SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED COMMISSION FILE NUMBER SEPTEMBER 30, 2000 0-11686 DYNAMIC SCIENCES INTERNATIONAL, INC. --------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEVADA 94-3226065 -------------------------------- --------------- (STATE OR OTHER JURISDICTION (IRS EMPLOYER OF INCORPORATION) IDENTIFICATION NO.) 6130 VARIEL AVENUE WOODLAND HILLS, CALIFORNIA 91367 (818)226-6245 ------------------------------------ ------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ---------------------- --------------------- NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT. COMMON STOCK - $.001 PAR VALUE $1.00 CUMULATIVE CONVERTIBLE PREFERRED STOCK - $.01 PAR VALUE CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- AS OF SEPTEMBER 30, 2000 , THE REGISTRANT HAD 34,074,141 SHARES OF THE COMPANY'S COMMON STOCK OUTSTANDING. THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES WAS $1,603,707 COMPUTED BY REFERENCE TO THE AVERAGE OF THE LOW BID AND HIGH ASK PRICES ON SEPTEMBER 30, 2000. DOCUMENTS INCORPORATED BY REFERENCE NONE 1 Item 1. Financial Statements -------- --------

DYNAMIC SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ( In Thousands ) ASSETS Current Assets 30 ~~June~~Sept.2000 ~~1999~~31 30Dec. ~~June~~1999 ~~1998~~ (~~AUDITED~~UNAUDITED) (AUDITED) ------------ ------------ Cash and cash equivalents $ 1011 $ 0 Accounts receivable, net 8642 775 Inventories ~~983~~979 ~~1053~~913 Prepaid expenses and other current assets 7078 9265 ------------ ------------ Total current assets ~~1149~~1110 ~~1222~~983 Property and equipment, at cost Machinery and equipment 358 358 Office furniture and fixtures 6 6 Leasehold improvements 16 16 Less accumulated depreciation and amortization ~~294~~333 ~~257~~310 ------------ ------------ Total fixed assets, net 8647 ~~123~~70 ------------ ------------ Other assets Other intangible assets, net of amortization ~~1434~~1532 ~~1361~~1546 Deposits 9 8 3 ------------ ------------ Total other assets ~~1442~~1541 ~~1364~~1554 ------------ ------------ TOTAL ASSETS $ 2,~~677~~698 $ 2,~~709~~607 ============ ============ 2 LIABILITIES & STOCKHOLDERS' EQUITY ~~June~~SEPT 330, ~~1999~~2000 ~~June~~DEC 3031, ~~1998~~1999 (~~AUDITED~~UNAUDITED) (AUDITED) Current liabilities Short-term notes payable $ 220 $ 62 Accounts payable ~~120~~48 ~~209~~133 Payroll taxes payable 1,~~040~~259 ~~875~~1233 Income taxes payable 2 12 Deferred income 2543 5542 Current portion of long term debt 230 ~~100~~5 Other accrued liabilities ~~442~~516 ~~322~~483 ------------ ------------ Total current liabilities 1,~~674~~868 1,~~568~~900 Long-term liabilities Long-term debt, net of current portion ~~475~~472 475 ------------ ------------ TOTAL LIABILITIES 2,~~149~~340 2,~~043~~375 Stockholders' equity Preferred stock, $.01 par value, 10,000,000 shares authorized Series A -- outstanding 2,935,000, stated at par 1,443 1,443 Series B to Series G -- outstanding 4,144,188 after deducting 1,855,800 canceled shares in treasury, started at par 60 60 Common stock, $.001 par value, 250,000,000 shares authorized 33,565,329 issued and outstanding including 17,746,517 subscribed, stated at par 3236 32 Additional paid-in capital ~~448~~676 448 Notes receivable from shareholders, non-interest bearing (160) (160) Retained deficit (1,~~230~~632) (1,~~092~~526) Less treasury stock, at cost, 1,855,800 Preferred stock B-G shares (65) (65) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY ~~528~~358 ~~666~~232 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 2,~~677~~698 $ 2,~~709~~607 ============ ============

DYNAMIC SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS Three Months ended ~~June~~SEPT 30 ~~Six~~Nine months ended ~~June~~SEPT 30 -------------------------- ------------------------ 2000 1999 ~~1998~~2000 1999 ~~1998~~ Sales TOTAL REVENUE $ ~~352~~318 $ ~~270~~151 $ ~~805~~856 $ ~~346~~956 TOTAL COST OF SALES ~~158~~103 ~~111~~81 ~~365~~342 ~~139~~446 ---------- -----------~~-----~~ ----------- ------------- GROSS PROFIT ~~194~~215 ~~159~~70 ~~440~~514 ~~207~~510 OPERATING EXPENSES Selling, general, and administrative ~~143~~171 ~~136~~160 ~~326~~412 ~~295~~486 Research & development net of new software 916 1411 3244 3143 ---------- -----------~~-----~~ ----------- ------------- TOTAL OPERATING EXPENSE ~~152~~187 ~~150~~171 ~~358~~456 ~~326~~529 ---------- -----------~~-----~~ ----------- ------------- INCOME (LOSS) FROM OPERATIONS 4228 9(101) 8258 (~~119~~19) OTHER INCOME AND EXPENSES Interest expense 109 8 1924 1027 Interest income 0 0 -0 0 ---------- ----------- ----------- ----------- TOTAL OTHER INCOME AND EXPENSES 109 8 1924 1027 INCOME (LOSS) BEFORE PROVISION FOR TAXES 3219 1(109) 6334 (~~129~~46) PROVISION FOR TAXES 0 0 0 0 NET INCOME (LOSS) 3219 1(109) $ 6334 $ (~~129~~46) ========== ===========~~=====~~ =========== ============= BASIC EARNINGS (LOSS) PER SHARE $ 0.~~0009~~0005 $ (0.~~00003~~0034) $ 0.~~0019~~0009 $ (0.~~004~~0014) ========== ===========~~=====~~ =========== ============= WEIGHTED NUMBER OF SHARES OUTSTANDING 3234,~~052~~074,~~031~~141 32,052,031 3234,~~052~~074,~~031~~141 32,052,031

DYNAMIC SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS FOR ~~SIX~~NINE MONTHS ---------------------- ENDED ~~JUNE~~SEPT 30 ---------------------- CASH FLOWS FROM OPERATING ACTIVITIES 2000 1999 ~~1998~~ (~~AUDITED~~UNAUDITED) (~~RESTATED~~AUDITED) Net income (loss) $ 6334 $ (~~129~~46) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and Amoritization 171 114 53 Issuance of common stock for rent expenses 0 10 Issuance of additional paid-in capital for rent expenses 0 410 (Increase) decrease in: Accounts receivable (~~186~~100) 42(69) Inventory 35(25) 43(21) Prepaid expenses 0(3) 0 (Decrease) increase in: Accounts payable 9 (3855) 50 Accrued expenses 0(54) 0 ----------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 35(32) 1328 NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (516) (1510) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of short term debt 5(9) 0(3) Repayment of long term debt (253) 2(10) Issuance of common stock 4 0 Additional paid in capital from stock issued 47 0 ---------- ---------- NET CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES 39 (2013) 2 ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -(9) -5 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD -20 -0 ---------- ---------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 1011 $ 05 ========== ==========

5 Item 2. Management's Discussion and Analysis of Financial Condition and -------------------------------------------------------------------------------- Third Quarter of 2000 Compared to the Third Quarter of 1999 --------------------------------------------- Total net sales for the third quarter of year 2000 increased $ 167,000 or 110% From the third quarter of 1999, primarily due to increased service agreement sales during the period. The Company's sales volume is affected by its dependence on a market generated by governmental agency requirements and their budget allocations. Gross profit increased by $145,000 or 207% from Q3 of 1998 as a result of increased sales. Cost of sales were 32% in 2000 and 54% in 1999 for the period. Research and development costs increased by $5,000 to $16,000 for Q3 of 2000 Compared to Q3, 1999. As a percentage of sales, R & D expenses decreased from 7% in 1999 to 5% in 2000. The increase in dollars spent, even though a smaller percentage of sales, shows DSII's commitment to continued new product development. Selling, general and administrative expenses increased $11,000 or 7% from 1999. As a percentage of sales for the period, those expenses represented 106% in 1999 and 54% in 2000. The income (loss) from DSII operations in Q3 1999 of ($101,000) increased to $28,000 in Q3 of 2000. Operating income was a profit of $19,000 in Q3 2000 following a loss of $109,000 in Q3 1999. Management feels that it has reduced the operating expenses to the minimum level consistent with efficient operation of all the required functions of the company. The Company capitalized $16,000 in Q3 2000 in software development costs on new projects. These costs will be written off over the next five years. Interest expense was $9,000 for Q3 of 2000, and $8,000 for Q3 1999. Liquidity and Capital Resources ---------------------------------- At September 30, 2000, the Company was not encumbered by bank debt, and its working capital was $358,000, an increase of $126,000 from Dec. 31, 1999. The Company is presently committed to generating working capital requirements from internal operations, while external-financing resources will continue to be pursued. Due to the nature of its products, the Company has been able to negotiate prompt payment schedules with some of its customers. The process is expected to continue during 2000. Short-term liquidity problems have developed due to delayed sales and the lack of external financing resources. Long-term liquidity would be dependent on achieving sales projections. 6 Exhibits: 2.1 Copy of the Plan and Agreement of merger by and among National Pay Telephone Corporation, a Nevada corporation, NPT Acquisition, Inc., a California corporation, and Dynamic Sciences, Inc., a California corporation dated December 12, 1986, is incorporated by reference to the Registrant's Form 8-K filed December 30, 1986. 2.2 Copy of the Agreement dated September 22, 1986, by and between National Pay Telephone Corporation and Dynamic Sciences, Inc. is incorporated by reference to the Registrant's Form 8-K filed on December 30, 1986. 2.3 Copy of the Purchase and Sale Agreement dated December 26, 1986, between National Pay Telephone Corporation and David J. Stein and associates, Inc., is incorporated by reference to the Registrant's Form 8-K filed on December 30, 1986. 2.4 Financial Statements for Affiliate Company, Phoebus Secure Technologies Corporation, is incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1989. 3.1 Copy of Registrant's Articles of Incorporation and Amendment thereto is incorporated by reference to SEC File #2-86622-LA, Exhibit 3.1, filed on September 17, 1983. 3.2 Copy of Registrant's amended by-laws was filed as an Exhibit 3.1 on Form 8-K dated December 30, 1986 and is incorporated by reference. 4.1 Copy of Stock Certificate for $1.00 Cumulative Convertible Preferred Stock (Series "A"), is incorporated by reference to the Registrant's Form 10-K for the fiscal year ended July 31, 1986. 4.2 Form of Certificate of Determination for the $1.00 Cumulative Preferred Stock is incorporated by reference to Exhibit 4.2 to Registration Statement of the Registrant on Form S-l, #33-5232, as filed on or about April 30, 1986. 4.3 Copy of Stock Certificate for Cumulative Convertible Preferred Stock Series "B-G" is incorporated by reference to the Registrant's Form 10-K for fiscal year end December 31, 1986. 4.4 Copy of Certificate of Determination (corrected) filed with the Secretary of the State of Nevada in connection with the Cumulative Convertible Preferred Stock Series "B-G." Conversion rights may be exercised for Series "C" on November 14, 1987; for Series "D" on May 14, 1988; for Series "E" on November 14, 1988; for Series "F" on May 14, 1989; and for Series "G" on November 14, 1989. This document is incorporated by reference to the Registrant's Form 10-K for fiscal year ended December 31, 1986. 22.1 List of Subsidiaries of the Registrant. Form 8-K Reports ------------------ There were no filings made on Form 8-K during the quarter ending September 30, 2000. 7 SIGNATURES Pursuant to the requirements of Section 13, or 115(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: 27 October, 2000 Dynamic Sciences International, Inc. ----------- By: /s/ Eli I. Shiri ------------------------------- Eli I. Shiri Chairman of the board 8

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