The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto in the Dynasil Corporation of America ("Dynasil", the "Company" or "we") Form 10-K for the fiscal year ended September 30, 2011.

General Business Overview

Revenue for the second quarter of fiscal year 2012, which ended March 31, 2012, was $12.5 million, an increase of 2.9% compared with revenue of $12.1 million for the quarter ended March 31, 2011. Loss from Operations for the quarter was ($344,662) compared with Income from Operations of $816,858 for the quarter ended March 31, 2011. Loss before Taxes for the quarter was ($467,136) compared with Income before Taxes of $661,701 for the quarter ended March 31, 2011. Net Loss was ($339,551) or ($0.02) per share for the quarter ended March 31, 2012, compared with Net Income of $396,216, or $0.03 per share, for the quarter ended March 31, 2011. Included in our business unit costs were expenses to support our growth initiatives with organic product development of specific product lines within Dynasil Products (previously referred to as RMD Instruments), our dual mode detector commercialization effort and development of Dynasil Biomedical Corp ("Dynasil Biomedical") technologies, all within our Products and Technology segment. These investments include technology development activities, capital equipment depreciation, development of intellectual property, and staff additions in support of organic products, dual mode detector technology and our longer term product/technology pipeline which includes our biomedical portfolio. We anticipate the dual mode detector business will produce revenue beginning this fiscal year. Commercialization of technology from our extensive research and development portfolio and strategic acquisitions are expected to be the key drivers of our future growth and we plan to continue to invest in these growth opportunities, depending upon the availability of capital to fund these endeavors. At the current time, the Company is actively exploring commercialization opportunities in thin film digital x-rays, sensors for nondestructive testing and radiation dosimeters based on technologies developed at Radiation Monitoring Devices, Inc. ("RMD"). We are developing three specific technologies within Dynasil Biomedical with the goal to commercialize or license the most promising opportunities. These include tissue sealant, hypothermia induction and blood storage technology which is being jointly developed with Mayo Clinic. Provisional patents have been filed for certain technologies. No determination has been made as to the Company's entry into these market segments; however, we anticipate decisions will be made on these opportunities within fiscal year 2012.

Results of Operations



                                           Results of Operations for the Three Months Ended March 31,
                                              2012                                             2011
                           Contract       Products &                        Contract       Products &
                           Research       Technology         Total          Research       Technology         Total
Revenue                     6,948,634       5,517,147       12,465,781       6,388,804       5,727,545       12,116,349
Gross Profit                2,625,649       2,559,331        5,184,980       2,291,936       2,423,896        4,715,832
SG&A                        2,247,221       3,282,421        5,529,642       2,057,774       1,841,199        3,898,973
Operating Income (Loss)       378,429        (723,091 )       (344,662 )       234,162         582,697          816,858

Revenue for the three months ended March 31, 2012 was $12,465,781, a 2.9% increase from $12,116,349 for the three months ended March 31, 2011. Revenue from our Contract Research segment ("Contract Research") increased by 8.8%. Revenue from our Products and Technology segment ("Products and Technology") decreased 3.7%. The Contract Research segment revenue growth was significant in light of current pressures on government research funding. The research backlog remains robust at nearly 18 months. The Products and Technology segment was essentially unchanged.

Gross Profit for the three months ended March 31, 2012 was $5,184,980, or 41.6% of sales, a 9.9% increase from $4,715,831, or 38.9% of sales, for the three months ended March 31, 2011. Gross profit as a percent of sales improved for the Contract Research segment to 37.8% at March 31, 2012 from 35.9% at March 31, 2011, as a result of a more favorable cost mix. Gross profit for the Products and Technology segment improved to 46.4% as a percent of sales at March 31, 2012 from 42.3% as a percent of sales for the quarter ended March 31, 2011 as a result of favorable sales mix.

Selling, general, and administrative ("SG&A") expenses for the three months ended March 31, 2012 were $5,529,642, or 44.4% of sales. This was an increase from SG&A expenses of $3,898,973, or 32.2% of sales, for the three months ended March 31, 2011. Included in the three months ended March 31, 2012, was $305,000 in stock compensation expense. This was an increase of $220,000 over the prior year. The Contract Research segment had a $189,447, or 9.2% increase in SG&A, which is commensurate with the increase in revenue over the prior period. The Products & Technology SG&A grew to 59.5% of sales for the three months ended March 31, 2012 compared to 32.1% for the three months ended March 31, 2011. Included in these costs is Dynasil Products' initiative to revitalize all product lines with the goal of gaining market share through new product launches. Dynasil Products spent $524,800 on research and development efforts in the three months ended March 31, 2012 for new product development and $174,000 on Sales and Marketing toward those efforts. There was an increase of $72,000 in expenses for commercialization of our dual mode detector business for the three months ended March 31, 2012 over the same period in 2011. Also, there was $249,968 in SG&A expenses during the three months ended March 31, 2012 for continuing development of the Dynasil Biomedical technologies purchased in April 2011.

Loss from Operations for the three months ended March 31, 2012 was ($344,662), a decrease of $1,161,520 from the prior year comparable period. As a percent of sales, the current period was (2.8%) compared with 6.7% in 2011. The Contract Research segment had lower gross margin and slightly lower SG&A costs resulting in Income from Operations of 5.4% of sales for the three months ended March 31, 2012 compared to 3.7% of sales for the period ended March 31, 2011. The Products and Technology segment had Loss from Operations of ($723,091) or (13.1%) of sales for the three months ended March 31, 2012, compared with Income from Operations of $582,697 or 10.2% of sales for the three months ended March 31, 2011.

Net interest expense for the three months ended March 31, 2012 was $122,474, compared with $155,157 for the three months ended March 31, 2011. Debt was reduced by ($1,877,874) to $9,896,168 at March 31, 2012 from $11,774,042 at March 31, 2011.

The Company recognized a tax benefit of $127,585 for the three months ended March 31, 2012 in recognition of specific federal and state tax losses and current period estimated Research and Experimentation tax credits.

Net Loss for the three months ended March 31, 2012 was ($339,551), or ($0.02) in basic earnings per share, compared with Net Income of $396,216, or $0.03 in basic earnings per share, for the quarter ended March 31, 2011.

Results of Operations - Year to Date



                                              Results of Operations for the Six Months Ended March 31,
                                               2012                                               2011
                            Contract        Products &                         Contract        Products &
                            Research        Technology         Total           Research        Technology         Total
Revenue                   $ 13,164,434     $ 11,699,602     $ 24,864,036     $ 12,455,923     $ 11,286,933     $ 23,742,856
Gross Profit              $  5,056,454     $  5,425,588     $ 10,482,042     $  4,824,145     $  4,798,411     $  9,622,556
SG&A                      $  4,609,072     $  5,971,755     $ 10,580,827     $  4,397,037     $  3,672,946     $  8,069,983
Operating Income (Loss)   $    447,383     $   (546,168 )   $    (98,785 )   $    427,108     $  1,125,465     $  1,552,573

Revenue for the six months ended March 31, 2012 was $24,864,036, a 4.7% increase from $23,742,856 for the six months ended March 31, 2011. Revenue from our Contract Research segment ("Contract Research") increased by 5.7% with continued high interest in our research capabilities from our largest governmental agency customers. Our Products and Technology segment ("Products and Technology") had a revenue increase of 3.7%. Sales for the quarter ended December 31, 2011 were up 11.2% while sales for the quarter ended March 31, 2012 decreased 3.7%. We have noticed decreased sales in our optics businesses due to key customers working down inventories.

Gross Profit for the six months ended March 31, 2012 was $10,482,042, or 42.2% of sales, an 8.9% increase from $9,622,556, or 40.5% of sales, for the six months ended March 31, 2011.

Selling, general, and administrative ("SG&A") expenses for the six months ended March 31, 2012 were $10,580,827, or 42.6% of sales. This was an increase from SG&A expenses of $8,069,983, or 34.0% of sales, for the six months ended March 31, 2011. Included in SG&A for the period, was $578,500 in stock compensation. The Contract Research segment had a 4.8% increase in SG&A commensurate with the increase in revenue for that segment over the prior period. The Products & Technology SG&A grew to 51.0% of sales for the six months ended March 31, 2012 compared to 32.5% for the six months ended March 31, 2011. Included in these costs is Dynasil Products' initiative to revitalize all product lines with the goal of gaining market share through new product launches. Dynasil Products spent $713,000 on research and development efforts and $243,000 on sales and marketing in the six months ended March 31, 2012 toward the new product development effort. There was $149,000 spent on commercialization of dual mode detector business in the six months ended March 31, 2012. Finally, included in SG&A expenses during the six months ended March 31, 2012 was $453,000 for continuing development of the Dynasil Biomedical technologies purchased in April 2011.

Loss from Operations for the six months ended March 31, 2012 was ($98,785), a decrease of $1,651,358 from the prior year comparable period. As a percent of sales, the Loss from Operations for the six months ending March 31, 2012 was (0.4%) compared with Operating Income of 6.5% in 2011. The Contract Research segment had Income from Operations of 3.4% of sales for the six months ended March 31, 2012, which was essentially unchanged from the period ended March 31, 2011, which was also 3.4% of sales. The Products and Technology segment had Loss from Operations of ($546,168) or (4.7%) of sales for the six months ended March 31, 2012, compared with Income from Operations of $1,125,465 or 10.0% of sales for the six months ended March 31, 2011. The change was primarily caused by higher SG&A costs for revitalization of our product lines and commercialization of new technologies.

Net interest expense for the six months ended March 31, 2012 was $246,637 compared with $313,352 for the six months ended March 31, 2011, primarily due to the continued reduction in debt.

The Company recognized a tax benefit of $250,911 for the six months ended March 31, 2012 in recognition of specific federal and state tax losses and current period Research and Experimentation tax credits.

Net Income for the six months ended March 31, 2012 was ($94,511) or ($0.01) in basic earnings per share, compared with $771,398, or $0.06 in basic earnings per share, for the quarter ended March 31, 2011.

Liquidity and Capital Resources

Cash decreased by $2,610,104 for the six months ended March 31, 2012 to $1,869,736. The primary sources of cash included non-cash stock compensation expense of $578,529 and depreciation and amortization of $713,669. These items totaled $1,292,198. There was a large increase in accounts receivable of $2,464,287 during the six months ended March 31, 2012. Revenues for the six months ended March 31, 2012 have remained at historical highs, but collections have not kept pace. Days Sales Outstanding (DSO) increased to 60.5 days at March 31, 2012 from 56.4 days at December 31, 2011 and 46.1 days at September 30, 2011. The $2,464,287 increase in accounts receivable is comprised of an increase of $1,640,244 from the Contract Research segment and an increase of $824,043 from the Products and Technology segment. In our Contracts Research segment, the required submission of some technical reports has been internally delayed, which has delayed payments. In addition, certain governmental agencies have adopted practices requiring more stringent paperwork in order for payment to be made. Once the processes are streamlined with the governmental agencies, there should be no further delays in payments. We believe that these paperwork submission difficulties are temporary and due in part to management transitions at RMD occurring earlier in the year. We do not believe that these procedural matters will ultimately affect the collectability of these receivables and accordingly, we have not made any increase in allowance for doubtful accounts for these receivables. The $824,043 increase in accounts receivable for the Products and Technology segment was due primarily to (i) delayed collections from the largest customer within the segment even though total revenue represents less than 10% of the segment (ii) slower customer payments in general and (iii) individual sale in excess of $200,000 to a large, well-established customer in the UK which has not yet been paid. DSO in this segment increased to 68.5 days from 60.8 days at December 31, 2011 and 61.3 days at September 30, 2011. The provision for doubtful accounts and sales returns was increased by $5,118. Activities are underway to improve collections in both segments and return to lower historical DSO levels. Inventories declined by $183,843 and inventory turns were 4.1 turns compared to 4.0 turns at September 30, 2011. Inventories are all within the Products and Technology segment.

Cash Used in Operating Activities

In total, including the increased investment in accounts receivable, operating activities used $1,107,639..

Cash Used in Investing and Financing Activities

Cash used for the purchase of property, plant and equipment was $687,328. Payments on long term debt were $949,002 as part of regularly schedule payments to Sovereign Bank, N.A. ("Sovereign" or the "Lender") under the five year Term Debt and Acquisition Line of Credit. Net cash used in financing activities was $917,301.

Expenses and Operating Income

The Company has heavily invested in strategic initiatives for the future. These expenses have primarily been recognized in SG&A expenses and have reduced operating income. These expenses include organic product development within Dynasil Products, increased spending on intellectual property creation, staff additions in support of organic products, continued costs to commercialize the dual mode detector technology and spending to support our longer term product/technology pipeline which includes our biomedical portfolio. These expenses, without corresponding revenue, have reduced operating income and reduced cash flow and reduced borrowing capacity. SG&A expenses associated with Dynasil Product's initiatives to revitalize all product lines was $713,000 in research & development and an additional $243,000 in sales & marketing efforts. There was $452,000 spent in the last six months for continuing development of the Dynasil Biomedical technologies purchased in April, 2011.

Sovereign Bank Loan Agreement

Due in part to the factors described above, on April 12, 2012, the Company entered into Amendment No. 2 to Loan and Security Agreement ("Amendment No. 2") with Sovereign Bank which amended the Loan and Security Agreement, dated July 7, 2010, as amended by Amendment No. 1 to Loan and Security Agreement, dated April 1, 2011 (the "Original Loan Agreement"). As described in more detail below, the purpose of the amendment was to extend the term of the revolving line of credit and amend the financial covenants during the current period as the Company worked through the accounts receivable and SG&A expense issues described above.

Amendment No. 2 extended the Scheduled Termination Date for the Revolving Line of Credit from July 7, 2012 to July 7, 2013 or such other later date as may be agreed to in writing by Lender, and made certain adjustments to the required financial covenants, as described below.

Amendment No. 2 adjusted the consolidated maximum leverage ratio required by the Original Loan Agreement to equal to or less than (i) 3.00 to 1.00 for any period ended on or before December 31, 2011 or on or after December 31, 2012, (ii) 3.75 to 1.00 for the rolling four quarter period ended on March 31, 2012, (iii) 3.25 to 1.00 for the rolling four quarter period ending on June 30, 2012, and (iv) 3.25 to 1.00 for the rolling four quarter period ending on September 30, 2012. The required fixed charge coverage ratio for each of those periods had previously been equal to or less than 3.0 to 1.0. The Company's ratio at March 31, 2012 was 3.56 to 1.00.

Additionally, Amendment No. 2 adjusted the consolidated fixed charge coverage ratio required by the Original Loan Agreement to not less than (i) 1.20 to 1.00 for any period ended on or before December 31, 2011 or on or after December 31, 2012, (ii) 0.90 to 1.00 for the rolling four quarter period ended on March 31, 2012, (iii) 1.05 to 1.00 for the rolling four quarter period ending on June 30, 2012, and (iv) 1.10 to 1.00 for the rolling four quarter period ending on September 30, 2012. The consolidated fixed charge coverage ratio for each of those periods had previously been not less than 1.20 to 1.00. The Company's ratio at March 31, 2012 was .99 to 1.00.

Amendment No. 2 also adjusted the limit on Unfunded Capital Expenditures (as defined in the Original Loan Agreement) by the Company to $3,250,000 in the aggregate (tested as of the last day of each fiscal quarter ended after September 30, 2011 on a year-to-date basis). During each Fiscal Year of the Company ending after September 30, 2012, the Company shall not incur Unfunded Capital Expenditures in excess of $2,000,000.00 in the aggregate (tested as of the last day of each fiscal quarter ended after September 30, 2012 on a year-to-date basis). The limit on Unfunded Capital Expenditures had previously been $1,700,000 (tested as of the last day of each fiscal quarter ended after September 30, 2011 on a year-to-date basis). The Company's unfunded capital expenditures were $687,328 at March 31, 2012.

The Company was in compliance with all financial covenants, as amended, at March 31, 2012. See "Liquidity Outlook" below.

Obligation to Repurchase Stock

The former owners of RMD Instruments, LLC, which the Company acquired in 2008 for a combination of cash and shares of Dynasil common stock, have the right to require the Company to repurchase up to 1,000,000 shares of Dynasil common stock issued to them as partial consideration for the transaction at a repurchase price of $2.00 per share (the "Put Right"). As previously disclosed, on February 27, 2012, Dr. Gerald Entine, a former owner of RMD Instruments, LLC, exercised this Put Right to require the repurchase of a total of 928,773 shares of Dynasil common stock held by Dr. Entine and certain affiliates ("Entine"). By no later than May 29, 2012, the Company must pay Entine an aggregate purchase price of $1,857,546 for these shares. To the extent that the Company does not pay cash for these shares, it must issue to Entine a promissory note in payment of the remaining purchase price not paid in cash. According to the terms of the Put Right, any amount of purchase price evidenced by a promissory note would be amortized over a 3-year period to maturity and shall bear interest at the greater of (x) 10% or (y) the prime interest rate published by the Wall Street Journal on the closing date, plus 5%. In addition, any such promissory note shall be secured by the shares purchased with the promissory note.

Dr. Entine was previously a member of the Company's board of directors until his retirement from the board effective as of the Company's 2012 Annual Meeting of Stockholders.

There are an additional 71,227 shares of common stock outstanding that are subject to the Put Right, which could require additional payments by the Company if exercised, at the same $2 per share purchase price. The Put Right with respect to these additional shares will expire on July 1, 2012.

Liquidity Outlook

Due to the delay in collections relating to the processing of the Company's invoices with governmental customers, the increased spending on commercialization and R&D activities and the additional liquidity needs created by the exercise of the Put Right, the Company believes it will not satisfy its financial covenants under the Sovereign Bank Loan Agreement as of June 30, 2012 unless it takes one or more of the actions described below.

To address compliance with its financial covenants and to maintain sufficient capital resources to meet its anticipated cash needs for working capital for the next 12 months, the Company is pursuing alternatives, including amending bank covenant requirements to obtain short-term waivers and/or obtaining third-party financing. Management has begun discussions with relevant parties to each of the potential actions. In addition, the Company plans to take internal steps to cut costs and reduce capital expenditures and to return its collection processes to their historical levels. However, there can be no assurances that the Company will be successful in implementing any of these actions, or if the Company is successful, whether the terms will be favorable to the Company. At the time of the filing of this Quarterly Report on Form 10-Q, given the preliminary stage of the Company's discussions with its Lender and others and the related uncertainty, the Company has reclassified the long-term debt associated with the Sovereign Bank Loan Agreement as a current liability amount of $8,028,688.

In the event of a future financial covenant breach, the Sovereign Bank Loan Agreement permits the Lender to accelerate the indebtedness and terminate the Loan Agreement, which would cause all amounts outstanding, including all accrued interest and unpaid fees, to become immediately due and payable. As described above, management has begun discussions with the Lender regarding the possible need for a waiver or amendment of the financial covenants, however there can be no assurance that the waiver or amendment will be received or that there will not be a material cost for obtaining such a waiver or amendment. Any such action taken by the Lender could result in the Company's having to refinance the Loan Agreement and obtain an alternative source of financing. There is no assurance that such financing would be obtained, or if such refinancing is obtained, that the terms of a new facility would be on terms comparable to the current Loan Agreement. If the Company is unable to obtain such financing, its operations and financial condition would be materially adversely affected and it would be forced to seek an alternative source of liquidity, such as by selling additional securities to continue operations, or to limit its operations.

Strategy to Commercialize our Advanced Technology

Our principal business strategy is to employ our contract research, product development and technological capabilities to establish leading positions in markets including homeland security, industrial and medical. We believe that we can achieve this strategy by: 1) developing and expanding our research portfolio; 2) commercializing the technologies coming from our Contract Research segment; 3) growing organically through investment in existing products; 4) acquiring new technologies or pathways to market to help accelerate commercialization of our technologies into our primary security and medical markets; and 5) identifying and investing in those technologies with the greatest revenue and growth potential in the market.

To achieve our strategy we are focusing on:

· Building a strong team of business and marketing leadership;

· Increasing our effectiveness across the organization through a series of operational initiatives, enabling us to expand into new product lines and penetrate new markets;

· Further strengthening our technology pipeline by expanding business development and by enhancing our intellectual property estate; and

· Executing a focused acquisition strategy that leverages our research and technology expertise and aligns acquisition dollars with projects closest to field readiness.

Contract Research - the Science Behind our Technology

Our Contract Research business unit, RMD, is among the largest small business participants in U.S. government-funded research, performing research and development activities for government agencies including Department of Energy, Department of Defense, Department of Homeland Security, Domestic Nuclear Detection Office, National Institutes of Health, and NASA.

RMD develops advanced technology in materials, sensors and prototype instruments that detect, use or measure radiation, light, magnetism or sound for use in security, medical and industrial applications. RMD has technology practices in material science, radiation detection, digital imaging technology, magnetic imaging, laser optics and photonics.

For more than 25 years, RMD has successfully conducted government research under the auspices of the Small Business Innovation Research ("SBIR") program. In recent years, RMD has augmented its SBIR research with larger, competitively bid government research and development contracts. To grow our research portfolio within the federal government, we are broadening our relationships within key federal funding agencies and the U.S. military. Our research initiatives are aligned with our focus on the homeland security, medical and industrial markets. As of March 31, 2012, RMD had a contract backlog of approximately 18 months.

We believe that research projects provide an important source for new commercial products in areas such as medical imaging, industrial sensors, critical care and point of care diagnostics and homeland security. For example, precision instrumentation in our Products & Technology segment, including our lead paint analyzer and a medical probe for cancer surgery, emanated from the RMD portfolio. Our government-funded research work also has spawned programs such as our dual-mode radiation detection technology.

Intellectual Property

During FY 2011, we were granted five new U.S. patents and have filed 25 new patent applications. Our current portfolio is 41 issued and 54 pending applications. We believe that intellectual property represents an important strategic advantage for us. As a result, we recently established a patent committee to help broaden the value of our intellectual property estate. The committee is strengthening the identification of intellectual property within the Company by implementing a broad based vetting process to specifically understand product definition, technical maturity, the value proposition, competition, and market size to ensure that we develop IP that maximizes the market value of our research. This is consistent with our strategy and will allow us to protect selected technologies that we believe have commercial potential - either through product offerings or licensing agreements.

Products & Technology - Bringing Technology to Market

Our Products & Technology segment includes six business units that manufacture . . .