U.
S. SECURITIES AND EXCHANGE COMMISSION


Washington,
DC   20549







FORM
10-Q







(Mark
One)






x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGEACT
      OF 1934




FOR THE
QUARTERLY PERIOD ENDED DECEMBER 31, 2010


o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934


FOR THE
TRANSITION PERIOD FROM _______ TO ______.




Commission
file number: 000-27503










DYNASIL
CORPORATION OF AMERICA


(Exact
name of registrant as specified in its charter)




Delaware
            22-1734088(State or other
      jurisdiction ofincorporation or organization)
            (I.R.S. Employer
      Identification
      No.)





44 Hunt
Street, Watertown, MA       
02472


(Address
of principal executive offices) (Zip Code)




Registrant’s
telephone number, including area code: (607) 272-3320





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days Yes x No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes oNo o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.




Large
      accelerated filer o
              Non-accelerated
      filer oAccelerated
      filer o
              Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)


Yes oNo x





As of
February 11, 2011 there were 14,884,315 shares of common stock, par value $.0005
per share, outstanding.













DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES





INDEX


PagePART
      1. FINANCIAL INFORMATIONItem
      1.   Financial StatementsDYNASIL CORPORATION OF AMERICA AND
      SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS AS OF DECEMBER 31, 2010 AND
      SEPTEMBER 30, 2009
              
              3CONSOLIDATED
      STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
      ENDED DECEMBER 31, 2010 AND 2009
              
              
              5CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
      FOR THE THREE MONTHS ENDED DECEMBER 31, 2010
              
              
              6CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
      ENDED DECEMBER 31, 2010 AND 2009
              
              
              7NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
              
              
              8Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              
              
              13Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk
              
              
              19Item
      4. Controls and Procedures
              
              
              19PART
      II.  OTHER INFORMATION
              
              
              20Item
      6. Exhibits
              
              
              20Signatures
              
              
              21





2




PART
I – FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS.





DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)




December
      31,
                
                
                September
      30,2010
                
                
                2010(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                2,624,189
                
                
                $
                4,111,966Accounts
      receivable, net of allowance for doubtful accounts of $136,776 and
      $132,584 and sales returns allowance of $21,327 and $24,168 for December
      31, 2010 and September 30, 2010, respectively.
                
                
                6,849,724
                
                
                
                6,360,583Inventories
                
                
                3,303,816
                
                
                
                3,097,219Costs
      in excess of billings
                
                
                460,724
                
                
                
                135,157Prepaid
      income taxes
                
                
                480,031
                
                
                
                410,045Prepaid
      expenses and other current assets
                
                
                440,307
                
                
                
                453,418Total
      current assets
                
                
                14,158,791
                
                
                
                14,568,388Property,
      Plant and Equipment, net
                
                
                3,882,136
                
                
                
                3,953,319Other
      AssetsIntangibles,
      net
                
                
                6,521,944
                
                
                
                6,671,149Goodwill
                
                
                13,591,287
                
                
                
                13,591,287Deferred
      financing costs, net
                
                
                180,590
                
                
                
                190,568Total
      other assets
                
                
                20,293,821
                
                
                
                20,453,004Total
      Assets
                
                $
                38,334,748
                
                
                $
                38,974,711LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesCurrent
      portion of long-term debt
                
                $
                1,870,779
                
                
                $
                1,870,779Accounts
      payable
                
                
                1,047,100
                
                
                
                1,482,250Accrued
      expenses and other liabilities
                
                
                1,546,197
                
                
                
                1,823,222Deferred
      tax liability
                
                
                69,538
                
                
                
                91,100Dividends
      payable
                
                
                131,400
                
                
                
                131,400Total
      current liabilities
                
                
                4,665,014
                
                
                
                5,398,751Long-term
      LiabilitiesLong-term
      debt, net
                
                
                10,368,298
                
                
                
                10,833,334Contingent
      consideration
                
                
                750,000
                
                
                
                750,000Total
      long-term liabilities
                
                
                11,118,298
                
                
                
                11,583,334




The
accompanying notes are an integral part of these consolidated financial
statements.




3





DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)
(Continued)





LIABILITIES
      AND STOCKHOLDERS' EQUITY
(Continued)




December
      31,
                  
                  
                  September
      30,2010
                  
                  
                  2010(unaudited)Temporary
      EquityRedeemable
      common stock, at redemption value of  $2 per share
      or  $2,000,000; put option on 1,000,000 shares issued and
      outstanding December 31, 2010 and September 30, 2010,
      respectively.
                  
                  $
                  2,000,000
                  
                  
                  $
                  2,000,000Stockholders'
      EquityCommon
      Stock, $0.0005 par value, 40,000,000 shares
      authorized,  14,656,416 and 12,482,356 shares issued, 13,846,256
      and 11,672,196 shares outstanding at December 31, 2010 and September 30,
      2010, respectively.
                  
                  
                  7,328
                  
                  
                  
                  6,241Preferred
      Stock, $.001 par value, 15,000,000 shares authorized, 0
      and  5,256,000 shares issued and outstanding at December 31,
      2010 and September 30, 2010, respectively, 10% cumulative,
      convertible
                  
                  
                  -0-
                  
                  
                  
                  5,256Additional
      paid in capital
                  
                  
                  15,444,710
                  
                  
                  
                  15,186,029Deferred
      compensation
                  
                  
                  (57,886
                  )
                  
                  
                  (160,088
                  )Accumulated
      other comprehensive income
                  
                  
                  108,481
                  
                  
                  
                  150,162Retained
      earnings
                  
                  
                  6,035,145
                  
                  
                  
                  5,791,36821,537,778
                  
                  
                  
                  20,978,968Less
      810,160 shares of treasury stock - at cost
                  
                  
                  (986,342
                  )
                  
                  
                  (986,342
                  )Total
      stockholders' equity
                  
                  
                  20,551,436
                  
                  
                  
                  19,992,626Total
      Liabilities and Stockholders' Equity
                  
                  $
                  38,334,748
                  
                  
                  $
                  38,974,711




The
accompanying notes are an integral part of these consolidated financial
statements.




4




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





Three
      Months EndedDecember
      312010
            
            
            2009Net
      revenue
            
            $
            11,626,507
            
            
            $
            9,936,767Cost
      of revenue
            
            
            6,719,783
            
            
            
            6,051,951Gross
      profit
            
            
            4,906,724
            
            
            
            3,884,816Selling,
      general and administrative expenses
            
            
            4,171,010
            
            
            
            2,812,980Income
      from operations
            
            
            735,714
            
            
            
            1,071,836Interest
      expense, net
            
            
            158,196
            
            
            
            162,441Income
      before income taxes
            
            
            577,518
            
            
            
            909,395Income taxes
            
            
            202,341
            
            
            
            295,626Net
      income
            
            $
            375,177
            
            
            $
            613,769Net
      Income
            
            $
            375,177
            
            
            $
            613,769Foreign
      currency translation, net of income taxbenefit
      of $21,562 and $0 for 2010 and 2009
            
            
            41,681
            
            
            
            -0-Total
      comprehensive income
            
            $
            416,858
            
            
            $
            613,769Net
      income
            
            $
            375,177
            
            
            $
            613,769Dividends
      on preferred stock
            
            
            131,400
            
            
            
            143,233Net
      income applicable to common stockholders
            
            
            243,777
            
            
            
            470,536Dividend
      add back due to preferred stock conversion
            
            
            131,400
            
            
            
            -0-Net
      income for diluted income per common share
            
            $
            375,177
            
            
            $
            470,536Basic
      net income per common share
            
            $
            0.03
            
            
            $
            0.04Diluted
      net income per common share
            
            $
            0.02
            
            
            $
            0.04Weighted
      average shares outstandingBasic
            
            
            12,979,939
            
            
            
            11,791,820Diluted
            
            
            15,497,495
            
            
            
            11,968,319





The
accompanying notes are an integral part of these consolidated financial
statements.




5




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


(UNAUDITED)




AccumulatedAdditional
              
              
              Deferred
              
              
              
              
              
              Other
              
              
              
              
              
              
              
              
              TotalCommon
              
              
              Common
              
              
              Preferred
              
              
              Preferred
              
              
              Paid-in
              
              
              Stock
              
              
              Retained
              
              
              Comprehensive
              
              
              Treasury
      Stock
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Compensation
              
              
              Earnings
              
              
              Income
              
              
              Shares
              
              
              Amount
              
              
              EquityBalance,
      September 30, 2010
              
              
              12,482,356
              
              
              $
              6,241
              
              
              
              5,256,000
              
              
              $
              5,256
              
              
              $
              15,186,029
              
              
              $
              (160,088
              )
              
              $
              5,791,368
              
              
              $
              150,162
              
              
              
              810,160
              
              
              $
              (986,342
              )
              
              $
              19,992,626Issuance
      of shares of common stockunder employee stock purchase
      plan
              
              
              11,709
              
              
              
              6
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              43,153
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              43,159Recognition
      of stock compensation earned
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              112,202
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              112,202Issuance of shares of common stock under
      stock option plan
              
              
              20,000
              
              
              
              10
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              39,990
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              40,000Compensation
      costs recognized inconnection with employee
      bonuses
              
              
              3,941
              
              
              
              2
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              17,497
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              17,499Compensation
      costs recognized inconnection with employment
      contract
              
              
              2,000
              
              
              
              1
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              9,999
              
              
              
              (10,000
              )
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-Compensation
      costs recognized inconnection with stock
    options
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              58,829
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              58,829Issuance
      of shares of common stock forconversion of Series C preferred
      stock
              
              
              2,102,400
              
              
              
              1,051
              
              
              
              (5,256,000
              )
              
              
              (5,256
              )
              
              
              4,205
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-Foreign
      currency translation adjustment
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              0
              
              
              
              -0-
              
              
              
              0
              
              
              
              (41,681
              )
              
              
              -0-
              
              
              
              -0-
              
              
              
              (41,681
              )Issuance
      of shares of common stock inlieu of Series C preferred stock
      dividends
              
              
              34,010
              
              
              
              17
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              85,008
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              85,025Preferred
      stock dividends
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              (131,400
              )
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              (131,400
              )Net
      income
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              375,177
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              375,177Balance,
      December 31, 2010
              
              
              14,656,416
              
              
              $
              7,328
              
              
              
              -0-
              
              
              $
              0
              
              
              $
              15,444,710
              
              
              $
              (57,886
              )
              
              $
              6,035,145
              
              
              $
              108,481
              
              
              
              810,160
              
              
              $
              (986,342
              )
              
              $
              20,551,436




The
accompanying notes are an integral part of these consolidated financial
statements.
  6




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)




Three
      Months EndedDecember
      312010
                
                
                2009Cash
      flows from operating activities:Net
      income
                
                $
                375,177
                
                
                $
                613,769Adjustments
      to reconcile net income to net cash used in operating
      activitiesStock
      compensation expense
                
                
                188,530
                
                
                
                54,676Provision
      for doubtful accounts and sales returns
                
                
                1,350
                
                
                
                (5,345
                )Depreciation
      and amortization
                
                
                327,596
                
                
                
                251,866Deferred
      income taxes
                
                
                (21,562
                )
                
                
                -0-Net
      increase (decrease) in billings in excess of costs
                
                
                (325,567
                )
                
                
                420,100(Increase)
      decrease in:Accounts
      receivable
                
                
                (490,491
                )
                
                
                (1,567,102
                )Inventories
                
                
                (206,597
                )
                
                
                209,250Prepaid
      expenses and other current assets
                
                
                13,111
                
                
                
                (47,690
                )Increase
      (decrease) in:Accounts
      payable and accrued expenses
                
                
                (712,403
                )
                
                
                268,908Income
      taxes payable
                
                
                (69,569
                )
                
                
                (353,559
                )Net
      cash used in operating activities
                
                
                (920,425
                )
                
                
                (155,127
                )Cash
      flows from investing activitiesPurchases
      of property, plant and equipment
                
                
                (124,124
                )
                
                
                (45,826
                )Net
      cash used in investing activities
                
                
                (124,124
                )
                
                
                (45,826
                )Cash
      flows from financing activitiesIssuance
      of common stock
                
                
                83,159
                
                
                
                177,533Repayment
      of long term debt
                
                
                (465,036
                )
                
                
                (726,032
                )Preferred
      stock dividends paid
                
                
                (46,375
                )
                
                
                (143,233
                )Net
      cash used in financing activities
                
                
                (428,252
                )
                
                
                (691,732
                )Effect
      of exchange rates on cash and cash equivalents
                
                
                (14,976
                )
                
                
                -0-Net
      decrease in cash and cash equivalents
                
                
                (1,487,777
                )
                
                
                (892,685
                )Cash
      and cash equivalents, beginning
                
                
                4,111,966
                
                
                
                3,104,778Cash
      and cash equivalents, ending
                
                $
                2,624,189
                
                
                $
                2,212,093





The
accompanying notes are an integral part of these consolidated financial
statements.




7




DYNASIL
CORPORATION OF AMERICA


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Note
1 - Basis of Presentation





The
consolidated balance sheet as of September 30, 2010 was audited and appears in
the Form 10-K previously filed by the Company.  The consolidated
balance sheet as of December 31, 2010 and the consolidated statements of
operations, changes in stockholders’ equity and cash flows for the three months
ended December 31, 2010 and 2009, and the related information contained in these
notes have been prepared by management without audit.  In the opinion
of management, all adjustments (which include only normal recurring items)
necessary to present fairly the financial position, results of operations and
cash flows in conformity with generally accepted accounting principles as of
December 31, 2010 and for all periods presented have been
made.  Interim operating results are not necessarily indicative of
operating results for a full year.





Certain
information and note disclosures normally included in the Company's annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted.  It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's September 30,
2010 Annual Report on Form 10-K previously filed by the Company with the
Securities and Exchange Commission.





Note
2 - Inventories





Inventories
are stated at the lower of average cost or market.  Cost is determined
using the first-in, first-out (FIFO) method.  Inventories consist of
raw materials, work-in-process and finished goods.  The Company
evaluates inventory levels and expected usage on a periodic basis and records
adjustments for impairments as required.





Inventories
consisted of the following:





December
      31, 2010
            
            
            September
      30, 2010Raw
      Materials
            
            $
            2,477,351
            
            
            $
            2,386,255Work-in-Process
            
            
            418,344
            
            
            
            416,525Finished
      Goods
            
            
            408,121
            
            
            
            294,439$
            3,303,816
            
            
            $
            3,097,219




Note
3 – Costs in Excess of Billings





Billings
in excess of costs, or costs in excess of billings, relates to research and
development contracts and consists of billings at provisional contract
rates compared to actual costs plus fees.




8





Note
4 – Intangible Assets





Intangible
assets at December 31, 2010 and September 30, 2010 consist of the
following:





Useful
            
            
            Gross
            
            
            AccumulatedDecember 31, 2010
            
            Life (years)
            
            
            Amount
            
            
            AmortizationAcquired
      Customer Base
            
            
            5-15
            
            
            $
            7,025,413
            
            
            $
            1,223,236Know
      How
            
            
            15
            
            
            
            512,000
            
            
            
            85,333Trade
      Names
            
            
            15
            
            
            
            219,000
            
            
            
            36,500Backlog
            
            
            4
            
            
            
            182,000
            
            
            
            71,400$
            7,938,413
            
            
            $
            1,416,469Useful
            
            
            Gross
            
            
            AccumulatedSeptember 30, 2010
            
            Life (years)
            
            
            Amount
            
            
            AmortizationAcquired
      Customer Base
            
            
            5-15
            
            
            $
            7,025,413
            
            
            $
            1,104,648Know
      How
            
            
            15
            
            
            
            512,000
            
            
            
            76,800Trade
      Names
            
            
            15
            
            
            
            219,000
            
            
            
            32,850Backlog
            
            
            4
            
            
            
            182,000
            
            
            
            52,966$
            7,938,413
            
            
            $
            1,267,264








Amortization
expense for the three months ended December 31, 2010 and 2009 was $149,205 and
$133,805.  Estimated amortization expense for each of the next five
fiscal years is as follows:





December 31, 2010
            
            2011
      (9 Mos)
            
            
            2012
            
            
            2013
            
            
            2014
            
            
            2015
            
            
            2016Acquired
      Customer Base
            
            
            355,765
            
            
            
            467,728
            
            
            
            463,133
            
            
            
            463,133
            
            
            
            463,133
            
            
            
            463,133Know
      How
            
            
            55,300
            
            
            
            55,300
            
            
            
            55,300
            
            
            
            55,300
            
            
            
            55,300
            
            
            
            55,300Trade
      Names
            
            
            10,950
            
            
            
            14,600
            
            
            
            14,600
            
            
            
            14,600
            
            
            
            14,600
            
            
            
            14,600Backlog
            
            
            55,300
            
            
            
            55,300
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0$
            477,315
            
            
            $
            592,928
            
            
            $
            533,033
            
            
            $
            533,033
            
            
            $
            533,033
            
            
            $
            533,033





Note
5 – Goodwill





There was
no change in the carrying value of goodwill during the three months ended
December 31, 2010.





Note
6 – Earnings Per Common Share





Basic
earnings per common share is computed by dividing the net income applicable to
common shares after preferred dividends paid if applicable, by the weighted
average number of common shares outstanding during each period.
Diluted earnings per common share adjusts basic earnings per share for the
effects of common stock options, common stock warrants, convertible preferred
stock and other potential dilutive common shares outstanding during the
periods.




9





For
purposes of computing diluted earnings per share, 2,517,556 and 176,499 common
share equivalents were assumed to be outstanding for the quarters ended December
31, 2010 and 2009, respectively.  The effect of assumed conversion of
the Series C Preferred Stock into 2,102,400 common shares, as well as certain
stock options, was antidilutive as of December 31, 2009 and therefore excluded
from the computations.  Due to the increase in the price of the
Company’s common stock, the Series C Preferred Stock was dilutive during the
quarter ended December 31, 2010.  The Series C Preferred Stock was
converted into common stock on December 21, 2010, thus the appropriate
percentage of these shares is included in the calculation as of December 31,
2010.  The computation of the weighted shares outstanding is as
follows:





Weighted
      average shares outstanding
            
            December
      31, 2010
            
            
            December
      31, 2009Basic
            
            
            12,979,939
            
            
            
            11,791,820Effect
      of dilutive securitiesStock
      Options
            
            
            663,870
            
            
            
            176,499Convertible
      Preferred Stock
            
            
            1,853,686
            
            
            
            0Dilutive
      Average Shares Outstanding
            
            
            15,497,495
            
            
            
            11,968,319




Note
7 - Stock Based Compensation





The fair
value of the stock options granted was estimated at the date of grant using the
Black-Scholes options pricing model.  Based on the list of assumptions
presented below with numbers shown for the most recent grant, the weighted
average fair value of the options granted during the three months ended December
31, 2010 is $1.62 per share.




December 2, 2010 (Date of most recent
      grant)Expected
      term in years
              
              3
      yearsRisk-free
      interest rate
              
              
              3.95
              %Expected
      volatility
              
              
              85.21
              %Expected
      dividend yield
              
              
              0.00
              %


The
expected volatility was determined with reference to the historical volatility
of the Company's stock.  The Company uses historical data to estimate
option exercise and employee termination with the valuation
model.  The expected term of options granted represents the period of
time that the options granted are expected to be outstanding.  The
risk-free interest rate for periods within the contractual life of the option is
based on the U.S. Treasury rate in effect at the time of grant.





During
the three months ended December 31, 2010, 69,802 stock options were granted with
prices ranging from $5.53 to $7.32 per share and 20,000 stock options were
exercised.  Of the options granted 11,445 of the options cannot be
exercised until 2011 and 30,000 of the options cannot be exercised until 2012,
therefore, the stock-based compensation expense of $60,280 will be recognized at
that time.  During the three months ended December 31, 2010, 28,537 of
the stock options granted were immediately exercisable and 30,000 of previously
granted stock options became exercisable, therefore, stock-based compensation
expense of $58,829 was recognized during the three months ended December 31,
2010.  The 20,000 stock options exercised had an exercise price of
$2.00 per share with $40,000 paid in cash.  During the three months
ended December 31, 2010, 20,000 options were cancelled, with an exercise price
of $1.66.





For the
three months ended December 31, 2010, total stock-based compensation charged to
operations for option-based arrangements amounted to $188,530.  At
December 31, 2010, there was approximately $115,394 of total unrecognized
compensation expense related to non-exercisable option-based compensation
arrangements under the Plan.





Note
8 - Equity





On
December 21, 2010, Dynasil issued an aggregate of 2,102,400 shares of its Common
Stock, $.0005 par value per share, as a result of the mandatory conversion on
that date of 5,256,000 shares of its Series C 10% Cumulative Convertible
Preferred Stock (the "Series C Preferred Shares") at a conversion price of $2.50
per share. Dynasil had previously given notice of the mandatory conversion of
all of the Series C Preferred Shares on October 22, 2010. 100% of the Series C
preferred stock was converted to common stock which eliminates dividend payments
of $525,600 on an annual basis.  The Company’s convertible preferred
stock, when issued, was convertible to common stock at or above the then current
market price of the Company’s common stock and therefore, contains no beneficial
conversion feature.  Dividends on the Series C Preferred Shares were
payable quarterly in cash or common stock at the election of the
stockholder.  There is currently no outstanding preferred
stock.




10




Note
9 – Segment, Customer and Geographical Reporting





Segment
Financial Information





Dynasil’s
business breaks down into two segments: optics/photonics products and
instruments and contract research.  Within these segments, there is a
segregation of reportable units based upon the organizational structure used to
evaluate performance and make decisions on resource allocation, as well as
availability and materiality of separate financial results consistent with that
structure.  The optics/photonics products and instruments segment
manufactures optical materials, components, coatings and specialized instruments
used in various applications in the medical, industrial, and homeland
security/defense sectors.  Our contract research segment is one of the
largest small business participants in U.S. government-funded
research.  The Company’s segment information is summarized
below:





Three
      Months Ended December 31,Segment
            
            2010
            
            
            2009Contract
      ResearchRevenue
            
            $
            6,067,119
            
            
            $
            5,787,584Income
      from Operations
            
            
            192,946
            
            
            
            398,713Income
      as a percent of revenues
            
            
            3.2
            %
            
            
            6.9
            %Photonics
      Products and InstrumentsRevenue
            
            $
            5,559,388
            
            
            $
            4,149,183Income
      from Operations
            
            
            542,768
            
            
            
            673,123Income
      as a percent of revenues
            
            
            9.8
            %
            
            
            16.2
            %TotalRevenue
            
            $
            11,626,507
            
            
            $
            9,936,767Income
      from Operations
            
            
            735,714
            
            
            
            1,071,836Income
      as a percent of revenues
            
            
            6.3
            %
            
            
            10.8
            %GoodwillContract
      Research
            
            $
            4,754,825
            
            
            $
            4,754,825Photonics
      Products and Instruments
            
            $
            8,836,462
            
            
            $
            6,299,571





Customer
Financial Information





For the
three months ended December 31, 2010, the top three customers for the Contract
Research segment were each various agencies of the U.S.
Government.  For the three months ended December 31, 2010, these
customers made up 82% of Contract Research revenue.





For the
Products and Instruments segment, there was no customer whose revenue
represented more than 10% of the total segment revenue for the three months
ended December 31, 2010.








Geographic
Financial Information





Revenue
by geographic location in total and as a percentage of total revenue, for the
three months ended December 31, 2010 and 2009 are as follows:





Three
      Months Ended
            
            
            Three
      Months EndedDecember
      31, 2010
            
            
            December
      31, 2009Geographic Location
            
            Revenues
            
            
            %
      of Total
            
            
            Revenues
            
            
            %
      of TotalUnited
      States
            
            $
            9,405,637
            
            
            
            80.9
            %
            
            $
            7,785,633
            
            
            
            78.4
            %Europe
            
            
            1,514,286
            
            
            
            13.0
            %
            
            
            806,911
            
            
            
            8.1
            %Other
            
            
            706,584
            
            
            
            6.1
            %
            
            
            1,344,223
            
            
            
            13.5
            %$
            11,626,507
            
            
            
            100.0
            %
            
            $
            9,936,767
            
            
            
            100.0
            %




11





Note
10 – Business Acquisition – Hilger Crystals, Ltd.





On July
19, 2010, Dynasil completed the acquisition of 100% of the issued and
outstanding common stock of Hilger Crystals Limited from Newport Corporation
(“Newport”).  Hilger, located in Margate, Kent, England, is engaged in
the manufacture of synthetic crystals for infrared spectroscopy and x-ray and
gamma ray detection.





The
following is the comparative financial information of the Company for the three
months ended December 31, 2010 and the proforma financial information for the
three months ended December 31, 2009 assuming the transaction had been
consummated at the beginning of the year (i.e., October 1, 2009.)





For the
      three
              months
      ended
              December
      31, 2010 (Unaudited)
            
            
            For the
      three
              months
      ended
              December
      31, 2009 (Unaudited)Statement
      of Operations:Revenue
            
            $
            11,626,507
            
            
            $
            10,494,396Cost
      of revenue
            
            
            6,719,783
            
            
            
            6,409,191Gross
      profit
            
            
            4,906,724
            
            
            
            4,085,205Operating
      Expense
            
            
            4,171,010
            
            
            
            3,107,810Income
      from operations
            
            
            735,714
            
            
            
            977,395Interest
      expense, net
            
            
            158,196
            
            
            
            160,567Income
      before taxes
            
            
            577,518
            
            
            
            816,828Income
      taxes
            
            
            202,341
            
            
            
            376,212Net
      Income
            
            $
            375,177
            
            
            $
            440,616Earnings
      per share:Basic
            
            $
            0.03
            
            
            $
            0.04Diluted
            
            $
            0.02
            
            
            $
            0.04








Note
11 - Income Taxes





Dynasil
Corporation of America and its wholly-owned subsidiaries file a consolidated
federal income tax return.





The
Company uses the asset and liability approach to account for income
taxes.  Under this approach, deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes and net operating loss and tax credit carryforwards.  The
amount of deferred taxes on these temporary differences is determined using the
tax rates that are expected to apply to the period when the asset is realized or
the liability is settled, as applicable, based on tax rates, and tax laws, in
the respective tax jurisdiction then in effect.  Valuation allowances
are provided if it is more likely than not that some or all of the deferred tax
assets will not be realized.  The provision for income taxes includes
taxes currently payable, if any, plus the net change during the year in deferred
tax assets and liabilities recorded by the Company.





The
Company applies the authoritative provisions related to accounting for
uncertainty in income taxes.  As required by these provisions, the
Company recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit.  For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax
authority.  The Company has applied these provisions to all tax
positions for which the statute of limitations remained open.  There
was no impact on the Company’s consolidated financial position, results of
operations, or cash flows as of December 31, 2010 and 2009.  As of
December 31, 2010 and 2009, the Company had no unrecognized tax
benefits.  The Company’s practice is to recognize interest and/or
penalties related to income tax matters in income tax expense.  As of
December 31, 2010 and 2009, the Company had no accrued interest or penalties
related to income taxes.  The Company currently has no federal or
state tax examinations in progress.  The Company’s tax filings for
federal and state jurisdictions for the years 2007 to 2010 are still subject to
examination.




12





ITEM
2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS





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
ending September 30, 2010.





General
Business Overview





Revenue
for the first quarter of fiscal year 2011 which ended December 31, 2010 rose to
a record level once again of $11.6 million, an increase of 17% over revenue of
$9.9 million for the quarter ended December 31, 2009.  Income from
Operations for the quarter was $735,714 as compared to $1,071,836 for the
quarter ended December 31, 2009 with specific unusually high administrative
expenses of approximately $340,000 associated with our December 2010 listing on
the NASDAQ Global Market (“NASDAQ”) and costs related to our acquisitions
program, including uncompleted transactions.  Similarly, Income before
Taxes for the quarter was $577,518, down $331,877 from the prior year quarter
ended December 31, 2009.  Net Income for the quarter was $375,177 or $0.03
per share, compared with Net Income of $613,769 or $0.04 per share, for the
quarter ended December 31, 2009.  Strong business unit profitability was
partially offset by our corporate level spending on growth related
initiatives.  While the costs of our NASDAQ listing had a significant
negative impact on quarter results, management believes that the NASDAQ listing
should enable us to increase the trading liquidity of our stock, broaden our
stockholder base and raise our profile in the investment
community.  In addition, acquisitions and commercialization of
technology from our extensive R&D portfolio are expected to be key drivers
of our future growth and we plan to continue to invest in these growth
drivers.





First
quarter revenue include $873,755 derived from our acquisition of Hilger on July
19, 2010.  Excluding the revenue associated with the acquisition of
Hilger, adjusted revenue growth was 8.2%.  Hilger’s results are
reported in our Optics/Photonics Products and Instruments segment.





For the
three months ended December 31, 2010, our Contract Research segment (“Contract
Research”) revenue increased 4.8%.  Major large customers such as
Homeland Security and Department of Energy continue to demonstrate strong
interest in our ongoing research work.  The backlog of total business
exceeds one and one half years.  Our Optics/Photonics Products and
Instruments segment (“Products and Instruments”) had revenue growth of 34%
overall, including Hilger and 12.9% excluding the acquisition.  Our
operations benefited from an improving economic environment and our internal
growth initiatives.





Results
of Operations





Results
      of Operations for the Three Months Ended December 31,2010
            
            
            2009Contract
      Research
            
            
            Products
      & Instruments
            
            
            Total
            
            
            Contract
      Research
            
            
            Products
      & Instruments
            
            
            TotalRevenue
            
            
            6,067,119
            
            
            
            5,559,388
            
            
            
            11,626,507
            
            
            
            5,787,584
            
            
            
            4,149,183
            
            
            
            9,936,767Gross
      Profit
            
            
            2,532,209
            
            
            
            2,374,515
            
            
            
            4,906,724
            
            
            
            2,195,311
            
            
            
            1,689,505
            
            
            
            3,884,816SG&A
            
            
            2,339,263
            
            
            
            1,831,747
            
            
            
            4,171,010
            
            
            
            1,796,597
            
            
            
            1,016,382
            
            
            
            2,812,980Operating
      Income
            
            
            192,946
            
            
            
            542,768
            
            
            
            735,714
            
            
            
            398,714
            
            
            
            673,122
            
            
            
            1,071,836





13





Revenue
for the three months ended December 31, 2010 was $11,626,507, a 17% increase
from $9,936,767 for the three months ended December 31,
2009.  Contract Research revenue increased by
4.8%.  Products and Instruments revenue rose 34.0% including the
results from the Hilger acquisition and 12.9%, adjusting for the
acquisition.





Gross
Profit for the three months ended December 31, 2010 was $4,906,724 or 42.2% of
sales, a 26.3% increase from $3,884,816, or 39.1% of sales for the three months
ended December 31, 2009.  Both business segments experienced an
improvement in Gross Profit.   The Gross Product percentage
increase for the Products and Instruments segment was driven primarily by an
increase in sales volumes and various cost saving initiatives.





SG&A
expenses for the three months ended December 31, 2010 were $4,171,010 or 35.9%
of sales.  This was a large increase from SG&A expenses of
$2,812,979 or 28.3% of sales for the three months ended December 31,
2009.  First quarter SG&A expenses included the full costs of the
successful application and registration for Dynasil’s stock listing on
NASDAQ.  The costs, including legal assistance were nearly
$160,000.  Future benefits to stockholders from the NASDAQ listing are
expected to include greater visibility for the Company and greater liquidity for
the stock.  Also included in SG&A expenses for the three months
ended December 31, 2010 are the costs associated with the search, investigation
and due diligence efforts towards various acquisition
opportunities.  Substantial legal costs were included in the recorded
total costs of at least $180,000.  Both business segments shared in
these unusual and high SG&A costs which occurred at the corporate
level.





Income
from Operations for the three months ended December 31, 2010 was
$735,714.  This was a decrease of $336,122 from the quarter ended
December 31, 2009.  As a percent of sales, the current quarter was
6.3% compared to 10.8% in 2009.  Both business segments reported lower
Income from Operations as the result of growth related spending at the corporate
level.  Contract Research results were impacted because a portion of
the higher SG&A costs were considered “unallowable” under government
contracts.





Net
interest expense for the three months ended December 31, 2010 was $158,196,
compared to $162,441 for the three months ended December 31,
2009.  Interest expense is lower despite the total bank debt
increasing to $12,239,077 from $9,410,288 at December 31, 2009.  The
decrease in interest expense is the result of the debt refinancing in July, 2010
at substantially improved terms.  The increase in debt is the result
of the borrowings to fund the Hilger acquisition in July 2010.





The
Company had a $202,341 provision for income taxes for the quarter ended December
31, 2010 and a $295,626 provision for the quarter ended December 31,
2009.





Net
Income for the three months ended December 31, 2010 was $375,177, or $0.03 in
basic earnings per share compared to $613,769 or $0.04 in basic earnings per
share for the quarter ended December 31, 2009.  The approximately
$340,000 of unusual and high SG&A expenses reduced earnings per share by
$0.01.





Liquidity
and Capital Resources





Cash
decreased by $1,487,777 for the three months ended December 31, 2010 to
$2,624,189.  The primary sources of cash were $375,177 of net income,
non cash stock compensation of $188,530, depreciation of $168,413 and
amortization of $159,183.  This totaled $891,303 and was offset by an
increase in Accounts Receivable of $490,491.  For the quarter, Days
Sales Outstanding (DSO) increased to 54.1 days from 51.8 days at September 30,
2010 and 51.5 days at December 31, 2009.  Both business segments
experienced similar increases.  Inventory increased $206,597 in the
Products and Instruments segment primarily as the result of opportunistic year
end inventory purchases. Inventory turns fell to 3.7 turns from 4.0 turns
at September 30, 2010.  Account Payable and Accrued Expenses were
reduced by $712,403 and the Contract Research segment experienced Costs in
Excess of Billings of $325,567.  In total, cash used by operations was
$920,425.  Payments on long term debt were $465,036 as part of regular
scheduled payments to Sovereign Bank under the five year borrowings under the
Term Debt and Acquisition Line of Credit.  Finally, the Company used
$124,124 for the purchase of machinery and equipment.  Common stock
issuance totaled $83,159 and there was $46,375 in cash paid for preferred stock
dividends.




14





Management
believes that its current cash and cash equivalent balances, along with the net
cash generated by operations and credit lines, are sufficient to meet its
anticipated cash needs for working capital for at least the next twelve
months.  As of December 31, 2010, the Company had cash of $2,624,189
and available bank line of credit borrowings of $4 million, made up of $3
million available under a working capital line of credit and an additional $1
million remaining available under an acquisition line of credit.  From
July 1, 2010 until June 30, 2012, the former owners of RMD Instruments, LLC may
tender up to 1,000,000 shares of Dynasil common stock at a repurchase price of
$2.00 per share which could require the Company to make cash payments of up to
$2.0 million.





The Bank
Loan Agreement also contains other terms, conditions and provisions that are
customary for commercial lending transactions of this sort. The Bank Loan
Agreement requires Dynasil to maintain at all times and measured at the end of
each fiscal quarter a Consolidated Maximum Leverage Ratio (Total Funded Debt to
EBITDA, as defined in the Bank Loan Agreement) not to exceed 3 to 1 and a Fixed
Charge Coverage Ratio of at least 1.2 to 1.  The Bank Loan Agreement
also provides for events of default customary for credit facilities of this
type, including, but not limited to, non-payment, breach of covenants,
insolvency and defaults on other debt.  On December 31, 2010, the
Company was in compliance with all covenants.  We believe that the
Company will remain in compliance and maintain access to the Bank lines of
credit.  However, this belief is based upon many assumptions including
the general business climate.  A reoccurring worldwide economic
slow-down could significantly impact the Company’s revenues and profits so that
a returning recession could cause a cash shortage.





Acquisitions
and Commercialization of Research





We
continue to execute our strategy of significant growth through acquisitions and
commercialization of our technology from our government funded
research.  During the last twelve months, Dynasil implemented key
initiatives to support the success of our commercialization strategy of our RMD
Research technology pipeline by increasing investment into our dual mode nuclear
detector program for Homeland Security applications and by acquiring Hilger
Crystals, Ltd. a leading manufacturer of synthetic crystals that are applicable
to a wide range of our industrial, medical and homeland security
applications.  By combining our technical depth in synthetic crystal’s
with Hilger’s highly specialized expertise in the growth and manufacture of
crystals, our objective is to accelerate the commercialization and distribution
of our extensive technology portfolio.  The dual mode detectors are
planned for use in locating nuclear bombs or nuclear materials at ports and
borders.  They are designed to be a single detector which replaces two
current detector subsystems – the gamma radiation detector and also the Helium-3
detectors for neutrons which are in critically short supply.  Handheld
devices are the initial target market and we made significant progress during
the first quarter developing commercial relationships with lead customers as
well as procuring equipment to scale up production.  We expect to have
production capacity operational at Hilger Crystals during the second quarter and
to be in full production mode during this fiscal year.  According to
the Civitas Group 2007 Radiation and Radiological Security Market Report, the
market for radiation detection instruments is approximately $300 million on an
annual basis.  Management is focused on commercialization of RMD
technology either internally or through acquisitions. The Hilger Crystals
acquisition exemplifies our growth strategy to acquire companies with strengths
in complementary areas, which enables us to more quickly commercialize our new
technology while expanding the scale and scope of our product lines and
distribution channels.





The
following additional technology areas are under active consideration for
commercial expansion, acquisitions, possible licensing or possible joint venture
activities.  Compact, low cost radiation badges are under development
for potential military, industrial and consumer applications which also may have
high potential.  The project has been funded by the Department of
Defense into Phase 3 where 150 prototypes for evaluation are planned for
shipment during the second quarter.  The Company is researching the
marketability of this potential product and according to Introductory Profile
2010 on dosimetryimaging.com, the total dosimeter market size is currently about
$500 million.  Another active project is sensors for non-destructive
testing which can detect very small cracks for applications such as aircraft
wings, turbine blades, nuclear power plant piping and other non-destructive
testing of metals.   This is a large world-wide industry for
which RMD Research is working to develop a product with a greatly enhanced
capability to detect cracks at the micro level.  When fully developed,
this technology could dramatically improve the outcomes in this
industry.  During the first quarter, prototypes were provided to a
potential lead customer and additional prototypes are scheduled for delivery in
the second quarter.  Another area of commercialization activity is new
thin film coatings for medical imaging applications.  RMD Research has
developed coatings which enable higher speed x-ray imaging as well as highly
sensitive PET sensors used for medical diagnostic
procedures.  According to the PET/SPECT Report dated November 10, 2010
from the firm Markets and Markets, the market for PET/SPECT imaging systems
is expected to grow from $6.8 billion in 2010 to $10.3 billion in
2015.  We currently sell low volume quantities of these coatings and
sensors and are evaluating the market potential.   Medical
testing instruments are another area of active research.  For example,
we have research funding for an instrument to provide early warning for
shock.  According to GBI Research, the multi-parametric critical-care
monitor market exceeds $3 billion per year.




15





Acquisition
activities were high during the first quarter as evidenced by the acquisition
spending impact to our earnings as we continue to invest in future
growth.  However, we did not reach any definitive
agreements.





Critical
Accounting Policies and Estimates





There
have been no material changes in our critical accounting policies or critical
accounting estimates since September 30, 2010.  We have not adopted any
accounting policies since September 30, 2010 that have or will have a material
impact on our consolidated financial statements.  For further
discussion of our accounting policies see the “Summary of Significant Accounting
Policies” in the Notes to Consolidated Financial Statements in our Annual Report
on Form 10-K for the fiscal year ended September 30, 2010 as well as the notes
in this Form 10-Q.





The
accounting policies that reflect our more significant estimates, judgments and
assumptions and which we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the
following:





Revenue
Recognition





Revenue
from sales of products is recognized at the time title and the risks and rewards
of ownership pass.  This is when the products are shipped per
customers’ instructions, the sales price is fixed and determinable, and
collections are reasonably assured.  Revenue from research and
development activities consists of up-front fees, research and development
funding and milestone payments.  Periodic payments for research and
development activities and government grants are recognized over the period that
the Company performs the related activities under the terms of the
agreements.





Government
funded services revenues from cost plus contracts are recognized as costs are
incurred on the basis of direct costs plus allowable indirect costs and an
allocable portion of the contracts’ fixed fees.  Revenue from
fixed-type contracts is recognized under the percentage of completion method
with estimated costs and profits included in contract revenue as work is
performed.  Revenues from time and materials contracts are recognized
as costs are incurred at amounts represented by agreed billing
amounts.  Recognition of losses on projects is taken as soon as the
loss is reasonably determinable.  The Company has no current accrual
provision for potential losses on existing research projects based on Management
expectations as well as historical experience.





The
majority of the Company’s contract research revenue is derived from the United
States government and government related contracts.  Such contracts
have certain risks which include dependence on future appropriations and
administrative allotment of funds and changes in government
policies.  Costs incurred under United States government contracts are
subject to audit.  The Company believes that the results of such
audits will not have a material adverse effect on its financial position or its
results of operations.





Valuation
of Long-Lived Assets, Intangible Assets and Goodwill





Goodwill





Goodwill
and intangible assets which have indefinite lives are subject to annual
impairment tests.  We test goodwill by reviewing the carrying value
compared to the fair value at the reporting unit level.  Fair value
for the reporting unit is derived using the income approach.  Under
the income approach, fair value is calculated based on the present value of
estimated future cash flows.  Assumptions by management are necessary
to evaluate the impact of operating and economic changes and to estimate future
cash flows.  Our evaluation includes assumptions on future growth
rates and cost of capital that are consistent with internal projections and
operating plans.




16





The
Company generally performs its annual impairment testing of goodwill during the
fourth quarter of its fiscal year, or more frequently if events or changes in
circumstances indicate that the assets might be impaired.  The Company
tests impairment at the reporting unit level using the two-step
process.  The Company’s primary reporting units tested for impairment
are RMD Research, which comprises our Contract Research segment and RMD
Instruments, which is a component of our Optics/Photonic Products and
Instruments segment.





Step one
of our impairment testing compares the carrying value of a reporting unit to its
fair value.  The carrying value represents the net book value of the
net assets of the reporting unit or simply the equity of the reporting unit if
the reporting unit is the entire entity.  If the fair value of the
reporting unit is greater than its carrying value, no impairment has been
incurred and no further testing or analysis is necessary.  The Company
estimates fair value using a discounted cash flow methodology which calculates
fair value based on the present value of estimated future cash
flows.  Estimating future cash flows requires significant judgment and
includes making assumptions about projected growth rates, industry-specific
factors, working capital requirements, weighted average cost of capital, and
current and anticipated operating conditions.  Assumptions by
management are necessary to evaluate the impact of operating and economic
changes.  The Company’s evaluation includes assumptions on future
growth rates and cost of capital that are consistent with internal projections
and operating plans.  The use of different assumptions or estimates
for future cash flows could produce different results.  The Company
regularly assesses the estimates based on the actual performance of our
reporting units.





If the
carrying value of a reporting unit is greater than its fair value, step two of
the impairment testing process is performed to determine the amount of
impairment to be recognized.  Step two requires the Company to
estimate an implied fair value of the reporting unit’s goodwill by allocating
the fair value of the reporting unit to all of the assets and liabilities other
than goodwill.  An impairment then exists if the carrying value of the
goodwill is greater than the goodwill’s implied fair value.  With
respect to the Company’s annual goodwill impairment testing performed during the
fourth quarter of fiscal year 2010, step one of the testing determined the
estimated fair values of the reporting units substantially exceeded their
carrying values by 20%.  Accordingly, the Company concluded that no
impairment had occurred and no further testing was necessary.





Intangible
Assets





The
Company’s intangible assets consist of an acquired customer base of Optometrics,
LLC, acquired customer relationships and trade names of RMD Instruments, LLC,
and acquired backlog and know how of RMD, Inc.  The Company amortizes
its intangible assets with definitive lives over their useful lives, which range
from 4 to 15 years, based on the time period the Company expects to receive the
economic benefit from these assets.  No impairment charge was recorded
during the periods ended December 31, 2010 and September 30, 2010.





Impairment
of Long-Lived Assets





The
Company’s long-lived assets include property, plant and equipment and intangible
assets subject to amortization.  The Company evaluates long-lived
assets for recoverability whenever events or changes in circumstances indicate
that an asset may have been impaired.  In evaluating an asset for
recoverability, the Company estimates the future cash flow expected to result
from the use of the asset and eventual disposition.  If the expected
future undiscounted cash flow is less than the carrying amount of the asset, an
impairment loss, equal to the excess of the carrying amount over the fair value
of the asset, is recognized.  As a result, the Company reviewed its
long-lived assets and determined there was no impairment charge during the
periods ended December 31, 2010 and September 30, 2010.





Estimating
Allowances for Doubtful Accounts Receivable





We
perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified.  While such credit
losses have historically been minimal, within our expectations and the
provisions established, we cannot guarantee that we will continue to experience
the same credit loss rates that we have in the past.  A significant
change in the liquidity or financial position of any of our significant
customers could have a material adverse effect on the collectability of our
accounts receivable and our future operating results.




17





Convertible
Preferred Stock





The
Company considers the guidance of EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios” and EITF 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments”, codified in FASB ASC Topic 470-20 when accounting for
the issuance of convertible preferred stock. The Company’s convertible preferred
stock, when issued, are generally convertible to common stock at or above the
then current market price of the Company’s common stock and therefore, will
contain no beneficial conversion feature.  The Company currently has
no convertible preferred stock outstanding.





Stock-Based
Compensation





We
account for stock-based compensation using fair value.  Compensation
costs are recognized for stock options granted to employees and
directors.  Options and warrants granted to employees and
non-employees are recorded as an expense at the date of grant based on the then
estimated fair value of the security in question, determined using the
Black-Scholes option pricing model.





Income
Taxes





As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income tax provision (benefit) in each of the
jurisdictions in which we operate.  This process involves estimating
our current income tax provision (benefit) together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes.  These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance
sheets.  We regularly evaluate our ability to recover the reported
amount of our deferred income taxes considering several factors, including our
estimate of the likelihood of the Company generating sufficient taxable income
in future years during the period over which temporary differences
reverse.





RECENTLY
ISSUED ACCOUNTING STANDARDS





In July
2010, the FASB issued Accounting Standards Update No. 2010-20 (ASU 2010-20),
Receivables (Topic 310) —
Disclosures about the Credit Quality of Financing Receivables and the Allowance
for Credit Losses. ASU 2010-20 requires disclosures about the nature of
the credit risk in an entity’s financing receivables, how that risk is
incorporated into the allowance for credit losses, and the reasons for any
changes in the allowance. Disclosure is required to be disaggregated at the
level at which an entity calculates its allowance for credit losses. ASU 2010-20
was effective for the Company beginning December 31, 2010, but was extended to
June 30, 2011 per ASU 2011-01. The adoption of this accounting standard is not
expected to have a material impact on our financial position, results of
operations, cash flows and disclosures.





In
December 2010, the FASB issued Accounting Standards Update No. 2010-28 (ASU
2010-28), Intangibles—Goodwill
and Other (Topic 350), When to Perform Step 2 of the Goodwill Impairment Test
for Reporting Units with Zero or Negative Carrying Amounts. The
amendments in this Update modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting
units, an entity is required to perform Step 2 of the goodwill impairment test
if it is more likely than not that a goodwill impairment exists. In determining
whether it is more likely than not that a goodwill impairment exists, an entity
should consider whether there are any adverse qualitative factors indicating
that an impairment may exist. The qualitative factors are consistent with the
existing guidance, which requires that goodwill of a reporting unit be tested
for impairment between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying amount. The amendments in this Update are effective for fiscal
years, and interim periods within those years, beginning after December 15,
2010. Early adoption is not permitted. ASU 2010-28 is effective for us beginning
October 1, 2011 and is not expected to have a material impact on the Company’s
financial position, results of operations, cash flows and
disclosures.




18





In
December 2010, the FASB issued Accounting Standards Update No. 2010-29 (ASU
2010-29), Business
Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for
Business Combinations.ASU 2010-29 requires a public entity to disclose
pro forma information for business combinations that occurred in the current
reporting period. The disclosures include pro forma revenue and earnings of the
combined business combinations that occurred during the year had been as of the
beginning of the annual reporting period. If comparative financial statements
are presented, the pro forma revenue and earnings of the combined entity for the
comparable prior reporting period should be reported as though the acquisition
date for all business combinations that occurred during the current year had
been as of the beginning of the comparable prior annual reporting period. The
amendments in this update are effective prospectively for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after October 1, 2011 effective for the Company
beginning September 30, 2011. The adoption of this accounting standard is not
expected to have a material impact on the Company’s financial position, results
of operations, cash flows and disclosures.





Forward-Looking
Statements





The
statements contained in this Quarterly Report on Form 10-Q which are not
historical facts, including, but not limited to, statements about our
expectations, beliefs, plans, objectives, prospects, financial condition,
assumptions or future events or performance, including, but not limited to, the
future markets and demand for our products, new research and development
initiatives, our debt covenant compliance, and the Company’s potential
repurchase obligation with respect to equity issued in connection with the RMD
acquisition are forward-looking statements that involve a number of risks and
uncertainties.  The actual results of the future events described in
such forward-looking statements could differ materially from those stated in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report on Form 10-Q, including, without limitation, those set forth
under Management’s Discussion and Analysis of Financial Condition and Results of
Operations, and the risks and uncertainties set forth from time to time in the
Company's filings with the Securities and Exchange Commission, and other public
statements. Such risks and uncertainties include, without limitation,
seasonality, interest in the Company's products, consumer acceptance of new
products, general economic conditions, consumer trends, costs and availability
of raw materials and management information systems, competition, litigation and
the effect of governmental regulation. The Company disclaims any intention or
obligation to update any forward-looking statements, whether as a result of new
information, future events or otherwise.





ITEM
3    Quantitative and Qualitative Disclosures About Market
Risk.





Dynasil,
as a smaller reporting company, is not required to complete this
item.





ITEM
4    Controls and Procedures





Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) under
the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of the
end of the period covered by this report and have determined that, as of such
date, such disclosure controls and procedures are effective.





There has
been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection
with this evaluation that occurred during our last fiscal quarter that
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.




19





PART
II





OTHER
INFORMATION





ITEM
6    Exhibits





(a)
Exhibits and index of Exhibits




10.1
              
              Dynasil
      Corporation of America Employee Stock Purchase Plan -- Filed as Appendix A
      to Definitive Proxy Statement filed December 30, 2010 and incorporated
      herein by reference.31.1(a)
              
              Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive
      Officerpursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002.31.1(b)
              
              Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial
      Officerpursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
              
              Section
      1350 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
      of2002(furnished
      but not filed for purposes of the Securities Exchange Act of
      1934)99.1
              
              Press
      release, dated February 14, 2011 issued by Dynasil Corporation of
      Americaannouncing
      its financial results for the quarter ended December 31,
    2010.




20





SIGNATURES





Pursuant
to the requirements 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.




DYNASIL
      CORPORATION OF AMERICABY:
              /s/
      Craig T. Dunham
              
              
              DATED:
      February 14,
      2011Craig
      T. Dunham,President
      and CEO/s/
      Richard A. Johnson
              
              
              DATED: February 14,
      2011Richard
      A. Johnson,Chief
      Financial Officer





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