The following should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004.

The term "the Company", "Dyadic", "we", "us" or "our" refers to Dyadic International, Inc., unless the context otherwise implies.

This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve substantial risks and uncertainties. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "may," "will," "expect," "intend," "anticipate," "believe," "estimate," "continue," "project," "plan," "shall," "should," and other similar words. You should read statements that contain these words carefully because they discuss our future expectations, making projections of our future results of operations or our financial condition or state other "forward-looking" information. Forward-looking statements involve known and unknown risks and uncertainties that may cause the actual results, performance or achievements of our Company to be materially different from those that may be expressed or implied by such statements. Important factors that could cause the actual results, performance or achievement of the Company to differ materially from the Company's expectations include (i) assumptions or cautionary factors discussed in connection with a particular forward-looking statement or elsewhere in this Form 10-QSB, or (ii) cautionary factors set forth in other Company's filings from time to time with the Securities and Exchange Commission, including our Annual Report on Form 10-KSB for the year ended December 31, 2004, including the section titled "Description of Business - Risk Factors That May Affect Future Results." All forward-looking statements attributable to the Company are expressly qualified in their entirety by these and other factors. Except as required by law or regulation, we do not undertake any obligation to publicly update forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

General

We are a biotechnology company engaged in the development, manufacture and sale of enzymes, other proteins, peptides and other bio-molecules derived from genes, and the collaborative licensing of our enabling proprietary technologies. We use our proprietary technologies to develop and manufacture biological products, and intend to collaboratively license them for research, development and manufacturing of biological products, for two categories of applications:

o enzymes and other biological products for a variety of industrial and commercial applications, which we refer to as our Enzyme Business; and

o human therapeutic proteins for use by pharmaceutical and biotechnology companies in pre-clinical and clinical drug development applications and commercialization following drug approval, which we refer to as our BioSciences Business.

We have developed and use a number of proprietary fungal strains to produce enzymes and other biomaterials, but the one on which we have principally focused is a patented system for protein production, or protein expression, which we call the C1 Expression System. This System is based on our patented Chrysosporium lucknowense fungus, known as C1, as its host production organism. A host production organism is an organism which has been genetically altered to express genes to produce targeted protein products. We discovered the C1 microorganism in the mid-1990's and initially developed it, without the application of molecular biology, to produce neutral cellulases for our textile manufacturing customers. By 1998, we began to apply molecular genetics and other proprietary biotechnology tools to C1 to create a technology, which we refer to as the C1 Host Technology. The C1 Host Technology, once fully developed, is expected to be capable of performing:

o two screening functions for:

o the discovery of genes and the proteins they express; and

o the identification of improved protein variants resulting from modifications to their genes; and

o three expression functions for:

o the expression of proteins in commercial volumes for industrial enzyme applications;

o the expression of human therapeutic proteins in small volumes for pre-clinical and clinical testing for drug development applications; and

o the expression of human therapeutic proteins for drugs in commercial volumes.

We have been, over the last several years, principally focused on the expression capabilities of the C1 Host Technology. These efforts culminated in our first commercially successful application - our C1 Expression System.

Using the C1 Expression System, as well as other biological systems, our Enzyme Business develops and produces commercial quantities of enzymes for sale to textile, pulp and paper, animal feed, chemical, agricultural, and other industries. These industries, in turn, use our products to enhance their own products or to improve production efficiency. We currently sell more than 45 liquid and dry enzyme products to more than 150 industrial customers in 50 countries.

We believe, however, even larger market opportunities will exist for our C1 Expression System when the technology is fully developed. For example, we believe our C1 Expression System can be successfully harnessed to help solve the protein expression problem confronting the global drug industry - the difficulty, despite enormous historic investment, of cost-effectively and expeditiously harnessing existing genomic knowledge to develop new specialized biological products, or therapeutic proteins. For the past five years, we have been developing our C1 Expression System to serve the drug industry in the discovery, development and production of human therapeutic proteins, with our primary focus on enabling pharmaceutical and biotechnology companies to not only successfully carry on the development of drugs from their gene discoveries, but also to manufacture those drugs at economically viable costs. Within therapeutic proteins, the production of antibodies is an area of special focus for us in view of the large number of antibodies in pharmaceutical companies' R&D pipelines for which a reliable and cost-effective production host is required.

Although this reprogramming of the C1 host is targeted at improving the production of biopharmaceuticals from human genes - which remains the focus of our commercialization strategy for the C1 Expression System - one side benefit of this core technology development program will be to further improve the capabilities of this unique fungus to make even larger quantities of proteins associated with genes from diverse living organisms, such as fungi other than C1, yeast, bacteria, algae and plants. This will help us generate revenues in the shorter term by cost-effective production of proteins and enzymes of commercial interest to potential business partners in sectors such as energy, agriculture, and food and feed. We continue to mine the C1 genome and have identified a number of enzymes that have the potential to become new products for several industries, such as pulp and paper and food and feed.

Still in the development stage, we refer to these activities as our BioSciences Business. These activities have generated $75,000 in revenue through June 30, 2005 and no revenue in 2004.

We have also been developing the screening potential of our C1 Host Technology for gene discovery and the identification of protein variants resulting from modifications to their genes, which we refer to as our C1 Screening System. These efforts have included our purchase of state-of-the-art robotics equipment and a collaborative partnership with a Netherlands-based scientific organization, TNO Quality of Life (f/k/a TNO Nutrition and Food Research Institute), and the establishment of a wholly-owned subsidiary, Dyadic Nederland BV, to develop a fully-automated high throughput screening system, or HTS System. We believe that if our BioSciences Business' application of our C1 Expression System and our C1 Screening System can each be perfected, we will be able to offer a potentially unique end-to-end solution for drug companies: a single host production organism usable throughout the discovery, pre-clinical and clinical testing and commercial production phases of drug development that would greatly increase drug development efficiency, economy and speed to market. By the same reasoning, we believe that the C1 Host Technology is expected to benefit the development of industrial or specialty enzyme products by allowing discovery, improvement, development and large-scale manufacturing in a single host organism, which should result in shorter inception to commercialization time and greater probability of success.

Currently, we own three issued U.S. patents, eight issued International patents and 49 U.S. and International filed and pending patent applications which we believe provide broad protection for our C1 Expression System, our underlying C1 Host Technology, our C1 Screening System and their products and commercial applications.

History of Dyadic

The Company's operating subsidiary, Dyadic International (USA), Inc. ("Dyadic-Florida"), was founded by Chief Executive Officer, Mark A. Emalfarb, in 1979, and was throughout the 1980's a leading supplier of both domestic pumice stones and pumice stones imported from overseas for use in the stone washing of denim garments. In the 1990's, we evolved from serving only the denim industry to the development and manufacture of specialty enzymes and chemicals and, by 1995, were generating revenues of approximately $8,500,000 and annual profits of approximately $1,300,000. In the mid-1990's, we discovered the C1 microorganism in connection with our efforts to develop improved industrial enzymes. By 1998, we began investing significant financial resources in the application of molecular genetic technology to the development of the C1 Host Technology.

In the first half of 2001, we raised capital of approximately $13,635,000, prior to expenses of approximately $200,000, largely to fund the development of our C1 Screening System. At that time, we thought we were within one year of being able to find collaboration partners to help us complete its development, though we continued to develop our C1 Expression System. However, between 2001 and 2003, even as our Enzyme Business began to grow rapidly, we experienced a major shift in market demand for our C1 Screening System. First, we found that large pharmaceutical companies, frustrated by lack of success with some of their investments in unproven screening technologies like our C1 Screening System, began requiring unprecedented levels of accumulated scientific data as a pre-condition to partnering with us. Second, we found that the interest of these large pharmaceutical companies had moved away from gene discovery and screening applications, to an interest in the expression of therapeutic proteins for pre-clinical testing, clinical trials and drug commercialization.

We adjusted our strategy accordingly, and between May 2003 and March 2004, we began to focus principally on our C1 Expression System, even as we continued to develop our C1 Screening System and related HTS hardware and assemble more scientific data to support our claims regarding that System's potential. During this interval of time, we also continued to grow our Enzyme Business, as we used our C1 Expression System and other proprietary technologies to successfully develop several industrial enzymes, while continuing to seek equity financing.

Between April and July 31, 2004, we raised common equity capital of approximately $4,735,000, prior to expenses of approximately $118,000, through a private placement. Between October 1 and November 4, 2004, we raised additional common equity capital of approximately $25,400,000, prior to estimated expenses of approximately $2.7 million, in a private placement we conducted companion to the merger of our wholly owned subsidiary into Dyadic-Florida, in which its shareholders received shares of our stock representing a majority of our outstanding shares.

We derive almost all of our revenues from the conduct of our Enzyme Business, and have thus far generated only nominal revenues from our conduct of our BioSciences Business. Since we began developing the C1 Host Technology in 1998, we have incurred net losses of approximately $28,894,000 through June 30, 2005. Those losses resulted primarily from expenses associated with research and development activities and general and administrative expenses. To become profitable, we must continue to grow our Enzyme Business (see Sales & Marketing Strategy below), and generate income from the conduct of our BioSciences Business, either directly or through potential future license agreements and collaborative partnerships with drug companies.

Research and Development - C1 Host Technology

During the first half of 2005, our efforts have focused on developing improved hosts for the production of a wider variety of proteins from diverse sources. For example, using gene knock-out technology, several genes thought to limit expression of foreign proteins in C1 have been eliminated. Through the removal of unwanted or interfering genes, our gene knock-out technology has shown some promise of producing human proteins at higher yields. Although the initial results are not at the levels we ultimately desire, the results of expression experiments in the improved strains suggest higher stability of the expressed human proteins. The effect of these knock-outs on C1's expression of foreign proteins currently is being tested. We believe that using knock-out technology will make our C1 expression system more robust and versatile, thus allowing us to produce a more diverse set of proteins for use in multiple industries.

In May 2005, we achieved the early completion of a high quality sequence of the 38,000,000 bases in the C1 genome by Agencourt Bioscience Corporation. The C1 sequence will aid in the development of our current business based on the ability of the C1 organism to produce large volumes of low cost industrial enzymes for industrial, textile, pulp and paper, feed and food, and agricultural applications and to expand the commercial capabilities of this technology. We expect to further extend its market reach to develop new and better therapeutic proteins more affordably. Completion of the C1 genome sequencing will permit us to mine it to identify novel and improved protein products for a broad spectrum of industries, including energy, feed and food, pulp and paper, and pharmaceuticals. In addition, this sequence information is expected to enable us and our collaborators to expand the variety of proteins and enzymes that can be brought to market. As an example, we expect to provide unique enzymes to companies in these industries to alleviate production process bottlenecks and high manufacturing costs they often face, as well as to enable manufacturing of many products in their R&D pipelines for which no suitable production processes have heretofore been found. It is expected that this genome sequence information will also allow Dyadic to improve the C1 Expression System by (i) readily identifying and isolating genes that interfere with high-level expression of proteins and knocking them out using the technology described above and (ii) allowing the identification and improvement of genes and proteins that have a positive impact on gene expression.

While the sequence has already proved useful by allowing Dyadic to search for genes within the raw sequence data, we anticipate additional value when the genome is fully annotated. Annotation will result in gene mining, curation, search, and viewing tools to allow the extraction of useful information from the C1 genome sequence. This annotated searchable genomic sequence will serve as a blueprint for the C1 host strain and will facilitate further development of C1 based technology as a platform for discovery and production of a variety of proteins, including high-value therapeutics.

Sales & Marketing Strategy - Enzymes

One of our top priorities for 2005 is to sharply expand the introduction of our new pulp and paper enzyme products to that industry. While we believe these products offer an exceptional value proposition for this industry, we made a strategic decision to approach the penetration of this market with an acute sensitivity to the fact that our target customer decision-makers are responsible for physical plants costing, in many instances, several hundred million dollars or more, and are accustomed to dealing with highly technical sales teams with strong support competencies, following long-term trials of new products. Accordingly, we set about to recruit and assemble a team of seasoned sales and marketing executives and technical salesmen with relevant industry experience in promoting and maintaining sales relationships involving substantial on-going sales and technical servicing. Thus far in 2005, we have successfully recruited a Vice President of Sales & Marketing - Enzymes, a Vice President - Pulp & Paper, and 5 technical sales representatives whom we believe fit this description. During the second half of 2005 and into 2006 we intend to expand our pulp and paper sales and marketing infrastructure, as we work to capture both an increasing number of new customer trials and convert existing and new customer trials into significant and sustained levels of pulp and paper product sales. We continue to estimate the addressable market for our existing enzyme products in the pulp and paper industry and potential enzyme products for the pulp and paper industry currently in our research and development pipeline to be in excess of $1.0 billion.

We have also begun to focus efforts in other industries, such as animal feed, either on our own, or possibly in a collaborative effort with a third party. Although we anticipate increased revenues in industrial enzyme industries other than textiles, we have not generated sufficient sales activity on which to base projections about the sales levels for the rest of 2005 and beyond.

Results of Operations for the Three-Months Ended June 30, 2005 Compared to the
Three-Months Ended June 30, 2004

The following table sets forth the amount of increase or decrease represented by
certain items reflected in the Company's condensed consolidated statements of
operations in comparing the three-months ended June 30, 2005 to the three-months
ended June 30, 2004 (in thousands):

                                        --------------------------------------
                                              Three-Months Ended June 30,
                                        --------------------------------------
                                                                     Increase
                (In thousands)             2005           2004      (Decrease)
                                        --------------------------------------

Net sales                               $    3,988    $    4,441    $     (453)
Cost of goods sold                           3,211         3,369          (158)
                                        --------------------------------------
Gross profit                                   777         1,072          (295)
                                        --------------------------------------


Operating expenses:
  Research and development                     973           857           116
  Selling, general and administrative        2,035         1,077           958
                                        --------------------------------------
                                             3,008         1,934         1,074

Loss from operations                        (2,231)         (862)       (1,369)
                                        --------------------------------------

Other income (expense):
  Interest expense                            (176)         (122)          (54)
  Investment income, net                        95            --            95
  Minority interest                             (3)          (26)           23
  Foreign currency exchange gain
    (loss), net                                 39           (79)          118
  Other income, net                             --             9            (9)
                                        --------------------------------------
Total other expense                            (45)         (218)          173
                                        --------------------------------------

Loss before income taxes                    (2,276)       (1,080)       (1,196)
Provision for income taxes                     (16)          (31)           15
                                        --------------------------------------
Net loss                                $   (2,292)   $   (1,111)   $   (1,181)
                                        ======================================

Net Sales

For the three-months ended June 30, 2005, we generated net sales of approximately $3,988,000, compared to net sales of approximately $4,441,000 for the comparable period ended June 30, 2004, a decrease of approximately $453,000. This decline in revenues reflects both the continued margin pressure in the textile industry and aggressive pricing by competitors which has created a strong downward pressure on pricing as well as the continued, although decreasing concentration of the Company's sales to the textiles market (69% and 82% for the three-month periods ended June 30, 2005 and 2004, respectively). Revenues also continue to be adversely affected by the negative residual effects on the Company's competitive position in its markets resulting primarily from the Company's inability, between 2003 and most of 2004, to fund working capital, staffing expansion, product registrations and product development needs, when the Company chose to instead expend its very limited resources on extending its C1 Host Technology platform. The Company is endeavoring to transition its revenue base from the lower margin textile enzymes to higher margin areas such as enzymes for the pulp and paper and animal feed industries, and has begun to achieve slight growth in these other enzyme industries, increasing net sales in these industries by 46% over sales for the three-months ended June 30, 2004 (or 29% of net sales versus 19%).

To what degree our revenues from the textiles market will continue to decline in the future will depend not only on that market's dynamics, but also on the extent to which pricing pressure created by our competitors continues, on our success in developing new products and our ability to lower our production costs. We believe our revenues will resume growth when new products being developed from our C1 Host Technology and other technologies for new markets (e.g. pulp & paper and animal feed) begin to achieve penetration and other new products are introduced both to existing and other new markets. We have made and continue to make substantial investments both in personnel and other initiatives since November 2004 to expand our sales, marketing and product development efforts. However, we intend to exercise discipline over the application of resources to the textiles market (which is characterized by low profit margins and intense competition) relative to other higher profit and larger market opportunities we identify, the initial effects of which are beginning to be seen in the second quarter of 2005. Nonetheless, the markets for a number of our new products are generally characterized by longer sales cycles for reasons relating to various factors, such as required governmental registration processes (e.g. animal feed enzymes in Europe) and required product trials at customers' facilities of multi-month durations or longer (e.g. pulp & paper), and we can, therefore, offer no guidance as to when, or if, these new products will penetrate those markets.

The following table reflects the Company's sales by industry for the three-month periods ended June 30, 2005 and 2004:

                         ------------------------------------------
                                 Three-Months Ended June 30,
                         -------------------------------------------------------------------
                             2005          %       2004           %      Increase/(Decrease)
                         -------------------------------------------------------------------
Textile*                 $2,752,000       69%   $3,644,000       82%         $ (892,000)
Animal Feed*                362,000        9%      341,000        8%             21,000
Pulp & Paper*               536,000       13%      290,000        6%            246,000
Others (5 industries)*      263,000        7%      166,000        4%             97,000

Bioscience                   75,000        2%           --        0%             75,000
                         -------------------------------------------------------------------
                         $3,988,000      100%   $4,441,000      100%         $ (453,000)
                         ===================================================================

Cost of Goods Sold

For the three-months ended June 30, 2005, cost of goods sold was approximately $3,211,000, or 81% of net sales, as compared to approximately $3,369,000, or 76% of net sales for the three-months ended June 30, 2004. The increase in cost of goods sold as a percentage of sales is due primarily to an increase in the inventory allowance, of approximately $340,000 or 8.5% of net sales. Due to the decrease in textile industry net sales, the Company has recorded a reserve for slow moving inventory items related to that industry.

The Company transacts a significant amount of its business in foreign currency. The effect of changes in foreign currency rates and the resultant effect on the cost of inventory and certain contract manufacturing costs denominated in Euros have and may significantly impact the ultimate cost incurred by the Company in the future.

Research and Development

For the three-months ended June 30, 2005, research and development expenses, or R&D, were approximately $973,000, or 24% of net sales, as compared to approximately $857,000, or 19% of net sales for the three-months ended June 30, 2004, representing an increase of approximately $116,000. To assist in the development of our core technologies, and on new product and technology development, in an effort to ultimately increase revenues and profit margins and to also create additional business opportunities, we hired a project manager, outside contract labor and scientific consultants for an additional expense of approximately $145,000 for both labor and research supplies during the three-month period ended June 30, 2005.

Selling, General and Administrative Expenses

For the three-months ended June 30, 2005, selling, general and administrative expenses were approximately $2,035,000, or 51% of net sales, compared to approximately $1,077,000, or 24% of net sales for the three-months ended June 30, 2004, representing an increase of approximately $958,000. This increase is attributable to several factors, including an increase in salaries and wages of approximately $330,000 due to the addition of five employees in 2005 (two in the finance department, including a Chief Financial Officer, and three in sales and marketing, including a Vice President - Pulp and Paper) and additional contract labor. These additions are a part of the substantial investments both in personnel and other initiatives we have made since November 2004 to expand our sales, marketing and product development efforts, as well as to staff the Company with the personnel necessary to operate as a public company. Professional fees of approximately $393,000 related to accounting, legal and other service related expenses to assist the Company in its transition to a public company and an increase of approximately $78,000 for directors and officers insurance premiums are also factors that contributed to the increase in . . .