................................................16

                                                 PART III

Item 9.       Directors, Executive Officers, Promoters and Control Persons;
                  Compliance With Section 16(a) of the Exchange Act........................................16
Item 10.     Executive Compensation........................................................................18
Item 11.     Security Ownership of Certain Beneficial Owners and Management................................21
Item 12.     Certain Relationship and Related Transactions.................................................22
Item 13.     Exhibits......................................................................................22
Item 14.     Principal Accountant Fees and Services........................................................24
</TABLE>


<PAGE>


                                     PART I

Item 1.           Description of Business.

Organization

         Science Dynamics Corporation (the "Company" or "Science Dynamics") was
incorporated in the State of Delaware in May 1973 and began operations in July
1977. The Company has been developing and delivering technologically advanced
telecommunication solutions for over twenty-five years.

Significant Recent Events

     On February  14,  2005,  Science  Dynamics  completed  the  acquisition  of
4,177,500  shares  of  the  outstanding   common  stock  of  Systems  Management
Engineering,  Inc.  ("SMEI"),  which shares constitute  approximately 82% of the
issued and outstanding shares of capital stock of SMEI on a fully diluted basis.
As  partial  consideration  for such  shares  of SMEI,  the  Company  issued  an
aggregate  of  16,553,251  shares  of  the  Company's  common  stock  to  twelve
accredited  investors  pursuant  to  Section  4(2)  of the  Securities  Act  and
Regulation D under the Securities Act. The acquisition was completed pursuant to
the terms of a Stock  Purchase  Agreement  dated  December 16, 2004, as amended,
among the  Company  and  certain  shareholders  of SMEI.  SMEI will  continue to
operate as an independent subsidiary of the Company.

About SMEI

     SMEI was  incorporated on March 11, 1997 under the laws of the Commonwealth
of Virginia.  SMEI was originally founded to provide the federal government with
engineering  services  coupled  with  advanced  technology  solutions.  SMEI has
developed advanced data management applications,  Internet server technology and
information  systems that it markets to both public and private sectors.  SMEI's
technology helps its customers reduce development time for projects,  manage the
deployment of applications  across the Internet to desktops around the world and
implement  military  grade  security on all systems where the  applications  are
deployed. SMEI has two divisions, a consulting services division and the Aquifer
Software division.

Consulting Services Division

     SMEI provides the federal  government and private industry with engineering
services  coupled with  innovative  information  technology  solutions.  SMEI is
committed  to  addressing  the  growing  public and  private  sector  demand for
integrated,  secure,  enterprise  class  e-business  solutions built on industry
standards.

     SMEI has designed,  developed and implemented  advanced business management
applications,  integration  technologies and enterprise geospatial systems. SMEI
currently  supports several  operational  systems in all of these categories for
major  organizations  and defense commands using web-based  technologies and the
consolidation  of  custom  and  commercial   off-the-shelf   software  to  unite
dissimilar applications into integrated systems.

GIS Service Capabilities

     SMEI specializes in the design and implementation of Enterprise  Geographic
Information  Systems  ("GIS"),  enabling the vision of public and private sector
clients for cross-organization data sharing. They are experts in the development
of Web services applications and secure geospatial  solutions.  SMEI architected
the  Naval  GeoReadiness  Repository  in  support  of  Base  Development,   Base
Realignment  and  Closure  (BRAC),  the  Installation  Visualization  Tool (IVT)
program, force protection,  anti-terrorism and homeland defense. Administered by
Naval Facilities Engineering Command Headquarters  (NAVFACHQ),  the GeoReadiness
Repository   provides   installation   geospatial  data  and  imagery   storage,
integration  of Navy real property  data,  the  automation  of data  submission,
standards   compliance   checking   and   conversion.   Web   services   provide
visualization,  cross-services data sharing,  and an advanced security model for
accessing  the GIS data.  SMEI  performs  spatial  analysis and risk  assessment
modeling for the military  medical  application.  SMEI also developed  GIS-R, an
Army GIS  repository to provide a visual method for users to access  information
from a  comprehensive  set of  government,  commercial,  and  installation  data
sources in an expandable, user-friendly decision support application.

                                       1
<PAGE>

     Implementation  planning  is  critical  to the  success of  Enterprise  GIS
initiatives.  Cross-organizational  data  sharing  and public  visualization  of
corporate  information  through the Internet  requires the understanding of data
needs across functional areas, as well as the backbone  technology to support an
Enterprise  approach.  The  SMEI  team  includes  key  in-house  experts  in GIS
supporting  technologies such as ESRI's ArcSDE, Oracle Spatial, UNIX and Windows
to  ensure  a stable  architecture  and  operating  environment  for  enterprise
applications.  As  current  customers  of this  service,  the Naval  Information
Technology Center (NITC) receives  architectural  and database support,  systems
integration analysis, and technical support from SMEI.

Technical and Management Consulting Services

     SMEI  provides  network  engineering,   architectural  guidance,   database
management,  expert  programming  and  functional  area  expert  analysis to its
Department of Defense  clients.  SMEI provides  strategic  consulting to support
business requirements, change management, and financial analysis and metrics for
several major federal customers.

     In addition, SMEI provides management, analytical, and technical consulting
to support legacy  application  modernization  and systems reduction goals under
several major  contracts  including  the  Department of Navy's Navy Marine Corps
Intranet (NMCI).

Aquifer Software Division

     SMEI develops and markets the Aquifer(TM)  Application Services Platform, a
proprietary   software  product  for  application   developers.   Aquifer  helps
developers  build a new class of  software  called rich  Internet  applications.
These  applications  are secure custom or commercial  desktop and mobile Windows
Forms applications that use the traditional client/server model while exploiting
Web Services-based communications over the Internet.

         Aquifer is a .NET application platform built on a service-oriented
architecture that delivers scalable and secure Web applications to Windows
desktop and Windows CE platforms. Aquifer helps SMEI reduce development time and
manage the deployment of applications across the Internet to desktops around the
world while implementing Department of Defense ("DOD") certified and accredited
security on all deployed systems. Aquifer addresses the needs of development
organizations to more rapidly develop custom Windows Forms applications and
lower the costs to secure, deploy and maintain them. Aquifer helps organizations
solve the following problems:

     o    Reduction in application development time, cost and risk;
     o    Reduction of desktop and PDA application deployment time and cost;
     o    Increased richness of user experience;
     o    Elimination   of   security   concerns   inherent   with  Web  browser
          vulnerabilities;
     o    Decreased server software and hardware costs; and
     o    Optimization of network resources for best performance.

     SMEI markets Aquifer as both a productivity  tool and a secure  application
platform.    Whether   modernizing   legacy   applications   or   building   new
service-oriented,  Web based systems, Aquifer is designed to shorten the time it
takes to develop and deliver custom  solutions in Microsoft  .NET  environments.
Aquifer provides many common service components including:

    o   Data Access;
    o   Role-based User Profiles;
    o   Flexible Security Model including strong encryption;
    o   Configuration Management;
    o   Event Management;
    o   Integration Gateways; and
    o   Secure Client.

     In its current version 5.4, the Aquifer  Application  Services Platform can
support between 500 and 1,000 concurrent active desktops against a single server
processor.

                                       2
<PAGE>

Sales and Marketing

     SMEI  markets  its  Aquifer   Application   Services  Platform  to  mid  to
large-sized   commercial   accounts,   federal  government   agencies,   systems
integrators  and  independent  software  vendors that are building  Windows rich
Internet applications.  Aquifer's products, training and services are focused on
the .NET  Windows  Forms  application  development  market where  enterprise  IT
organizations  and systems  integrators  are tasked with  building  and managing
applications that run on the Internet using the .NET Framework.

          SMEI  employs the  following  tactics to sell the Aquifer  Application
          Services Platform:

          Direct Sales to Enterprise IT Organizations and Systems  Integrators -
          A direct sales force performs this activity. This segment includes all
          new federal, systems integrator and commercial accounts. SMEI believes
          that reference-ability is a key post-sale objective.

          Targeted  Marketing  - With the  help of  extensive  lead  generation,
          public relations and targeting marketing communication materials, SMEI
          hopes to establish itself as a leader in the rich Internet application
          development  and  management  market with an emphasis on security over
          both wired and wireless communications.  The tactics include marketing
          materials directed at DOD agencies,  the financial services and health
          care  markets  and other  markets  where  strong  security is a common
          requirement.  Print media,  direct mail, trade  shows/conferences  and
          live Web casts are the main components of lead generation for SMEI.

          Strategic  Alliances  - SMEI  plans  to  continue  to  form  strategic
          alliances  with federal and  commercial  systems  integrators  and Web
          services  performance  management  vendors to sell SMEI's  products as
          value-added  resellers  and  to  enhance  Aquifer's   capabilities  by
          integrating with other vendor's performance  monitoring  capabilities.
          SMEI believes that  engaging  marketing an delivery  channels that are
          not  currently  available to the company will  broaden  market  reach,
          increase  delivery  bandwidth in some  instances,  and yield a greater
          return on sales and marketing expenditure.

          Important partnerships SMEI has developed recently include:

          o    Microsoft.  SMEI  is a  Microsoft  Certified  Partner.  Recently,
               Aquifer's  security  model and its  presence  on the Navy  Marine
               Corps  Intranet  (NMCI)  network  have  attracted  interest  from
               Microsoft  Federal and from  Microsoft  Business  Development  in
               Redmond. SMEI is currently working with Redmond to develop a NMCI
               formal  Microsoft/SMEI case study describing the benefits of .NET
               and Aquifer.

          o    AmberPoint. AmberPoint is a Silicon Valley-based software company
               that builds and markets  management  solutions  for Web services.
               SMEI and AmberPoint  co-market  products to federal  governmental
               agencies.  SMEI plans to integrate Aquifer and AmberPoint to help
               developers   more   easily  and   accurately   monitor  the  .NET
               applications they build.

     SMEI's goal is to turn every  Aquifer  customer  into a reference  account.
SMEI believes that first hand  testimonials  describing the  productivity  gains
with  Aquifer  are of  great  value  and can  significantly  enhance  sales  and
marketing efforts

Business of Science Dynamics

     Science Dynamics has continues to supply call control technology to service
providers offering Collect-Only calling to inmates of correctional institutions.
The Company has been a primary  supplier to a major Local Exchange Carrier (LEC)
and,  in recent  years,  has  expanded  its  customer  base to include the newly
emerging  cadre of  unregulated  companies  offering the same service in today's
more highly competitive  telecom  environment.  The Company's  Commander product
line is a  versatile  and feature  rich  platform,  well  prepared to handle the
increasing demand for investigative tools and security.

                                       3
<PAGE>

Business Development

     Science Dynamics  believes its future success is dependent on expanding its
existing  product  line to encompass a more diverse  customer  base.  Management
believes  this will  enable the  Company to reduce its  exposure  to the risk of
declines in  telecommunications  sales while  capitalizing on potential gains in
the Company's  other  business  sectors.  As Science  Dynamics  expands  product
offerings into other sectors,  the Company plans to move from primarily offering
products  to  offering a mix of products  and  services  to generate  consistent
recurring  revenue  streams.  Some of the key areas Science  Dynamics intends to
focus on expanding are:

     1.   OEM  Licensing  - This would  include  licensing  existing  technology
          Science Dynamics has developed to other equipment manufacturers either
          to incorporate into their existing product offering or for resale.
     2.   Voice and Data  Security  Products - The Company's  existing  products
          provide  feature rich call control  technology that can be expanded to
          serve additional markets.

     The first step in realizing  its  business  development  strategy  requires
enhancing  existing  products  to address  the needs of other  markets.  Science
Dynamics  continues  to supply  call  control  technology  to service  providers
offering  Collect-Only  calling  to inmates of  correctional  institutions.  The
Company plans expand on its existing  Commander  product line by licensing it to
other  vendors  and also by  modifying  the  product  to meet the needs of other
markets.

Science Dynamics Products

     With the acquisition of SMEI,  Science Dynamics  currently offers products,
based on its  BubbleLink  technology  and on SMEI's  Aquifer  technology.  These
products are marketed to the government and private industries.

Commander Call Control System

     The  Commander  call control  system is built on the  Company's  BubbleLink
software architecture.  This open source platform is a combination of integrated
computer telephony  hardware and software.  The Commander call control system is
capable  of  handling  thousands  of call  transactions  per hour  and  provides
correctional  facility  officials  with  effective  tools to manage and  control
inmate telephone calls using the Commander system software.

     The Commander I models are designed for the small to midsize  municipal and
county correctional  facilities  requiring control for up to 40 inmate telephone
lines.  The Commander I base system provides  telephone  control for 4 lines and
can be expanded in 4 line increments.

     Commander  call control  systems are  supported by an  integrated  array of
administrative  and  investigative  programs that provide a management  solution
suite. All programs interact in real-time with Commander calls and databases via
an Ethernet Local Area Network (LAN) or a Wide Area Network (WAN).

     Commander  provides  technologically  advanced call control and  management
tools targeted at  investigation  and law  enforcement  in the inmate  telephone
control  industry.  Commander  includes  live  monitoring,  debit and  recording
features.  The Commander  system can be  structured to use pre-paid  debit cards
that support  specialized  tariffs and call timing.  With pre-paid  debit cards,
Commander provides complete control and security.

     The  existing  Commander  system  is ported to  support  multiple  vendors'
equipment,  which makes the product  more  flexible  in its  operation  and also
pricing. The Company is developing Commander's investigative software to provide
a single  repository for storing call records,  recordings  and other  documents
related to a specific case or investigation.

MinuteMan

     The  MinuteMan  product,  which is also built on the  Company's  BubbleLink
technology,  is a complete  turnkey system.  MinuteMan  provides PSTN interface,
card databases,  IVR and SMDR collection.  The MinuteMan is designed for smaller
pre-paid  card  vendors that want to break free from the resale only mode of the
card business.

                                       4
<PAGE>
Aquifer

     Aquifer is a  software  architecture  that  provides  users the  ability to
develop and manage applications in a secure distributed  computing  environment.
Aquifer has been used in developing several  applications  within the Department
of Defense. Aquifer's security system is certified by the Department of Defense.

     Science  Dynamics plans to combine  Aquifer's secure  development  platform
with the transaction processing capabilities of BubbleLink. The Company believes
the  products'  synergies  will  provide  an  end  to end  solution  for  secure
communications.

Product Development

     Science  Dynamics   continues  to  refine  its  core  BubbleLink   software
technology.  The BubbleLink  software  provides a hosting platform for telephony
transactions  and processes.  The BubbleLink  technology  supports the Company's
existing  Commander  family of inmate  products and the MinuteMan  pre-paid card
system.  Management  believes the  addition of Aquifer to its product  offerings
gives the Company greater flexibility with product design and will help keep the
Company competitive.

Sales and Marketing

Science Dynamics

     Science  Dynamics  employs  a direct  sales  team to market  the  Company's
products to IT organizations, systems integrators and IP carriers. The Company's
direct sales team primarily  focuses on independent  regional carriers and plans
to expand its focus to include IP based carriers.

SMEI

     SMEI  markets  its  Aquifer   Application   Services  Platform  to  mid  to
large-sized   commercial   accounts,   federal  government   agencies,   systems
integrators  and  independent  software  vendors that are building  Windows rich
Internet applications.  Aquifer's products, training and services are focused on
the .NET  Windows  Forms  application  development  market where  enterprise  IT
organizations  and systems  integrators  are tasked with  building  and managing
applications that run on the Internet using the .NET Framework.

          SMEI employs the following tactics to sell the Aquifer Application
          Services Platform:

          Direct Sales to Enterprise IT Organizations and Systems  Integrators -
          A direct sales force performs this activity. This segment includes all
          new federal, systems integrator and commercial accounts. SMEI believes
          that reference-ability is a key post-sale objective.

          Targeted  Marketing  - With the  help of  extensive  lead  generation,
          public relations and targeting marketing communication materials, SMEI
          hopes to establish itself as a leader in the rich Internet application
          development  and  management  market with an emphasis on security over
          both wired and wireless communications.  The tactics include marketing
          materials directed at DOD agencies,  the financial services and health
          care  markets  and other  markets  where  strong  security is a common
          requirement.  Print media,  direct mail, trade  shows/conferences  and
          live Web casts are the main components of lead generation for SMEI.

          Strategic  Alliances  - SMEI  plans  to  continue  to  form  strategic
          alliances  with federal and  commercial  systems  integrators  and Web
          services  performance  management  vendors to sell SMEI's  products as
          value-added  resellers  and  to  enhance  Aquifer's   capabilities  by
          integrating with other vendor's performance  monitoring  capabilities.
          SMEI believes that  engaging  marketing an delivery  channels that are
          not  currently  available to the company will  broaden  market  reach,
          increase  delivery  bandwidth in some  instances,  and yield a greater
          return on sales and marketing expenditure.


                                       5
<PAGE>
          Important partnerships SMEI has developed recently include:

          o    Microsoft.  SMEI  is a  Microsoft  Certified  Partner.  Recently,
               Aquifer's  security  model and its  presence  on the Navy  Marine
               Corps  Intranet  (NMCI)  network  have  attracted  interest  from
               Microsoft  Federal and from  Microsoft  Business  Development  in
               Redmond. SMEI is currently working with Redmond to develop a NMCI
               formal  Microsoft/SMEI case study describing the benefits of .NET
               and Aquifer.

          o    AmberPoint. AmberPoint is a Silicon Valley-based software company
               that builds and markets  management  solutions  for Web services.
               SMEI and AmberPoint  co-market  products to federal  governmental
               agencies.  SMEI plans to integrate Aquifer and AmberPoint to help
               developers   more   easily  and   accurately   monitor  the  .NET
               applications they build.

     SMEI's goal is to turn every  Aquifer  customer  into a reference  account.
SMEI believes that first hand  testimonials  describing the  productivity  gains
with  Aquifer  are of  great  value  and can  significantly  enhance  sales  and
marketing efforts

Research and Development

     Science Dynamics' research efforts are focused on adapting new technologies
to current and potential  products.  Efforts in research cover new techniques in
software development and component technologies.

     Science  Dynamics is  continuously  redesigning  and  updating its existing
products  to  integrate  the latest  technologies.  As the  Company  expands its
products in existing markets and makes initial steps into new markets, increases
in research expenditures will become necessary.

Intellectual Property

Science Dynamics

     In June 1998,  Science  Dynamics was granted a patent from the U.S.  Patent
and Trademark Office on a three-way call detection system.

SMEI

     On November  12, 2003,  SMEI filed an  application  with the United  States
Patent and Trademark  Office for a trademark of the name  "Aquifer." On December
21, 2004 the United States Patent and Trademark  Office issued  trademark serial
number  78326540  for  the  name  "Aquifer."  SMEI  has  not  yet  received  the
Certificate of Registration.

     No assurance can be given as to the scope of any patent protection. Science
Dynamics believes that rapid  technological  developments in the  communications
and IT industries  may limit the protection  afforded by its patents.  Since the
Company's  patents  precisely  define the parameters of their  technology,  that
information  may  allow  competitors  to  modify  the  technology  in  order  to
circumvent  the original  patent.  Accordingly,  the Company  believes  that its
success is dependent on its engineering competence, service, and the quality and
economic value of products.

Customer Support

Science  Dynamics

     Science  Dynamics'  technical  support staff provides  telephone support to
customers  using a  computerized  call  tracking and problem  reporting  system.
Science  Dynamics also provides initial  installation and training  services for
its products.  The Company has instituted an annual  maintenance  contract which
entitles  customers  to  software  updates,   technical  support  and  technical
bulletins.

                                       6
<PAGE>
SMEI

     The SMEI team includes in-house experts in GIS supporting technologies such
as  ESRI's  ArcSDE,  Oracle  Spatial,  UNIX  and  Windows  to  ensure  a  stable
architecture and operating environment for enterprise  applications.  As current
customers  of this  service,  the Naval  Information  Technology  Center  (NITC)
receives  architectural and database support,  systems integration analysis, and
technical support from SMEI.

Competition

Science Dynamics

     There are six major competitors in the call control platform field, T-Netix
and Evercom both provide  call control  systems as part of a  telecommunications
service  offering.  In  addition,  both these  companies  sell  directly  to the
correctional  facilities while Science Dynamics only sells to service providers.
Science  Dynamics  competes with these companies  primarily by offering  service
providers customized call control features not available on any other platform.

SMEI

     As a company offering IT services, SMEI's services market is fragmented and
highly   competitive.   SMEI  faces  competition  from  companies  providing  IT
outsourcing and business process outsourcing solutions.  SMEI also competes with
software vendors in the .NET Web Application Services Platform market. Potential
competitors of SMEI's Aquifer software include:

          o    Kinitos,  Inc.  delivers an enterprise  deployment  solution that
               allows IT to maintain  centralized  control of  existing  Windows
               Forms clients.  The Kinitos .NET platform  centralizes control of
               the monitoring, deployment and updating of existing Windows Forms
               client  applications  throughout  the network.  It handles policy
               based  client   deployment   and  rollback,   enables  real  time
               monitoring   and   delivers   centralized   reporting  of  client
               applications.

               Kinitos also has a component that provides client-side "plumbing"
               for  creating   Windows  Forms   applications.   It  handles  the
               communications  from  client to server,  provides  online/offline
               services,  reliable  messaging,  logging and dynamic  updating of
               client applications.

          o    ObjectWare,   Inc.  markets  its  IdeaBlades   technology  as  an
               application  development platform for the rapid creation of smart
               client   applications.   ObjectWare   leverages   Microsoft  .NET
               technology to streamline development,  deployment and maintenance
               processes while simplifying the supporting  hardware and software
               environments.

     SMEI believes that its Aquifer platform offers more comprehensive  features
and that on this basis Aquifer has a marketing and  performance  advantage  over
competing products.  SMEI believes that its Aquifer DOD certified and accredited
security  technology  not only creates an advantage over  competitors,  but also
creates  a strong  barrier  to  entry.  The  following  chart  demonstrates  the
competitive  features in Aquifer and those features currently available from the
above competitors.
<TABLE>
<CAPTION>

------------------------------------------------------- ----------- ----------- ---------------
                 Application Service                     Aquifer    Kinitos       ObjectWare
------------------------------------------------------- ----------- ----------- ---------------
<S>                      <C>                              <C>            <C>           <C>
Configuration Management                                   Yes         Yes           Yes
------------------------------------------------------- ----------- ----------- ---------------
Data Access                                                Yes          No           Yes
------------------------------------------------------- ----------- ----------- ---------------
DITSCAP Approved Security                                  Yes          No            No
------------------------------------------------------- ----------- ----------- ---------------
Active Directory Support                                   Yes          No            No
------------------------------------------------------- ----------- ----------- ---------------
Event Management                                           Yes         Yes            No
------------------------------------------------------- ----------- ----------- ---------------
User, Account and Application Management                   Yes          No            No
------------------------------------------------------- ----------- ----------- ---------------
Management Console                                         Yes          No            No
------------------------------------------------------- ----------- ----------- ---------------
Execute multiple applications per client instance          Yes         Yes            No
------------------------------------------------------- ----------- ----------- ---------------
Multi-platforms (e.g., Win 32, Win CE)                     Yes         N/A           N/A
------------------------------------------------------- ----------- ----------- ---------------
Performance Management                                   Partner        No            No
------------------------------------------------------- ----------- ----------- ---------------
</TABLE>

                                       7
<PAGE>
Government Regulation

Science Dynamics

     The Federal  Communications  Commission requires that some of the Company's
products  meet Part 15 and Part 68 of the Code of Federal  Regulations.  Part 15
(subpart B) deals with the suppression of radio  frequency and  electro-magnetic
radiation to specified  levels.  Part 68 deals with  protection of the telephone
network. Other than Federal Communication Commission requirements, the Company's
business is not subject to material governmental regulation.

SMEI

             None since they are providing an unregulated services.

Employees

     As of March 29, 2005,  Science  Dynamics had 9 full time  employees  and no
part time  employees.  Science  Dynamics  supplements  full-time  employees with
subcontractors and part-time individuals, consistent with workload requirements.
None of Science  Dynamics'  employees  are  covered by a  collective  bargaining
agreement. Science Dynamics considers relations with its employees to be good.

     As of March 29,  2005,  SMEI had 26 full time  employees  and one part time
employee.  None of SMEI's  employees  are  covered  by a  collective  bargaining
agreement. SMEI considers relations with its employees to be good.

Item 2. Description of Property.

     Science Dynamics leases a 3,000 square foot office in an industrial park in
Pennsauken,  New Jersey.  This space is also used to test the Company's products
and other  corporate  activities.  The Company's lease began June 1, 2003 and is
for a term of three years at $2,812 per month.

     SMEI  subleases a facility  located at 12100  Sunset  Hills  Road,  Reston,
Virginia 20191.  The facility is comprised of 9,342 square feet of office space.
The sublease is pursuant to a  Sub-Sublease  Agreement  dated June 22, 2001. The
sublease  commenced  July 15, 2001 and ends  September 30, 2005.  SMEI currently
pays $18,289.81 per month under the sublease,  which is subject to a 3% increase
in July 2005.

Item 3. Legal Proceedings.

     Neither  Science  Dynamics  or SMEI is  currently a party to, nor is any of
Science Dynamics' or SMEI's property currently the subject of, any pending legal
proceeding.  None of the Science Dynamics' 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 4. Submission of Matters to a Vote of Security Holders.

     No matter was  submitted  to a vote of security  holders  during the fourth
quarter of the fiscal year covered by this report.


                                       8
<PAGE>
                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

Market Information

     Our common  stock is currently  quoted on the OTC Bulletin  Board under the
symbol  "SIDY." For the periods  indicated,  the following  table sets forth the
high and low bid  prices  per  share of common  stock.  These  prices  represent
inter-dealer  quotations without retail markup,  markdown, or commission and may
not necessarily represent actual transactions.

                                         Fiscal 2004               Fiscal 2003
                                  ------------- ------------ ------------ ------
Calendar Quarter                  High          Low          High         Low
--------------------------------- ------------- ------------ ------------ ------

First Quarter                     $0.25         $0.08        $0.11        $0.03
Second Quarter                    $0.27         $0.09        $0.11        $0.05
Third Quarter                     $0.13         $0.05        $0.09        $0.05
Fourth Quarter                    $0.09         $0.05        $0.13        $0.05

     The  market  price  of the  Company's  common  stock,  like  that of  other
technology  companies,  is highly  volatile  and is subject to  fluctuations  in
response to  variations in operating  results,  announcements  of  technological
innovations  or new  products by the Company,  or other  events or factors.  The
Company's stock price may also be affected by broader market trends unrelated to
the Company's performance.

Holders

     As  of  December  31,  2004,  the  Company's   common  stock  was  held  by
approximately  264  stockholders of record.  The transfer agent of the Company's
common stock is Continental Stock Transfer and Trust Company.

Dividends

     The Company has not  declared  any  dividends  to date.  The Company has no
present  intention  of paying  any cash  dividends  on its  common  stock in the
foreseeable future, as the Company intends to use earnings,  if any, to generate
growth.  The payment by of  dividends,  if any, in the future,  rests within the
discretion  of the  Company's  Board of Directors  and will depend,  among other
things, upon the Company's earnings,  its capital requirements and its financial
condition,  as well as other relevant factors.  There are no restrictions in the
Company's Certificate of Incorporation or By-laws that restrict the Company from
declaring dividends.


                                       9
<PAGE>

Securities Authorized for Issuance Under Equity Compensation Plans

     The  following  table  shows   information  with  respect  to  each  equity
compensation  plan under which the  Company's  common  stock is  authorized  for
issuance as of the fiscal year ended December 31, 2004.
<TABLE>
<CAPTION>

                      EQUITY COMPENSATION PLAN INFORMATION
------------------------------------ ------------------------ ----------------------- ---------------------------
Plan category                        Number of securities     Weighted average        Number of securities
                                     to be issued upon        exercise price of       remaining available for
                                     exercise of              outstanding options,    future issuance under
                                     outstanding options,     warrants and rights     equity compensation plans
                                     warrants and rights                              (excluding securities
                                                                                      reflected in column (a)
------------------------------------ ------------------------ ----------------------- ---------------------------
                                               (a)                    (b)                         (c)
------------------------------------ ------------------------ ----------------------- ---------------------------
<S>                                            <C>                    <C>                          <C>
Equity compensation plans approved
by security holders                          535,000                  $0.12                   18,260,000
------------------------------------ ------------------------ ----------------------- ---------------------------

------------------------------------ ------------------------ ----------------------- ---------------------------
Equity compensation plans not
approved by security holders
                                               -0-                     -0-                       -0-
------------------------------------ ------------------------ ----------------------- ---------------------------

------------------------------------ ------------------------ ----------------------- ---------------------------
Total                                        535,000                  $0.12                   18,260,000
------------------------------------ ------------------------ ----------------------- ---------------------------
</TABLE>

Recent Sales of Unregistered Securities

Common Stock

     On February 14, 2005, as partial  consideration  for the acquisition of 82%
of the  outstanding  common  stock of SMEI,  the Company  issued an aggregate of
16,553,251 shares of the Company's common stock to twelve  accredited  investors
pursuant  to  Section  4(2) of the  Securities  Act and  Regulation  D under the
Securities Act.

     On February 10, 2005, the Company  amended the conversion  price of each of
the  Company's  outstanding  convertible  term  notes  held by Laurus to a fixed
conversion rate of $0.05.  On February 11, 2005,  Laurus  converted  $547,988.78
principal  amount of  convertible  term notes of the Company and  $223,447.28 of
interest on such convertible  term notes into an aggregate of 15,428,722  shares
of the Company's  common stock.  As a result of the  conversion by Laurus of the
term notes, all amounts  outstanding  under the term notes were re-paid in full.
In consideration for the amendment to the conversion rate of the term notes held
by  Laurus  and the  conversion  by  Laurus of the term  notes,  $550,762.95  of
outstanding  principal  and accrued and unpaid  interest on a  convertible  note
dated March 31, 2003 issued in the face amount of  $1,000,000  by the Company to
Laurus was also re-paid.

Convertible Note and Warrant

     In connection  with the  acquisition  of SMEI,  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")  and a Common  Stock  Purchase  Warrant  to
purchase  6,000,000  shares of the Company's common stock at a price of $.10 per
share.  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. No
advertising or general solicitation was employed in offering the securities. All
persons  were  accredited  investors,  represented  that  they were  capable  of
analyzing the merits and risks of their investment.

Option Grants

     During 2004 the Company issued options to purchase  1,080,000 shares of the
Company's common stock pursuant to its 2002 employee stock option plan, of which
775,000 options expired in 2004.

                                       10
<PAGE>

     On October 6, 2004,  in connection  with Mr.  Burgess'  amended  employment
agreement,  the  Company  granted Mr.  Burgess an option to  purchase  2,000,000
shares  of the  Company's  common  stock at $.05  per  share as part of his 2003
bonus.  On December  30,  2004 in  connection  with  Calabash's  new  consulting
agreement the Company awarded Calabash an option to purchase  2,000,000 share of
the Company's common stock at $.05. Calabash is controlled by Alan C. Bashforth,
Chairman and Acting Chief Financial Officer of the Company.

     Except as expressly set forth above,  the  individuals and entities to whom
Science Dynamics issued securities are unaffiliated  with the Company.  For each
of the  above  sales of  unregistered  securities,  no  advertising  or  general
solicitation  was employed in offering the  securities.  The offerings and sales
were made to a limited number of persons, all of whom were accredited investors,
business  associates of the Company or the  Company's  executive  officers,  and
transfer was restricted by the Company in accordance  with the  requirements  of
the  Securities  Act of 1933, as amended.  All of the  above-referenced  persons
represented that they are accredited and sophisticated investors,  that they are
capable of  analyzing  the merits and risks of their  investment,  and that they
understood the speculative nature of their investment.  Furthermore,  all of the
above-referenced  persons had access to the  Company's  Securities  and Exchange
Commission filings.

Item 6. Management's Discussion and Analysis or Plan of Operation.

Forward-Looking Statements

     The information in this annual report contains  forward-looking  statements
within the meaning of the Private Securities Litigation Reform Act of 1995. This
Act  provides  a "safe  harbor"  for  forward-looking  statements  to  encourage
companies to provide  prospective  information  about themselves so long as they
identify these statements as forward looking and provide  meaningful  cautionary
statements  identifying  important  factors that could cause  actual  results to
differ from the  projected  results.  All  statements  other than  statements of
historical  fact made in this report are forward  looking.  In  particular,  the
statements herein regarding  industry prospects and future results of operations
or financial position are forward-looking statements. Forward-looking statements
reflect  management's  current  expectations and are inherently  uncertain.  Our
actual results may differ significantly from management's expectations.

     The following  discussion and analysis  should be read in conjunction  with
the financial  statements of Science Dynamics  Corporation,  included  herewith.
This  discussion  should not be  construed  to imply that the results  discussed
herein will necessarily continue into the future, or that any conclusion reached
herein will necessarily be indicative of actual operating results in the future.
Such discussion represents only the best present assessment of our management.

General Overview

     Science  Dynamics  was  incorporated  in the State of Delaware May 1973 and
commenced  operations  in  July  1977.  The  Company  has  been  developing  and
delivering technologically advanced solutions for over twenty-five years.

     Throughout fiscal 2004, the Company began to see some  stabilization in the
telecommunications  market.  During  this  period the  Company  has  focused its
efforts on software solutions.  Margins for the Company's software products have
historically been higher than hardware products and have shown stability through
fluctuating  business  environments.  This  strategy  has enabled the Company to
deliver  products with higher margins while reducing  overhead costs  associated
with lower margin product offerings.

     As the  Company  is  coming  out of a  downturn  in the  telecommunications
market,  management  believes  it is  crucial to ensure  the  Company's  product
offering has a diverse  exposure to mitigate any risk  associated  with a single
industry  or  market.  The  Company  plans to expand its  product  line to other
markets through a combination of acquisitions and product development.

     In  conjunction  with  the  Company's  efforts  to  reduce  overhead  costs
associated  with  lower  margin  product  offerings  and focus on higher  margin
products,  the Company sold certain  assets and  liabilities  of M3  Acquisition
Corp.,  one of the  Company's  subsidiaries.  The  sale  reduced  the  Company's
liabilities by approximately  $1,100,000 The product margins  generated from the

                                       11
<PAGE>
Audio  Visual  business  unit were  approximately  25%  compared to 75% from the
Science  Dynamics  Software  business unit.  Management  believes the sale of M3
Acquisition  Corp.'s assets was necessary to maintain the Company's focus on the
software business which saw a sales increase of approximately 8% from 2003 while
maintaining consistent product margins.

     In line with efforts to expand the Company's product line and market reach,
on December  14,  2004 the Company  signed a  definitive  agreement  to purchase
approximately 82% of the outstanding  shares of SMEI. SMEI is a software company
focused  primarily  on  providing  solutions to the  government  market.  SMEI's
product offering includes Aquifer,  an innovative  software product that enables
government  departments  and  corporations  to  efficiently  manage  distributed
computing applications in a secure environment. The Aquifer product has built in
Department of Defense certified security.

     Combining  Aquifer's  application  management  qualities  with the IP based
transaction processing  capabilities of BubbleLink provide Science Dynamics with
a dynamic  product  offering that can be used to develop  vertical  applications
encompassing a multitude of industries.

Results of  Operations  - Year Ended  December 31, 2004  Compared  with the Year
Ended December 21, 2003

     The  following  table sets  forth  income and  certain  expense  items as a
percentage  of total  revenue  and the  change in dollar  amounts  of such items
compared to the previous fiscal year:

                                          For the Years Ending December 31,
                                                2004                2003
                                                ----                ----
      Sales                                 $1,609,717           1,490,834
      Net Loss                               $(481,178)          $(282,167)

      Net Loss Per Share                         (0.01)              (0.00)

<TABLE>
<CAPTION>

                                                     OPERATING EXPENSES                   PERCENT OF SALES
                                                     ------------------                   ----------------
                                                      2004             2003              2004             2003
                                                      ----             ----              ----             ----


<S>                                               <C>              <C>                  <C>              <C>
        Cost of Goods Sold                        $344,951         $423,985             21.4%            28.4%

        Research & Development                     304,160          382,764             18.9%            25.7%

        Selling, General & Admin                 1,503,422        1,402,750             93.4%            94.1%

        Total Operating Costs and Expenses      $2,152,533       $2,209,499            133.7%           148.2%
</TABLE>

     Sales for the fiscal year ended December 31, 2004 were $1,609,717  compared
to  $1,490,834  in the 2003 fiscal year.  Revenues in 2004 and 2003 for software
technology sales were  predominantly  derived from the Commander  Product Lines,
30% was  from  consulting  services,  as  well as  revenue  generated  from  the
maintenance and support of those products.  The increase can be attributed to an
increase in consulting services.

     Cost of goods sold for the fiscal year ended December 31, 2004 decreased to
$344,951 from $423,985 in the year ended December 31, 2004. The decrease in cost
of sales in due to the Company's  continual efforts to sell larger systems which
have higher product margins and as a result a decreasing contribution margin. In
addition  the  decrease can also be  attributed  to the  increase in  consulting
services in 2004.

     Research and development  expenses  decreased to $304,160 in the year ended
December 31, 2004, from $382,764 in the year ended December 31, 2003, a decrease
of $78,604.  The decrease in research and  development  expenses during the year
ended December 31, 2004 was due to the limited  resources  available for product
development.  Management  believes that  continual  enhancement of the Company's
products is necessary  to enable  Science  Dynamics to maintain its  competitive

                                       12
<PAGE>
position.  Science  Dynamics  will have to focus its  principal  future  product
development and resources on developing new, innovative,  technical products and
updating  existing  products in the  communications  arena which will enable the
Company to explore other established markets that are considered "safe" from the
telecom disruption currently facing the industry.

     Selling, general and administration expenses increased to $1,503,422 in the
year ended  December 31, 2004 compared to $1,402,750 in the year ended  December
31, 2003.  Selling,  General and  administration  expenses  consist of salaries,
consulting  fees,  depreciation  and  overhead  expenses.  The  increase  can be
primarily attributed to additional professional costs.

     Interest  Expense for the year ended  December 31, 2004  includes  interest
accrued on our  convertible  notes,  interest  paid on a short-term  note from a
stockholder and other short-term borrowing.  Interest expense for the year ended
December 31, 2004 was $283,740  compared to $199,713 for the year ended December
31,  2003.  The  increase in interest  expenses  was due to an increase in short
borrowing, and an increase in the Company's revolving credit line.

     Finance  Expense in the twelve months ended  December 31, 2004 was $66,847,
compared to $125,942 for the twelve months ended December 31, 2003. The decrease
is attributed to the amortization of the financing expenses on the Laurus notes.

Liquidity and Capital Resources

     Net cash (used) by operating  activities  for the years ended  December 31,
2004  and  2003 was  $327,611  and  $216,770,  respectively.  Net  cash  used in
operating  activities for the year ended December 31, 2004 included the net loss
of $481,178,  and  adjustments  which  amounted to $153,567 and was comprised of
depreciation,  non-cash  items,  offset by the decrease in accounts  payable and
accrued expenses,  customer deposits,  an increase in accounts  receivable and a
gain on the disposal of the assets of M3 Acquisition Corp.

     Net cash used in investing activities for the years ended December 31, 2004
and  2003 was $0 and $0,  respectively.  The  Companies  limited  resources  has
curtailed all investment in capital purchases.  Management  believes that in the
future the Company will need to invest in updated technology to stay competitive
in the its current  markets.  In addition the Company well  continue to look for
acquisitions that have synergy with Science Dynamics products.

     Net cash  provided  (used) by  financing  activities  for the  years  ended
December 31, 2004 and 2003 was $499,260  and  ($238,879),  respectively.  Due to
continued  losses the  Company has to borrow  funds to meet its working  capital
needs.

     At December 31, 2004, the Company had $192,681 in cash and cash equivalents
and a $3,430,828  deficit in working capital,  compared $21,032 in cash and cash
equivalents  and a  $3,578,118  deficit  in  working  capital  in 2003.  Current
liabilities  at December 31, 2004 were  $3,734,261,  compared to  $3,703,141  at
December 31, 2003.  The deficit in working  capital for the year ended  December
31, 2004 is attributable  to the low sales results.  The increase in the current
liabilities  for the year ended December 31, 2004 resulted from the minimal cash
flows from operation.

     The cash  requirements  for funding the Company's  operations  have greatly
exceeded cash flows from operations. The Company has satisfied its capital needs
primarily  through debt  financing.  The Company's  liabilities  consist of over
extended  accounts  payable and accrued  expenses.  The Company has successfully
negotiated  payment  arrangements  with some of its vendors and is attempting to
negotiate payment  arrangements  with others.  The Company is in discussion with
other creditors to renegotiate extended terms. The Company cannot guarantee that
any of these  discussions  will be successful.  If we are unable to successfully
renegotiate  any  of  the  above  payment  arrangements,  our  business  may  be
materially and adversely affected.

     The Company's  revenue and cash flow are subject to many  uncertainties and
cannot  be  assured.  In  order  to have  sufficient  cash to meet  management's
anticipated cash requirements.  The Company cash requirements include increasing
inventory for long lead items, payment of current and old payables.  The Company
is trying to obtain additional  working capital through equity financing as well

                                       13
<PAGE>
as increase  sales.  Science  Dynamics does not have  sufficient cash on hand to
continue  its  operations  without  successfully  raising  additional  funds and
increasing its sales. The inability to generate  sufficient cash from operations
or to obtain the required  additional  funds could require  Science  Dynamics to
reduce or curtail operations.

Subsequent Events

     On February 10,  2005,  Science  Dynamics  amended  (the  "Amendment")  the
conversion  price of each of the Company's  outstanding  convertible  term notes
held by Laurus to a fixed conversion rate of $0.05. On February 11, 2005, Laurus
converted  $547,988.78  principal amount of convertible notes and $223,447.28 of
interest on such convertible notes into an aggregate of 15,428,722 shares of the
Company's  common  stock.  As a result of the  conversion  by Laurus of the term
notes,  all amounts  outstanding  under the term notes were re-paid in full.  In
consideration  for the Amendment and the conversion by Laurus of the term notes,
$550,762.95  of  outstanding  principal  and  accrued  and unpaid  interest on a
convertible note dated March 31, 2003 issued in the face amount of $1,000,000 by
the Company to Laurus was re-paid.  As a result of the  foregoing  transactions,
$1,322,199.01,  representing  all  outstanding  debt of the  Company  to  Laurus
(except as set forth below) was re-paid.

     Subsequent  to the above  transactions,  on February 14, 2005,  the Company
entered into a Securities Purchase Agreement (the "Purchase  Agreement"),  dated
February 11, 2005,  with Laurus for the sale of a  $2,000,000  principal  amount
Secured  Convertible  Term Note (the "Note") and a Common Stock Purchase Warrant
(the "Warrant") to purchase  6,000,000 shares of the Company's common stock. 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 gross proceeds of $2,000,000 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  bears  interest  at a rate per  annum  equal  to the  prime  rate
published  in The Wall Street  Journal from time to time,  plus 3%.  Interest is
calculated  on the  last day of each  month  until  the  maturity  date  (each a
"Determination Date"). Subject to the following adjustment to the interest rate,
the interest  rate shall not be less than 8%. If (i) the Company has  registered
the resale of the shares  issuable upon conversion of the Note and upon exercise
of the Warrant on an effective  registration  statement  with the Securities and
Exchange Commission, and (ii) the market price of the Company's common stock for
the five trading days  immediately  preceding a  Determination  Date exceeds the
then applicable  fixed  conversion price by at least 25%, then the interest rate
for the succeeding  calendar month shall  automatically  be reduced by 200 basis
points,  or 2%, for each  incremental  25%  increase in the market  price of the
common stock above the then applicable fixed conversion  price.  Notwithstanding
this interest rate  adjustment,  in no event will the interest rate be less than
0%.

     Interest is payable on the Note 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 must 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 must 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").  Any principal amount that remains outstanding on the maturity date is
due and payable on the maturity date.

     If the Monthly Amount (or a portion of the Monthly Amount if not all of the
Monthly  Amount is converted into shares of common stock) is required to be paid
in cash, then the Company must pay Laurus an amount equal to 102% of the Monthly
Amount due and owing to Laurus on the  Repayment  Date in cash.  If the  Monthly
Amount (or a portion of the Monthly  Amount if not all of the Monthly  Amount is

                                       14
<PAGE>
converted  into  shares of common  stock)  is  required  to be paid in shares of
common stock, the number of such shares to be issued by the Company to Laurus on
such Repayment Date (in respect of such portion of the Monthly Amount  converted
into in shares of common stock),  shall be the number determined by dividing (x)
the portion of the Monthly Amount  converted into shares of common stock, by (y)
the then applicable  fixed  conversion  price. The fixed conversion price of the
Note is $0.10 per share,  subject  to  adjustment  for  subsequent  lower  price
issuances by the Company, as well as customary  adjustment  provisions for stock
splits, combinations, dividends and the like.

     Laurus is required to convert  into shares of common stock all or a portion
of the Monthly  Amount due on each  Repayment  Date  according to the  following
guidelines  (the  "Conversion  Criteria"):  (i) the closing  price of the common
stock as reported by Bloomberg, L.P. on the Repayment Date shall be greater than
or equal to 115% of the  fixed  conversion  price  and (ii) the  amount  of such
conversion  does not exceed 25% of the aggregate  dollar  trading  volume of the
common stock for the 22-day trading period immediately  preceding the applicable
Repayment Date. If the Conversion Criteria are not met, Laurus must convert only
such part of the Monthly Amount that meets the Conversion Criteria.  Any part of
the  Monthly  Amount due on a  Repayment  Date that  Laurus has not been able to
convert  into  shares of  common  stock due to  failure  to meet the  Conversion
Criteria, must be paid by the Company in cash at the rate of 102% of the Monthly
Amount  otherwise due on such Repayment Date,  within three business days of the
applicable Repayment Date.

     The  Warrant  is  exercisable  at a price of $0.11 per share from the issue
date through the close of business on February 11,  2012.  Upon  exercise of the
Warrant,  payment may be made by Laurus  either (i) in cash or by  certified  or
official bank check payable to the order of the Company equal to the  applicable
aggregate  exercise price, (ii) by delivery of the Warrant,  or shares of common
stock and/or common stock receivable upon exercise of the Warrant, or (iii) by a
combination of any of the foregoing  methods.  The exercise price of the Warrant
is subject to adjustment for stock splits, combinations, dividends and the like.

     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 upon  exercise of the  Warrant in a  registration  statement  under the
Securities  Act 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. In the event the Company does not
meet these  deadlines,  it may be required to pay Laurus  liquidated  damages in
cash equal to 2% for each 30-day  period  (prorated  for  partial  periods) on a
daily basis of the original principal amount of the Note.

Off-Balance Sheet Arrangements

     We do 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

     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

                                       15
<PAGE>
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  inevitably  lead to the removal of the going  concern  comment
from our audited financials.

     As  discussed  in  Note  4 to the  accompanying  financial  statements,  on
September  1, 2004,  the Company  sold  substantially  all of its  tangible  and
intangible  assets that were used in its audio and visuals  systems  integration
business.  Accordingly, the financial condition and results of the operations of
the Audio Visual division segment have been reflected as discontinued operations
for all periods.

     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.  Investments in affiliates  over which the Company
has  significant  influence  but not a  controlling  interest are carried on the
equity basis.

     Major Customers. Currently two customers account for more than 41% of total
sales in 2004 and no customers accounted for more than 10% in 2003.

Item 7.           Financial Statements.

     All financial  information  required by this Item is attached hereto at the
end of this report.

Item 8.  Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure.

         Not applicable.

Item 8A. 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 its 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 its 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  recorded,
processed,  summarized  and reported,  within the time periods  specified in the
Commission's  rules and  forms.  There was no change in 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,  the  Company's  internal  control over  financial
reporting.

Item 8B. Other Information.

         None.
                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        With Section 16(a) of the Exchange Act.

     The following are the names and certain information regarding the Company's
Directors, Director Nominees and Executive Officers following the acquisition of
SMEI. The Company plans to appoint the Director  Nominees to the Company's Board
of Directors  approximately ten days after the date the Company transmits to all
holders of record of the  Company's  common stock  information  required by Rule
14f-1 under the Securities Exchange Act of 1934, as amended. There are no family
relationships  among  any of the  Company's  Directors,  Director  Nominees  and
Executive Officers.
<TABLE>
<CAPTION>
------------------------------- --------- --------------------------------------------------------
             Name                 Age                            Position
------------------------------- --------- --------------------------------------------------------
<S>                                <C>                             <C>
Paul Burgess                       40     President, Chief Executive Officer and Director
------------------------------- --------- --------------------------------------------------------
Alan C. Bashforth                  54     Acting Chief Financial Officer, Secretary and Chairman
                                          of the Board of Directors
------------------------------- --------- --------------------------------------------------------
Eric D. Zelsdorf                   39     Chief Technology Officer and Director Nominee
------------------------------- --------- --------------------------------------------------------
Herbert B. Quinn                   68     Director Nominee
------------------------------- --------- --------------------------------------------------------
Robert E. Galbraith                61     Director Nominee
------------------------------- --------- --------------------------------------------------------
</TABLE>
                                       16
<PAGE>
Background of Executive Officers and Directors

     Paul Burgess,  President,  Chief Executive Officer and Director. From March
1, 2003 until February 14, 2005, Mr. Burgess was Chief Operating  Officer of the
Company.  As of February 9, 2005, Mr. Burgess was appointed  President and Chief
Executive  Officer of the  Company.  On  February  14,  2005,  Mr.  Burgess  was
appointed a director of the Company.  From January  2000 to December  2002,  Mr.
Burgess was  President  and Chief  Financial  Officer of Plan B  Communications.
Prior to Plan B  Communications,  Mr.  Burgess  spent three years with  MetroNet
Communications, where he was responsible for the development of MetroNet's coast
to coast intra and inter city  networks.  Mr.  Burgess was also  influential  in
developing the operations of MetroNet  during the company's  early growth stage.
Prior to joining  MetroNet,  Mr.  Burgess  was with ISM, a company  subsequently
acquired by IBM Global  Services,  where he was  responsible  for developing and
deploying the company's distributed computing strategy.

     Alan C. Bashforth,  Acting Chief Financial Officer,  Secretary and Chairman
of the Board of Directors. From April 4, 2002 to February 9, 2005, Mr. Bashforth
was President, Chief Executive Officer and the sole Director of the Company. Mr.
Bashforth  continues to serve as a Acting Chief Financial  Officer,  Secreatary,
director and as Chairman of the Board of Directors of the Company. Mr. Bashforth
has been a member of the Company's Board of Directors since November 1996. Since
1996,  Mr.  Bashforth  has held various  executive  officer  positions  with the
Company.  From the end of 1996 to December 15, 2000, Mr. Bashforth was President
of Cascadent Communications,  a major customer of the Company. Previously he was
President  of  Innovative  Communications  Technology,   Ltd.  ("ICT"),  a  data
communications company located in Jersey, Channel Islands, until the acquisition
of the intellectual property of ICT by the Company in November 1996.

     Eric D.  Zelsdorf,  Chief  Technology  Officer and  Director  Nominee.  Mr.
Zelsdorf  founded  SMEI in 1997 and since then he has been the Chief  Technology
Officer,  President and a Director of SMEI. Mr.  Zelsdorf has led SMEI since its
inception and currently advises clients as well as industry  standards groups on
the  implementation  of secure Web  services  and  enterprise  architecture  and
integration.  From  1992 to 1997,  Mr.  Zelsdorf  was Vice  President  and Chief
Technology Officer for ECG, Inc.

     Herbert B. Quinn,  Director Nominee.  Mr. Quinn has been Chairman and Chief
Executive  Officer  of SMEI  since  1998 when he led the  merger  of Energy  and
Environmental  Technologies  into SMEI.  Mr. Quinn is a retired  Army  Brigadier
General,  former  Senior  Executive  for the EPA and a  registered  Professional
Engineer.

     Robert E.  Galbraith,  Director  Nominee.  Mr.  Galbraith  is  currently  a
consultant  to firms  seeking  innovative  technical  solutions  in the security
marketplace.   Areas  in  which  Mr.  Galbraith  have  consulted  include:  data
encryption,  internet telephony (VoIP), intelligent data recording, secure local
and wide area network solutions, physical security and biometric security. Prior
to consulting, Mr. Galbraith was President, owner and technical administrator of
Secure Engineering Services,  Inc. ("SESI") from its inception in 1979 until the
firm was sold in 1996. During this period,  SESI provided services and equipment
to the U.S.  Forces and NATO component  Forces in Europe.  Clients  included the
U.S. Army, Navy and Air Force, the SHAPE Technical Center, Euro Fighter Program,
Sandia Labs, JPL, MITRE and NATO programs.

Board Composition

     At each annual meeting of stockholders,  all of the Company's directors are
elected  to serve from the time of  election  and  qualification  until the next
annual meeting of stockholders following election. The exact number of directors
is to be  determined  from time to time by resolution of the board of directors.
There were no board meetings during the fiscal year ended December 31, 2004.

     Each  officer is elected by, and serves at the  discretion  of the board of
directors.  Each of our  officers  and  directors  devotes  his full time to our
affairs.

Audit Committee Financial Expert

     The Company does not have an audit committee financial expert, as that term
is defined  in Item 401 of  Regulation  S-B.  The  Company  has not been able to
identify a suitable nominee to serve as an audit committee financial expert.

                                       17
<PAGE>
Code of Ethics

     The Company has adopted a Code of Ethics and Business Conduct for Officers,
Directors  and  Employees  that applies to all of the  officers,  directors  and
employees of the Company.  The Code of Ethics has been filed with the  Company's
annual  report for the fiscal  year ended  December  31,  2003 on Form 10-KSB as
Exhibit  14.1,  filed with the  Securities  and Exchange  Commission on April 9,
2004. Upon request, the Company will provide to any person without charge a copy
of its Code of Ethics.  Any such request  should be made to Attn:  Paul Burgess,
Science Dynamics  Corporation,  7150 N. Park Drive, Suite 500, Pennsauken,  N.J.
08109. The Company's  telephone number is (856) 910-1166.  The Company is in the
process of building a section of its website at www.scidyn.com where the Code of
Ethics will be available to investors.

Section 16(a) Beneficial Ownership Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive  officers and persons who beneficially own more than ten
percent of a registered  class of the Company's  equity  securities to file with
the SEC  initial  reports of  ownership  and reports of change in  ownership  of
common stock and other equity securities of the Company. Officers, directors and
greater than ten percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.  Based solely upon
a review of Forms 3 and 4 and amendments  thereto furnished to the Company under
Rule 16a-3(e)  during the fiscal year ended  December 31, 2004,  and Forms 5 and
amendments  thereto  furnished  to the Company  with  respect to the fiscal year
ended December 31, 2004, the Company  believes that during the fiscal year ended
December 31, 2004,  its  executive  officers,  directors and all persons who own
more than ten percent of a registered  class of its equity  securities  complied
with all Section 16(a) filing  requirements,  except as follows:  Alan Bashforth
reported five transactions late and filed two Form 4s late; and Paul Burgess has
never filed a Form 3.

Item 10. Executive Compensation.

     The  following  table  sets forth all  compensation  paid in respect of the
Company's   Chief   Executive   Officer  and  those   individuals  who  received
compensation in excess of $100,000 per year (collectively,  the "Named Executive
Officers") for our last three completed fiscal years.
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE
                                                                                            Long-Term
                                                                                           Compensation
                                                                            -------------------------------------------
                                               Annual Compensation                      Awards                Payouts
                                      ------------------------------------- ------------------------------ ------------

                                                                  Other                       Securities                   All
                                                                 Annual     Restricted        Under-lying                 Other
          Name and                                               Compen-    Stock Award(s)    Options/        LTIP       Compen-
     Principal Position       Year     Salary ($)   Bonus ($)  sation ($)   ($)               SARs (#)     Payouts ($)  sation ($)
----------------------------- ------- ------------- ---------- ------------ ----------------- ------------ ------------ -----------
<S>                           <C>         <C>         <C>            <C>      <C>                 <C>          <C>          <C>
Alan C. Bashforth,            2004       -0-          -0-      $240,000 (1)       -0-         2,000,000       -0-         -0-
     Acting Chief Financial                                    $240,000                                                $75,000
                              2003       -0-          -0-         (1)             -0-             -0-         -0-         (3)
     Officer, Secretary,      2002       -0-          -0-      $165,000       $130,909 (2)        -0-         -0-         -0-
     Chairman, Former
     President and Former
     Chief Executive Officer

Paul Burgess,                         $175,000
                              2004       (4)          -0-         -0-             -0-         2,000,000       -0-         -0-
     President, Chief                 $145,833
Executive                     2003       (5)          -0-         -0-             -0-         2,000,000       -0-         -0-
     Officer and Director
</TABLE>


                                       18
<PAGE>


     (1)  Consultancy fee of $240,000 owed to Calabash  Consulting LTD, of which
          Mr. Bashforth is the principal executive officer and owner.
     (2)  Pursuant to his consulting  agreement,  Mr. Bashforth is entitled to a
          bonus equal to 4,363,636  shares of the Company's common stock for the
          year ended  December  31,  2002.  These  shares are valued at $.03 per
          share.
     (3)  Remaining  balance of consultancy fee owed to Calabash  Consulting LTD
          for 2002 contract.
     (4)  Of Mr. Burgess' $145,833 compensation for 2003, $65,625 remains unpaid
          and has been accrued for the year ended December 31, 2003 and 2004.
     (5)  Of Mr. Burgess' $175,000 compensation for 2004, $21,875 remains unpaid
          and has been accrued for the year ended December 31,2004

                               Options Grant Table

     The  following  table  sets  forth  information  with  respect to the named
executive officers  concerning the grant of stock options during the fiscal year
ended  December 31, 2004. We did not have during such fiscal year, and currently
do not have,  any plans  providing  for the grant of stock  appreciation  rights
("SARs").

                      Option/SAR Grants in Last Fiscal Year
--------------------------------------------------------------------------------

                               Individual Grants
--------------------------- --------------- ------------- ---------- -----------
           (a)                 (b)            (d)            (e)         (c)

                                            % of Total
                                            Options/
                            Number of       SARs
                            Securities      Granted to    Exercise
                            Underlying      Employees     or Base
                            Options/ SARs   in Fiscal     Price      Expiration
           Name             Granted (#)     Year          ($/Sh)     Date
--------------------------------------------------------------------------------
Alan C. Bashforth              2,000,000        46.5%        $.05        None
Paul Burgess                   2,000,000        46.5%        $.05__    __None__

Aggregate Option Exercises in Last Fiscal Year

     No options were exercised by the Company's executive officers and directors
during the most recent fiscal year.

Compensation of Directors

     No director receives any cash compensation for their service as a director.
All  directors  are  reimbursed  for  their  reasonable  out-of-pocket  expenses
incurred in connection with their duties to the Company.

Employment Agreements

     On December 30, 2004, Science Dynamics entered into a consulting  agreement
with Calabash Consultancy,  Ltd. Under the agreement, Calabash Consultancy, Ltd.
was engaged as a business  development,  financial  and  management  consultant,
which  consulting  services are to be provided by Alan Bashforth to act as Chief
Executive  Officer and Chairman of the Board of  Directors  of the Company.  The
agreement started January 1, 2005 and continues for an initial  three-year term.
The agreement will automatically  renew for additional  one-year terms following
the initial  term,  provided  that  following  the initial term either party may
terminate  the agreement by providing the other party a minimum of 30 days prior
written notice.  In  consideration  for its services,  the Company agreed to pay
Calabash  Consultancy,  Ltd.  an  annual  fee of  $300,000.  After  the  Company
completes the acquisition of SMEI,  Calabash  Consultancy,  Ltd. will be awarded
warrants  to  purchase  6,000,000  shares of the  Company's  common  stock at an
exercise  price of $0.10 per share that expire  seven years after  issuance.  In
addition, as part of a bonus payment for years 2003 and 2004, the Company agreed
to grant  Calabash  Consultancy,  Ltd.  fully vested  stock  options to purchase
2,000,000  shares of the Company's  common stock with an exercise price of $0.05
per share.


                                       19
<PAGE>
The Company agreed to fully reimburse Calabash Consultancy, Ltd. for any and all
expenses  incurred in the  performance  of duties under the agreement and to pay
Calabash  Consultancy,  Ltd. $850 per month for a vehicle to be used exclusively
by  Calabash  Consultancy,  Ltd.  during the term of the  agreement.  During the
initial term or any subsequent  renewal, if the Company is sold to another party
or  subject  to a  change  of  control,  or  ownership  of more  than 20% of the
Company's  outstanding  common stock is controlled  by a single party,  Calabash
Consultancy,  Ltd.  may  terminate  the  agreement  by providing 30 days advance
notice of  termination.  Upon such  termination,  all options and warrants  will
become fully  vested and all other  amounts due under the  agreement,  including
payments  through the term of the  agreement,  will become  immediately  due and
payable.  The Company  agreed to indemnify  Calabash  Consultancy,  Ltd. and Mr.
Bashforth and hold them harmless for all acts or decisions made by Mr. Bashforth
in good faith while performing services for the Company. The Company also agreed
to be  responsible  for  payment of any and all taxes that may become due to any
state or federal taxing authority  arising out of the agreement and to indemnify
and hold harmless  Calabash  Consultancy,  Ltd. and Mr.  Bashforth from any such
payment.

     On January 1, 2005,  the Company  entered into a Consulting  Agreement with
SMEI and Herbert B. Quinn,  Jr.,  which is  effective as of the date the Company
completed the acquisition of SMEI.  Under the agreement,  Mr. Quinn will perform
strategic  analytical  and advisory  services as reasonably  requested by SMEI's
Chief Executive Officer.  For his services,  the Company agreed to pay Mr. Quinn
$150,000  per year.  Mr.  Quinn also is  eligible to receive  options  under the
Company's  stock option plan or any similar plan that is in effect.  The term of
the agreement is for one year and will  automatically  renew for one  additional
year unless  either party gives at least 30 days prior  written  notice of their
intent  not to  extend  the  agreement.  The  agreement  does  not  contain  any
termination provisions.

     On February 4, 2005, the Company entered into an Employment  Agreement with
SMEI and Eric D. Zelsdorf. Under the agreement, Mr. Zelsdorf will be employed as
SMEI's Chief Technology Officer until December 31, 2007. For his services,  SMEI
agreed to pay Mr. Zelsdorf a base salary of $160,000 per year. Mr. Zelsdorf also
may be paid an incentive  bonus based on a percentage  of his base salary.  Upon
completion  of the Company's  acquisition  of SMEI,  the Company  agreed that it
would grant Mr. Zelsdorf stock options in accordance with the Company's employee
stock option  program.  The exercise price of the stock options are to be set at
the  Company's  stock  price  at the  close  of the  acquisition  of SMEI by the
Company.  The agreement will terminate upon the following events and conditions:
(a) upon expiration of its terms; (b) for cause by SMEI immediately upon written
notice;  (c) For cause by Mr.  Zelsdorf  immediately  upon written  notice;  (d)
without  cause by either  party  upon  written  notice;  or (e) in the event Mr.
Zelsdorf is unable to perform services required under the agreement by reason of
incapacity or disablement for more than six months.  Cause by SMEI is defined in
the agreement as: a material breach by Mr. Zelsdorf,  a felony conviction or any
willful act or omission of dishonesty which causes harm to SMEI.  Resignation of
Mr.  Zelsdorf with cause is defined to include,  but not limited to: a reduction
in  position  and/or  responsibilities,  a  material  change  in Mr.  Zelsdorf's
reporting  structure,  or relocation beyond 30 miles of SMEI's principal office.
If the agreement is terminated by SMEI without cause or if Mr. Zelsdorf  resigns
with cause,  Mr.  Zelsdorf  will be entitled to all  compensation  and  benefits
otherwise  remaining  unpaid under the  remaining  term of the agreement and all
stock  options  which  have  been  granted  under  the  agreement   will  become
immediately vested and exercisable.  In the event Mr. Zelsdorf is terminated for
cause or resigns voluntarily, no compensation will be due to him other than what
was earned through the date of termination.

     On February 4, 2005, the Company  entered into a Consulting  Agreement with
SMEI and Herbert B. Quinn,  Jr.,  which is  effective as of the date the Company
completes the acquisition of SMEI.  Under the agreement,  Mr. Quinn will perform
strategic  analytical  and advisory  services as reasonably  requested by SMEI's
Chief Executive Officer.  For his services,  the Company agreed to pay Mr. Quinn
$150,000  per year.  Mr.  Quinn also is  eligible to receive  options  under the
Company's  stock option plan or any similar plan that is in effect.  The term of
the agreement is for one year and will  automatically  renew for one  additional
year unless  either party gives at least 30 days prior  written  notice of their
intent  not to  extend  the  agreement.  The  agreement  does  not  contain  any
termination provisions.

     On February 14, 2005, upon  effectiveness  of the Company's  acquisition of
SMEI, the Company entered into an Executive  Employment Agreement Amendment with
Paul Burgess. Under the Executive Employment Agreement Amendment, Mr. Burgess is
employed by the Company as its Chief  Executive  Officer for an initial  term of
three years.  Thereafter,  the Executive  Employment  Agreement Amendment may be
renewed upon the mutual  agreement of Mr.  Burgess and the Company.  Mr. Burgess

                                       20
<PAGE>
will be paid a base salary of $225,000 per year under the  Executive  Employment
Agreement  Amendment.  The  Company  previously  agreed  to  grant  Mr.  Burgess
2,000,000  shares of restricted  stock.  This grant was replaced by the grant of
fully vested options to purchase 2,000,000 shares of common stock of the Company
at an exercise  price of $0.03 per share.  The Company  also agreed to grant Mr.
Burgess  fully  vested  options to purchase an  additional  2,000,000  shares of
common  stock of the Company at an exercise  price of $0.05 per share as a bonus
for services  rendered to the Company during 2004.  Further,  upon the effective
date of the Executive  Employment  Agreement  Amendment,  the Company  agreed to
grant Mr. Burgess options to purchase  6,000,000  shares of the Company's common
stock at an exercise  price of $0.10 per share,  which will vest  one-third each
year over a three-year  period  beginning  February 14, 2006.  In addition,  the
Company agreed to pay Mr. Burgess an incentive  bonus based on 1% of the revenue
of the most recent  12-month  period of any  acquisitions  closed by the Company
during the term of the Executive Employment  Agreement Amendment.  The Executive
Employment  Agreement  Amendment  may  be  terminated  by  Mr.  Burgess  at  his
discretion by providing at least 30 days prior written notice to the Company. In
the event the Company is acquired, or is the non-surviving party in a merger, or
the Company sells all or substantially all of its assets,  the surviving company
is bound to the provisions of the Executive Employment Agreement Amendment.

Item 11.  Security  Ownership of Certain  Beneficial  Owners and  Management and
          Related Stockholder Matters.

Security Ownership of Certain Beneficial Owners and Management

     The following  table sets forth certain  information,  as of March 28, 2005
with respect to the beneficial  ownership of the outstanding common stock by (i)
any holder of more than five (5%) percent;  (ii) each of the Company's executive
officers and directors; and (iii) the Company's directors and executive officers
as a group. Except as otherwise indicated, each of the stockholders listed below
has sole voting and investment power over the shares beneficially owned.

<TABLE>
<CAPTION>

                                                     Common Stock           Percentage of
Name of Beneficial Owner (1)                    Beneficially Owned (2)     Common Stock (2)
---------------------------------------------- ------------------------- ---------------------
<S>                                                    <C>                        <C>
Alan C. Bashforth (3)                                 14,048,363                 14.9%
Paul Burgess (4)                                       4,000,000                  4.4%
Herbert B. Quinn, Jr. (5)                              6,604,424                  7.7%
Eric D. Zelsdorf                                       5,835,606                  6.8%
Robert Galbraith (6)                                   1,245,000                  1.4%
---------------------------------------------- ------------------------- ---------------------
All   officers,   directors   and   directors         31,733,393                 32.3%
nominees as a group   (5 persons)
</TABLE>

     (1)  Except as otherwise indicated, the address of each beneficial owner is
          c/o  Science  Dynamics  Corporation,  7150 N. Park  Drive,  Suite 500,
          Pennsauken, NJ 08109.

     (2)  Applicable  percentage  ownership  is based on  86,239,910  shares  of
          common  stock  outstanding  as  of  March  28,  2005,   together  with
          securities  exercisable  or  convertible  into shares of common  stock
          within  60 days of March  28,  2005 for each  stockholder.  Beneficial
          ownership is determined in accordance with the rules of the Securities
          and Exchange  Commission and generally  includes  voting or investment
          power with  respect  to  securities.  Shares of common  stock that are
          currently  exercisable or exercisable within 60 days of March 28, 2005
          are  deemed  to be  beneficially  owned  by the  person  holding  such
          securities for the purpose of computing the percentage of ownership of
          such  person,  but are not treated as  outstanding  for the purpose of
          computing the percentage ownership of any other person.
     (3)  Includes:  (a) 165,000  shares owned  directly by Mr.  Bashforth;  (b)
          1,520,000 shares owned by Innovative Communications Technology,  Ltd.,
          which is controlled by Mr.  Bashforth;  (c) 4,363,363  shares owned by
          Calabash  Holdings  Ltd.,  which is controlled by Mr.  Bashforth;  (d)
          options owned by Calabash  Holdings Ltd. to purchase  2,000,000 shares
          exercisable  at $0.05 per share;  and (e)  warrants  owned by Calabash
          Holdings Ltd. to purchase  6,000,000  shares  exercisable at $0.10 per
          share which expire on February 14, 2012.

                                       21
<PAGE>
     (4)  Includes  (a) options to  purchase  2,000,000  shares of common  stock
          exercisable at $0.03 per share; and (b) options to purchase  2,000,000
          shares of common stock exercisable at $0.05 per share.
     (5)  Includes 370,515 shares owned by Elizabeth L. Quinn, spouse of Herbert
          B. Quinn,  Jr. (6) Includes 50,000 shares owned by Melinda  Galbraith,
          spouse of Robert Galbraith.


     No Director,  nominee for  Director,  executive  officer,  affiliate or any
owner of  record  or  beneficial  owner of more  than 5% of any  class of voting
securities  of the  Company is a party  adverse to the Company or has a material
interest adverse to the Company.

Item 12. Certain Relationships and Related Transactions.

     On December 30, 2004, Science Dynamics entered into a consulting  agreement
with Calabash Consultancy,  Ltd. Under the agreement, Calabash Consultancy, Ltd.
was engaged as a business  development,  financial  and  management  consultant,
which  consulting  services are to be provided by Alan Bashforth to act as Chief
Executive  Officer and Chairman of the Board of  Directors  of the Company.  The
agreement started January 1, 2005 and continues for an initial  three-year term.
The agreement will automatically  renew for additional  one-year terms following
the initial  term,  provided  that  following  the initial term either party may
terminate  the agreement by providing the other party a minimum of 30 days prior
written notice.  In  consideration  for its services,  the Company agreed to pay
Calabash  Consultancy,  Ltd.  an  annual  fee of  $300,000.  After  the  Company
completes the acquisition of SMEI,  Calabash  Consultancy,  Ltd. will be awarded
warrants  to  purchase  6,000,000  shares of the  Company's  common  stock at an
exercise  price of $0.10 per share that expire  seven years after  issuance.  In
addition, as part of a bonus payment for years 2003 and 2004, the Company agreed
to grant  Calabash  Consultancy,  Ltd.  fully vested  stock  options to purchase
2,000,000  shares of the Company's  common stock with an exercise price of $0.05
per share. The Company agreed to fully reimburse Calabash Consultancy,  Ltd. for
any and all expenses  incurred in the  performance of duties under the agreement
and to pay Calabash  Consultancy,  Ltd.  $850 per month for a vehicle to be used
exclusively  by Calabash  Consultancy,  Ltd.  during the term of the  agreement.
During the initial  term or any  subsequent  renewal,  if the Company is sold to
another  party or subject to a change of control,  or ownership of more than 20%
of the  Company's  outstanding  common stock is  controlled  by a single  party,
Calabash  Consultancy,  Ltd. may  terminate  the  agreement by providing 30 days
advance notice of termination.  Upon such termination,  all options and warrants
will  become  fully  vested  and all other  amounts  due  under  the  agreement,
including  payments through the term of the agreement,  will become  immediately
due and payable. The Company agreed to indemnify Calabash Consultancy,  Ltd. and
Mr.  Bashforth  and hold them  harmless  for all acts or  decisions  made by Mr.
Bashforth in good faith while performing  services for the Company.  The Company
also agreed to be  responsible  for payment of any and all taxes that may become
due to any state or federal taxing authority arising out of the agreement and to
indemnify and hold harmless  Calabash  Consultancy,  Ltd. and Mr. Bashforth from
any such payment.

     On January 1, 2005,  the Company  entered into a Consulting  Agreement with
SMEI and Herbert B. Quinn,  Jr.,  which is  effective as of the date the Company
completed the acquisition of SMEI.  Under the agreement,  Mr. Quinn will perform
strategic  analytical  and advisory  services as reasonably  requested by SMEI's
Chief Executive Officer.  For his services,  the Company agreed to pay Mr. Quinn
$150,000  per year.  Mr.  Quinn also is  eligible to receive  options  under the
Company's  stock option plan or any similar plan that is in effect.  The term of
the agreement is for one year and will  automatically  renew for one  additional
year unless  either party gives at least 30 days prior  written  notice of their
intent  not to  extend  the  agreement.  The  agreement  does  not  contain  any
termination provisions.

Item 13. Exhibits.

Exhibit
Number                                   Description
------------------ -- ----------------------------------------------------------
2.1     Asset Purchase Agreement effective September 1, 2004 between Modern Mass
        Media Group,  Inc. and M3  Acquisition  Corp.,  a subsidiary  of Science
        Dynamics Corporation  (Incorporated by reference to Form 8-K, filed with
        the Securities and Exchange Commission on October 22, 2004)
2.2     Stock Purchase  Agreement dated December 16, 2004 among Science Dynamics

                                       22
<PAGE>
        Corporation,  Systems Management Engineering,  Inc. and the shareholders
        of Systems Management Engineering, Inc. identified on the signature page
        thereto   (Incorporated  by  reference  to  Form  8-K,  filed  with  the
        Securities and Exchange Commission on December 22, 2004)
2.3     Amendment No. 1 to Stock Purchase Agreement dated February 2, 2005 among
        Science Dynamics Corporation,  Systems Management Engineering,  Inc. and
        the shareholders of Systems Management  Engineering,  Inc. identified on
        the signature page thereto (Incorporated by reference to Form 8-K, filed
        with the Securities and Exchange Commission on February 11, 2005)
3.1     Certificate of Incorporation (Incorporated by reference to the Company's
        registration statement on Form S-18 (File No. 33-20687), effective April
        21, 1981)
3.2     By-laws  (Incorporated  by  reference  to  the  Company's   registration
        statement on Form S-18 (File No. 33-20687), effective April 21, 1981)
4.1     Securities  Purchase  Agreement  dated  February 11, 2005 by and between
        Science Dynamics Corporation and Laurus Master Fund, Ltd.  (Incorporated
        by  reference  to Form  8-K  filed  with  the  Securities  and  Exchange
        Commission on February 18, 2005)
4.2     Secured  Convertible  Term Note dated February 11, 2005 issued to Laurus
        Master Fund, Ltd.  (Incorporated by reference to Form 8-K filed with the
        Securities and Exchange Commission on February 18, 2005)
4.3     Common Stock  Purchase  Warrant dated February 11, 2005 issued to Laurus
        Master Fund, Ltd.  (Incorporated by reference to Form 8-K filed with the
        Securities and Exchange Commission on February 18, 2005)
4.4     Master Security Agreement dated February 11, 2005 among Science Dynamics
        Corporation,  M3 Acquisition Corp., SciDyn Corp. and Laurus Master Fund,
        Ltd.  (Incorporated  by reference to Form 8-K filed with the  Securities
        and Exchange Commission on February 18, 2005)
4.5     Stock Pledge Agreement dated February 11, 2005 among Laurus Master Fund,
        Ltd.,  Science  Dynamics  Corporation,  M3 Acquisition  Corp. and SciDyn
        Corp.  (Incorporated  by reference to Form 8-K filed with the Securities
        and Exchange Commission on February 18, 2005)
4.6     Subsidiary  Guaranty  dated February 11, 2005 executed by M3 Acquisition
        Corp. and SciDyn Corp. (Incorporated by reference to Form 8-K filed with
        the Securities and Exchange Commission on February 18, 2005)
4.7     Registration  Rights  Agreement  dated  February 11, 2005 by and between
        Science Dynamics Corporation and Laurus Master Fund, Ltd.  (Incorporated
        by  reference  to Form  8-K  filed  with  the  Securities  and  Exchange
        Commission on February 18, 2005)
4.8     Second Omnibus Amendment to Convertible  Notes and Related  Subscription
        Agreements of Science Dynamics Corporation issued to Laurus Master Fund,
        Ltd.  (Incorporated  by reference to Form 8-K, filed with the Securities
        and Exchange Commission on March 2, 2005)
10.1    Sub-Sublease  Agreement made as of June 22, 2001 by and between Software
        AG and Systems Management  Engineering,  Inc. (Incorporated by reference
        to Form 8-K  filed  with  the  Securities  and  Exchange  Commission  on
        February 18, 2005)
10.2    Microsoft Partner Program  Agreement  (Incorporated by reference to Form
        8-K filed with the  Securities  and Exchange  Commission on February 18,
        2005)
10.3    AmberPoint Software Partnership Agreement  (Incorporated by reference to
        Form 8-K filed with the Securities  and Exchange  Commission on February
        18, 2005)
10.4    Executive Employment Agreement Amendment made as of February 14, 2005 by
        and between Science Dynamics Corporation and Paul Burgess  (Incorporated
        by  reference  to Form  8-K  filed  with  the  Securities  and  Exchange
        Commission on March 2, 2005)
10.5    Consulting  Agreement  dated  January 1, 2005 between  Science  Dynamics
        Corporation,  Systems Management Engineering, Inc. and Herbert B. Quinn,
        Jr. (Incorporated by reference to Form 8-K filed with the Securities and
        Exchange Commission on February 25, 2005)
10.6    Agreement dated December 30, 2004 between Science  Dynamics  Corporation
        and Calabash Consultancy,  Ltd.  (Incorporated by reference to Form 8-K,
        filed with the Securities and Exchange Commission on February 25, 2005)
10.7    Employment  Agreement  dated  January 1, 2005 between  Science  Dynamics
        Corporation,  Systems Management Engineering,  Inc. and Eric D. Zelsdorf
        (Incorporated  by  reference to Form 8-K filed with the  Securities  and
        Exchange Commission on February 25, 2005)
14.1    Code of Ethics (Incorporated by reference to the Company's annual report
        on Form 10-KSB for the fiscal year ended  December 31, 2003,  filed with

                                       23
<PAGE>

        the Securities and Exchange Commission on April 9, 2004)
21.1    Subsidiaries of the Company
31.1    Certification by Chief Executive Officer,  required by Rule 13a-14(a) or
        Rule 15d-14(a) of the Exchange Act,  promulgated pursuant to Section 302
        of the Sarbanes-Oxley Act of 2002.
31.2    Certification by Chief Financial Officer,  required by Rule 13a-14(a) or
        Rule 15d-14(a) of the Exchange Act,  promulgated pursuant to Section 302
        of the Sarbanes-Oxley Act of 2002.
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,  promulgated pursuant to Section 906
        of the Sarbanes-Oxley Act of 2002.
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,  promulgated pursuant to Section 906
        of the Sarbanes-Oxley Act of 2002.

Item 14. Principal Accountant Fees and Services.

Audit Fees

     The  aggregate  fees  billed by Peter C.  Cosmas  Co.  CPA's the  Company's
principal accountant for the audit of the Company's annual financial statements,
review of financial  statements included in the quarterly reports and other fees
that are normally  provided by the  accountant in connection  with statutory and
regulatory  filings or engagements  for the fiscal years ended December 31, 2004
and 2003 were $89,500 and $53,200, respectively.

Tax Fees

     The  aggregate  fees  billed  for  professional  services  rendered  by the
Company's principal  accountant for tax compliance,  tax advice and tax planning
for the fiscal  years  ended  December  31, 2004 and 2003 were $3,000 and $1,100
respectively.  These fees related to the preparation of federal income and state
franchise tax returns.

All Other Fees

     There were no other fees billed for  products  or services  provided by the
principal accountant for the fiscal years ended December 31, 2004 and 2003.

Audit Committee Pre-Approval Policies and Procedures

         Not applicable.


                                       24
<PAGE>



                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                              SCIENCE DYNAMICS CORPORATION


         Dated:   March 31, 2005              By:  /s/ Paul Burgess
                                                   -------------------
                                              Paul Burgess
                                              Chief Executive Officer


         Dated:   March 31, 2005              By:  /s/ Alan C. Bashforth
                                                   ----------------------
                                              Alan C. Bashforth
                                              Acting Chief Financial Officer
                                              and Principal Accounting Officer

         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.


         Signature                          Title                      Date


         /s/ Paul Burgess                Director                 March 31, 2005
         -------------------------
         Paul Burgess


         /s/ Alan C. Bashforth           Chairman of the Board    March 31, 2005
         -------------------------
         Alan C. Bashforth



                                       25

<PAGE>

                          SCIENCE DYNAMICS CORPORATION



                   Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S>                                                <C>                                         <C>
     Report of Independent Accountants dated March 4, 2005                              Page F-2

     Consolidated Balance Sheets as of December 31, 2004 and 2003                       Page F-3

     Consolidated Statements of Operations, two years ended December 31, 2004           Page F-4

     Consolidated Statements of Cash Flows, two years ended December 31, 2004           Page F-5

     Consolidated Statements of Changes in Shareholders' Equity, two years ended
     December 31, 2004                                                                  Page F-6

     Notes to Consolidated Financial Statements                                         Pages F-7 - F-18
</TABLE>



                                      F-1
<PAGE>
             Report of Independent Registered Public Accounting Firm



     To The Board of Directors and Shareholders of Science Dynamics Corp.



     We have audited the  accompanying  consolidated  balance  sheets of Science
Dynamics  Corp.  and its  subsidiaries  as of December 31, 2004 and 2003 and the
related consolidated  statements of operations,  stockholders' equity (deficit),
and cash flows for the years then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.



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



     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the financial  position of Science
Dynamics Corp. and subsidiaries as of December 31, 2004 and 2003, and results of
their  operations  and their cash  flows for the years then ended in  conformity
with accounting principles generally accepted in the United States.



     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that the Company will continue as a going concern. As discussed in Note
1(b) to the financial  statements,  the Company has generated significant losses
and requires additional capital to continue  operations.  These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also  described in Note 1(b). The financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.




/s/ Peter C. Cosmas Co., CPAs
    -------------------------
    Peter C. Cosmas Co., CPAs

370 Lexington Ave.
New York, NY 10017
March 4, 2005



                                      F-2
<PAGE>
                  SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                  DECEMBER 31,
<TABLE>
<CAPTION>
ASSETS
                                                                              2004                    2003
Current assets:
<S>                                                                            <C>                      <C>
   Cash and cash equivalents                                                   $   192,681              $   21,032
   Accounts receivable - trade                                                      56,922                  25,879
   Inventories                                                                      51,018                  76,300
   Other current assets                                                              2,812                   2,812
                                                                       --------------------    --------------------
      Total current assets                                                         303,433                 126,023
                                                                       --------------------    --------------------

Property and equipment, net                                                         39,347                 149,388
Deferred Asset                                                                          -0-                 66,847
Other assets                                                                         2,812                   2,812
                                                                                                                 -
                                                                       --------------------    --------------------
      Total assets                                                             $   345,592               $ 345,070
                                                                       ====================    ====================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Short term payable                                                           $  300,000                $ 56,860
   Customer deposits                                                                     -                  87,300
   Liabilities discontinued operations                                             114,516                  45,953
   Revolving Credit Line                                                           550,763                 336,309
   Loan payable stockholders/Officers                                              244,240                 163,192
   Accounts payable                                                                719,940               1,171,693
   Accrued expenses                                                                839,689                 443,474
   Convertible Debenture                                                           965,113               1,198,360
   Deposit Stock Purchase                                                                -                 200,000
                                                                       --------------------    --------------------
      Total current liabilities                                                  3,734,261               3,703,141







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,
      53,964,167 and 46,918,088 issued
      53,838,367 and 46,792,288 outstanding
      in 2004 and 2003 respectively.                                               539,642                 469,181

   Additional paid-in capital                                                   16,080,961              15,700,842

   (Deficit)                                                                   (19,611,439)            (19,130,261)
                                                                       --------------------    --------------------
                                                                                (2,990,836)             (2,960,238)
   Common stock held in treasury, at cost                                         (397,833)               (397,833)
                                                                       --------------------    --------------------
   Total shareholders' equity (Deficit)                                         (3,388,669)             (3,358,071)
                                                                       --------------------    --------------------
   Total liabilities and shareholders'
   Equity                                                                       $  345,592               $ 345,070
                                                                       ====================    ====================
</TABLE>

         See accompanying notes to the consolidatedfinancial statements.


                                      F-3
<PAGE>
                  SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                          2004                         2003
                                                                          ----                         ----

<S>                                                                       <C>                          <C>
Net Sales                                                                 $   1,609,717                $  1,490,834
                                                                  ----------------------       ---------------------
Operating costs and expenses:

      Cost of sales                                                             344,951                     423,985
      Research and development                                                  304,160                     382,764
      Selling, general
          And administrative                                                  1,503,422                   1,402,750
                                                                  ----------------------       ---------------------
                                                                              2,152,533                   2,209,499
                                                                  ----------------------       ---------------------

Operating (Loss) before other income (expenses)                                (542,816)                   (718,665)

Other income (expenses):
   Sale of NJ NOL                                                               233,956                     217,021
   Sale of Intangible Asset                                                         -0-                   1,350,000
   Other Income                                                                  82,000                           -
   Write Down of Assets                                                               -                    (105,603)
   Interest Expense                                                            (283,740)                   (199,713)
   Finance Expense                                                              (66,847)                   (125,942)
                                                                  ----------------------       ---------------------
   Net Income (Loss) from Continuing operations                                (577,447)                    417,098

Discontinued Operations:

   Income (Loss) from Discontinued operations                                  (189,041)                   (699,265)
   Gain on the sale of assets                                                   285,310
                                                                  ----------------------       ---------------------
       Income (loss) from Discontinued operations                                96,269                    (699,265)


                                                                  ----------------------       ---------------------
Net Loss                                                                     $ (481,178)                  $(282,167)
                                                                  ======================       =====================

Basic and diluted earnings per common share
     From Continuing operations                                               $   (0.00)                    $  0.01
                                                                  ======================       =====================
     From Discontinued operations                                             $   (0.00)                    $ (0.01)
                                                                  ======================       =====================
     From Net Loss                                                            $   (0.01)                    $ (0.00)
                                                                  ======================       =====================



Weighted average shares outstanding basic and diluted                        49,946,200                  46,782,018
                                                                  ----------------------       ---------------------
</TABLE>


        See accompanying notes to the consolidated financial statements.


                                      F-4
<PAGE>
                  SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                       2004                  2003
                                                                       ----                  ----
Cash flows from operating activities:
<S>                                                                   <C>                    <C>
   Net (loss)                                                         $  (481,178)           $ (282,167)
                                                                 -----------------     -----------------

Adjustments to reconcile net (loss) to net cash
provided by (used for) operating activities:
   Depreciation                                                           110,042               259,426
   Non-Cash items                                                         190,000
   Adjustments relating to Discontinued operations                        (96,269)              211,393
   Write down of assets                                                                         105,603
   Financing expense non cash                                              66,847               125,942

Changes in operating assets and liabilities:
  (Increase) decrease in:
   Accounts receivable                                                    (31,043)               20,549
   Inventories                                                             25,282               129,251
   Other current assets                                                                          25,463
   Other assets                                                                                  14,558

   Increase (decrease) in:
   Short term payables                                                                          (71,553)
   Accounts Payable and
      accrued expenses                                                    (23,992)             (122,005)
   Customer Deposits                                                      (87,300)             (199,690)
                                                                 -----------------     -----------------

Total adjustments                                                         153,567               498,937
                                                                 -----------------     -----------------
   Net cash provided by (used for)
   operating activities                                                  (327,611)              216,770
                                                                 -----------------     -----------------
Cash flows from investing activities:
 Purchase of property and equipment - net                                       -                     -
                                                                 -----------------     -----------------

   Net cash (used) in investing activities                                      -                     -
                                                                 -----------------     -----------------
Cash flows from financing activities:

  Exercise of Stock Options                                                 4,500                     -
  Loans from Stockholders /Officers                                        86,240                     -
  Payment of Bank Notes                                                         -               (83,876)
  Subscribed Stock                                                              -               200,000
  Payments Convertible debt                                                     -              (661,312)
  Short term Borrowing                                                    190,000                     -
  Net borrowing on Revolving AR credit facility                           218,520               306,309
                                                                 -----------------     -----------------

  Net cash (used in) provided by financing activities                     499,260              (238,879)
                                                                 -----------------     -----------------

  Net increase (decrease) in
  cash and cash equivalents                                               171,649                22,109

Cash and cash equivalents -
 beginning of period                                                       21,032                43,141
                                                                 -----------------     -----------------

Cash and cash equivalents -
 end of period                                                       $    192,681               $21,032
                                                                 =================     =================
</TABLE>

        See accompanying notes to the consolidated financial statements.

                                      F-5
<PAGE>
                  SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                    FOR THE TWO YEARS ENDED DECEMBER 31, 2004

<TABLE>
<CAPTION>
                                  Common Stock         Additional                                Treasury
                                  ------------           Paid-In                                 --------
                               Shares      Amount        Capital        (Deficit)          Shares        Amount          Total
                               ------      ------        -------        ---------          ------        ------          -----
Balance
<S>       <C> <C>          <C>           <C>         <C>            <C>                    <C>        <C>             <C>
 December 31, 2002         46,618,088    $ 466,181   $15,653,884    $(18,848,094)          125,800    $ (397,833)     $ (3,125,862)

Issuance of common stock
 net of related expenses      300,000        3,000        46,958                                                            49,958

Net Loss                                                                (282,167)                                         (282,167)

Balance
                           -------------------------------------------------------  -----------------------------------------------
 December 31, 2003         46,918,088  $   469,181   $15,700,842   $ (19,130,261)          125,800    $ (397,833)     $ (3,358,071)

Issuance of common stock
  Convertible debt          2,700,000       27,000       109,080                                                           136,080
     Conversion

Sale of Common Stock        4,000,000       40,000       160,000                                                           200,000

Issuance of Common
Stock for repayment
 Of loan                      196,079        1,961        28,039                                                            30,000
                                    ,            ,
Options exercised             150,000        1,500         3,000                                                             4,500

Stock based Compensation                                  80,000                                                            80,000

Net Loss                                                                (481,178)                                         (481,178)
                           -------------------------------------------------------  -----------------------------------------------
Balance
   December 31, 2004       53,964,167      539,642    16,080,961    $(19,611,439)          125,800    $ (397,833)     $ (3,388,669)
                           -------------------------------------------------------  -----------------------------------------------
</TABLE>
        See accompanying notes to the consolidated financial statements.


                                      F-6
<PAGE>
                  SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     1)   Organization and Summary of Significant Accounting Policies:

          a)   Organization and Description of Business:

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.  Throughout  its  history  SciDyn has  adapted to the  changes in this
industry by  reinventing  itself to be more  responsive  and open to the dynamic
pace of change experienced in the broader converged  communications  industry of
today.  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 solution provider focused on developing applications
through software on our core platform technology.

          b)   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 inevitably lead to
the removal of the going concern comment from our audited financials.

     As discussed in Note 4 on September 1, 2004, the Company sold substantially
all of its  tangible  and  intangible  assets  that  were  used in its audio and
visuals systems integration business.  Accordingly,  the financial condition and
results  of the  operations  of the  Audio  Visual  division  segment  have been
reflected as discontinued operations for all periods.

          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.  Investments  in  affiliates  over which the Company has  significant
influence but not a controlling interest are carried on the equity basis.

          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.

                                      F-7
<PAGE>
          e)   Inventories:

Inventories are stated at the lower of cost or market, with cost determined on a
first-in, first-out basis.

          f)   Depreciation, Amortization and Long-Lived Assets

Long-lived assets include:

Property,  plant and  equipment - These assets are recorded at original cost and
increased  by the  cost of any  significant  improvements  after  purchase.  The
Company depreciates the cost evenly over the assets' estimated useful lives. For
tax purposes, accelerated depreciation methods are used as allowed by tax laws.

Goodwill-  Goodwill  represents  the  difference  between the purchase  price of
acquired  business and the fair value of the their net assets.  Good will is not
amortized.

Identifiable  intangible  assets - These assets are  recorded at original  cost.
Intangible  assets with finite lives are amortized  evenly over their  estimated
useful lives. Intangible assets with indefinite lives are not amortized.

At least  annually,  The Company  reviews all long-lived  assets for impairment.
When necessary,  charges are recorded for  impairments of long-lived  assets for
the amount by which the present  value of future cash flows,  or some other fair
value measure, is less than the carrying value of these assets.

          g)   Cash and Cash Equivalents:

The Company  considers  all highly  liquid  debt  instruments  purchased  with a
maturity of three months or less to be cash equivalents.

          h)   Income Taxes:

The Company elected to adopt the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109 "Accounting for Income Taxes",  (SFAS No. 109) in 1992.
Under  SFAS  No.  109,   deferred  income  taxes  are  recognized  for  the  tax
consequences in future years of differences  between the tax basis of assets and
liabilities  and their  financial  reporting  amounts at each year-end  based on
enacted tax laws and statutory tax rates  applicable to the periods in which the
differences  are expected to affect  taxable  income.  Valuation  allowances are
established  when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expenses (credit) is the tax payable (receivable) for
the  period  and the  change  during  the  period in  deferred  tax  assets  and
liabilities.

          i)   Revenue Recognition:

Revenue is recognized when all  significant  contractual  obligations  have been
satisfied  and  collection of the  resulting  receivable is reasonably  assured.
Revenue from product  sales is  recognized  when the goods are shipped and title
passes to the customer. Sales of services are recognized at time of performance.

          j)   Impairment of Long-Lived Assets:

Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of long-lived  Assets and for long-lived  Assets to be Disposed of, "
SFAS No. 121 requires the Company to review the  recoverability  of the carrying
amounts of its long-lived  assets  whenever  events or changes in  circumstances
indicate that the carrying amount of the asset might not be recoverable.

                                      F-8
<PAGE>
In the event that facts and  circumstances  indicate that the carrying amount of
long-lived  assets may be impaired,  an  evaluation of  recoverability  would be
performed.  If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the assets' carrying amount
to  determine  if a  write-down  to fair  value is  required.  Fair value may be
determined  by  reference  to  discounted  future cash flows over the  remaining
useful life of the related asset.

          k)   Fair Value Disclosures:

The carrying amounts  reported in the  Consolidated  Balance Sheets for cash and
cash equivalents,  accounts  receivable,  accounts payable and accrued expenses,
approximate fair value because of the immediate or short-term  maturity of these
financial instruments.

          l)   Stock Based Compensation:

In December 2002, the Financial  Accounting  Standard Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based  Compensation - Transition and Disclosure",
SFAS No. 148 amends  Statement  of  Financial  Accounting  Standards  No. 123, "
Accounting  for  Stock-Based  Compensation,"  to  provide  alternate  methods of
transition for companies electing to voluntarily change to the fair value method
of  accounting  for  stock-based  compensation  and also  amends the  disclosure
provisions  of SFAS No. 123. The  provisions  of SFAS No. 148 are  effective for
fiscal years ending  December 15, 2002.  The Company has adopted the  disclosure
provisions of SFAS No. 148.

The Company  accounts for its stock options in accordance with the provisions of
Accounting principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related  interpretations.  As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise  price.  On January 1, 1996, the Company adopted the
disclosure   requirements   of  SFAS  No.  123,   Accounting   for  Stock  Based
Compensation.

If the  Company  had elected to  recognize  compensation  cost based on the fair
value of the  awards at the grant  date,  the net loss  would  have been the pro
forma amounts shown below.

<TABLE>
<CAPTION>
Net Loss                                                                     2004                        2003
<S>                                                                        <C>                          <C>
As reported                                                               $(481,178)                  $(282,167)
Deduct compensation expenses (Fair Value)                                  (129,786)                    (12,241)
                                                                  --------------------------- ---------------------------
Pro Forma Net Loss                                                        $(610,964)                  $(294,408)
                                                                  --------------------------- ---------------------------
Basic and Diluted Net Loss per share
   As reported                                                               ($0.01)                     ($0.00)
                                                                  --------------------------- ---------------------------
   Pro Forma Net Loss                                                        ($0.01)                     ($0.00)
                                                                  --------------------------- ---------------------------
</TABLE>
The weighted-average fair value per share of the options granted during 2004 and
2003 was estimated on the date of grant using the Black-Scholes option pricing
model, was $0.12 and $0.02 respectively. The following assumptions were used to
estimate the fair value of the options at grant date based on the following:

                                                 2004             2003
                                              -------           -------
Risk-Free interest rate                         4.70%            2.25%
Expected dividend yield                           -                -
Expected stock price volatility                  50%              50%
Expected option Life                           10 years         10 years


                                      F-9
<PAGE>
         m) New Financial Accounting Standards

In December  2004,  the FASB issued SFAS No. 123  (revised  2004),  "Share-Based
Payment" (SFAS 123R) which replaces SFAS No. 123,  "Accounting  for  Stock-Based
Compensation,"  (SFAS 123) and  supersedes APB Opinion No. 25,  "Accounting  for
Stock  Issued to  Employees."  SFAS 123R  requires  all  share-based  payment to
employees,  including grants of employee stock options,  to be recognized in the
financial statements at fair value beginning in the third quarter of 2005. Under
SFAS 123R,  the Company must  determine the  appropriate  fair value model to be
used for valuing share-based payments,  the amortization method for compensation
cost,  and the  transition  method to be used at date of adoption.  The standard
permits three transition method adoption  alternatives:  "Prospective adoption "
would require the Company to begin expensing  share-based payments after July 1,
2005. Prior interim and annual period would not be restated.

     "Modified   Prospective  Adoption"  would  require  the  Company  to  begin
expensing  share-based  payments effective January 1, 2005. Prior annual periods
would not be restated.

     "Modified  retrospective  adoption"  would  require  the  Company  to begin
expensing  share-based  payments effective January 1, 2005, Prior annual periods
would be restated.

The Company is currently  evaluating  the impact that SFAS 123R will have on its
consolidated results of operations and financial  condition,  which in part will
be dependent on the  transition and the  amortization  methods used to adopt the
new rules in 2005.

     2)   Accounts Receivable:

The Company evaluates its accounts  receivable on a  customer-by-customer  basis
and has  determined  that no  allowance  for  doubtful  accounts is necessary at
December 31, 2004 and 2003.


     3)   Property and Equipment:

A summary of the major components of property and equipment is as follows:
                                   2004                        2003
 Computers, fixtures
 And equipment                 $1, 486,956                 $ 1,486,956

 Less accumulated
          Depreciation          (1,447,609)                 (1,337,568)
                               ------------                -----------
          Totals               $    39,347                 $   149,388
                               ============                ===========

                                      F-10
<PAGE>
     4)   Disposition of Assets

On September 1, 2004,  the Company  sold  substantially  all of its tangible and
intangible  assets  that were used in its audio and visual  systems  integration
business,  including:  (a) all  related  intellectual  property;  (b) all  fixed
assets; (c) all customer lists; and (d) the goodwill associated  therewith;  all
free and clear of any security interests,  mortgages and other encumbrances. The
assets sold were valued by the Company at $812,452,  which included  $250,498 of
goodwill. In consideration for the assets sold under the Agreement,  Modern Mass
Media Group, Inc. (The Purchaser) assumed  liabilities  amounting to $1,097,762.
The Company  recorded a gain on the sale of  $285,310.  The  Company  received a
release on $320,000 of the outstanding  liabilities and Modern Mass Media Group,
Inc. has paid $483,013 of the  outstanding  liabilities as of February 28, 2005.
The outstanding balance as of February 28, 2005 is $294,749 that the Company did
not receive a release for. . Accordingly, the financial condition and results of
the  operations  of the Audio Visual  division  segment  have been  reflected as
discontinued operations for all periods.

     5)   Income Taxes:

In 1992, the Company  adopted SFAS No. 109,  Accounting for Income taxes.  Under
the  provision of SFAS No. 109, the Company  elected not to restate  prior years
due to immateriality.  In 1992, the effect of the change was to decrease the net
loss by  $308,000  (.10 per  share).  The  deferred  tax  asset  recognized  was
recovered through the sale of New Jersey State  net-operating loss carryovers as
permitted by the State in the amount of  $308,000.  In 2004 and 2003 the Company
recovered  $233,956  and  $217,021  respectively  through the sale of New Jersey
State net-operating loss carryovers as permitted by the State. This recovery was
recognized  as other  income  in the  years  ended  2004 and 2003  Statement  of
Operations.

At this time, the Company does not believe it can reliably predict profitability
for the long-term.  Accordingly,  the deferred tax asset  applicable to 2004 and
2003 operations has been reduced in its entirety by the valuation allowance.

As a result of the  operating  losses for the years ended  December 31, 1990 and
1992-2004  the Company  has  available  to offset  future  taxable  income a net
operating loss of approximately  $20,000,000  expiring  2005-2024.  In addition,
research credits expiring 2005-2018 are available to offset future taxes.

The  components  of the  provision  (credit)  for income  taxes from  continuing
operations is as follows:

                                 2004             2003
                                 ----             ----
       Deferred

       Federal               $      -          $     -

       Current
           Federal                  -                -
           State                    -                -
                             --------          -------
                             $      -          $     -
                             --------          -------

     Differences  between the tax provision computed using the statutory federal
     income  tax rate and the  effective  income  tax rate on  operations  is as
     follows:


                                      F-11
<PAGE>
                                      2004                 2003
                                      ----                 ----
       Federal

       Statutory rate              $(163,601)           $(93,295)

          Research tax
          Credits                          -                   -

          Tax benefit not
          Provided due
          To valuation
              Allowance              163,601              93,295
                                   ---------            --------
                                   $       -            $      -
                                   =========            ========


     Components  of the  Company's  deferred tax assets and  liabilities  are as
     follows:

                                                     December 31,
                                      2004                  2003
       Deferred tax assets:

       Tax benefits related
       To net operating
       Loss carry forwards
       And research tax Credits      $6,977,846       $6,814,245

       Total deferred tax Asset       6,977,846        6,814,245
                                      ---------        ---------

       Valuation Allowance for

       Deferred tax Assets            6,977,846        6,814,245
                                      ---------        ---------

       Net deferred tax Assets       $      -0-       $      -0-
                                     ==========       ==========




     6)   Commitments:

          a.   Leases
The Company leases their office, sales and manufacturing facilities and certain
vehicles under non-cancelable operating leases with varying terms. The leases
generally provide that the Company pay the taxes, maintenance and insurance
expenses related to the leased assets. Future minimum lease payments required
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year, as of December 31, 2004 are as follows:

               2005                            33,744
               2006                            16,872
               2007                               -0-
               2008                               -0-

        Total minimum lease payments         $ 50,616
                                             ========



                                      F-12
<PAGE>
     7)   Intangible Assets:

On December 22, 2003, the Company entered into an agreement with Evercom Network
Services Inc. to Develop a next generation VoIP platform for the law enforcement
market.  The  technology  developed  by SciDyn  within  the  frame  work of this
agreement  will be available to Evercom  under a perpetual  licensing  agreement
that will allow SciDyn to market and enhance the product for all market  sectors
outside of the law enforcement industry. The agreement also provided SciDyn with
an  upfront  payment of  $1,350,000  for  certain  intellectual  property  being
utilized in the  development of the new platform.  In connection  with this sale
the Company booked a sale of intangible asset for $1,350,000,  included in other
income in the  consolidated  statement of operations for the year ended December
31, 2003. The Company also received $375,000 for consulting services rendered in
2004. In October 2004 the Companies terminated the consulting contract.


     8)   Notes payable

          a.   Short Term Loans Payable

In February and September 2004 the Company negotiated two short-term notes for
$300,000. The Company received net proceeds of $190,000 and incurred $110,000 of
interest expenses. These loans were collateralized by the sale of the New Jersey
Net Operating Loss. The Company received $233, 936 from the sale of its New
Jersey NOLs. Subsequent to December 31, 2004 the Company repaid $200,000 of the
outstanding obligation and has received an extension for the remaining balance.

          b.   Loan payable stockholders/Officers

The  short-term  loan payable  consists of loans from various  stockholders  and
officers of the Company  amounting  to  $244,240  and  $163,192 in 2004 and 2003
respectively.

          c.   Convertible Debentures

The debentures are  convertible  into common stock at a conversion  price of the
lower of 85% of the  average  of the three  lowest  closing  bid  prices for the
common  stock thirty days prior to the closing date or 85% of the average of the
three  lowest  closing  bid  prices for the common  stock  thirty  days prior to
conversion.  The offering of convertible debentures was exempt from registration
under Rule 506 of Regulation D and under Section 4(2) of the Securities  Act. No
advertising or general solicitation was employed in offering the securities.  In
order to secure all its  obligations  pursuant to this  security  agreement  the
company granted a security interest in all its assets to Laurus Master Fund LTD.

          d.   Credit Line

On March  31,  2003 the  Company  entered  into a  revolving  credit  line up to
$1,000,000 with Laurus Master Fund LTD. The outstanding  balance at December 31,
2004 and 2003 is $550,763 and $336,309 respectively.

     9)   Related party agreements

On December 30, 2004,  the Company  entered  into a  consulting  agreement  with
Calabash Consultancy,  Ltd. Under the agreement,  Calabash Consultancy, Ltd. was
engaged as a business development,  financial and management  consultant,  which
consulting  services  are to be  provided  by  Alan  Bashforth  to act as  Chief
Executive  Officer and Chairman of the Board of  Directors  of the Company.  The
agreement started January 1, 2005 and continues for an initial  three-year term.
The agreement will automatically  renew for additional  one-year terms following
the initial  term,  provided  that  following  the initial term either party may
terminate  the agreement by providing the other party a minimum of 30 days prior
written notice.  In  consideration  for its services,  the Company agreed to pay
Calabash  Consultancy,  Ltd.  an  annual  fee of  $300,000.  After  the  Company
completes the  acquisition of Systems  Management  Engineering,  Inc.  ("SMEI"),
Calabash Consultancy, Ltd. will be awarded warrants to purchase 6,000,000 shares
of the  Company's  common  stock at an  exercise  price of $0.10 per share  that
expire seven years after issuance.  In addition,  as part of a bonus payment for

                                      F-13
<PAGE>
years 2003 and 2004,  the Company  agreed to grant  Calabash  Consultancy,  Ltd.
fully vested stock options to purchase  2,000,000 shares of the Company's common
stock  with an  exercise  price of $0.05 per  share.  The  Company  recorded  an
expenses of $80,000 in  connection  with  issuance of the  options.  The Company
agreed to fully reimburse  Calabash  Consultancy,  Ltd. for any and all expenses
incurred in the  performance  of duties under the  agreement and to pay Calabash
Consultancy,  Ltd.  $850 per  month  for a  vehicle  to be used  exclusively  by
Calabash Consultancy,  Ltd. during the term of the agreement. During the initial
term or any  subsequent  renewal,  if the  Company is sold to  another  party or
subject to a change of control,  or ownership of more than 20% of the  Company's
outstanding common stock is controlled by a single party,  Calabash Consultancy,
Ltd.  may  terminate  the  agreement  by  providing  30 days  advance  notice of
termination.  Upon such termination,  all options and warrants will become fully
vested and all other amounts due under the agreement, including payments through
the term of the agreement,  will become immediately due and payable. The Company
agreed to indemnify Calabash  Consultancy,  Ltd. and Mr. Bashforth and hold them
harmless  for all acts or  decisions  made by Mr.  Bashforth in good faith while
performing  services for the Company.  The Company also agreed to be responsible
for  payment  of any and all taxes  that may  become due to any state or federal
taxing authority arising out of the agreement and to indemnify and hold harmless
Calabash Consultancy, Ltd. and Mr. Bashforth from any such payment.

On March 1, 2003 the Company entered into a three year employment agreement with
Paul  Burgess  to become the Chief  operating  Officer  for an annual  salary of
$175,000. In addition he has been granted an option to purchase 2,000,000 shares
of  stock at .03 a share.  In  October  2004 the  Company  amended  Mr.  Burgess
Employment  agreement with the following terms: upon the completion of the "SMEI
Acquisition" (see Note 14 Subsequent  Events) Mr. Burgess will become President,
Chief Operating officer and a director of the Company. His annual salary will be
$225,000.  As part of his 2003 bonus he received  2,000,000 fully vested options
at an exercise  price of $0.05.  Upon the effective  date of this  agreement Mr.
Burgess  will be granted  6,000,000  stock  options with a strike price of $0.10
vesting over a three year  period,  each third on the  anniversary  date of this
agreement. In addition Mr. Burgess is entitled to an incentive bonus based on 1%
of the revenue of the most recent 12 month period of an any acquisitions  closed
by the company during the term of this contract.

In April of 2004 Alan  Bashforth,  President  and CEO of the  Company,  and Paul
Burgess, COO of the Company, formed Strategic Telecom Financing, which purchased
$107,070 of equipment from Science Dynamics.  They are leasing this equipment to
two of The  Company's  customers  who were  unable to obtain  financing  with an
outside  company.  The  terms  of the  sales  would  have  been  the same if our
customers  were  able  to  obtain  other  financing  arrangements.  The  leasing
agreements  are for 4 and 5 years at an interest  rate of 18%  payable  monthly.
Science Dynamics has been paid for these sales.

     10)  Stock

On November 6, 2002 by written  consent of the  majority  of  stockholders,  the
Company, adopted an amendment to the Corporations'  Certificate of Incorporation
to increase the number of authorized  shares of common stock, from 45,000,000 to
200,000,000  shares and create  10,000,000  shares of preferred  stock,$.01  par
value per share of which the Board of  Directors of the  Corporation  shall have
the right to determine the terms, rights upon issuance.

     11)  Stock Based Compensation:

          a.   2002 Employee Stock option plan

On November 6, 2002 the stockholders approved the adoption of The Company's 2002
Employee  Stock Option Plan.  Under the Plan,  options may be granted  which are
intended to qualify as Incentive Stock Options ("ISOs") under Section 422 of the
Internal Revenue Code of 1986 (the"Code") or which are not ("Non-ISOs") intended
to qualify as Incentive Stock Options thereunder.  The maximum number of options
made  available  for  issuance  under the Plan are twenty  million  (20,000,000)
options.  The  options  may be  granted to  officers,  directors,  employees  or
consultants  of the  Company and its  subsidiaries  at not less than 100% of the
fair market  value of the date on which  options are  granted.  The term of each
Option  granted  under the Plan shall be contained  in a stock option  agreement
between the Optionee and the Company.

                                      F-14
<PAGE>
The Company measures stock compensation cost using the intrinsic value method of
accounting  prescribed  by APB Opinion No. 25,  Accounting  for Stock  issued to
Employees,  and related  interpretations  accordingly,  no compensation cost was
recognized for stock option awards in 2004 and 2003 under this plan.
<TABLE>
<CAPTION>
                                           Number of     Number of       Weighted-
                                            Options       Options         Average
                                           Available    Outstanding    Exercise Price

<S>              <C>                      <C>                   <C>           <C>
Balance  January 1, 2003                  20,000,000           -0-            -0-
Options granted under Plan                  (660,000)     660,000          $0.03
Options expired in 2003                                  (280,000)         $0.03
                                          --------------------------------------
Balance December 31, 2003                 19,340,000      380,000          $0.03
Options granted under Plan                (1,080,000)   1,080,000          $0.18
Options exercised in 2004                                (150,000)         $0.03
Options expired in 2004                                  (775,000)         $0.18
                                          --------------------------------------
Balance December 31, 2004                 18,260,000      535,000          $0.12
                                          --------------------------------------
</TABLE>

Options  issued in December 31, 2004 were 305,000  vesting  equally over a three
year period at a price of $0.18 and December 31, 2003 were 380,000 fully vest at
an exercise  price of $0.03.  The  weighted  average  contractual  life of those
options was 10 years.

          b.   Employee Stock Purchase Plan

In 2002 the Company  established an Employee Stock Purchase Plan. The Plan is to
provide eligible  Employees of the Company and its Designated  Subsidiaries with
an  opportunity  to purchase  Common  Stock of the Company  through  accumulated
payroll  deductions and to enhance such Employees' sense of participation in the
affairs of the Company and its Designated  Subsidiaries.  It is the intention of
the Company to have the Plan qualify as an "Employee  Stock Purchase Plan" under
Section 423 of the Internal  Revenue Code of 1986.  The  provisions of the Plan,
accordingly,  shall be  construed so as to extend and limit  participation  in a
manner consistent with the requirements of that section of the Code. The maximum
number of shares of the Company's Common Stock which shall be made available for
sale under the Plan shall be twenty million  (20,000,000)  shares.  There are no
shares issued under the plan in 2004 or 2003.

          c.   Other Stock based Compensation

The Company issued  4,000,000 and 2,000,000  fully vest options to its executive
officers at an exercise price of $0.05 and $0.03 in 2004 and 2003  respectively.
The  Company  recorded  an  expense  of  $80,000  in 2004 due to the  fact  that
2,000,000  of the  4,000,000  options were issued at $0.05 when the market price
was  $0.09  at  the  grant  date.  It is  the  Companies  policy  to  record  as
compensation expense the excess of market price over the exercise price that the
executive must pay to acquire the stock.

                                      F-15
<PAGE>

          d.   Warrants

The Company issued -0- and 840,000  common stock  purchase  warrants in 2004 and
2003  respectively  at a prices  ranging  from  $1.4339  to $0.052  per share in
connection with the issuance of various convertible notes.

     12)  Major Customers:

Currently two customers  account for more than 41% of total sales in 2004 and no
customers accounted for more than 10% in 2003.

     13)  Earnings (Loss) Per Share:

In February 1997, the Financial  Accounting Standards Board issued SFAS No. 128.
"Earnings  Per Share"  applicable  for financial  statements  issued for periods
ending after December 15, 1997. As required the Company adopted SFAS No. 128 for
the year ended  December 31, 1997 and  restated  all prior  period  earnings per
share  figures.  The Company  has  presented  basic  earnings  per share.  Basic
earnings per share  excludes  potential  dilution and is  calculated by dividing
income  available  to common  stockholders  by the  weighted  average  number of
outstanding common shares. Diluted earnings per share incorporates the potential
dilutions  from all  potentially  dilutive  securities  that would have  reduced
earnings per share.  Since the  potential  issuance of  additional  shares would
reduce loss per share they are  considered  anti-dilutive  and are excluded from
the calculation.

The weighted average number of shares used to compute basic loss per share was
49,946,200 in 2004 and 46,782,018 in 2003.

     14)  Subsequent events:

          a)   Stock Purchase Agreement

On  December  16,  2004,  Science  Dynamics  Corporation,  entered  into a Stock
Purchase  Agreement with Systems Management  Engineering,  Inc. ("SMEI") and the
holders of a majority of the  outstanding  common stock of SMEI. On February 14,
2005,  the  Company  completed  the  acquisition  of  4,177,500  shares  of  the
outstanding common stock of Systems Management Engineering, Inc. ("SMEI"), which
shares  constitute  approximately  82% of the issued and  outstanding  shares of
capital stock of SMEI on a fully diluted basis. As consideration for such shares
of SMEI, the Company  issued an aggregate of 16,553,251  shares of the Company's
common  stock to twelve  accredited  investors  pursuant to Section  4(2) of the
Securities Act and Regulation D under the Securities Act and $1,655,325 in cash.
SMEI will continue to operate as an independent subsidiary of the Company.

Upon SMEI reaching the following  goals for the 12 month period ending  December
31, 2005, where "EBITDA" represents earnings before interest,  tax, depreciation
and  amortization,  and before any marketing  and/or selling expenses which have
been incurred in connection with SMEI's technology  products and which marketing
and/or  selling  expenses have been  incurred in accordance  with a budget to be
mutually approved by the Company and the SMEI Shareholders:

     o    If SMEI's  EBITDA  is less  than  $500,000,  then the  Company  is not
          obligated   to  pay  any   Additional   Consideration   to  the   SMEI
          Shareholders;
     o    If SMEI's  EBITDA is equal to or greater  than  $500,000 and less than
          $750,000,  the  Company  must  pay the  SMEI  Shareholders  Additional
          Consideration equal to $192,500;
     o    If SMEI's  EBITDA is equal to or greater  than  $750,000 and less than
          $1,000,000,  the  Company  must pay the SMEI  Shareholders  Additional
          Consideration equal to $385,000;

                                      F-16
<PAGE>
     o    If SMEI's EBITDA is equal to or greater than  $1,000,000 and less than
          $1,250,000,  the  Company  must pay the SMEI  Shareholders  Additional
          Consideration equal to $577,500;
     o    If SMEI's EBITDA is equal to or greater than  $1,250,000 and less than
          $1,500,000,  the  Company  must pay the SMEI  Shareholders  Additional
          Consideration equal to $770,000; and
     o    If SMEI's EBITDA is equal to or greater than  $1,500,000,  the Company
          must  pay the  SMEI  Shareholders  Additional  Consideration  equal to
          $1,540,000.

          b)   Debt Financing

     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") and a Common Stock Purchase Warrant to purchase  6,000,000 shares of the
Company's  common stock. 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 gross proceeds of $2,000,000 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  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 is 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 must 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 must 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").  Any principal amount that remains outstanding on the maturity date is
due and payable on the maturity date.

The  Warrant  is  exercisable  at a price of $0.11 per share from the issue date
through the close of business on February 11, 2012.

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.

                                      F-17
<PAGE>
     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 upon  exercise of the  Warrant in a  registration  statement  under the
Securities  Act 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. In the event the Company does not
meet these  deadlines,  it may be required to pay Laurus  liquidated  damages in
cash equal to 2% for each 30-day  period  (prorated  for  partial  periods) on a
daily basis of the original principal amount of the Note.

          c)   Convertible debt and Revolving Credit Line

On February 10, 2005, the Company amended (the "Amendment") the conversion price
of each of the Company's outstanding  convertible term notes held by Laurus to a
fixed conversion rate of $0.05. Laurus converted $547,988.78 principal amount of
convertible notes of the Company and $223,447.28 of interest on such convertible
notes into an aggregate of 15,428,722 shares of the Company's common stock. As a
result of the  conversion by Laurus of the term notes,  all amounts  outstanding
under the term notes were re-paid in full.  In  consideration  for the Amendment
and the  conversion  by Laurus of the term  notes,  $550,762.95  of  outstanding
principal and accrued and unpaid interest on a convertible  note dated March 31,
2003 by the  Company to Laurus was also  re-paid.  Total  repayment  amounted to
$1,322,199.

                                      F-18