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 third quarter of fiscal year 2012, which ended June 30, 2012, was $12.4 million, an increase of 2.2% compared with revenue of $12.2 million for the quarter ended June 30, 2011. Loss from Operations for the quarter was ($23,986) compared with Income from Operations of $229,276 for the quarter ended June 30, 2011. Loss before Taxes for the quarter was ($164,232) compared with Income before Taxes of $80,713 for the quarter ended June 30, 2011. Net Loss was ($48,130) or $0.00 per share for the quarter ended June 30, 2012, compared with Net Income of $1,026,878, or $0.07 per share, for the quarter ended June 30, 2011. Selling, general and administrative (SG&A) costs increased $2,701,418 from the nine month period ended June 30, 2011. These increased costs were virtually all within the Products and Technology segment. However, SG&A costs declined by $349,350 for the quarter ended June 30, 2012 as compared to the previous quarter ended March 31, 2012. We continue to invest in efforts to support our growth initiatives with organic 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.

The dual mode detector technology is producing revenue while still under development. The timing of this development has not proceeded along the track that was originally expected; however, we are delivering limited quantities of commercial grade crystals now and are working to improve the size and quality of this product. 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 also developing three specific technologies within Dynasil Biomedical with the goal to monetize the most promising opportunities. Provisional patents have been filed for certain technologies. We recently entered into a technology collaboration agreement with Mayo Clinic, a not-for-profit worldwide leader in medical care, research and education for people from all walks of life. The first project under the collaborative agreement will focus on the development of a therapeutic hypothermia core cooling technology designed to protect the brain during cardiac arrest and traumatic brain injury. Separately, Dynasil and Mayo Clinic are working together on a blood storage technology designed to extend the shelf life of blood products. Dynasil is in preparation of separate business and financing plans for two of our biomedical technologies. Our intention is that, over the next six to twelve months, at least one of these will be spun out into an independent entity in which Dynasil will retain a substantial interest. This will accomplish both the elimination of some of the G&A support for these technologies as well as enable us to bring expertise to help us advance these technologies. It is too early in the process to tell if these will be commercial or investment successes; therefore, no determination has been made as to the Company's entry into these market segments.

Results of Operations



                                            Results of Operations for the Three Months Ended June 30,
                                              2012                                             2011
                           Contract       Products &                        Contract       Products &
                           Research       Technology         Total          Research       Technology         Total
Revenue                     6,552,211       5,863,561       12,415,772       6,273,104       5,880,071       12,153,175
Gross Profit                2,377,608       2,778,698        5,156,306       2,797,767       2,342,797        5,140,564
SG&A                        2,406,042       2,774,250        5,180,292       2,663,635       2,247,653        4,911,288
Operating Income (Loss)       (28,435 )         4,449          (23,986 )       134,132          95,144          229,276
GM %                               36 %            47 %                             45 %            40 %

Revenue for the three months ended June 30, 2012 was $12,415,772, a 2.2% increase from $12,153,175 for the three months ended June 30, 2011. Revenue from our Contract Research segment ("Contract Research") increased by 4.4%. Revenue from our Products and Technology segment ("Products and Technology") decreased 0.3%. The Contract Research segment revenue growth was significant in light of current pressures on government research funding. The research backlog remains consistent at nearly 18 months. The Products and Technology segment revenue was essentially unchanged.

Gross Profit for the three months ended June 30, 2012 was $5,156,306, or 41.5% of sales, a 0.3% increase from $5,140,564, or 42.3% of sales, for the three months ended June 30, 2011. Gross profit as a percent of sales declined for the Contract Research segment to 36.3% at June 30, 2012 from 44.6% at June 30, 2011, as a result of higher direct costs associated with subcontractors and material costs necessary to perform on contracts. Gross profit for the Products and Technology segment improved to 47.4% as a percent of sales at June 30, 2012 from 39.8% as a percent of sales for the quarter ended June 30, 2011 as a result of favorable sales mix.

Selling, general, and administrative ("SG&A") expenses for the three months ended June 30, 2012 were $5,180,292, or 41.7% of sales. This was an increase from SG&A expenses of $4,911,288, or 40.4% of sales, for the three months ended June 30, 2011. Included in the three months ended June 30, 2012, was approximately $91,000 associated with the separation of our former President and CEO. The Contract Research segment had a 9.7% decline in SG&A expenses of $257,593, partially offsetting the decline in gross margin. The Products & Technology SG&A grew to 47.3% of sales for the three months ended June 30, 2012 compared to 38.2% for the three months ended June 30, 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 approximately $362,500 on research and development efforts in the three months ended June 30, 2012 for new product development and approximately $176,500 on sales and marketing efforts. There were costs of approximately $116,500 associated with the continuing development of the dual mode technology. Finally, there was approximately $236,100 in SG&A expenses during the three months ended June 30, 2012 for continuing development of the Dynasil Biomedical technologies that were acquired in April 2011.

Loss from Operations for the three months ended June 30, 2012 was ($23,986), a decrease of $253,262 from the prior year comparable period. As a percent of sales, the current period was (0.2%) compared with 1.9% in 2011. The Contract Research segment had lower gross margin, partially offset by lower SG&A costs resulting in Loss from Operations of 0.4% of sales for the three months ended June 30, 2012 compared to 2.1% of sales for the period ended June 30, 2011. The Products and Technology segment had Income from Operations of $4,449 or 0.1% of sales for the three months ended June 30, 2012, compared with Income from Operations of $95,144 or 1.6% of sales for the three months ended June 30, 2011.

Net interest expense for the three months ended June 30, 2012 was $140,246, compared with $148,563 for the three months ended June 30, 2011. Interest-bearing debt outstanding at June 30, 2012 was $11,270,135, slightly lower than the outstanding $11,309,008 at June 30, 2011. Debt at June 30, 2012 includes $1,857,564 of promissory notes associated with the obligation to repurchase stock. The addition of the promissory notes offsets the reduction in bank debt of $1,896,419 from June 30, 2011 to June 30, 2012. The promissory notes had an interest rate of 10% per annum.

The Company recognized a net tax benefit of $116,102, net of accrued interest and penalties of approximately $94,000 for the three months ended June 30, 2012 in recognition of federal and state tax losses and current period Research and Experimentation tax credits. The net tax benefit of $946,165 recorded for the next three months ended June 30, 2011 included approximately $1.0 million in Research and Experimentation tax credits.

Net Loss for the three months ended June 30, 2012 was ($48,130), or $0.00 in basic earnings per share, compared with Net Income of $1,026,878, or $0.07 in basic earnings per share, for the quarter ended June 30, 2011. The net tax benefit included approximately $178,000 in U.K. Research and Development tax credits partially offset by approximately $94,000 in estimated interest and penalties related to amended tax returns filed for 2008, 2009 and 2010.

Results of Operations - Year to Date



                                              Results of Operations for the Nine Months Ended June 30,
                                               2012                                               2011
                            Contract        Products &                         Contract        Products &
                            Research        Technology         Total           Research        Technology         Total
Revenue                   $ 19,716,645     $ 17,563,163     $ 37,279,808     $ 18,729,027     $ 17,167,003     $ 35,896,030
Gross Profit              $  7,434,062     $  8,111,840     $ 15,545,902     $  7,621,912     $  7,137,861     $ 14,759,773
SG&A                      $  7,015,114     $  8,664,430     $ 15,679,544     $  7,060,672     $  5,917,454     $ 12,978,126
Operating Income (Loss)   $    418,949     $   (552,591 )   $   (133,642 )   $    561,240     $  1,220,407     $  1,781,647
GM %                                38 %             46 %                              41 %             42 %

Revenue for the nine months ended June 30, 2012 was $37,279,808, a 3.9% increase from $35,896,030 for the nine months ended June 30, 2011. Revenue from our Contract Research segment increased by 5.3% with continued high interest in our research capabilities from our largest governmental agency customers. Our Products and Technology segment had a revenue increase of 2.3%.

Gross Profit for the nine months ended June 30, 2012 was $15,545,902, or 41.7% of sales, a 5.3% increase from $14,759,773, or 41.1% of sales, for the nine months ended June 30, 2011.

SG&A expenses for the nine months ended June 30, 2012 were $15,679,544, or 42.1% of sales. This was an increase from SG&A expenses of $12,978,126, or 36.2% of sales, for the nine months ended June 30, 2011. Included in SG&A for the period, was $819,526 in stock compensation compared with $497,055 for the nine months ended June 30, 2011, and approximately $91,000 associated with the separation of our former President and CEO. The Contract Research segment had a 0.6% decrease in SG&A. The Products & Technology SG&A grew to 49.3% of sales for the nine months ended June 30, 2012 compared to 34.5% for the nine months ended June 30, 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 $1,075,000 on research and development efforts and $419,000 on sales and marketing in the nine months ended June 30, 2012. Finally, included in SG&A expenses during the nine months ended June 30, 2012 was $671,800 for continuing development of the Dynasil Biomedical technologies purchased in April 2011.

Loss from Operations for the nine months ended June 30, 2012 was ($133,642), a decrease of $1,915,289 from the prior year comparable period. As a percent of sales, the Loss from Operations for the nine months ending June 30, 2012 was (0.4%) compared with Operating Income of 5.0% in 2011. The Contract Research segment had Income from Operations of 2.1% of sales for the nine months ended June 30, 2012, compared with the period ended June 30, 2011, which was 3.0% of sales. The Products and Technology segment had Loss from Operations of ($552,591) or (3.1%) of sales for the nine months ended June 30, 2012, compared with Income from Operations of $1,220,407 or 7.1% of sales for the nine months ended June 30, 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 nine months ended June 30, 2012 was $375,855 compared with $461,916 for the nine months ended June 30, 2011, primarily due to the continued reduction in debt during the year partially offset by the interest expense associated with the promissory notes created on June 7, 2012.

The Company recognized a tax benefit of $367,047 for the nine months ended June 30, 2012 in recognition of federal and state tax losses and current period Research and Experimentation tax credits.

Net Loss for the nine months ended June 30, 2012 was ($142,450) or ($0.01) in basic earnings per share, compared with Net Income of $1,798,073, or $0.12 in basic earnings per share, for the nine months ended June 30, 2011.

Liquidity and Capital Resources

Cash decreased by $1,493,528 for the nine months ended June 30, 2012 to $2,986,312. There were non-cash expenses including stock compensation expense of $821,586 and depreciation and amortization of $1,085,691. These items totaled $1,907,277. There was an increase in accounts receivable of $1,780,946 during the nine months ended June 30, 2012. However, accounts receivable declined during the quarter ended June 30, 2012 by $632,750 and Days Sales Outstanding (DSO) improved to 57.0 days from 60.5 days at March 31, 2012. The Contract Research segment had DSO of 55.4 days at June 30, 2012 compared with 54.6 days at March 31, 2012. Although we are still experiencing delays in some of the required submissions of our technical reports, resulting in delayed payments, our process has improved and collection improvement is expected. 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 receipt of 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 Products and Technology segment had DSO of 59.2 days at June 30, 2012 compared with 68.5 days at March 31, 2012. Despite the improvement, collections have generally been slower in this segment. Inventories increased a modest $37,312 and inventory turns were unchanged from 4.0 turns at September 30, 2011. Inventory reserves were increased by $59,353. The net increase in accounts payable and accrued expenses provided $728,418 in cash from operating activities. There has been greater emphasis on aligning payment practices with collection activities.

Cash Provided by Operating Activities

In total, including the increased accounts receivable and the source from accounts payable and accrued expenses, operating activities provided cash of $631,059 for the nine months ended June 30, 2012.

Cash Used in Investing and Financing Activities

Cash used for the purchase of property, plant and equipment for the nine months ended June 30, 2012 was $764,028. Payments of long term debt for the nine months ended June 30, 2012 were $1,432,581 primarily 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 $1,379,917 for the nine months ended June 30, 2012.

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, cash flow and the Company's borrowing capacity. SG&A expenses associated with Dynasil Product's activities for the nine months ended June 30, 2012 was $1,075,000 in research & development and an additional $419,000 for the nine months ended June 30, 2012 in sales & marketing efforts. There was $671,800 spent in the nine months ended June 30, 2012 for continuing development of the Dynasil Biomedical technologies purchased in April, 2011. In total, however, SG&A declined in the quarter ended June 30, 2012 from the prior quarter ended March 31, 2012.

Sovereign Bank Loan Agreement

Due in part to the factors described above, on June 29, 2012, the Company entered into a letter agreement (the "Waiver Letter") with Sovereign as well as Amendment No. 3 (the "Amendment") to the Loan and Security Agreement, dated July 7, 2010, as amended on April 1, 2011 and April 12, 2012 (the "Original Loan Agreement"). Under the Waiver Letter, the Lender agreed to waive non-compliance by the Company with certain financial covenants under the Original Loan Agreement as of June 30, 2012, subject to the Company's compliance with the terms of the Amendment, including the requirement that the Company would raise, on or before September 30, 2012, at least $2,000,000 in gross proceeds from the sale of its capital stock and/or the incurrence of new indebtedness which is subordinated to the indebtedness in favor of the Lender, on terms and conditions acceptable to the Lender in its sole discretion (the "Required Capital Raise") and applying the proceeds as described below, all of which the Company has successfully completed.

The Amendment also made certain other changes to the Original Loan Agreement, including certain financial covenants, limitations on capital expenditures and the termination of the Company's acquisition line of credit, in each case as described in more detail below. The Amendment did not change the interest rates on outstanding indebtedness under the Original Loan Agreement.

The terms of the Amendment are described below:

• The Required Capital Raise on or before September 30, 2012

Under the Amendment, the Company agreed with the Lender that the Company would raise, on or before September 30, 2012, at least $2,000,000 in gross proceeds from the sale of its capital stock and/or the incurrence of new indebtedness which is subordinated to the indebtedness in favor of the Lender, on terms and conditions acceptable to the Lender in its sole discretion. As disclosed in the Company's Form 8-K filed on June 8, 2012, the Company has incurred indebtedness in favor of certain entities affiliated with Dr. Gerald Entine (together, "Entine") in the aggregate principal amount of $1,857,546 (the "Entine Indebtedness"). The Company incurred the Entine Indebtedness in satisfaction of its obligation to repurchase certain shares of Dynasil common stock from Entine pursuant to a put right exercised by Entine on February 12, 2012. The proceeds of the Required Capital Raise must first be used to repay all amounts outstanding under the Entine Indebtedness by September 30, 2012, and thereafter for general working capital needs. The Required Capital Raise has been completed as of July 31, 2012 pursuant to the Note Purchase Agreement ("the Agreement") with Massachusetts Capital Resource Company ("MCRC") described below. Pursuant to the terms of the Agreement, the Company issued and sold to MCRC a $3,000,000 subordinated note (the "Subordinated Note") for proceeds of $3,000,000.

• Amendment to Leverage Ratio Covenants

For the Consolidated Maximum Leverage Ratio (Consolidated Total Funded Debt to Consolidated EBITDA, as defined in the Amendment), the Amendment (i) revised the required ratio for September 30, 2012 from 3.25x to 4.5x; (ii) revised the required ratio for December 31, 2012 from 3.0x to 4.5x; and (iii) revised the required ratio for March 31, 2013 and for each rolling four quarters thereafter from 3.0x to 4.0x.

The Amendment also includes a new Consolidated Maximum Adjusted Leverage Ratio covenant, which is Consolidated Total Funded Debt (excluding subordinated debt) to Consolidated EBITDA, as defined in the Amendment. The Amendment requires the Company to maintain a Consolidated Maximum Adjusted Leverage Ratio equal to or less than (i) 3.25x to 1.00x for each of the rolling four quarter periods ending on September 30, 2012 and December 31, 2012, and (ii) 3.0x to 1.0x for each rolling four quarter period ending on or after March 31, 2013.

For the purposes of calculating both the Consolidated Maximum Leverage Ratio and the Consolidated Maximum Adjusted Leverage Ratio, Consolidated EBITDA (as defined in the Amendment) will be (i) at September 30, 2012, the actual Consolidated EBITDA for the 3 months then ended times 4; (ii) at December 31, 2012, the actual Consolidated EBITDA for the 6 months then ended times 2; and
(iii) at March 31, 2013, the actual Consolidated EBITDA for the 9 months then ended times 4/3 (provided that the add-backs for costs are not annualized).

• Amendment to Fixed Charge Coverage Ratio Covenants

For the Consolidated Fixed Charge Coverage Ratio, the Amendment (i) revised the required ratio for September 30, 2012 from 1.10x to 1.00x; (ii) revised the required ratio for December 31, 2012 from 1.20x to 1.00x; (iii) revised the required ratio for March 31, 2013 from 1.20x to 1.05x; (iv) revised the required ratio at 6/30/13 from 1.20x to 1.10x; and (v) did not change the required ratio at September 30, 2013 (remained at 1.20x).

The Consolidated Fixed Charge Coverage Ratio is defined as Consolidated EBITDA (as defined in the Amendment) for the applicable period divided by the sum of
(a) the Company's consolidated interest expense for such period, plus (b) the aggregate principal amount of scheduled payments on the Company's indebtedness made during such period (excluding any repayment of the Entine Indebtedness), plus (c) the sum of all cash dividends and other cash distributions to the Company's shareholders during such period, plus (d) the sum of all taxes paid in cash by the Company during such period, less (e) up to $75,000 paid to the IRS, to the extent characterized as interest expense, in connection with certain historical tax filings (the "IRS Payments").

For the purposes of calculating the Consolidated Fixed Charge Coverage Ratio, Consolidated EBITDA will be (i) at September 30, 2012, the actual Consolidated EBITDA for the 3 months then ended times 4; (ii) at December 31, 2012, the actual Consolidated EBITDA for the 6 months then ended times 2; and (iii) at March 31, 2013, the actual Consolidated EBITDA for the 9 months then ended times 4/3 (provided that the add-backs for Entine Indebtedness repayment and the IRS Payments are not annualized).

• Restriction on Capital Expenditures

For the fiscal year ending September 30, 2012, the Amendment reduced the limitation on the Company's capital expenditures from $3.25 million to $2.25 million and for fiscal years ending September 30, 2013 and for each fiscal year thereafter, the Amendment raised the limitation on the Company's capital expenditures from $2.00 million to $2.25 million.

• Termination of Acquisition Line of Credit

The Amendment also accelerated the termination date of the Company's $5 million acquisition line of credit to June 29, 2012, which will prohibit the Company from drawing down the approximately $1 million of previously available undrawn funds.

Obligation to Repurchase Stock

As previously disclosed, on February 27, 2012, Dr. Gerald Entine, a former owner of RMD Instruments, LLC and RMD Instruments Corp. (collectively, "RMD"), exercised a put right to require the repurchase of a total of 928,773 shares of Company common stock held by certain entities affiliated with Dr. Entine (collectively, "Entine") for an aggregate purchase price of $1,857,546, payable on the ninetieth business day from the date of the notice of the exercise of the put. This put right originated from the Company's acquisition of RMD in July 2008 and is set forth in the Asset Purchase Agreement dated July 1, 2008 by and among the Company, RMD Instruments Corp., RMD Instruments, LLC and Gerald Entine 1988 Family Trust and the other parties named therein (the "Put Right").

The Company determined to pay the entire aggregate purchase price by issuing the Entine entities three separate promissory notes (the "Entine Promissory Notes") in the aggregate principal amount of $1,857,546. The closing of the transaction occurred on June 7, 2012.

On July 31, 2012, the Company entered into a Note Purchase Agreement with MCRC as described below, in the amount of $3,000,000. The proceeds were used to pay the Entine Promissory Notes in full on August 1, 2012.

There were an additional 71,227 shares of common stock outstanding that were subject to the Put Right. The notice period for these shares has expired and the temporary equity of $142,454 associated with these shares has been reclassified to permanent equity.

Note Purchase Agreement - Massachusetts Capital Resource Company

On July 31, 2012, the Company entered into the Agreement with MCRC. Pursuant to the terms of the Agreement, the Company issued and sold to MCRC the $3,000,000 Subordinated Note for proceeds of $3,000,000. The Company has used a portion of the proceeds from the sale of the Subordinated Note to repay the Entine Indebtedness in the aggregate principal amount of $1,857,546 and has agreed to use the balance of the proceeds for working capital purposes.

The Subordinated Note matures on July 31, 2017, unless accelerated pursuant to an event of default, as described below. The Subordinated Note bears interest at the rate of ten percent (10%) per annum, with interest to be payable monthly on the last day of each calendar month in each year, the first such payment to be due and payable on August 31, 2012. Under the terms of the Agreement, beginning on and with September 30, 2015, and on the last day of each calendar month thereafter through and including July 31, 2017, the Company will redeem, without premium, $130,434 in principal amount of the Subordinated Note together with all accrued and unpaid interest then due on the amount redeemed.

Under the terms of the Agreement and a Subordination Agreement dated July 31, 2012, among the Company, the Guarantor Subsidiaries, the Lender and MCRC, MCRC and any successor holder of the Subordinated Note have agreed that the payment of the principal of and interest on the Subordinated Note shall be subordinated in right of payment, to the prior payment in full of all indebtedness of the Company for money borrowed from banks or other institutional lenders at any time . . .