DDS Technologies USA (DDSU) 10QSB 2005 Q4 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2005

¨ Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from            to            

Commission File No. 000-30498

DDS Technologies USA, Inc.

(Exact name of small business issuer as specified in its charter)

Nevada	13-4253546
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

150 East Palmetto Park Road

Suite 510

Boca Raton, Florida 33432

(Address of Principal Executive Offices)

(561) 750-4450

(Issuer’s telephone number)

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

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of November 4, 2005: 19,812,490 shares of common stock outstanding, $0.0001 par value per share.

Transitional Small Business Disclosure format.    Yes  ¨    No  x

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONTENTS

PAGE	1	CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004.
PAGE	2	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 AND FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005 (UNAUDITED).
PAGES	3-6	CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005 (UNAUDITED).
PAGE	7	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 AND FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005 (UNAUDITED).
PAGES	8-18	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
PAGES	19-22	MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PAGE	22	CONTROLS AND PROCEDURES
PAGES	23-24	PART II OTHER INFORMATION
PAGE	25	EXHIBITS AND REPORTS ON FORM 8-K
PAGES	26-28	CERTIFICATIONS

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL INFORMATION

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2005			December 31, 2004
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	469,997		$	442,762
Inventory, net		220,536			220,536
Prepaid expenses		18,947			253,560
Total Current Assets		709,480			916,858
FIXED ASSETS, NET		35,123			39,666
PATENT		4,935,000			4,935,000
DEPOSITS ON PURCHASE OF MACHINERY		581,064			575,714
TOTAL ASSETS	$	6,260,667		$	6,467,238
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	394,875		$	358,474
Accrued professional fees		60,000			77,009
Embedded derivatives at fair value		4,337,937			—
Total Current Liabilities		4,792,812			435,483
COMMITMENTS AND CONTINGENCIES 6% CONVERTIBLE PREFERRED STOCK		498,439			—
STOCKHOLDERS’ EQUITY
Common stock, $.0001 par value, 50,000,000 shares authorized, 19,345,395 shares issued and outstanding		1,934			1,923
Additional paid-in capital		18,370,696			18,171,587
Deferred consulting expense		(35,042	)		(72,879	)
Deficit accumulated during development stage		(17,368,172	)		(12,068,876	)
Total Stockholders’ Equity		969,416			6,031,755
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,260,667		$	6,467,238

See accompanying notes to the condensed consolidated financial statements.

1

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months Ended September 30, 2005			For the Three Months Ended September 30, 2004			For the Nine Months Ended September 30, 2005			For the Nine Months Ended September 30, 2004			For the Period From July 17, 2002 (Inception) Through September 30, 2005
REVENUES	$	—		$	—		$	—		$	—		$	—
EXPENSES
Professional fees		237,950			622,490			886,545			2,578,326			7,609,136
General and administrative		234,897			265,846			627,783			700,106			2,183,849
Salaries and related taxes		122,922			159,400			386,534			470,319			1,248,190
Research and development		46,766			—			138,444			—			273,552
Litigation settlement expense		226,000						226,000						226,000
Merger costs		—			—			—			—			200,000
Machinery impairment		—			—			—			—			2,602,775
Total Expenses		868,535			1,047,736			2,265,306			3,748,751			14,343,502
INTEREST INCOME		3,287			1,337			8,158			3,782			17,478
LOSS ON FAIR VALUE ADJUSTMENT TO EMBEDDED DERIVATIVES		(3,283,641	)		—			(629,752	)		—			(629,752	)
PRIVATE PLACEMENT EXPENSES		—			—			(1,852,332	)		—			(1,852,332	)
NET LOSS	$	(4,148,889	)	$	(1,046,399	)	$	(4,739,232	)	$	(3,744,969	)	$	(16,808,108	)
Convertible preferred stock dividends		(304,863	)		—			(560,064	)		—
LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(4,453,752	)	$	(1,046,399	)	$	(5,299,296	)	$	(3,744,969	)
NET LOSS PER SHARE – BASIC AND DILUTED	$	(0.23	)	$	(0.05	)	$	(0.28	)	$	(0.20	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC AND DILUTED		19,295,030			19,235,542			19,255,444			18,961,531

See accompanying notes to the condensed consolidated financial statements.

2

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

	Common Stock			Additional Paid-In Capital			Subscriptions Receivable			Deferred Consulting Expense			Note Receivable Related Party			Interest Receivable Related Party			Accumulated Deficit			Total
	Shares	Amount
Common stock issued for cash at inception	10,944,055	$	1,095	$	957,310		$	—		$	—		$	—		$	—		$	—		$	958,405
Common stock issued for license valued at $1.00 per share	3,500,000		350		3,499,650			—			—			—			—			—			3,500,000
Common stock issued for cash in December 2002 at $1.00 per share	100,000		10		99,990			—			—			—			—			—			100,000
Net loss, July 17, 2002 (inception) through December 31, 2002	—		—		—			—			—			—			—			(407,803	)		(407,803	)
Common stock issued for cash in January 2003 at $1.00 per share	200,000		20		199,980			—			—			—			—			—			200,000
Common stock issued for license in January 2003 at $1.00 per share	500,000		50		499,950			—			—			—			—			—			500,000
Note receivable – related party in February 2003	—		—		—			—			—			(235,000	)		—			—			(235,000	)
Interest receivable – related party	—		—		—			—			—			—			(3,074	)		—			(3,074	)
Common stock issued for cash in February, March and April 2003 at $1.00 per share	800,000		80		799,920			—			—			—			—			—			800,000
Recapitalization for merger in April 2003	429,000		43		(43	)		—			—			—			—			—			—
Common stock issued for cash in May 2003 at $1.00 per share	100,000		10		99,990			—			—			—			—			—			100,000
Common stock subscribed at $1.00 per share	1,500,000		150		1,499,850			(1,500,000	)		—			—			—			—			—
Collection of subscription receivable in July 2003	—		—		—			500,000			—			—			—			—			500,000
Warrants issued for consulting expense in April 2003	—		—		1,274,848			—			(1,274,848	)		—			—			—			—
Common stock issued for cash in July and August 2003 at $3.50 per share, net	502,714		50		1,020,444			—			—			—			—			—			1,020,494

See accompanying notes to the condensed consolidated financial statements.

3

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

	Common Stock				Additional Paid-In Capital		Subscriptions Receivable	Deferred Consulting Expense		Note Receivable Related Party		Interest Receivable Related Party		Accumulated Deficit		Total
	Shares		Amount
Warrants issued with the sale of common stock in July and August 2003	—		—		563,056		—	—		—		—		—		563,056
Common stock issued for services in August and September 2003	175,000		17		1,298,233		—	(1,298,250	)	—		—		—		—
Common stock issued for settlement	60,000		6		464,994		—	—		—		—		—		465,000
Cancellation of subscription receivable	(1,000,000	)	(100	)	(999,900	)	1,000,000	—		—		—		—		—
Common stock issued for cash in October 2003 at $6.00 per share, net	904,334		90		2,896,206		—	—		—		—		—		2,896,296
Warrants issued with the sale of common stock in October 2003	—		—		1,962,114		—	—		—		—		—		1,962,114
Warrants issued for consulting expense in December 2003	—		—		29,761		—	(29,761	)	—		—		—		—
Options issued for consulting services in August and November 2003	—		—		181,010		—	(181,010	)	—		—		—		—
Amortization of deferred consulting expenses in 2003	—		—		—		—	1,427,336		—		—		—		1,427,336
Net loss, year ended December 31, 2003	—		—		—		—	—		—		—		(4,670,321	)	(4,670,321	)
BALANCE, December 31, 2003	18,715,103		1,871		16,347,363		—	(1,356,533	)	(235,000	)	(3,074	)	(5,078,124	)	(9,676,503	)
Common stock issued for accrued professional fees in February 2004 at $7.45 per share	10,000		1		74,499		—	—		—		—		—		74,500
Common stock issued for services in February 2004 at $4.30 per share	10,000		1		42,999		—	(43,000	)	—		—		—		—

See accompanying notes to the condensed consolidated financial statements.

4

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

	Common Stock		Additional Paid-In Capital	Subscriptions Receivable	Deferred Consulting Expense		Note Receivable Related Party	Interest Receivable Related Party		Accumulated Deficit	Total
	Shares	Amount
Warrants issued for consulting expense in February 2004	—	—	42,454	—	(42,454	)	—	—		—	—
Warrants issued for consulting expense in April 2004	—	—	170,052	—	(170,052	)	—	—		—	—
Common stock issued for services in May 2004 at $2.55 per share	10,000	1	25,499	—	(25,500	)	—	—		—	—
Warrants issued for consulting expense in May 2004	—	—	12,165	—	(12,165	)	—	—		—	—
Common stock issued for cash in May 2004 at $3.30 per share, net	490,439	49	741,680	—	—		—	—		—	741,729
Warrants issued with the sale of common stock in May 2004	—	—	714,876	—	—		—	—		—	714,876
Amortization of deferred consulting expenses in 2004	—	—	—		1,576,825		—	—		—	1,576,825
Interest receivable related party in 2004	—	—	—	—	—		—	(1,844	)	—	(1,844	)

See accompanying notes to the condensed consolidated financial statements.

5

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

	Common Stock		Additional Paid-In Capital	Subscriptions Receivable	Deferred Consulting Expense		Note Receivable Related Party	Interest Receivable Related Party	Accumulated Deficit		Total
	Shares	Amount
Warrants issued for consulting expense for August 2005			46,723		(46,723	)					—
Amortization of deferred consulting expenses in 2005					84,560						84,560
Warrants issued for convertible preferred stock financing			101,646								101,646
Stock Issued for dividends on convertible preferred stock	109,853	11	50,740								50,751
Accretion of preferred stock to dividends									(498,438	)	(498,438	)
Dividends on preferred stock	—	—	—	—	—		—	—	(61,626	)	(61,626	)

See accompanying notes to the condensed consolidated financial statements.

6

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

	For the Nine Months Ended September 30, 2005			For the Nine Months Ended September 30, 2004			For the Period From July 17, 2002 (Inception) Through September 30, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,739,232	)	$	(3,744,969	)	$	(16,808,108	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		4,153			4,303			13,946
Machinery and deposits impairment		—			—			2,602,775
Amortization of deferred consulting expense		84,560			1,614,885			3,088,721
Settlement on legal payable		—			—			(350,000	)
Forgiveness of interest receivable		—			—			3,074
Common stock issued for services		—			—			465,000
Warrants issued for services		101,646						101,646
Gain/(Loss) on fair value adjustment to embedded derivatives		629,752			—			629,752
Valuation of embedded derivatives in excess of gross proceeds		1,533,186						1,533,186
Changes in operating assets and liabilities:
Prepaid expenses and other assets		229,263			268,871			(24,297	)
Accrued professional fees		(17,009	)		—			484,500
Accounts payable and accrued expenses		25,526			(50,839	)		384,000
Net Cash Used In Operating Activities		(2,148,155	)		(1,907,749	)		(7,875,805	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit on purchase of machinery		—			667,092			(4,011,976	)
Refund of deposit on purchase of machinery		—			—			741,000
Purchases of fixed assets		390			(31,496	)		(177,118	)
Acquisition of license/patent		—			—			(700,000	)
Note receivable and accrued interest –related party		—			—			(238,074	)
Net Cash Provided by (Used In) Investing Activities		390			635,596			(4,386,168	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock and warrants		—			1,456,607			10,556,970
Sale of convertible preferred stock		2,175,000						2,175,000
Net Cash Provided By Financing Activities		2,175,000			1,456,607			12,731,970
NET INCREASE IN CASH		27,235			184,454			469,997
CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD		442,762			1,174,281			—
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	469,997		$	1,358,735		$	469,997
NON CASH INVESTING AND FINANCING ACTIVITIES:
Accretion of convertible preferred stock	$	498,439			—		$	498,439
Dividends payable on convertible preferred stock	$	10,875			—		$	10,875
Common stock issued for license valued at $1.00 per share	$	—		$	—		$	4,000,000
Warrants issued for deferred consulting services	$	—		$	—		$	1,509,519
Common stock issued for deferred consulting expenses	$	—		$	—		$	1,308,250
Common stock issued for accrued consulting expenses	$	—		$	—		$	74,500
Options issued for deferred consulting services	$	—		$	—		$	99,636
Common stock issued to consultant to settle contract dispute	$	—		$	—		$	60,000
Deposits transferred into fixed assets and inventory	$	—		$	—		$	1,307,087
Forgiveness and reclass of note receivable to acquisition of patent	$	—		$	471,724		$	235,000
Common stock issued for dividends on convertible preferred stock	$	50,751		$	—		$	50,751

See accompanying notes to the condensed consolidated financial statements.

7

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

NOTE 1BACKGROUND

DDS Technologies USA, Inc. and subsidiary (collectively, the ”Company”) is a development stage company with no revenues since its inception on July 17, 2002. The Company has obtained the patent rights on a world wide basis for a dry disaggregation and micronization system that converts certain waste into value added products for further processing or resale.

Since its inception, the Company has been dependent upon the receipt of capital investment to fund its continuing activities. In addition to the normal risks associated with a new business venture, there can be no assurance that the Company’s product development will be successfully completed or that it will be a commercial success. The Company’s ability to execute its business plan will depend on its ability to obtain additional financing and achieve a profitable level of operations. There can be no assurance that sufficient financing will be obtained. Nor can the Company give any assurance that it will generate substantial revenues or that its business operations will prove to be profitable.

On October 12, 2005 the Company merged DDS Technologies USA, Inc., a Delaware corporation into the Company. As a result of the merger, each DDS Delaware shareholder at the time of the merger (other than the Company) received one share of the Company’s common stock for each share of DDS Delaware common stock which it held immediately prior to the merger.

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of DDS Technologies USA, Inc. and its wholly owned subsidiary. All material intercompany accounts and transactions have been eliminated.

(B) Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses at September 30, 2005 and December 31, 2004, approximate their fair value because of their relatively short-term nature.

(C) Patent Valuation

The patent is valued at its original acquisition cost plus the forgiveness of the carrying amount of a note receivable. The acquisition cost is based on the issuance of 4 million shares of common stock plus cash consideration. The patent has a 20 year life which expires in May 2022. The patent will be amortized over the expiration term when the Company commences operations which generate revenues.

8

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

(D) Derivatives

The Company accounts for its long term warrants, short term warrants and the conversion feature of the convertible preferred stock issued in a private placement with the 6% convertible preferred stock as derivatives under the guidance of Statement of Financial Accounting Standards (“SFAS”) No. 133,Accounting for Derivative Instruments and Hedging Activities, Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. 150-1,Issuer’s Accounting for Freestanding Financial Instruments Composed of More Than One Option or Forward Contract Embodying Obligations Under SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and FSP No. 150-5,Issuer’s Accounting under SFAS No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable.

The long term warrants, short term warrants and the conversion feature of the convertible preferred stock are treated as a liability in the accompanying condensed consolidated balance sheet at September 30, 2005 and are recorded at fair value. The change in fair value for each reporting period is recorded as other income/(expense) in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2005. For the three and nine months ended September 30, 2005, the Company recorded other expense relating to the fair value adjustment of $3,283,641 and $629,752 respectively. Also see Note 6.

(E) Research and Development

Research and development consists of consulting fees incurred in the development of the Company’s technology and are expensed as incurred.

For the three and nine months ended September 30, 2005 and 2004, and for the period from July 17, 2002 (inception) through September 30, 2005, the Company incurred research and development expenses of $46,766, $138,444, $0, $0 and $273,552, respectively.

(F) Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

9

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

(G) Loss Per Common Share

Net loss per common share (basic and diluted) is based on the net loss, adjusted for preferred stock dividends, divided by the weighted average number of common shares outstanding during each period. Common stock equivalents were not included in the calculation of diluted loss per share as their effect would be anti-dilutive.

(H) Interim Consolidated Financial Statements

The condensed consolidated financial statements as of September 30, 2005 and for the three and nine months ended September 30, 2005 and 2004, and for the period from July 17, 2002 (inception) through September 30, 2005, are unaudited. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet information as of December 31, 2004 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-KSB. The interim condensed consolidated financial statements should be read in conjunction with that report.

(I) Stock-Based Compensation

The Company accounts for its stock-based employee compensation plans using the intrinsic value based method, under which compensation cost is measured as the excess of the stock’s market price at the grant date over the amount an employee must pay to acquire the stock. Stock options and warrants issued to non-employees are accounted for using the fair value based method, under which the expense is measured as the fair value of the security at the date of grant based on the Black-Scholes pricing model.

SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, requires the Company to provide pro forma information regarding net income and earnings per share for each period presented as if compensation cost for the Company’s stock options had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option pricing model with the following weighted average assumptions; no dividend yield for all years; expected volatility from 132% to 135%; risk-free interest rate of 3%, and an expected life of 10 years.

10

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

In January 2005, the Company granted stock options to two Board members to purchase a total of 400,000 shares at an exercise price of $1.00 per share. Of the options to purchase 400,000 shares, options to purchase 100,000 shares are exercisable immediately and the balance vests over the following three years. All the options expire in January 2015.

In March 2005, the Company granted stock options to its President and Chief Executive Officer as part of his employment agreement. The Company issued stock options to purchase 400,000 shares at an exercise price of $1.00 per share. Of the options to purchase 400,000 shares, options to purchase 100,000 shares are exercisable immediately and the balance vests over the following three years. All the options expire in March 2015.

Under the accounting provisions of SFAS No. 123, as amended by SFAS No. 148, the Company’s net loss and net loss per common share would have been as follows:

		For the Nine Months Ended September 30, 2005			For the Nine Months Ended September 30, 2004
Net loss	As Reported	$	(4,739,232	)	$	(3,744,969	)
	Pro Forma	$	(6,641,882	)	$	(4,805,851	)
Net loss per common	As Reported	$	(0.28	)	$	(0.20	)
share - basic and diluted	Pro Forma	$	(0.35	)	$	(0.25	)

(J) Reclassifications

Certain amounts from prior periods have been reclassified to conform to current period’s presentation.

NOTE 3RELATED PARTY TRANSACTIONS

For the three months ended September 30, 2005 and 2004, and for the period from July 17, 2002 (inception) through September 30, 2005, the Company incurred consulting expenses of $45,000, $42,000 and $1,061,500, respectively, from stockholders of the Company.

For the nine months ended September 30, 2005 and 2004, the company incurred consulting expenses from stockholders of the Company of $135,000 and $274,500 respectively.

11

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

NOTE 4STOCK OPTIONS

A summary of the status of the Company’s option plans as of and for the nine months ended September 30, 2005 is presented below:

	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2004		1,800,000	$	5.23
Granted		800,000	$	1.00
Outstanding at September 30, 2005		2,600,000	$	3.93
Options exercisable at September 30, 2005		1,550,000	$	4.38
Weighted average fair value of options granted to employees during the period from July 17, 2002 (Inception) through September 30, 2005	$	3.93

The following table summarizes information about the stock options outstanding at September 30, 2005:

Options Outstanding					Options Exercisable
Exercise Price	Number Outstanding at September 30, 2005	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable at September 30, 2005	Weighted Average Exercise Price
$3.40	300,000	8.67	$	3.40	300,000	$	3.40
$3.96	200,000	8.50	$	3.96	200,000	$	3.96
$5.00	600,000	7.62	$	5.00	600,000	$	5.00
$7.00	400,000	8.08	$	7.00	—	$	—
$8.00	200,000	8.08	$	8.00	200,000	$	8.00
$3.40	50,000	8.67	$	3.40	50,000	$	3.40
$0.63	50,000	9.08	$	0.63	—	$	—
$1.00	400,000	9.25	$	1.00	100,000	$	1.00
$1.00	400,000	9.25	$	1.00	100,000	$	1.00

NOTE 5CONSULTING AND MARKETING AGREEMENTS

On April 26, 2004, the Company entered into a 14 month agreement with a marketing company. The marketing company provides business advisory and various other investment and marketing

12

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

services to the Company. The Company paid the marketing company $25,000 upon signing the agreement and pays a monthly fee of $5,000. In addition, the Company issued warrants for the purchase of 400,000 shares of common stock at exercise prices of $3.75 and $4.25 per share. The warrants are exercisable until April 26, 2007. The warrants were valued using the Black-Scholes pricing model and resulted in a fair value of $170,052. The amount is amortized over the life of the agreement resulting in consulting expense of $72,879 for the nine months ended September 30, 2005. There is no remaining unamortized balance as of September 30, 2005 relating to the warrant issuance.

On May 12, 2005, the Company entered into a 12 month agreement with a marketing company. The marketing company provides financial advisory and various other investment and marketing services to the Company. The Company pays a monthly fee of $5,000 for these services. Additionally the Company paid a success fee of $25,000 to the marketing company for its services in the signing of the licensing agreement with Sulfur Solutions, Inc.

On August 8, 2005, the Company entered into a six month agreement with a marketing company. The marketing company provides business advisory and various other investment and marketing services to the Company. The Company pays a monthly retainer fee of $7,000. In addition, the Company issued warrants for the purchase of 80,000 shares of common stock at an exercise price of $0.75 per share. The warrants are exercisable until August 7, 2006. The warrants were valued using the Black-Scholes pricing model and resulted in a fair value of $46,723. For the three and nine months ended September 30, 2005, the Company recognized $11,681 in consulting expense. The remaining unamortized balance of $35,042 is presented in the condensed consolidated balance sheet as deferred consulting expense.

NOTE 6PRIVATE PLACEMENT

On April 12, 2005, the Company entered into a Securities Purchase Agreement with certain accredited investors for the sale of 6% Series A convertible preferred stock. The Company issued 2,175 shares of its Series A convertible preferred stock for a purchase price of $2,175,000 ($1,957,500 net of commissions) and the Company may raise up to an additional $2.2 million upon the exercise of the short term warrants (as described below). The Series A preferred stock is initially convertible into approximately 3.1 million shares of the Company’s common stock at a conversion rate of $.70 per share and has a 6% annual dividend rate payable quarterly in arrears in cash or, in common stock if certain “Equity Conditions”, as defined, are met. Because the Company is likely not to meet specific performance criteria, it is likely that the conversion price will be reduced on January 1, 2006 to $.50 per share.

13

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

Each investor also received two warrants, a long-term warrant exercisable for a period of five years to acquire shares of common stock and a short-term warrant exercisable for a period of one year to acquire additional shares of Series A preferred stock and long term warrants. The long term warrants in the aggregate are exercisable for approximately 2.3 million shares of common stock at a price of $.875 per share. Because the Company is likely not to meet specific performance criteria, it is likely that the exercise price will be reduced on January 1, 2006 to $.50 per share. The short term warrants in the aggregate are exercisable for (i) the same number of shares of convertible preferred stock (the “Short Term Warrant Preferred Stock”) as shares of Series A preferred stock were issued in the offering and (ii) long term warrants for a number of shares of common stock equal to 35% of the number of shares of common stock issuable upon conversion of the short term warrant preferred stock. The Short Term Warrant exercise price is $1,000 per share of Short Term Warrant Preferred Stock together with the accompanying long term warrants. The Short Term Warrant Preferred Stock has the same rights and preferences as the Series A preferred stock, except the conversion price of the Short Term Warrant Preferred Stock is initially $0.85 per share.

Among the purchasers in the offering were four members of the Company’s Board of Directors, who purchased units either directly or indirectly for purchase amounts of $25,000, $20,000, $20,000 and $20,000, each.

In April 2005, by the approval of the Board and a majority vote of the shareholders, the number of authorized shares of the Company’s common stock was increased to 50 million shares.

Shares of the convertible preferred stock are mandatorily redeemable at the end of two years from date of issuance. There are also certain triggering events that are outside of the Company’s control that could cause an earlier redemption.

The Company accounted for the convertible preferred stock based on Staff Accounting Bulletin (“SAB”) Topic No. D-98,Classification and Measurement of Redeemable Securities and SEC Accounting Series Release No 268,Redeemable Preferred Stock. As such the convertible preferred stock is presented as mezzanine equity between the liabilities and equity sections in the accompanying condensed consolidated balance sheet at September 30, 2005.

The accounting for the long and short term warrants issued with the preferred stock was determined under the guidance of SFAS 133, FASB FSP No. 150-1, FASB FPS No 150-5 and Emerging Issues Task Force (“EITF”) No. 00-19,Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock. Accordingly the warrants are treated as derivatives and classified as a liability. The long term warrants are recorded at a fair value, based on the Black-Scholes pricing model, and revalued each reporting period with the change in fair value recorded as other income/(expense). For the nine months ended September 30, 2005 the fair value adjustment resulted in a loss of $244,674. The short term warrants are recorded at fair value, as determined by an independent valuation services firm, and are revalued each reporting period with the change in fair value recorded as other income/(expense). For the nine months ended September 30, 2005 the fair value adjustment resulted in a loss of $256,820.

14

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

The beneficial conversion feature relating to the preferred stock, is also treated as an embedded derivative and is therefore classified as a current liability in accordance with SFAS 133. The conversion feature of the convertible preferred stock is recorded at fair value, as determined by an independent valuation services firm, and revalued each reporting period with the change in fair value recorded as other income/(expense). For the nine months ended September 30, 2005 the fair value adjustment resulted in a loss of $128,258.

Since the long and short term warrants and the conversion feature were deemed to be embedded derivatives, the Company recorded the entire fair value of all the embedded derivatives at the transaction date as a liability. Since the total fair value of $3,708,185 exceeded the proceeds from the private placement, a $1 value was ascribed to the preferred stock, and the resulting difference between the value of the embedded derivatives and the proceeds from the private placement of $1,533,186 was recorded as private placement expense in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2005. Additionally the redemption value of the preferred stock of $2,175,000 is accreted to dividends over the redemption period of two years, which resulted in dividends of $271,875 and $498,438 for the three and nine months ended September 30, 2005, respectively.

The Company is required to make quarterly dividend payments of 6% on the $2,175,000 that it raised from the sale of 6% Series A convertible preferred stock. The initial dividend payment was due on June 1, 2005 and quarterly thereafter. The payment is payable in either cash or common stock based on certain conditions being met. Dividends on preferred stock for the three and nine months ended September 30, 2005 were $32,988 and $61,626 respectively. At September 30, 2005 the Company accrued dividends amounting to $10,875.

In connection with the private placement, the Company incurred cash commissions of $217,500 and issued 155,357 warrants to the investment banker. The warrants were valued using the Black-Scholes pricing model. The fair value of these warrants is reflected as private placement expense and recorded as additional paid-in capital in the condensed consolidated financial statements. The cash payment of $217,500 is also treated as private placement expense in the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2005.

In July 2005, the Company issued 51,665 shares of common stock valued at $.34 per share in settlement of dividends payable as of June 1, 2005. In September 2005, the Company issued 58,188 shares of common stock valued at $.57 per share in settlement of dividends payable as of September 1, 2005.

15

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

NOTE 7COMMITMENTS AND CONTINGENCIES

(A) Litigation

The Company is a defendant in a lawsuit whereby the plaintiff contends that it is entitled to a commission for allegedly procuring financing for a transaction. The Company filed an Answer and Affirmative Defenses. The plaintiff seeks damages totaling $175,584, plus interest from December 31, 2002. The Company believes the suit is without merit and is vigorously defending its position. In the opinion of management, this suit will not have a material adverse effect on the Company’s consolidated financial position or results of operations. The Company does not believe a provision is necessary at September 30, 2005 for this matter.

The Company received a potential claim from two shareholders alleging that the Company failed to register their shares for re-sale in the Company’s registration statement, filed on Form S-1 under the Securities Act of 1933, as amended on November 12, 2003 and an amendment thereto on December 13, 2003. In addition, these shareholders have alleged that they were induced erroneously into surrendering shares of DDS Holdings, Inc. in connection with the reorganization into Black Diamond Industries, Inc. Although the Company believes that it has defenses to these alleged actions, the Company is attempting to reach an amicable settlement for these claims. There can be no assurance that these disputes will be favorably resolved, if at all, or that these claims will not have a material adverse effect on the Company. The Company does not believe a provision is necessary at September 30, 2005 for this matter.

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

On October 19, 2005 the Company entered into a Marketing & License Agreement and a Mutual Release with Xethanol Corporation (“Xethanol”). The Agreement grants Xethanol a license with respect to the Company’s proprietary dry disaggregation technology to extract materials from agricultural commodities including corn and cellulosic biomass to be used as ethanol production feedstock in Xethanol’s ethanol production facilities. In addition, the Company has granted Xethanol an exclusive license, with certain exceptions, to market the Company’s dry disaggregation technology to the ethanol industry in the USA.

Pursuant to the agreement, the parties entered into a Mutual Release, pursuant to which each party discharged the other from all claims and liabilities related to a previous dispute between them and the parties have agreed to dismiss all pending litigation proceedings. As part of the settlement, the Company is obligated to make a payment of $50,000 and issue 200,000 restricted shares of its

16

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

stock to Xethanol and Xethanol will release the DDS machine. The shares were valued at $176,000. The Company recorded $226,000 as a settlement amount in the accompanying condensed consolidated statement of operations for the periods ended September 30, 2005.

(B) Commitments

Currently there are components for three additional machines awaiting final assembly at a future time. The components are fully paid for and reflected in the Deposit account. Additional costs will be incurred if and when these machines are ordered by customers, assembled and shipped. While the final amount per machine is not determinable at this time, it is expected that the final payment, per machine, is likely in the range between $100,000 and $150,000. In August 2005, the Company signed an agreement with a US based manufacturing company, for the design, manufacture and supply of machines incorporating the patented dry disaggregation system technology.

(C) Lease Agreement

In August 2005, the Company entered into a lease agreement for office space for its Research and Development center located in Norcross, Georgia. The lease is for a period of three years beginning in November 2005. The monthly lease payment is $5,350. The Company also paid a lease deposit of $5,350 and recorded it as a deposit on the accompanying condensed consolidated balance sheet.

NOTE 8OTHER AGREEMENTS

In February 2005, the Company entered into a five year agreement with a Canadian company whereby the Company granted a license to the Canadian company for the purpose of processing and extracting metals and other minerals from the waste, or tailings, of tar sand mining. If, during the evaluation phase, the machine operates within certain parameters, the Company will be paid a negotiated purchase price for each machine plus royalties.

On August 30, 2005 the Company entered into an agreement with a U.S. based equipment manufacturer to manufacture and supply the Company with machines embodying the DDS patented technology.

NOTE 9SUBSEQUENT EVENTS

On October 19, 2005 the Company entered into a Marketing & License Agreement and amicably settled the outstanding litigation with Xethanol Corporation resulting in a Mutual Release discharging each party from all claims and liabilities. See Note 7 (A) above.

17

DDS TECHNOLOGIES USA, INC.

AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 17, 2002 (INCEPTION) THROUGH SEPTEMBER 30, 2005

(UNAUDITED)

On October 12, 2005 the Company merged DDS Technologies USA, Inc., a Delaware corporation into the Company. As a result of the merger, each DDS Delaware shareholder at the time of the merger (other than the Company) received one share of the Company’s common stock for each share of DDS Delaware common stock which is held immediately prior to the merger

In October 2005, pursuant to the terms of the exclusive license agreement entered into in February 2005, the Company shipped its first machine embodying its proprietary DDS Technology. Acceptance and payment of the machine will be in accordance with the terms of the previously disclosed agreement.

18

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

Background

DDS Technologies USA, Inc. and subsidiary (the ”Company”) is a development stage company with no revenues since its inception on July 17, 2002. The Company has obtained the patent rights on a world wide basis for a dry disaggregation and micronization technology that converts certain waste into value added products for further processing or resale.

On November 14, 2002, Black Diamond Industries, Inc., a public Florida corporation conducting no business other than to seek a suitable acquisition partner, acquired all of the outstanding shares of common stock of DDS Holdings, Inc., a Nevada corporation, pursuant to a securities exchange agreement dated October 27, 2002. Under the terms of the securities exchange agreement, the stockholders of DDS Holdings, Inc. agreed to transfer all of the issued and outstanding shares of common stock of DDS Holdings, Inc. in exchange for an aggregate of 12,915,525 shares of common stock, or approximately 93%, of Black Diamond Industries. Immediately prior to, and in conjunction with the transaction, the sole director and officer and majority shareholder of Black Diamond Industries returned 13,564,350 shares of common stock to treasury.

In December 2002, Black Diamond Industries changed its name to DDS Technologies USA, Inc. and reincorporated in the State of Delaware.

Under a share exchange agreement dated April 4, 2003, FishtheWorld Holdings, Inc., a public Florida corporation conducting no business other than to seek a suitable acquisition partner, acquired 88.5% of DDS Technologies USA, Inc. in exchange for 15,367,255 shares of common stock, or approximately 97% of the then issued and outstanding shares, of FishtheWorld Holdings. Immediately prior to the share exchange, the majority shareholder of FishtheWorld Holdings returned 8,571,000 shares to treasury and resigned as the sole director and officer. The members of the Board of Directors of DDS Technologies USA, Inc. became members of the Board of Directors of FishtheWorld.

In May 2003, FishtheWorld Holdings changed its name to DDS Technologies, USA, Inc. and reincorporated in the State of Nevada.

On October 12, 2005 the Company merged DDS Technologies USA, Inc., a Delaware corporation into the Company. As a result of the merger, each DDS Delaware shareholder at the time of the merger (other than the Company) received one share of the Company’s common stock for each share of DDS Delaware common stock which is held immediately prior to the merger.

Generally accepted accounting principles in the United States of America require that a company whose stockholders retain a majority interest in a business combination be treated as the acquirer for accounting purposes. Since Black Diamond Industries and FishtheWorld Holdings were public shells and DDS Holdings, Inc. is a development stage company with no revenues, the transactions were treated as recapitalizations of DDS Technologies USA, Inc.

DDS Technologies USA, Inc. was formed in July 2002 for the purpose of commercializing certain technology which had been licensed from DDS Technologies Ltd., a United Kingdom company and a principal stockholder of DDS Technologies USA, Inc. The license had provided for the exclusive North, South, Central American and Caribbean (excluding Cuba) rights to the pending patent, #02425336.1, which was filed with the European Patent Office on May 28, 2002.

19

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

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

The patent relates to the Longitudinal Micrometric Separator For Classifying Solid Particulate Materials. Management believes that this Disaggregation Dry System (DDS) technology is a unique process, in which fragments of organic and inorganic matter are “crushed to collision” enduring violent accelerations and decelerations causing the disaggregation of the structure. Various companies that we have contacted as potential customers have expressed the view that this technology and its end results may have significant potential value both economically and nutritionally. Management believes that the results obtained utilizing the technology is unattainable with any other currently available technology.

Initial work on the production version of the Company’s dry disaggregation machine by the Company’s consulting engineers has revealed that it does not fully disaggregate organic material to the extent that a prototype research machine does, and therefore requires additional development work. However, the production version does micronize very effectively to particle sizes of between 5 and 20 microns, which management believes should provide application opportunities and commercial potential in a number of industries.

Critical Accounting Policies

The Securities and Exchange Commission issued Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” suggesting that companies provide additional disclosure and commentary on their most critical accounting policies. In Financial Reporting Release No. 60, the Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified the following significant policies as critical to the understanding of our condensed consolidated financial statements. The preparation of our condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting periods. Areas where significant estimation judgments are made and where actual results could differ materially from these estimates are:

A. The carrying amount of our patent.

20

B. The assumptions used in calculating the fair value of our stock options and warrants issued using the Black-Scholes pricing model and other independent valuation service firm.

The Company believes the following are among the most critical accounting policies that impact our consolidated financial statements. The Company suggests that our significant accounting policies, as described in our consolidated financial statements in the Summary of Significant Accounting Policies and Organization, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition or Plan of Operations:

A. The Company evaluates impairment of our long-lived assets by applying the provisions of SFAS No. 144. In applying those provisions, the Company has recognized an impairment charge of $2,602,775 on our long-lived assets.

B. The Company accounts for its embedded derivatives by applying the provisions of SFAS 133. In applying those provisions, the Company recognized a loss from the fair value adjustment to the embedded derivatives of $3,283,641 and $629,752 for the three and nine months ended September 30, 2005, respectively.

Results of Operations

From July 17, 2002 (inception) through September 30, 2005, the Company has incurred an accumulated deficit of $17,368,172. To date, the Company has yet to achieve revenues from operations. During the nine months ended September 30, 2005 and 2004, the Company incurred operating expenses of $2,265,306 and $3,748,751, respectively. The decrease in operating expenses is primarily due to the reduction in the amortization of deferred consulting fees associated with warrants issued for services. Private placement expenses of $1,852,332 primarily represent the valuation of embedded derivatives in excess of gross proceeds and the cash paid and the fair value of warrants issued in association with the funds raised in the private placement completed during this quarter. During this quarter the Company also recognized a loss of $3,283,641 as a result of revaluing the embedded derivatives as of September 30, 2005 related to the sale of the convertible preferred stock. The Company anticipates that losses from operations will continue for the remainder of the year primarily due to our relatively long sales cycle and the significant due diligence and testing conducted by our prospective customers. Testing includes the preparation of various sample products for processing using our proprietary technology process through our testing facility and submitting our analysis of results to third party labs for independent verification as well as reviewing the results with the prospective client. However, if the Company is unable to successfully implement its business model, the Company may never achieve profitability.

The Company has marketed its technology to various large US and Latin American companies resulting in Memoranda of Understanding and has recently signed a five year licensing agreement with a Canadian firm for the purpose of processing and extracting sulfur and sulfur derivative materials in North America. However there can be no assurance that the Dry Disaggregation System technology will achieve market acceptance or that sufficient revenues will be generated to

21

allow us to operate profitably. The Company entered into a five year agreement with a Canadian company whereby the Company granted a license to the Canadian company for the purpose of processing and extracting metals and other minerals from the waste, or tailings, of tar sand mining. Pursuant to the agreement, the Company has shipped the first machine. If, during the evaluation phase, the machine operates within certain parameters, the Company will be paid a negotiated purchase price for each machine plus royalties.

Liquidity and Capital Resources

To date, we have funded our losses, license payments and patent acquisitions through the private sale of common and preferred stock and financing from accredited investors. On April 12, 2005 we completed a private placement for the sale of convertible preferred stock to accredited investors resulting in net proceeds of $1,957,500. Our cash balance at September 30, 2005 was $469,997. Based on this balance we believe that we will be able to fund our operations into the fourth quarter of this year. The Company is currently seeking to raise additional funds through another private placement. Without demonstrating commercial feasibility, securing customers or both, we may not be able to secure additional capital necessary to fund operations.

In connection with the most recent private placement, the Company is required to make a 6% annual dividend payment, payable quarterly in arrears in cash, or in common stock if certain “Equity Conditions”, as defined, are met. Having met these “Equity Conditions” in September the Company issued shares of common stock in partial settlement of dividends payable.

Currently there are components for three additional machines awaiting final assembly at a future time. The components are fully paid for and reflected in the Deposit account. Additional costs will be incurred when these machines are assembled and shipped based on future sales. While the final amount per machine is not determinable at this time, it is expected that the final payment, per machine, would range between $100,000 and $150,000. The Company has signed an agreement with a US based manufacturing company, for the design, manufacture and supply of machines incorporating the patented dry disaggregation system technology.

ITEM 3. CONTROLS AND PROCEDURES

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-QSB, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective in timely providing them with material information required to be disclosed by us in our filings under the Exchange Act. There have been no significant changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls during our most recent fiscal quarter, including any corrective actions with regard to significant deficiencies and material weaknesses.

22

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a defendant in a lawsuit whereby the plaintiff contends that it is entitled to a commission for allegedly procuring financing for a transaction. The plaintiff seeks damages totaling $175,584 plus interest from December 31, 2002. In April 2004, the Company filed and Answer and Affirmative Defenses. The Company believes the suit is without merit and is vigorously defending its position. In the opinion of management, this suit will not have a material effect on the Company’s condensed consolidated financial position or results of operations.

The Company received a potential claim from two shareholders alleging that the Company failed to register their shares for re-sale in the Company’s last registration statement, filed on Form S-1 under the Securities Act of 1933, as amended on November 12, 2003 and an amendment thereto on December 13, 2003. In addition, these shareholders have alleged that they were induced erroneously into surrendering shares of DDS Holdings, Inc. in connection with the reorganization into Black Diamond Industries, Inc. Although the Company believes that it has defenses to these alleged actions, the Company is attempting to reach an amicable settlement for these claims. There can be no assurance that these disputes will be favorably resolved, if at all, or that these claims will not have a material adverse effect on the Company. The Company does not believe a provision is necessary at September 30, 2005 for this matter.

The Company is a defendant in a lawsuit whereby a stockholder and former president of the Company contends that he is entitled to receive consulting fees under a consulting agreement (See Note 3). The Company suspended payments and terminated the consulting agreement due to breach of the terms of the agreement. The Company has filed an Answer and Affirmative Defenses and a Counterclaim alleging breach of the consulting agreement and breach of fiduciary duty.

On October 19, 2005 the Company entered into a Marketing & License Agreement and a Mutual Release with Xethanol Corporation (“Xethanol”). The Agreement grants Xethanol a license with respect to the Company’s proprietary dry disaggregation technology to extract materials from agricultural commodities including corn and cellulosic biomass to be used as ethanol production feedstock in Xethanol’s ethanol production facilities. In addition, the Company has granted Xethanol an exclusive license, with certain exceptions, to market the Company’s dry disaggregation technology to the ethanol industry in the USA.

The Company and Xethanol had been engaged in litigation regarding a Pre-Formation Agreement previously entered into by the two companies. The dispute has now been amicably settled. Pursuant to the agreement, the parties entered into a Mutual Release, pursuant to which each party discharged the other from all claims and liabilities and the parties have agreed to dismiss all pending litigation proceedings. As part of the settlement, the Company is obligated to make a payment of $50,000 and issue 200,000 restricted shares of its stock to Xethanol and Xethanol will release the DDS machine. As a part of the settlement, the Company is obligated to make a

23

payment of $50,000 and issue 200,000 restricted shares of stock to Xethanol and Xethanol will release the DDS machine. The shares were valued at $176,000. The Company recorded $226,000 as a settlement amount in the accompanying condensed consolidated statement of operations for the period ended September 30, 2005.

ITEM 2. CHANGES IN SECURITIES

During the third quarter of 2005, the Company issued 109,853 shares of common stock as dividend payment due pursuant to the April 12, 2005 sale of 6% Series A convertible Preferred Stock.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits, which are furnished with this Quarterly Report or incorporated herein by reference, are filed as part of this Quarterly Report.

Exhibit Number	Exhibit Description
31.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K.

On July 22, 2005, we filed a Form 8-K reporting the signing of an exclusive licensing agreement.

On August 30, 2005, we filed a Form 8-K reporting the revised accounting treatment of the embedded derivatives related to the sale of Convertible Preferred Stock.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(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, on the 14^th day of November 2005.

DDS TECHNOLOGIES USA, INC

/s/ Spencer L. Sterling

Spencer L. Sterling

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Joseph Fasciglione

Joseph Fasciglione

Chief Financial Officer

(Principal Accounting Officer)

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