U.
S. SECURITIES AND EXCHANGE COMMISSION


Washington,
DC   20549





FORM
10-K


(Mark
One)





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 for the fiscal year ended September 30,
  2010.





 ̈
            TRANSITION
      REPORT PURSUANT TO 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 of
              (I.R.S.
      Employerincorporation
      or organization)
              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





Securities
registered pursuant to Section 12(b) of the Act:





Title
      of each class
              
              Name
      of each exchange on which registeredCommon
      Stock, $0.0005 par value
              
              The
      NASDAQ Stock Market LLC
                (NASDAQ
      Global Market)





Securities
registered pursuant to Section 12(g) of the Act:  none





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈   No
x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes  ̈   No
x





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
preceding 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
 ̈





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 shorter period that the registrant was required to submit and
post such files.) Yes  ̈   No
 ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K  ̈





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  ̈       Accelerated
filer  ̈


Non-accelerated
filer  ̈         Smaller
reporting company x




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


Yes  ̈ Nox





As of
March 31, 2010, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $12,288,691.





As of
December 17, 2010 there were 12,738,080 shares of common stock, par value $.0005
per share, outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the proxy statement for the Annual Meeting of Stockholders to be held
February 1, 2011 are incorporated by reference into Part III of this
report.








PART
I





ITEM
1.  DESCRIPTION OF BUSINESS





Dynasil
Corporation of America (“Dynasil", "we" or the "Company") is a rapidly growing
provider of technology, products, services and solutions aimed at making the
world safer and healthier.  The Company develops and manufactures
specialized sensors, precision instruments and optical products, including
nuclear detectors and medical probes, for the medical, industrial and homeland
security/defense markets.  In addition, we have substantial revenue
from government-funded contract research from which we usually retain the
commercial rights to the technology.  The resulting technology and
commercialization initiatives combined with our expansion goals through both
organic and acquisition growth are expected to further bolster our track record
of significant and profitable growth.





Recent
Recognition





On
December 14, 2010, we announced that we will be listed on the NASDAQ Global
Markets under the symbol of DYSL effective on December 17, 2010.





On
November 23, 2010, we were honored as number two on New Jersey’s 50 fastest
growing companies by NJBIZ based on our 577 percent annualized revenue growth
for a four year period from 2005-2009. Similarly, on October 28, 2010, we were
ranked number three on Deloitte’s 2010 Greater Philadelphia Fast 50 technology,
media, life sciences and clean tech companies.  In addition, on
October 20, 2010, we were ranked 175th on
Deloitte LLP’s 2010 Technology Fast 500 list, a ranking of the 500 fastest
growing technology, media, telecommunications, life sciences and clean
technology companies in North America.





History





Dynasil
was founded in 1960 as a New Jersey corporation to manufacture synthetic fused
silica, a high purity, optical material used for applications such as laser
systems and optical instruments. For five decades, Dynasil has provided
synthetic fused silica and fused quartz products to customers for a wide range
of optics applications.  On March 3, 2008, Dynasil became a Delaware
corporation by consummating a migrating merger.





During
October 2004, Mr. Craig Dunham became the Company’s new President and
CEO.  With new leadership, Dynasil’s strategy evolved to one designed
for significant profitable growth through increasing the revenues of the
existing business and through acquisitions.  With the acquisition of
Radiation Monitoring Devices, Inc. in 2008, the growth strategy was expanded to
commercialize the best technologies developed by our R & D efforts to drive
revenue and profitable growth, bolstered by focused acquisitions aimed at
capitalizing on our technologies and products, gaining complementary
capabilities and expanding market channels.


2





Building
Our Capability Through Acquisitions





In March,
2005, we acquired Optometrics LLC (“Optometrics”), a worldwide supplier of
optical components and instruments including diffraction gratings, interference
filters, laser optics, monochromators and specialized optical systems. In
October 2006, we acquired Evaporated Metal Films Corporation (“EMF”) an optical
thin-film coatings company with a broad range of application markets including
solar energy, display systems, dental photography, optical instruments,
satellite communications and lighting. In July 2008, we acquired Radiation
Monitoring Devices, Inc. (“RMD Research”), a contract research company, and
certain assets of RMD Instruments, LLC (“RMD Instruments”), an advanced
instruments company that manufactures and sells instruments and components in
the medical imaging, environmental sensing and quality control markets which
include hand-held analyzers for lead paint and medical probes for cancer
surgery. RMD Instruments and RMD Research are referred to, together, in this
Annual Report as “RMD”.  In July 2010, Dynasil acquired Hilger
Crystals, Ltd. (“Hilger”), a leading manufacturer of synthetic crystals
applicable to a wide range of industrial, medical, and homeland security
applications with a long history of supplying high-quality synthetic crystals
for infrared spectroscopy, X-ray and gamma ray
detection.  Applications for synthetic crystals include homeland
security, baggage scanning, medical imaging, oil exploration, chemical analysis
and military.





The 2008
acquisition of RMD increased our technical capabilities and intellectual
property, and added high potential optical instruments to our optics/photonics
products and instruments segment.  With the new opportunities emerging
from the RMD research work, our growth strategy was expanded to include the
development of new technology for commercialization through government funded
research.  Dynasil is currently exploring commercialization
opportunities in the nuclear detector, medical imaging, photodiode, dosimeter
and micro-crack detection areas.  During 2009, Dynasil hired a
Corporate Vice President with responsibility over this area and established a
Commercialization Advisory Committee to further assist in the
process.  In 2010, the Company took additional steps to accelerate the
commercialization and distribution of the extensive technology portfolio,
including the acquisition of Hilger Crystals, Ltd., a leading manufacturer of
synthetic crystals which was acquired to speed the time to market for
commercialization of our nuclear detector technology for Homeland Security
applications.





Dynasil
is currently comprised of six business units in two business segments, five of
which manufacture commercial products in the optics/photonics products and
instruments segment, including the original optical materials business, optical
components, optical coatings, optical instruments and optical crystal
growth.  The sixth business unit is involved in the contract research
segment.  See note 15 to the Consolidated Financial Statements for
segment information.





During
the last six years, Dynasil has implemented clear focus, professional management
tools, process improvements, and has realized improved execution across its
companies with the following results:


- Revenue
has grown from $2 million in FY 2004 to $43 million in FY 2010, a 63% compound
annual growth rate.


-
Operating income has been increased from a $0.1 million loss for FY 2004 to a
$4.8 million profit for FY 2010.


- Net
income has been increased from a $0.2 million loss for FY 2004 to a $3.2 million
profit for FY 2010.


-
Earnings per share have been increased from a loss of ($0.08) per share in FY
2004 to $0.22 per share for FY 2010.


- The
stock price has increased from $0.07 per share in September 2004 to an average
of $ 5.00 per share for the thirty calendar days ending December 13, 2010 – an
increase of more than 70 times.





Optics/
Photonics Products and Instruments Segment





We
manufacture optics/photonics products and instruments including optical
materials, components, coatings, specialized instruments and synthetic crystals
for a broad range of applications markets in the medical, industrial, and
homeland security/ defense sectors.  Our products include optical
instruments as well as components that are used for optical instruments, lasers,
analytical instruments, semiconductor/ electronic devices, automotive
components, spacecraft/aircraft components, advertising displays, baggage
scanners and in devices for the solar energy industry.





We also
produce several analytical instruments including instruments designed to measure
the “Sun Protection Factor” (“SPF”) of sunscreens, handheld instruments to
determine whether there is lead in the paint of buildings and whether
electronics are in compliance with the Reduction of Hazardous Substances
(“ROHS”) regulations, and medical probes which reduce the scope of cancer
surgery.





Our
products are distributed through direct sales as well as other channels and
delivered by commercial carriers. We have twenty sales and marketing employees
who handle sales.  We also use manufacturer’s representatives and
distributors in various foreign countries for international sales and U.S.
manufacturer’s representatives for some of the RMD Instruments’ product
lines.  Marketing efforts include direct customer contact through
sales visits, advertising in trade publications and presentations at trade
shows.


3





We
compete for business in the optics and instrument industries primarily with
fabricators of industrial optical materials, other optical components
manufacturers, other optical crystal manufacturers and other optical coaters as
well as other analytical instruments manufacturers and synthetic crystal
manufacturers.  Market share in the optics and analytical instrument
industries is largely a function of quality, price, performance and speed of
delivery.  We believe that we compete effectively in all three
areas.





Contract
Research Segment





RMD
Research has been conducting government research under the Small Business
Innovation Research (“SBIR”) program for more than 25 years as well as, more
recently, non-SBIR projects.  The current contract backlog is
approximately two years.  Management believes that prior and current
research projects are a source for new commercial products in areas like medical
imaging, industrial sensors and homeland security.





We
compete for contract research work with a variety of small and some large
businesses which submit contract proposals based on government solicitations. We
believe that the quality of our research and development work as well as our
proposal quality are key competitive factors and that we compete very well in
all of these areas.





Commercialization
Activities





For most
of our contract research activities, U.S. Government customers allow us to earn
a small profit on the work and to retain commercial rights to the technology
that we develop.  As a result, we have 37 patents granted, an
additional 1 patent approved awaiting issuance and 19 patents in the application
process which are assigned or co-assigned to RMD.





Commercialization
of new technology is a major focus area for the Company.  In June
2009, Mr. Paul Tyra was hired as Vice President – Commercialization to
accelerate this process.  In September 2009, Mr. Ken Morse, founding
Managing Director of the MIT Entrepreneurship Center agreed to assist us as a
consultant in the commercialization of our extensive research and technology
portfolio.  We also established a Commercialization Advisory Board to
further assist in the process.





During
the third quarter of FY 2010, Dynasil’s Board took a key step with
commercialization of RMD Research technology by approving investment into dual
mode nuclear detectors for Homeland Security applications which would be used to
locate nuclear bombs or nuclear materials at ports and borders.  One
of the most serious threats faced by the United States is the possibility of
terrorists smuggling a nuclear weapon into the country and, consequently, the
Department of Homeland Security is seeking improved detection
equipment.  Existing detectors tend to be expensive, too small, or are
plagued by false alarms from naturally occurring radioactive materials, such as
kitty litter and bananas.  In addition, current border protection
technology for nuclear materials utilizes a crucial ingredient called helium-3
which was a by-product of the nuclear weapons program and is increasingly in
short supply. Dynasil's proprietary crystals show great promise as a replacement
for helium-3 and they are designed to be a single detector which replaces two
current detector subsystems – the helium-3 detectors for neutrons and also the
gamma radiation detector.  Handheld devices would be the initial
target market.  On July 19, 2010, the Company completed the
acquisition of Hilger Crystals Limited from Newport Corporation with the
objectives of speeding the time to market for the new dual mode nuclear
detectors as well as adding Hilger’s existing businesses and sales channels to
Dynasil.  Hilger already manufactures synthetic crystals for x-ray and
gamma ray detection for Homeland Security and medical imaging applications. The
acquisition combines the technical depth in synthetic crystals at RMD Research
with Hilger’s highly specialized expertise in the growth, manufacturing,
packaging and distribution of synthetic crystals.  The acquisition of
Hilger puts the Company in a strong position as a high quality manufacturer and
supplier.  The transaction 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 line and distribution channels.





The
following additional technology areas are under active consideration for
commercial expansion, 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 prototypes are being developed.  The
Company is researching the marketability and market size for this potential
product.  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.  While not yet fully developed, if
perfected, this technology could dramatically improve the outcomes in this
industry.  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 rather than just still pictures
as well as highly sensitive PET sensors used for medical diagnostic
procedures.  We currently sell low volume quantities of these coatings
and sensors and are evaluating the market potential.


4





Additional
Background Information





We
currently have more than 1,157 customers with approximately 56% of our business
concentrated in our top 10 customers.  Our five largest customers
accounted for approximately 22.6%, 14.7%, 5.3%, 3.7% and 2.7%, respectively, of
our revenues during fiscal year 2010.  The loss of any of these top
five customers would likely have a material adverse effect on our business,
financial condition and results of operations.





Generally,
our customers provide purchase orders for a specific part, quantity and quality
or they provide a contract for research projects.  Product orders are
normally filled over a period ranging from one to six weeks.  We have
blanket orders that call for monthly deliveries of predetermined
amounts.  Contract research projects generally run for a one to two
year period.





Our
largest supplier for materials and components is Corning Incorporated, which is
a primary supplier of the fused silica material that is fabricated and sold by
our New Jersey facility.





Our
research and development (“R&D”) activities include government funded
research which totaled $20.6 million for fiscal year 2010 and $18.2 million for
fiscal year 2009.  R&D for our historical businesses has primarily
involved new product development, changes to our manufacturing processes and the
introduction of improved methods and equipment. Improvements to our processes
are ongoing and related costs are incorporated into our manufacturing
expenses.  Substantially all of our research and development costs
relate to research contracts performed by RMD Research, and are in turn billed
to the contracting party





Other
than federal, state and local environmental and safety laws as well as
International Traffic in Arms Regulation (“ITAR”) and FDA requirements, our
operations are not subject to direct governmental regulation, although RMD
Research must comply with the government contracting rules contained in the
federal acquisitions register.  We do not have any pending notices of
environmental or government contract violations and are aware of no potential
violations.  There are no known buried storage tanks on our
properties.  Environmental compliance costs for fiscal year 2010 were
$55,000.





Our total
work force consists of 222 total employees: 31 administrative, 20 sales, 88
research and/or engineering and 86 manufacturing personnel.  Of these
employees, 212 are full-time.  Forty-one members of the research and
development staff hold Ph.D.s.  The operations are non-union except
for a two-person union in one location.





ITEM
2.  PROPERTIES





We own a
manufacturing and office facility consisting of a one-story, masonry and steel
building containing approximately 15,760 square feet in West Berlin, New
Jersey.  We lease a 10,000 square foot manufacturing and office
building in Ayer, MA from a related party with a lease that expires in March
2013. We own a two-story, 44,000 square foot manufacturing and office facility
in Ithaca, New York.  We own a two-story, 17,000 square foot
manufacturing and office facility in Margate, Kent, in the U.K.  We
lease a 40,000 square foot manufacturing, research, and office building in
Watertown, MA for RMD from a related party with leases that expire in June
2013.  We also lease 13,050 square feet office and research space in
adjacent buildings in Watertown, MA with leases that expire in May 2013 and
February 2014.  The Watertown locations are the primary location for
our corporate offices and contract research segment.  Optics/photonics
products and instruments operations are conducted at all five
locations.  We believe that the properties are in satisfactory
condition and suitable for our purposes.  The New Jersey, New York,
and U.K. properties are collateral against notes payable to banks.





ITEM
3.  LEGAL PROCEEDINGS





None.





ITEM
4.  (Removed and Reserved)


5





PART
II




ITEM
5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 Market
Information
 Effective
December 17, 2010, the Company’s Common Stock has been listed on the NASDAQ
Global Market under the symbol “DYSL”.  Prior to December 17, 2010,
the Company’s Common Stock was quoted on the NASD-OTC Bulletin Board under the
symbol "DYSL.OB".
  The
      "high" and "low" bid quotations for the Company's Common Stock as reported
      by the OTC Bulletin Board for each quarterly period for the fiscal years
      ended September 30, 2009 and September 30, 2010:Fiscal Quarter
                                      High Bid Price
                                      Low Bid Price2009First
                                      $1.40
                                      $0.51Second
                                      $1.55
                                      $0.55Third
                                      $1.06
                                      $0.64Fourth
                                      $2.35
                                      $0.852010First
                                      $3.10
                                      $1.80Second
                                      $2.70
                                      $2.00Third
                                      $2.90
                                      $2.00Fourth
                                      $4.30
                                      $0.51The
      above listed quotes reflect inter-dealer prices without retail mark-up,
      mark-down, or commissions, and may not represent actual
      transactions.The
      “high” and “low” sale prices for trades of the Company’s Common stock on
      the OTC bulletin board were as follows for each quarterly period for the
      fiscal years ended September 30, 2009 and September 30,
    2010:Fiscal Quarter
                                      High Sale Price
                                      Low Sale Price2009First
                                      $1.50
                                      $0.70Second
                                      $1.55
                                      $0.55Third
                                      $1.35
                                      $0.80Fourth
                                      $2.45
                                      $0.852010First
                                      $3.25
                                      $1.85Second
                                      $2.73
                                      $2.01Third
                                      $3.00
                                      $2.40Fourth
                                      $4.50
                                      $2.35




As of the
December 6, 2010 Annual Meeting record date there were 12,734,139 shares of the
Company’s common stock outstanding held by approximately 1026 holders of
record.





The
Company has paid no cash dividends on its common stock since its inception. The
Company intends to retain any future earnings for use in its business and does
not intend to pay cash dividends on its common stock in the foreseeable
future.  There are no restrictions on dividend payments unless the
Company is in default under the loan documents with Sovereign/Santander
Bank.


6





Equity
Compensation Plan Information





The
Company adopted Stock Incentive Plans in 1996 and 1999 that permit, among other
incentives, grants and options to officers, directors, employees and consultants
to purchase up to 3,750,000 shares of the Company’s common
stock.  At the February 3, 2010 Annual Meeting, a new Stock Incentive
Plan was adopted by the shareholders which permits up to 6,000,000 shares of the
Company’s common stock to be purchased through this plan.  At
September 30, 2010, 5,819,756 shares of common stock are available for issuance
under the plan in addition to the number of stock options outstanding. Options
are generally exercisable at or above the common stock’s fair market value on
the date of grant over a three to five-year period.  For the 2010 plan
to date, options have been granted at exercise prices ranging from $3.58 to
$7.32 per share.  On September 30, 2010, 1,855,500 options were
outstanding.





Plan Category
                
                Number of securities
                  to be issued upon
                  exercise of
                  outstanding options,
                  warrants, and rights
                  ( a )
                
                
                Weighted-average
                  exercise price of
                  outstanding
                  options, warrants
                  and rights
                  ( b )
                
                
                Number of securities remaining
                  available for future issuance
                  under equity compensation
                  plans (excluding securities
                  reflected in column (a))
                  ( c )Equity
      compensation plans approved by security holders
                
                
                1,855,500
                
                
                $
                2.88
                
                
                
                5,819,756Equity
      compensation plans not approved by security holders
                
                None
                
                
                None
                
                
                None





Additional
information regarding the securities authorized for issuance under equity
compensation plans are set forth in Note 9 to the Consolidated Financial
Statements of this Form 10-K document and is hereby incorporated by
reference.





On
September 28, 2010, the Company adopted an Amended and Restated Employee Stock
Purchase Plan.  The existing plan was amended to extend the
termination date to September 28, 2020.  The Employee Stock Purchase
Plan permits substantially all employees to purchase common stock at a purchase
price of 85% of the fair market value of the shares. Under the plan, a total of
450,000 shares have been reserved for issuance.  Of these, 180,038
shares have been purchased by employees at purchase prices ranging from $.06 to
$2.72 per share. During any twelve-month calendar period, employees are limited
to a total of $5,000 of stock purchases.





ITEM
6.   SELECTED FINANCIAL DATA





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





ITEM 7.  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 appearing elsewhere in this
Form 10-K.





General
Business Overview





Fiscal
year 2010 was a year of significant growth in revenues and profits for
Dynasil.  When compared to fiscal year 2009, revenues increased 25%
from $34.4 million to $43.0 million.  Income from Operations increased
68.6% from $2.8 million to $4.8 million.  Net Income increased 108.5%
from $1.55 million to $3.23 million.  Diluted Earnings per Share
increased 159% from $0.08 per share to $0.22 per share.  Our Contract
Research segment had increased revenues of 16.8% with continued high interest
from major large customers such as Homeland Security, Department of Energy and
National Institute of Health.  The revenue backlog for contract
research continues to be nearly two years.  Our Optics/Photonics
Products and Instruments segment had sales growth of 36.3%.  Included
in our Optics/Photonics Products and Instruments segment are sales derived from
our acquisition of Hilger Crystals on July 19, 2010.  Hilger provided
revenues of $687,850 from the acquisition date to September 30,
2010.  Sales growth in this segment would have been 31.6% absent the
acquisition.  The Optics/Photonics Products and Instruments segment
experienced a rebound in customer demand coupled with new product introductions
and new customer business development.




7


Net
income was greatly aided by $1.2 million in tax credits awarded under the
Qualifying Therapeutic Discovery Project (“QTDP”) program, enacted as part of
the Patient Protection and Affordable Care Act of 2010 which reduced taxes by
$793,200.  The QTDP tax credits were provided to help fund projects
with reasonable potential to (a) treat areas of unmet medical need or prevent,
detect or treat chronic or acute diseases and conditions; (b) reduce the
long-term growth of health care costs in the United States; or (c) significantly
advance the goal of curing cancer within thirty years.  The Company
was awarded the maximum credit allowed under five different
initiatives.  Finally, during fiscal 2010, the Company completed
refinancing of its outstanding indebtedness with Sovereign/Santander
Bank.  The financing lowered the Company’s weighted average cost of
debt from 6.82% to 5.58% (a decrease of 18%) while increasing Dynasil’s lines of
credit from $1.2 million to $8 million.





We remain
focused on continuing to execute internal growth as well as growing through
further acquisitions and commercialization opportunities from technology coming
out of our contract research segment.





Results
of Operations





Results of Operations for the Years Ending September 302010
                
                
                2009Contract
                  Research
                
                
                Products &
                  Instruments
                
                
                Total
                
                
                Contract
                  Research
                
                
                Products &
                  Instruments
                
                
                TotalRevenue
                
                
                23,109,847
                
                
                
                19,859,915
                
                
                
                42,969,762
                
                
                
                19,794,281
                
                
                
                14,569,393
                
                
                
                34,363,674Gross
      Profit
                
                
                9,445,339
                
                
                
                8,318,463
                
                
                
                17,763,802
                
                
                
                8,244,719
                
                
                
                5,489,454
                
                
                
                13,737,173SG&A
                
                
                7,758,445
                
                
                
                5,213,195
                
                
                
                12,971,641
                
                
                
                6,760,751
                
                
                
                4,130,345
                
                
                
                10,891,096Operating
      Income
                
                $
                1,686,894
                
                
                $
                3,105,268
                
                
                $
                4,792,162
                
                
                $
                1,483,968
                
                
                $
                1,359,109
                
                
                $
                2,843,077





Overall,
revenues for the fiscal year ended September 30, 2010 were $42,969,762. This
represents an increase of 25.0% over revenues for the fiscal year ended
September 30, 2009 of $34,363,674.  Contract Research revenues
increased by 16.8% with continued strong contracts from Homeland Security,
Department of Energy and others.  Optics/Photonics Products and
Instruments achieved an increase of 36.3% including the addition of the Hilger
revenue of $687,850, continued new customer and new product growth initiatives
and more favorable economic conditions.





Gross
profit for fiscal year 2010 increased by 29.3% from the prior year period to
$17,763,802.  Therefore, given our 25% increase in revenues, gross
profit as a percentage of sales improved from 40.0% to 41.3%.  Gross
profit margin from Contract Research was relatively constant with the
improvement coming from volume improvement and cost initiatives in the
Optics/Photonics Products and Instruments segment.





Selling,
general and administrative (“SG&A”) expenses increased to $12,971,640 or
30.2% of sales for fiscal year 2010 from $10,891,096 or 31.7% of sales for
fiscal year 2009, an improvement of 1.5% of sales.  Again, the
improvements came primarily from the Optics/Photonics Products and Instruments
segment where costs were controlled as revenues increased.  SG&A
expenses in fiscal 2010 included period costs of $127,372 associated with the
debt refinancing transaction with Sovereign/Santander Bank.  In
addition, SG&A expenses included $183,627 in period costs associated with
the acquisition of Hilger Crystals.





Net
Interest Expense decreased to $628,120 in fiscal 2010 from $735,317 in fiscal
2009.  This decrease came from continued debt reduction with regular
periodic payments from the beginning of the year until July when the debt was
refinanced with Sovereign/Santander Bank at which time the weighted average cost
of debt was reduced.  The effect of the interest rate reduction was
partially offset by additional $4 million in borrowings to fund the acquisition
of Hilger Crystals, leading to higher debt levels.





For
fiscal year 2010, the Company had income tax expense of $929,661 as compared to
$556,462 for fiscal year 2009.  Higher net taxable income was offset
when the Company was awarded $1.2 million in federal tax credits associated with
the Qualifying Therapeutic Discovery Project (QTDP), enacted as part of the
Patient Protection and Affordable Care Act of 2010, which reduced taxes by
$793,200.





The
Company had net income of $3,234,381 for the year ended September 30, 2010
compared to net income of $1,551,298 for the fiscal year ended September 30,
2009.  Net income improved most dramatically for our Optics/Photonics
Products and Instruments segment since net profit margin is relatively fixed
with our contractual arrangements for the Contract Research
segment.


8





Liquidity
and Capital Resources





Net cash
as of September 30, 2010 was $4,111,966 which was an increase of $1,007,188 as
compared to $3,104,778 at September 30, 2009.





Net cash
provided by operating activities was $3,109,097 for fiscal year 2010 versus
$2,380,435 for fiscal year 2009.  Fiscal year 2010 net income was
$3,234,381, depreciation/ amortization added back $1,040,132, and accounts
receivable increased by $1,689,793.  The accounts receivables
increased 42% as compared to the revenue increase of 25% over the prior year
period.  Correspondingly, days sales outstanding (DSO) increased by
5.8 days to 51.8.  This increase was primarily the result of timing
differences year to year with the collection of governmental agency accounts
receivable within the Contract Research segment.  Excluding the
additional inventory purchased as part of the Hilger acquisition, inventory
decreased by $198,241 with inventory turns of 3.8 days staying relatively
constant including Hilger.  Accounts payable and accrued expense
changes added $845,151 to cash flow with the higher business
volume.  Income taxes payable decreased by $894,217 primarily with the
QTDP tax credits which will provide future cash flow benefit.





Cash
flows used in investing activities were $4,366,423 for fiscal year 2010 compared
to $445,646 for fiscal year 2009.  Cash paid for the Hilger Crystals
acquisition in July totaled $4,002,946.  Capital expenditures to
purchase machinery and equipment were $363,406 for fiscal year 2010 compared to
$445,646 for 2009.





Cash
flows from financing activities added $2,247,810 to cash for fiscal year 2010
and ($2,712,966) was used for fiscal year 2009. Cash added from financing
activities for fiscal year 2010 included borrowings of $9,000,000 under the new
Term Loan with Sovereign/Santander Bank.  These proceeds were used to
repay indebtedness to Susquehanna Bank of $5,415,300; Tompkins Trust of $985,015
and RMD Instruments LLC of $2,000,000.  An additional $4,000,000 was
borrowed under the Acquisition Line of Credit to fund the acquisition of Hilger
Crystals.  Cash was used to make periodic payments against long term
debt of $2,058,892 both before and after the debt refinancing.  Cash
was received from the issuance of common stock in the amount of $271,255 and
preferred stock dividends of $427,433 were paid in cash.





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 12
months.  As of September 30, 2010, the Company had cash of $4,111,966
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 a cash payment of up to
$2.0 million (see Note 9 to the financial statements contained in this
report).





In
addition, there are currently plans for capital expenditure of $1,367,000 in the
next twelve months.  This includes investment in the Company’s dual
mode nuclear detector initiative for Homeland Security applications which would
be used to locate nuclear bombs or nuclear material at ports and
borders.  Any other major business expansions or acquisitions will
likely require the Company to seek additional debt and/or equity
financing.





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 (see Note 7 to the financial
statements contained in this report).  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 September 30, 2010, the Company was in
compliance with all covenants.





DYNASIL’S
STRATEGY





Our
vision is to be the premier global specialized sensor, precision instruments and
optical products company. Our mission is to deliver sustainable growth and
maximum value to our shareholders and the best products, services and
technologies to our customers. Our plan is to continue to grow profitably
through organic growth driven by commercialization of our best technologies and
acquisitions of companies with strengths in complementary areas that enable us
to more quickly commercialize our new technology while expanding the scale and
scope of our product line and distribution channels. We plan to continue to use
Government R & D funding to supplement technology development.





Dynasil’s
sensors and instruments are aimed at making the world safer and healthier in
critical applications including:


9





-
            Medicalproducts such as
      probes to help surgeons determine which lymph nodes to remove during
      breast cancer surgery.


-
            Commercialproducts such
      as handheld x-ray florescence (XRF) instruments to determine whether there
      is lead in paint within buildings or
toys.


-
            Homeland security
      products such as improved sensors for detecting nuclear materials or dirty
      bombs at ports and borders.


-
            Defenseproducts such as
      laser optics for fighter jets.





We have
the following strengths that we believe make Dynasil unique:


-
            A
      track record of consistent growth and profitability – growing from $2
      million revenues in fiscal year 2004 to $43 million in fiscal year 2010 –
      a 63% compound annual growth rate while being profitable every quarter
      since fiscal year 2004.


-
            A
      profitable research business developing advanced technology to provide
      significant upside opportunity where we typically get to retain the
      commercial rights to the
technology.


-
            A
      plan to continue to grow aggressively through acquisitions and technology
      commercialization.





Our
competitive advantage comes from effective execution as well as new technology
from our profitable research operation.


-
            Dynasil
      has a proven track record for delivering results by bringing focus to
      businesses and improving their execution.  The acquisitions of
      Optometrics, EMF, the Precision Optics filter product line, RMD and Hilger
      Crystals have been completed since March 2005 and we have significantly
      improved operational execution and results in these
      businesses.


-
            Management
      expects the profitable research at RMD to drive our internal growth of
      commercial products as well as to lead to acquisitions where RMD
      technology can provide a competitive advantage.  An example of
      our current involvement with commercialization occurred in the third
      quarter when the Company’s Board approved investment into dual mode
      nuclear detectors for Homeland Security applications.  These
      detectors are designed to locate nuclear bombs or nuclear materials at
      ports and borders and are expected to replace two current detector
      subsystems – the gamma radiation detector and also the helium-3
      detectors for neutrons, which are in critically short
      supply.  The initial target product is handheld devices with
      volume commercial sales expected during FY
2011.





Financial
Objective





Dynasil’s
goal is to perform in the top 25% of peer group companies with respect to the
total return to shareholders.





Ethics
Policy





Dynasil
has a Code of Conduct which requires adherence to the highest ethical standards
in all its dealings with customers, vendors, employees and
stockholders.  Ethical behavior includes the principles of integrity,
fairness, respect, openness, and obeying all laws. The Company adopted a
revised Code of Conduct for all employees on October 1, 2010.  The Company
will provide a copy to any person without charge upon request and it is posted
on the Company website – www.dynasilcorp.com.





Operations
Strategy





The
Company is organized into strong business units which are focused on customers
and meeting key business goals.  Each business unit is led by a
General Manager with overall responsibility for their unit results as well as
responsibility to manage the interfaces with other business units and the
corporate staff.  The Company seeks to foster a high level of employee
involvement, motivation, and profit-sharing participation.





An
effective central corporate staff focuses on adding value by centralizing a few
selected activities and by developing key competencies within the business units
which include:


-
            Providing
      overall corporate leadership and
coordination.


-
            Identifying,
      structuring, and coordinating acquisition activities to support growth
      objectives.


-
            Driving
      commercialization of the Company’s extensive research portfolio either
      organically or through
acquisitions.


-
            Implementing
      key corporate competencies in the business units to support organic growth
      by teaching and consulting to
include:


10


o
            Clear
      focus by defining a few, key business objectives; prioritizing the
      projects to best meet those objectives; setting individual goals;
      consistently communicating updates; and sharing in the
      profits;


o
            Disciplined
      manufacturing, sales and business
processes;


o
            Market
      understanding, strategy process, and identification of a few high growth
      projects; and continuous revenue growth and operational
      improvements;


o
            Providing
      cost effective financial reporting, tax compliance, investor relations,
      SEC compliance, legal support, and fund raising to support
      growth.


-
            Facilitating
      cooperation and coordination between business units such as working
      together to maximize overall effectiveness of sales and
      marketing.


-
            Identifying
      transferable skills within the business units and using them to help other
      business units.


-
            Purchasing
      shared items, such as insurance, where consolidated purchasing delivers
      savings.


-
            Coordinating
      Human Resource policies, high level recruiting, and supporting business
      units with HR issues.





Acquisitions





The
Company plans to aggressively pursue additional acquisitions to enhance growth
using the following criteria:





a)
Acquisitions that can quickly add to financial results.  Target
companies are product companies serving related markets that can be purchased on
attractive financial terms.  Of particular interest are companies
where a combination with Dynasil offers increased customer access, complementary
capabilities that can expand revenues, cost savings or where companies have
developed capabilities that can be rapidly brought to market given access to
Dynasil’s existing infrastructure, growth capital and/or leadership
assistance.  Our business model has proven to be an attractive exit
option for long term owners who want to see their business continue to prosper
and grow.





b)
Acquisitions that create strategic competitive advantage through technology
leadership where RMD has developed technology that can quickly create
value.





Strategy
Summary





•
            Use
      profitable research to springboard
growth


–
            Internal
      growth by commercializing
technology


–
            Focused
      acquisitions can speed time to
market


•
            Continue
      Effective Execution


–
            People
      focused on key goals & the
basics


–
            Build
      upon strong customer base and
expand


•
            Use
      acquisitions to capitalize on our
technology


–
            Increase
      market penetration


–
            Gain
      complementary capabilities and market
channels





“Off
Balance Sheet” Arrangements





The
Company has no “Off Balance Sheet” arrangements.





RECENT
ACCOUNTING PRONOUNCEMENTS





See
Note 1, "Summary of Significant Accounting Policies" in the Notes to
Consolidated Financial Statements for a full description of recent accounting
pronouncements, including the respective dates of adoption or expected adoption
and effects on our consolidated financial position, results of operations and
cash flows.





CRITICAL
ACCOUNTING POLICIES





Our
discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America and pursuant to the rules and regulations of the SEC.  The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  We have identified the following as the items that
require the most significant judgment and often involve complex estimation:
revenue recognition, valuation of long-lived assets, intangible assets and
goodwill, estimating allowances for doubtful accounts receivable, stock-based
compensation and accounting for income taxes.


11





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.  Revenues from research and
development activities consist 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 revenue 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.  Revenues from
fixed-type contracts are 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.





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.





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.


12





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.  With
the significant economic downturn during fiscal 2009, the Company
concluded that impairment indicators existed.  As a result, the
Company reviewed its long-lived assets and determined there was no
impairment charge during the year ended September 30, 2009.  The
Company determined there was no impairment for the year ended September 30,
2010.





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 June 30, 2010 and 2009.





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.





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.





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.  The Company believes that these carryforwards will be
realized, and has adjusted the valuation allowance accordingly.


13





Forward-Looking
Statements





The
statements contained in this Annual Report on Form 10-K which are not historical
facts, including, but not limited to certain statements found under the captions
"Description of Business," “General Business Overview,” "Results of Operations,"
“Dynasil’s Strategy,” and "Liquidity and Capital Resources" above, 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 Annual Report on Form 10-K, including,
without limitation, the portions of such reports under the captions referenced
above, and the 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.




14


ITEM
8.  FINANCIAL STATEMENTS





REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


Dynasil
Corporation of America and Subsidiaries


Watertown,
Massachusetts





We
have audited the accompanying consolidated balance sheets of DYNASIL CORPORATION OF AMERICA AND
SUBSIDIARIES (the “Company”) as of September 30, 2010 and 2009, and the
related consolidated statements of operations and comprehensive income, changes
in stockholders’ equity, and cash flows for the years then
ended.  These consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DYNASIL CORPORATION OF AMERICA AND
SUBSIDIARIES as of September 30, 2010 and 2009 and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.





We
were not engaged to examine management’s assessment of the effectiveness of
DYNASIL CORPORATION OF AMERICA
AND SUBSIDIARIES’ internal control over financial reporting as of
September 30, 2010 and 2009, included in the accompanying management’s report on
internal control over financial reporting and, accordingly, we do not express an
opinion thereon.





HAEFELE,
FLANAGAN & CO., p.c.





Moorestown,
New Jersey


December
17, 2010




F-1


DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


SEPTEMBER
30, 2010 and 2009


2010
                    
                    
                    2009ASSETSCurrent
      assetsCash
      and cash equivalents
                    
                    $
                    4,111,966
                    
                    
                    $
                    3,104,778Accounts
      receivable, net of allowance for doubtful accounts of $132,584 for 2010
      and $123,853 for 2009 and sales returns of $24,168 for 2010 and $18,916
      for 2009
                    
                    
                    6,360,583
                    
                    
                    
                    4,053,742Inventories
                    
                    
                    3,097,219
                    
                    
                    
                    2,371,516Deferred
      tax asset
                    
                    
                    -0-
                    
                    
                    
                    290,100Cost
      in excess of billings
                    
                    
                    135,157
                    
                    
                    
                    -0-Prepaid
      income taxes
                    
                    
                    410,045
                    
                    
                    
                    -0-Prepaid
      expenses and other current assets
                    
                    
                    453,418
                    
                    
                    
                    306,848Total
      current assets
                    
                    
                    14,568,388
                    
                    
                    
                    10,126,984Property,
      Plant and Equipment, net
                    
                    
                    3,953,319
                    
                    
                    
                    2,744,724Other
      AssetsIntangibles,
      net
                    
                    
                    6,671,149
                    
                    
                    
                    7,232,035Goodwill
                    
                    
                    13,591,287
                    
                    
                    
                    11,054,396Deferred
      financing costs, net
                    
                    
                    190,568
                    
                    
                    
                    64,637Total
      other assets
                    
                    
                    20,453,004
                    
                    
                    
                    18,351,068Total
      Assets
                    
                    $
                    38,974,711
                    
                    
                    $
                    31,222,776LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesCurrent
      portion of long-term debt
                    
                    $
                    1,870,779
                    
                    
                    $
                    1,749,524Accounts
      payable
                    
                    
                    1,482,250
                    
                    
                    
                    773,837Accrued
      expenses and other liabilities
                    
                    
                    1,823,222
                    
                    
                    
                    1,111,342Income
      taxes payable
                    
                    
                    -0-
                    
                    
                    
                    507,122Deferred
      tax liability
                    
                    
                    91,100
                    
                    
                    
                    -0-Billings
      in excess of costs
                    
                    
                    -0-
                    
                    
                    
                    60,448Dividends
      payable
                    
                    
                    131,400
                    
                    
                    
                    149,150Total
      current liabilities
                    
                    
                    5,398,751
                    
                    
                    
                    4,351,423Long-term
      LiabilitiesLong-term
      debt, net
                    
                    
                    10,833,334
                    
                    
                    
                    6,386,796Note
      payable to related party
                    
                    
                    -0-
                    
                    
                    
                    2,000,000Contingent
      consideration
                    
                    
                    750,000
                    
                    
                    
                    -0-Total
      long-term liabilities
                    
                    
                    11,583,334
                    
                    
                    
                    8,386,796Temporary
      EquityRedeemable
      common stock, at redemption value of $2,000,000; put option on 1,000,000
      shares issued and outstanding in 2010 and 2009
                    
                    
                    2,000,000
                    
                    
                    
                    2,000,000


Stockholders'
      EquityCommon
      Stock, $0.0005 par value, 40,000,000 shares authorized, 12,482,356 and
      11,250,257 shares issued, 11,672,196 and 10,440,097 shares outstanding for
      2010 and 2009, respectively
                        
                        $
                        6,241
                        
                        
                        $
                        6,125Preferred
      Stock, $.001 par value, 15,000,000 shares authorized, 5,256,000 and
      5,966,000 shares issued and outstanding for 2010 and 2009, respectively,
      10% cumulative, convertible
                        
                        
                        5,256
                        
                        
                        
                        5,966Additional
      paid in capital
                        
                        
                        15,186,029
                        
                        
                        
                        14,364,388Deferred
      compensation - common stock
                        
                        
                        (160,088
                        )
                        
                        
                        -0-Accumulated
      other comprehensive income
                        
                        
                        150,162
                        
                        
                        
                        -0-Retained
      earnings
                        
                        
                        5,791,368
                        
                        
                        
                        3,094,42020,978,968
                        
                        
                        
                        17,470,899Less
      810,160 shares of treasury stock - at cost
                        
                        
                        (986,342
                        )
                        
                        
                        (986,342
                        )Total
      stockholders' equity
                        
                        
                        19,992,626
                        
                        
                        
                        16,484,557Total
      Liabilities and Stockholders' Equity
                        
                        $
                        38,974,711
                        
                        
                        $
                        31,222,776
 
 The
accompanying notes are an integral part of these consolidated financial
statements.




F-2


DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


FOR
THE YEARS ENDED SEPTEMBER 30, 2010 and 2009





2010
                      
                      
                      2009Net
      revenues
                      
                      $
                      42,969,762
                      
                      
                      $
                      34,363,674Cost
      of revenues
                      
                      
                      25,205,960
                      
                      
                      
                      20,629,501Gross
      profit
                      
                      
                      17,763,802
                      
                      
                      
                      13,734,173Selling,
      general and administrative expenses
                      
                      
                      12,971,640
                      
                      
                      
                      10,891,096Income
      from operations
                      
                      
                      4,792,162
                      
                      
                      
                      2,843,077Interest
      expense, net
                      
                      
                      628,120
                      
                      
                      
                      735,317Income
      before income taxes
                      
                      
                      4,164,042
                      
                      
                      
                      2,107,760Income
      tax expense, net of $793,200 of tax benefits resulting from QTDP tax
      credits
                      
                      
                      929,661
                      
                      
                      
                      556,462Net
      income
                      
                      $
                      3,234,381
                      
                      
                      $
                      1,551,298Net
      Income
                      
                      $
                      3,234,381
                      
                      
                      $
                      1,551,298Other
      comprehensive income, net of $77,400 and $-0- income taxes in 2010 and
      2009Foreign
      currency translation
                      
                      
                      150,162
                      
                      
                      
                      -0-Total
      comprehensive income
                      
                      $
                      3,384,543
                      
                      
                      $
                      1,551,298Net
      income
                      
                      $
                      3,234,381
                      
                      
                      $
                      1,551,298Dividends
      on preferred stock
                      
                      
                      537,433
                      
                      
                      
                      589,740Net
      income applicable to common shareholders
                      
                      
                      2,696,948
                      
                      
                      
                      961,558Dividend
      add back due to assumed preferred stock conversion
                      
                      
                      537,433
                      
                      
                      
                      71,000Net
      income for diluted income per common share
                      
                      $
                      3,234,381
                      
                      
                      $
                      1,032,558Basic
      net income per common share
                      
                      $
                      0.22
                      
                      
                      $
                      0.08Diluted
      net income per common share
                      
                      $
                      0.22
                      
                      
                      $
                      0.08Weighted
      average shares outstandingBasic
                      
                      
                      12,404,701
                      
                      
                      
                      11,373,837Diluted
                      
                      
                      14,937,575
                      
                      
                      
                      12,328,261





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




F-3


DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


FOR
THE YEARS ENDED SEPTEMBER 30, 2010 and 2009





Additional
                  
                  
                  Deferred
                  
                  
                  
                  
                  
                  Accumulated
                    Other
                  
                  
                  
                  
                  
                  
                  
                  
                  TotalCommon
                  
                  
                  Common
                  
                  
                  Preferred
                  
                  
                  Preferred
                  
                  
                  Paid-in
                  
                  
                  Stock
                  
                  
                  Retained
                  
                  
                  Comprehensive
                  
                  
                  Treasury Stock
                  
                  
                  Stockholders'Shares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Compensation
                  
                  
                  Earnings
                  
                  
                  Income
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  EquityBalance,
      October 1, 2008 as previously reported
                  
                  
                  12,142,849
                  
                  
                  $
                  6,072
                  
                  
                  
                  5,966,000
                  
                  
                  $
                  5,966
                  
                  
                  $
                  16,122,185
                  
                  
                  $
                  0
                  
                  
                  $
                  2,132,862
                  
                  
                  $
                  0
                  
                  
                  
                  810,160
                  
                  
                  $
                  (986,342
                  )
                  
                  $
                  17,280,743Reclassification
      adjustment
                  
                  
                  (1,000,000
                  )
                  
                  
                  (500
                  )
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  (1,999,500
                  )
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  
                  0
                  
                  
                  $
                  0
                  
                  
                  
                  (2,000,000
                  )Balance,
      October 1, 2008 as restated
                  
                  
                  11,142,849
                  
                  
                  
                  5,572
                  
                  
                  
                  5,966,000
                  
                  
                  
                  5,966
                  
                  
                  
                  14,122,685
                  
                  
                  
                  0
                  
                  
                  
                  2,132,862
                  
                  
                  
                  0
                  
                  
                  
                  810,160
                  
                  
                  
                  (986,342
                  )
                  
                  
                  15,280,743Issuance
      of shares of common stock under employee stock purchase
    plan
                  
                  
                  3,333
                  
                  
                  
                  2
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  3,541
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  3,543Issuance
      of shares of common stock in lieu of compensation to
    directors
                  
                  
                  40,075
                  
                  
                  
                  20
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  50,145
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  50,165Issuance
      of shares of common stock under stock option plan
                  
                  
                  53,000
                  
                  
                  
                  26
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  27,024
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  27,050Compensation
      costs recognized in connection with stock options
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  133,998
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  133,998Issuance
      of shares of common stock in lieu of Series C preferred stock
      dividends
                  
                  
                  11,000
                  
                  
                  
                  5
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  27,495
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  27,500Preferred
      stock dividends
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  (589,740
                  )
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  (589,740
                  )Net
      income
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  1,551,298
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  1,551,298Balance,
      September 30, 2009
                  
                  
                  11,250,257
                  
                  
                  $
                  5,625
                  
                  
                  
                  5,966,000
                  
                  
                  $
                  5,966
                  
                  
                  $
                  14,364,888
                  
                  
                  $
                  0
                  
                  
                  $
                  3,094,420
                  
                  
                  $
                  0
                  
                  
                  
                  810,160
                  
                  
                  $
                  (986,342
                  )
                  
                  $
                  16,484,557Issuance
      of shares of common stock under employee stock purchase
    plan
                  
                  
                  20,546
                  
                  
                  
                  10
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  43,818
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  43,828Issuance
      of shares of common stock in lieu of compensation to
    directors
                  
                  
                  81,179
                  
                  
                  
                  41
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  221,602
                  
                  
                  
                  (102,314
                  )
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  119,329Issuance
      of shares of common stock under stock option plan
                  
                  
                  121,459
                  
                  
                  
                  61
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  226,469
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  226,530Compensation
      costs recognized in connection with employee bonuses
                  
                  
                  6,500
                  
                  
                  
                  3
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  18,254
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  18,257Compensation
      costs recognized in connection with employment contract
                  
                  
                  7,500
                  
                  
                  
                  4
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  22,871
                  
                  
                  
                  (22,875
                  )
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-Compensation
      costs recognized in connection with stock options
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  166,913
                  
                  
                  
                  (34,899
                  )
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  132,014Issuance
      of shares of common stock in lieu of advisor fees
                  
                  
                  4,484
                  
                  
                  
                  2
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  10,999
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  11,001Issuance
      of shares of common stock for conversion of Series B preferred
      stock
                  
                  
                  946,431
                  
                  
                  
                  473
                  
                  
                  
                  (710,000
                  )
                  
                  
                  (710
                  )
                  
                  
                  237
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-Foreign
      currency translation adjustment
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  150,162
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  150,162Issuance
      of shares of common stock in lieu of Series C preferred stock
      dividends
                  
                  
                  44,000
                  
                  
                  
                  22
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  109,978
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  110,000Preferred
      stock dividends
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  (537,433
                  )
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  (537,433
                  )Net
      income
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  3,234,381
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  3,234,381Balance,
      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
                  )
                  
                  $
                  19,992,626





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




F-4





DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED SEPTEMBER 30, 2010 and 2009


2010
                      
                      
                      2009Cash
      flows from operating activities:Net
      income
                      
                      $
                      3,234,381
                      
                      
                      $
                      1,551,298Adjustments
      to reconcile net income to net cash provided by operating
      activitiesStock
      compensation expense
                      
                      
                      329,686
                      
                      
                      
                      184,163Provision
      for doubtful accounts and sales returns
                      
                      
                      1,886
                      
                      
                      
                      64,404Depreciation
      and amortization
                      
                      
                      1,040,132
                      
                      
                      
                      946,932Deferred
      income taxes
                      
                      
                      303,800
                      
                      
                      
                      (56,600
                      )(Increase)
      decrease in:Accounts
      Receivable
                      
                      
                      (1,689,793
                      )
                      
                      
                      (727,443
                      )Inventories
                      
                      
                      198,241
                      
                      
                      
                      538,214Prepaid
      expenses and other current assets
                      
                      
                      (64,565
                      )
                      
                      
                      (38,589
                      )Increase
      (decrease) in:Accounts
      payable and accrued expenses
                      
                      
                      845,151
                      
                      
                      
                      (396,145
                      )Income
      taxes payable
                      
                      
                      (894,217
                      )
                      
                      
                      470,646Billings
      in excess of cost
                      
                      
                      (195,605
                      )
                      
                      
                      (156,445
                      )Net
      cash provided by operating activities
                      
                      
                      3,109,097
                      
                      
                      
                      2,380,435Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                      
                      
                      (363,406
                      )
                      
                      
                      (445,646
                      )Decrease
      in other assets
                      
                      
                      (71
                      )
                      
                      
                      -0-Cash
      paid for acquisition
                      
                      
                      (4,002,946
                      )
                      
                      
                      -0-Net
      cash used in investing activities
                      
                      
                      (4,366,423
                      )
                      
                      
                      (445,646
                      )Cash
      flows from financing activitiesIssuance
      of common stock
                      
                      
                      271,255
                      
                      
                      
                      30,593Repayment
      of long term debt
                      
                      
                      (2,058,892
                      )
                      
                      
                      (1,691,202
                      )Repayment
      of short term debt
                      
                      
                      -0-
                      
                      
                      
                      (490,117
                      )Proceeds
      from debt refinancing
                      
                      
                      626,685
                      
                      
                      
                      -0-Proceeds
      from long term debt
                      
                      
                      4,000,000
                      
                      
                      
                      -0-Deferred
      financing costs incurred
                      
                      
                      (146,055
                      )
                      
                      
                      -0-Preferred
      stock dividends paid
                      
                      
                      (445,183
                      )
                      
                      
                      (562,240
                      )Net
      cash used in financing activities
                      
                      
                      2,247,810
                      
                      
                      
                      (2,712,966
                      )Effect
      of exchange rates on cash and cash equivalents
                      
                      
                      16,704
                      
                      
                      
                      -0-Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      1,007,188
                      
                      
                      
                      (778,177
                      )Cash
      and cash equivalents, beginning
                      
                      
                      3,104,778
                      
                      
                      
                      3,882,955Cash
      and cash equivalents, ending
                      
                      $
                      4,111,966
                      
                      
                      $
                      3,104,778





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




F-5


DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





Note
1 – Summary of Significant Accounting Policies





Nature
of Operations





The
Company is primarily engaged in the development, marketing and manufacturing of
optical products and optical instruments as well as contract
research.  The Company’s products and services are used in a broad
range of application markets including the medical, industrial and homeland
security/defense sectors.  The products and services are sold
throughout the United States and internationally.





Principles
of Consolidation





The
accompanying consolidated financial statements include the accounts of Dynasil
Corporation of America (“Dynasil” or the “Company”) and its wholly-owned
subsidiaries: Optometrics Corporation (“Optometrics”), Dynasil International
Incorporated, Hibshman Corporation, Evaporated Metal Films Corp (“EMF”), RMD
Instruments Corp (“RMD Instruments”), Radiation Monitoring Devices, Inc (“RMD
Research”) and Hilger Crystals, Ltd (“Hilger”).  RMD Instruments and
RMD Research are referred to, together, in these financial statements as
“RMD.”  All significant intercompany transactions and balances have
been eliminated.





Use
of Estimates





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





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.  Revenues from research and
development activities consist 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 revenue 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.  Revenues from
fixed-type contracts are 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.





Allowances
for Doubtful Accounts Receivable





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


F-6


DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





Shipping
and Handling Costs





The
Company includes shipping and handling fees billed to customers in sales
and shipping and handling costs incurred in cost of revenues.





Research
and Development





The
Company expenses research and development costs as incurred.  Research
and development costs include salaries, employee benefit costs, department
supplies, direct project costs and other related costs.  Research and
development costs incurred during the years ended September 30, 2010 and 2009
were $20,600,349 and $18,210,315, respectively.  Substantially all of
these research and development costs relate to research contracts performed by
RMD Research, and are in turn billed to the contracting party.





Billings in Excess of
Costs





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 less actual costs plus fees.





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, contain no beneficial
conversion feature.





Patent
Costs (principally Legal Fees)





Costs
incurred in filing, prosecuting and maintaining patents are expensed as
incurred.  Such costs aggregated approximately $367,657 and $285,139
for the years ended September 30, 2010 and 2009, respectively.





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
primarily 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.





Property,
Plant and Equipment and Depreciation and Amortization





Property,
plant and equipment are recorded at cost or at fair market value for acquired
assets.  Depreciation is provided using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes
over the estimated useful lives of the respective assets





The
estimated useful lives of assets for financial reporting purposes are as
follows:  building and improvements, 8 to 25 years; machinery and
equipment, 5 to 10 years; office furniture and fixtures, 5 to 10 years;
transportation equipment, 5 years. Maintenance and repairs are charged to
expense as incurred; major renewals and betterments are
capitalized.  When items of property, plant and equipment are sold or
retired, the related costs and accumulated depreciation are removed from the
accounts and any gain or loss is included in income.


F-7


DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





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.  With the significant economic downturn
during fiscal 2009, the Company concluded that impairment indicators
existed.  As a result, the Company reviewed its long-lived assets and
determined there was no impairment charge during the year ended September 30,
2009.  The Company further determined there was no impairment for the
year ended September 30, 2010.





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.





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.


F-8


DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





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 June 30, 2010 and 2009.





Deferred
Financing Costs





Deferred
financing costs, net of $190,568 and $64,637 at September 30, 2010 and 2009
include accumulated amortization of $8,986 and $33,719,
respectively.  Amortization expense for the years ended September 30,
2010 and 2009 was $20,122 and $16,499.  Unamortized debt financing
costs of $106,999 were expensed in 2010 due to refinancing.





Advertising





The
Company expenses all advertising costs as incurred.  Advertising
expense for the years ended September 30, 2010 and 2009 was $177,891 and
$219,275.





Deferred
Rent





Deferred
rent consists of the excess of the allocable straight line rent expense to date
as compared to the total amount of rent due and payable through such
period.  Deferred rent is amortized as a reduction to rent expense
over the term of the lease.  Deferred rent was $103,314 and $70,770 as
of September 30, 2010 and 2009 and is included in accrued expenses and other
liabilities.





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 September 30, 2010 and 2009.  As of
September 30, 2009 and 2010, 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
September 30, 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.


F-9


DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





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.





For
purposes of computing diluted earnings per share, 2,532,874 and 954,424 common
share equivalents were assumed to be outstanding for the years ended September
30, 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 September 30, 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 and included
in the calculation as of September 30, 2010.  The computation of the
weighted shares outstanding is as follows:





Weighted average shares outstandingBasic
                    
                    
                    12,404,701
                    
                    
                    
                    11,373,837Effect
      of dilutive securitiesStock
      Options
                    
                    
                    430,474
                    
                    
                    
                    10,124Convertible
      Preferred Stock
                    
                    
                    2,102,400
                    
                    
                    
                    944,300Dilutive
      Average Shares Outstanding
                    
                    
                    14,937,575
                    
                    
                    
                    12,328,261





Stock
Based Compensation





Stock-based
compensation cost is measured using the fair value recognition provisions of the
FASB authoritative guidance, which requires the measurement and recognition of
compensation expense for all stock-based awards made to employees and directors,
including employee stock options, based on estimated fair values.





We
elected to use the modified prospective application transition method as
provided by the FASB authoritative guidance.  In accordance with the
modified prospective transition method, compensation cost is recognized in the
consolidated financial statements for all awards granted after the date of
adoptions.





Foreign
Currency Translation





The
operations of Hilger, the Company’s foreign subsidiary, use their local currency
as its functional currency. Assets and liabilities of the Company’s foreign
operations, denominated in their local currency, Great Britain Pounds (GBP), are
translated at the rate of exchange at the balance sheet date.  Revenue
and expense accounts are translated at the average exchange rates during the
period.  Adjustments resulting from translating foreign functional
currency financial statements into U.S. dollars are included in the foreign
currency translation adjustment, a component of accumulated other comprehensive
income in stockholders’ equity.  Gains and losses generated by
transactions denominated in foreign currencies are recorded in the accompanying
statement of operations in the period in which they occur.





Comprehensive
Income





Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources, including foreign currency translation
adjustments.  Accumulated comprehensive income at September 30 2010
and 2009 represents cumulative translation adjustments related to Hilger, the
Company’s foreign subsidiary.  The Company presents comprehensive
income in the consolidated statements of operations and comprehensive
income.





Financial
Instruments





The
carrying amount reported in the balance sheets for cash and cash equivalents,
accounts receivable and accounts payable approximates fair value because of the
immediate or short-term maturity of these financial instruments. The carrying
amount for long-term debt approximates fair value because the underlying
instruments are primarily at current market rates.


F-10





DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of accounts receivable. In the normal course of business,
the Company extends credit to certain customers. Management performs initial and
ongoing credit evaluations of their customers and generally does not require
collateral.





Concentration
of Credit Risk





The
Company maintains allowances for potential credit losses and has not experienced
any significant losses related to the collection of its accounts
receivable.  As of September 30, 2010 and 2009, approximately
$2,166,759 and $1,035,288 or 34% and 26% of the Company’s accounts receivable
are due from foreign sales.





The
Company maintains cash and cash equivalents at various financial institutions in
New Jersey, Massachusetts and New York.  Accounts at each institution
are insured by the Federal Deposit Insurance Corporation up to $250,000. At
September 30, 2010, the Company's uninsured bank balances totaled $3,163,714.
The Company has not experienced any significant losses on its cash and cash
equivalents.





Recent
Accounting Pronouncements





In April
2009, the FASB released an amendment to ASC 805, “Business Combinations,” which
requires an acquirer to recognize at fair value, at the acquisition date, an
asset acquired or a liability assumed that arises from a contingency if the
acquisition date fair value of that asset or liability can be determined during
the measurement period. If the acquisition date fair value cannot be determined
during the measurement period, an asset or liability shall be recognized at the
acquisition date if (1) information available before the end of the measurement
period indicates that it is probable that an asset existed or that a liability
had been incurred at the acquisition date, and (2) the amount of the asset or
liability can be reasonably estimated. The Company adopted the provisions of the
guidance under ASC 805 and its amendment effective October 1, 2009. The impact
of the adoption was dependent on the nature of acquisitions
completed.  See Note 2 – Business Acquisition – Hilger Crystals
Limited.





In August
2009, the FASB issued ASU 2009-05, “Measuring Liabilities at Fair
Value,” an update to ASC 820. This update provides amendments to reduce
potential ambiguity in financial reporting when measuring the fair value of
liabilities. Among other provisions, this update provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the valuation techniques described in ASU 2009-05. The
Company adopted the provisions of this guidance under ASU 2009-05 effective
October 1, 2009. The adoption did not have an impact on the Company’s
consolidated results of operations, financial position or cash
flows.





In
January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and
Disclosures:  Improving Disclosures About Fair Value Measurements.”
This update requires reporting entities to make new disclosures about recurring
or nonrecurring fair-value measurements including significant transfers into and
out of Level 1 and Level 2 fair-value measurements and information on purchases,
sales, issuances, and settlements on a gross basis in the reconciliation of
Level 3 fair-value measurements. ASU 2010-06 was effective for interim and
annual reporting periods beginning after December 15, 2009, except for Level 3
reconciliation disclosures which are effective for annual periods beginning
after December 15, 2010. The Company adopted the provisions of this guidance
under ASU 2009-06, except for Level 3 reconciliation disclosures, effective
October 1, 2011. As this guidance is disclosure-related, it did not have an
impact on the Company’s consolidated results of operations, financial position
or cash flows.




F-11




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





In
April 2010, the FASB issued ASU 2010-17, “Revenue Recognition—Milestone
Method (Topic 605): Milestone Method of Revenue Recognition.” ASU 2010-17
provides guidance on applying the milestone method to milestone payments for
achieving specified performance measures when those payments are related to
uncertain future events. The scope of ASU 2010-17 is limited to transactions
involving research or development. This update further states that the milestone
method is not the only acceptable method of revenue recognition for milestone
payments. Accordingly, entities can make an accounting policy election to
recognize arrangement consideration received for achieving specified performance
measures during the period in which the milestones are achieved, provided
certain criteria are met. An entity’s policy for recognizing deliverable
consideration or unit of accounting consideration contingent upon achievement of
a milestone shall be applied consistently to similar deliverables or units of
accounting. ASU 2010-17 is effective on a prospective basis for milestones
achieved in interim and fiscal years beginning after June 15, 2010. Early
adoption is permitted. The Company will adopt the provisions of this update
under ASU 2010-17 effective October 1, 2010. The Company does not expect ASU
2010-17 to have a material impact on its consolidated results of operations,
financial position or cash flows.





Statement
of Cash Flows





For
purposes of the statement of cash flows, the Company generally considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.





Reclassifications





Certain
amounts as previously reported have been reclassified to conform to the current
year financial statement presentation.  See Note 9 describing the
reclassification to Temporary Equity.





Note
2 – 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.





Pursuant
to the Share Purchase Agreement dated July 19, 2010 by and among Dynasil,
Newport, Hilger and Newport Spectra-Physics Limited, Dynasil acquired 100% of
the issued and outstanding common stock of Hilger for an initial payment of $4
million in cash and a possible additional payment of up to $0.75 million after
eighteen months based on Hilger’s current business revenues for the eighteen
months following the acquisition.  In addition, the Company made a
payment in the amount of $2,946 associated with a post-closing balance sheet
adjustment based on net working capital.  There were associated
transaction costs of $183,627 recorded in selling, general and administrative
costs for the period ended September 30, 2010.





The
acquisition was funded by borrowing $4 million from Sovereign/Santander Bank
under the Acquisition Line of Credit.  This borrowing carries the
interest rate of one month LIBOR plus 3.5%.  There remains $1 million
available under this Acquisition Line of Credit carrying the rate of 0.25% per
annum on the unused portion.  The transaction costs were funded from
the Company’s existing cash balances.





The total
purchase price of $4,752,946 has been allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed on the basis of their
estimated fair values.  The results of operations of Hilger have been
included in the consolidated financial statements from July 19, 2010, the
effective date of the acquisition.





Purchase
      price:Purchase
      price
                  
                  $
                  4,000,000Contingent
      consideration
                  
                  
                  750,000Working
      Capital Adjustment
                  
                  
                  2,946$
                  4,752,946





The
Allocation of the purchase price is summarized below.





Purchase
      price allocation:Accounts
      receivable
                    
                    $
                    618,938Inventories
                    
                    
                    923,944Prepaid
      expenses and other current assets
                    
                    
                    127,831Property
      and equipment
                    
                    
                    1,111,728Goodwill
                    
                    
                    2,513,054Current
      liabilities assumed
                    
                    
                    (542,549
                    )Net
      fair value of assets acquired
                    
                    $
                    4,752,946




F-12




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





The
following is the proforma financial information of the Company for the year
ended September 30, 2010, assuming the transaction had been consummated at the
beginning of the year ended September 30, 2010 (i.e., October 1,
2009):





For the year endedSeptember 30, 2010Statement of Operations
                                
                                (Unaudited)Revenues
                                
                                $
                                45,087,896Cost
      of revenues
                                
                                
                                26,468,238Gross
      profit
                                
                                
                                18,619,658Operating
      Expense
                                
                                
                                13,885,262Income
      from operations
                                
                                
                                4,734,396Interest
      and other expense
                                
                                
                                (626,246
                                )Income
      before income taxes
                                
                                
                                4,108,150Income
      taxes
                                
                                
                                (986,829
                                )Net
      income
                                
                                $
                                3,121,321Earnings
      per share:Basic
                                
                                $
                                0.21Diluted
                                
                                $
                                0.21





Note
3 – Inventories





Inventories
at September 30, 2010 and 2009 consisted of the following:





2010
                    
                    
                    2009Raw
      Materials
                    
                    $
                    2,386,255
                    
                    
                    $
                    1,374,134Work-in-Process
                    
                    
                    416,525
                    
                    
                    
                    550,151Finished
      Goods
                    
                    
                    294,439
                    
                    
                    
                    447,231$
                    3,097,219
                    
                    
                    $
                    2,371,516





Note
4 - Property, Plant and Equipment





Property,
plant and equipment at September 30, 2010 and 2009 consist of the
following:





2010
                    
                    
                    2009Land
                    
                    $
                    182,812
                    
                    
                    $
                    40,450Building
      and improvements
                    
                    
                    2,387,256
                    
                    
                    
                    1,812,658Machinery
      and equipment
                    
                    
                    5,982,594
                    
                    
                    
                    5,163,255Office
      furniture and fixtures
                    
                    
                    325,155
                    
                    
                    
                    278,135Transportaion
      equipment
                    
                    
                    60,828
                    
                    
                    
                    60,8288,938,645
                    
                    
                    
                    7,355,326Less
      accumulated depreciation
                    
                    
                    4,985,426
                    
                    
                    
                    4,610,602$
                    3,953,219
                    
                    
                    $
                    2,744,724





Depreciation
expense for the years ended September 30, 2010 and 2009 was $459,123 and
$395,210.


F-13




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





Note
5 – Intangible Assets





Intangible
assets at September 30, 2010 and September 30, 2009 consist of the
following:





Useful
                              
                              
                              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





Useful
                            
                            
                            Gross
                            
                            
                            AccumulatedSeptember 30, 2009
                            
                            Life (years)
                            
                            
                            Amount
                            
                            
                            AmortizationAcquired
      Customer Base
                            
                            5-15
                            
                            
                            $
                            7,025,413
                            
                            
                            $
                            630,294Know
      How
                            
                            15
                            
                            
                            
                            512,000
                            
                            
                            
                            42,667Trade
      Names
                            
                            15
                            
                            
                            
                            219,000
                            
                            
                            
                            18,250Backlog
                            
                            4
                            
                            
                            
                            182,000
                            
                            
                            
                            15,167$
                            7,938,413
                            
                            
                            $
                            706,378





During
the period ended June 30, 2010, the Company adjusted the useful life of the
Company’s Backlog from 15 years to 4 years from the date of acquisition (July 1,
2008).  A useful life of 4 years coincides with the corresponding
revenues generated from the backlog.  The Company determined that
amortizing the backlog over 15 years versus 4 years from the date of acquisition
did not have a material impact on the current or prior period financial
statements.  Commencing April 1, 2010, the net book value of the
backlog of $160,767 is being amortized over its remaining useful life of 27
months.  Amortization expense for the years ended September 30, 2010
and 2009 was $560,887 and $535,137.





Estimated
amortization expense for each of the next five fiscal years:





2011
                  
                  $
                  596,8152012
                  
                  $
                  578,3922013
                  
                  $
                  523,0872014
                  
                  $
                  523,0872015
                  
                  $
                  523,087





Note
6 – Goodwill





There was
no change in the carrying value of goodwill during the year ended September 30,
2009.  Goodwill increased $2,536,891 during the year ended September
30, 2010 in connection with the Hilger Acquisition.





Note
7 – Debt





On July
9, 2010, Dynasil completed bank financing with Sovereign Bank (the "Bank") (the
"Sovereign Credit Facility") which refinanced all outstanding debt and increased
Dynasil's line of credit from $1.2 million to $8 million by entering into a Loan
and Security Agreement with the Bank dated as of July 7, 2010 (the "Bank Loan
Agreement").  Dynasil, as Borrower, and all of Dynasil's wholly owned
active subsidiaries including: EMF, Optometrics, RMD Instruments and RMD
Research, as Guarantors, executed and delivered various supporting agreements
dated July 7, 2010 in favor of the Bank.  Under the Bank Loan
Agreement, the Bank provided Dynasil with three borrowing facilities: a
five-year $9 million term loan (the "Term Loan") at an interest rate of 5.58%; a
$3 million working capital line of credit (the "Working Capital Line of Credit")
at an interest rate of Prime or one month LIBOR plus 2.75% and a monthly fee
calculated at the rate of 0.25% per annum of the unused Working Capital Line of
Credit; and a $5 million acquisition line of credit (the "Acquisition Line of
Credit") at an interest rate of one month LIBOR plus 3.5% and a monthly fee
calculated at the rate of 0.25% per annum of the unused Acquisition Line of
Credit.




F-14




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





The $9
million proceeds of the Term Loan were used to pay off all of Dynasil's
indebtedness with Susquehanna Bank (the "Susquehanna Bank Note"), Tompkins Trust
Company (the "Tompkins Trust Bank Note"), and RMD Instruments LLC (the "RMD
Instruments LLC Note"), in an aggregate amount of $8,373,315. The remaining
$626,685 was used to pay transaction expenses and to increase available working
capital.  The RMD Instruments LLC Note was a note payable to the
former owners of RMD Instruments LLC, where a current officer of Dynasil has a
financial interest.  The Term Loan is to be repaid with equal
principal payments of $107,142.85 per month plus interest and matures on July 7,
2015.  Interest on advances under the Working Capital Line of Credit
is payable monthly and such advances are repayable in full on July 7, 2012,
unless the Working Capital Line of Credit is renewed by the Bank.  The
Acquisition Line of Credit is available to Dynasil for future acquisitions under
the terms specified in the Bank Loan Agreement.  Advances under the
Acquisition Line of Credit are repayable monthly based on a 7-year straight line
amortization plus interest, with a balloon payment due on July 7,
2015.





The
Company borrowed $4 million under the Acquisition Line of Credit to fund the
acquisition of Hilger Crystals in July 2010.  The Acquisition Loan is
to be repaid with equal principal payments of $47,619 per month and matures on
July 7, 2015.





The Bank
Loan Agreement limits Dynasil and its subsidiaries' ability to, among other
things: dispose of assets, engage in a new line of business materially different
than its current business, have a change in control, acquire another business,
incur additional indebtedness, incur liens, pay dividends and make other
distributions, make investments and redeem (subject to exceptions) any of its
equity securities.





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 Fixed Charge Coverage
Ratio is defined as EBITDA (as defined in the Bank Loan Agreement) for the
applicable period divided by the sum of (a) Dynasil's consolidated interest
expense for such period, plus (b) the aggregate principal amount of scheduled
payments on Dynasil's indebtedness made during such period, plus (c) the sum of
all cash dividends and other cash distributions to Dynasil's shareholders during
such period, plus (d) the sum of all taxes paid in cash by Dynasil during such
period, plus (e) all unfunded capital expenditures during such
period.  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.  Upon an event of default and during its continuance, the
interest rate will automatically increase 5.0% above the otherwise applicable
interest rate.  In addition, upon an event of default, the Bank may
elect a number of remedies including, but not limited to, stopping the advance
of money to Dynasil and declaring all obligations (including principal, interest
and expenses) immediately due and payable, which shall occur automatically if
Dynasil becomes insolvent.  On September 30, 2010, the Company was in
compliance with all covenants. The Company believes that they will remain in
compliance and maintain access to the Bank lines of credit.





Dynasil's
obligations under the Bank Loan Agreement are guaranteed by EMF, Optometrics,
RMD Instruments, RMD Research and Dynasil and each of such subsidiaries have
granted the bank a security interest in substantially all its personal
property.  In addition, EMF has granted a mortgage in the Bank's favor
as to EMF's leasehold property in Ithaca, New York.  Finally, the
Company has pledged 65% of the outstanding shares of Hilger as collateral to the
Bank.


F-15




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





Long-term
Debt





Long-term
debt at September 30, 2010 and 2009 consisted of the following:





2010
                  
                  
                  2009Note
      payable to bank in monthly installments of $107,143 through July, 2015
      followed by a balloon payment of the remaining principal
      amount.  The interest rate is fixed at 5.58% for the life of the
      loan, secured by substantially all assets.
                  
                  $
                  8,785,714
                  
                  
                  $
                  -0-Note
      payable to bank in monthly installments of $47,619 through July, 2015
      followed by a balloon payment of the remaining principal
      amount.  The interest rate in floating based on one month LIBOR
      plus 3.5%.  The rate at September 30, 2010 was 3.76%, secured by
      substantially all assets.
                  
                  
                  3,904,762
                  
                  
                  
                  -0-Note
      payable to bank in monthly installments of $8,727 including interest of
      7.8% through October 2011 (after October 2011, the interest rate will
      adjust every five years to the Federal Home Loan Bank of NY Advance Rate
      plus 2.8%), maturing on October 1, 2026, secured by a mortgage on the
      Ithaca, New York real estate, repaid July 9, 2010 with
      refinancing.
                  
                  
                  -0-
                  
                  
                  
                  979,187Note
      payable to Ithaca Urban Renewal Agency for Lease of land in Ithaca, New
      York for 99 years with the options to purchase said land for $26,640 after
      May 2008
                  
                  
                  13,636
                  
                  
                  
                  16,389Note
      payable to bank in monthly installments of $174,359 including interest at
      6.0%, through June 2013, secured by substantially all Dynasil and
      subsidiary assets except EMF real estate, repaid July 9, 2010 with
      refinancing.
                  
                  
                  -0-
                  
                  
                  
                  7,140,744Note
      payable to related party in which the former owners of RMD and current
      officers of RMD have a financial interest, bears interest at 8% through
      September 30, 2009, increased to 9% effective October 1, 2009, due October
      1, 2009, unsecured, repaid July 9, 2010 with refinancing.
                  
                  
                  -0-
                  
                  
                  
                  2,000,000$
                  12,704,112
                  
                  
                  $
                  10,136,320Less
      current portion
                  
                  
                  1,870,779
                  
                  
                  
                  1,749,524$
                  10,833,333
                  
                  
                  $
                  8,386,796





The
aggregate maturities of long-term debt, as of September 30, 2010 are as
follows:





For
      the years ending:September
      30, 2012
                    
                    $
                    1,857,142September
      30, 2013
                    
                    
                    1,857,142September
      30, 2014
                    
                    
                    1,857,142September
      30, 2015
                    
                    
                    5,261,907Thereafter
                    
                    
                    -0-$
                    10,833,333





Note
8 – Income Taxes





The
Company’s income tax expense (benefit) for the years ended September 30, 2010
and 2009 are as follows:





2010
                      
                      
                      2009CurrentFederal
                      
                      $
                      1,423,575
                      
                      
                      $
                      479,600State
                      
                      
                      404,036
                      
                      
                      
                      178,662Utilization
      of NOL carryforwards
                      
                      
                      -0-
                      
                      
                      
                      (45,200
                      )Utilization
      of QTDP tax credits
                      
                      
                      (1,201,750
                      )
                      
                      
                      -0-$
                      625,861
                      
                      
                      $
                      613,062DeferredFederal
                      
                      
                      233,400
                      
                      
                      
                      (67,500
                      )State
                      
                      
                      70,400
                      
                      
                      
                      10,900303,800
                      
                      
                      
                      (56,600
                      )Income
      tax expense
                      
                      $
                      929,661
                      
                      
                      $
                      556,462




F-16




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





The
reasons for the difference between total tax expense and the amount computed by
applying the statutory federal income tax rates to income before income taxes at
September 30, 2010 and 2009 are as follows:





2010
                    
                    
                    2009Taxes
      at statutory rates applied to income before income taxes
                    
                    $
                    1,354,300
                    
                    
                    $
                    716,600Increase
      (reduction) in tax resulting from:Depreciation
                    
                    
                    (22,600
                    )
                    
                    
                    (39,500
                    )Amortization
                    
                    
                    (238,900
                    )
                    
                    
                    (251,700
                    )Accounts
      receivable
                    
                    
                    (1,300
                    )
                    
                    
                    18,700Inventories
                    
                    
                    (22,700
                    )
                    
                    
                    70,200Vacation
      pay
                    
                    
                    34,600
                    
                    
                    
                    1,400Unfunded
      pension liability
                    
                    
                    -0-
                    
                    
                    
                    (9,700
                    )Deferred
      compensation
                    
                    
                    (3,700
                    )
                    
                    
                    3,700Other
                    
                    
                    18,100
                    
                    
                    
                    12,500State
      income taxes
                    
                    
                    301,261
                    
                    
                    
                    136,062Net
      benefit of net operating loss carryforwards
                    
                    
                    -0-
                    
                    
                    
                    (45,200
                    )Net
      benefit of QTDP tax credits
                    
                    
                    (793,200
                    )
                    
                    
                    -0-Deferred
      income taxes
                    
                    
                    303,800
                    
                    
                    
                    (56,600
                    )$
                    929,661
                    
                    
                    $
                    556,462





Deferred
income taxes (benefit) 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 the tax effects of
net operating losses that are available to offset future taxable
income.  Significant components of the Company’s deferred tax assets
(liabilities) at September 30, 2010 and 2009 are as follows:





2010
                        
                        
                        2009Inventories
                        
                        $
                        239,100
                        
                        
                        $
                        259,800Vacation
      pay
                        
                        
                        110,500
                        
                        
                        
                        79,000Unfunded
      pension liability
                        
                        
                        20,200
                        
                        
                        
                        20,200Deferred
      compensation
                        
                        
                        -0-
                        
                        
                        
                        3,400Accounts
      receivable
                        
                        
                        44,600
                        
                        
                        
                        44,200Depreciation
                        
                        
                        (449,000
                        )
                        
                        
                        (207,800
                        )Net
      operating loss carryforwards
                        
                        
                        -0-
                        
                        
                        
                        -0-State
      deferred taxes
                        
                        
                        20,900
                        
                        
                        
                        91,300Foreign
      currency translation
                        
                        
                        (77,400
                        )
                        
                        
                        -0-$
                        (91,100
                        )
                        
                        $
                        290,100





As of
September 30, 2010 and 2009, the Company has no net operating loss carryforwards
to offset future federal or state income taxes.  The Company does have a
QTPD tax credit carryover to fiscal year 2011 of $ 20,646 for research and
development costs incurred in 2010 (during the Company’s 2011 fiscal
year.)




In July 2010, the Company applied
for the Qualifying Therapeutic Discovery Projecttax credit(“QTDP”). The QTDP tax credit allows
qualifying businesses to claim a credit for 50% of theirqualifiedinvestment in qualifying projects for
tax years 2010 and 2009.The tax credit covers research and
development costs from 2009 and 2010.  In October 2010, the Company received
notification from the Internal Revenue Service that it was granted the credits
of approximately $1,200,000.




F-17




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009




The
Company files its tax returns as prescribed by the tax laws of the jurisdictions
in which it operates. The Company's tax filings for federal and state
jurisdictions for the years from 2006 to 2009 are still subject to
examination.




Note
9 – Stockholders’ Equity





On
February 3, 2009, Dynasil stockholders approved an amendment to the Company's
Certificate of Incorporation to increase the authorized number of common shares
from 25,000,000 to 40,000,000 and the authorized number of preferred shares from
10,000,000 to 15,000,000.





Convertible
Preferred Stock





On
October 2, 2006 the Company sold 710,000 shares of a Series B 10% Cumulative
Convertible Preferred Stock in a private placement.  The stock was
sold at a price of $1.00 per share.  Total expenses for the stock
placement were $10,000.  No underwriting discounts or commissions were
paid in connection with the sale.  Each share of preferred stock
carried a 10% per annum dividend and was convertible to 1.33 shares of common
stock at any time by the holders and was callable after two years by Dynasil at
a redemption price of $1.00 per share.  Proceeds of the preferred
stock sale were primarily used to acquire the capital stock of EMF and for
related acquisition costs.  Dynasil called all of these shares for
redemption on November 30, 2009 and all of the shares were converted to common
stock on November 30, 2009 prior to their redemption.





On July
5, 2008 the Company sold 5,256,000 shares of a Series C 10% Cumulative
Convertible Preferred Stock (the "Series C Preferred Stock") in a private
placement. The stock was sold at a price of $1.00 per share.  Total
expenses for the stock placement were $0.  No underwriting discounts
or commissions were paid in connection with the sale.  Each share of
preferred stock carries a 10% per annum dividend and is convertible to 0.40
shares of common stock at any time by the holders and is callable after two
years by Dynasil at a redemption price of $1.05 per share.  Proceeds
of the Series C Preferred Stock were primarily used for the acquisition of RMD,
for related acquisition costs, and for general working
capital.





On
October 22, 2010, the Company determined to cause the mandatory conversion of
all outstanding shares of the Series C Preferred Stock into shares of its Common
Stock, $.0005 par value per share, at a conversion price of $2.50 per
share.  The conversion will be effected on December 21,
2010.  Following the conversion, all 5,256,000 shares of Series C
Preferred Stock that had been outstanding will be cancelled and will be
automatically converted, without any action required on the part of the holders
of Series C Preferred Stock, into an aggregate of 2,102,400 shares of Common
Stock.





Temporary
Equity





As part
of the July 1, 2008 RMD Instruments acquisition, the Company issued one million
Dynasil common stock shares to the members of the Seller. Commencing July 1,
2010, the Seller's members may tender these shares of Dynasil common stock to
the Company for repurchase by it at a repurchase price of $2.00 per share during
a two year period ending July 1, 2012, upon no less than ninety (90) days prior
notice to the Company.  During the quarter ended June 30, 2010, the Company
reclassified the 1,000,000 shares of redeemable common stock valued at its
redemption value of $2.00 per share, or $2,000,000, from permanent equity to
temporary equity to properly reflect the repurchase requirement that is not
within the Company’s control. Management believes the likelihood of redemption
is remote and has determined that the reclassification adjustment has no
material impact on the financial statements for the periods presented.
 There is no material impact on the Company’s financial position, results
of operations or earnings per share.  In addition, there is no material
impact on liquidity ratios: debt to equity, debt leverage, return on equity or
working capital.  The reclassification adjustment resulted in a decrease in
common stock of $500 and additional paid-in-capital of $1,999,500 and an
increase in temporary equity of $2,000,000.  Prior periods presented have
been reclassified to conform with the current period financial statement
presentation.





Stock
Based Compensation





The
Company adopted Stock Incentive Plans in 1996 and 1999 which provide for, among
other incentives, the granting to officers, directors, employees and consultants
options to purchase shares of the Company’s common stock.  The
Company’s 1999 Stock Incentive Plan was amended on July 25, 2000, with an
effective date of January 1, 1999.  Options are generally exercisable
at the fair market value or higher on the date of grant over a three to five
year period currently expiring through 2012.




F-18




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





The Plans
also allow eligible persons to be issued shares of the Company’s common stock
either through the purchase of such shares or as a bonus for services rendered
to the Company.  Shares are generally issued at the fair market value
on the date of issuance.  The Company adopted a new Stock Incentive
Plan at the February 3, 2010 Annual Meeting.  The maximum number of
shares of common stock which may be issued under the new Plan is 6,000,000, of
which 5,819,756 shares of common stock are available for future purchases under
the plan at September 30, 2010, in addition to outstanding stock options and
unvested common stock shares.





A summary
of stock option activity for the years ended September 30, 2010 and 2009 is
presented below:




Shares
            
            
            Exercise Price
              per ShareOptions
      outstanding at October 1, 2008
            
            
            843,725
            
            
            $0.40
      - $4.00Granted
      in 2009
            
            
            707,116
            
            
            $1.40
      - $2.65Exercised
      in 2009
            
            
            (53,000
            )
            
            $0.40
      - $0.85Cancelled
      in 2009
            
            
            (147,000
            )
            
            $0.85
      - $2.89Options
      outstanding at September 30, 2009
            
            
            1,350,841
            
            
            $0.51
      - $4.00Granted
      in 2010
            
            
            671,118
            
            
            $3.19
      - $4.06Exercised
      in 2010
            
            
            (121,459
            )
            
            $0.51
      - $2.00Cancelled
      in 2010
            
            
            (45,000
            )
            
            $1.54
      - $2.93Options
      outstanding at September 30, 2010
            
            
            1,855,500
            
            
            $1.40
      - $4.06Options
      exercisable at September 30, 2010
            
            
            1,220,488
            
            
            $1.50
      - $4.00




During
the year ended September 30, 2010, 671,118 stock options were granted at prices
ranging from $3.19 to $4.06 per share and 121,459 options were
exercised.  Of the options granted in 2010, 137,500 of the granted
stock options cannot be exercised until 2011, 163,971 of the granted stock
options cannot be exercised until 2012, 137,500 of the granted stock options
cannot be exercised until 2013 and 34,375 of the granted stock options cannot be
exercised until 2014, therefore the stock-based compensation expense will be
recognized at that time.  Of the exercised options, 2,182 options had
an exercise price of $0.51 per share with $1,113 paid in cash, 2,134 options had
an exercise price of $0.53 per share with $1,131 paid in cash, 7,143 options had
an exercise price of $0.60 per share with $4,286 paid in cash, and 110,000
options had an exercise price of $2.00 per share with $220,000 paid in
cash.  During the year ending September 30, 2010, 45,000 options were
cancelled, with prices ranging from $1.54 to $2.93.





During
the year ended September 30, 2009, 707,116 stock options were granted at prices
ranging from $1.40 to $2.65 per share and 53,000 options were
exercised.  Of the options granted in 2010, 121,666 of the granted
stock options could not be exercised until 2010 and 111,666 of the granted
stock options could not be exercised until 2011, therefore the stock-based
compensation expense will be recognized at that time.  Of the
exercised options, 13,000 options had an exercise price of $0.85 per share with
$11,050 paid in cash, and 40,000 options had an exercise price of $0.40 per
share with $16,000 paid in cash.  During the year ending September 30,
2009, 147,000 options were cancelled, with prices ranging from $0.85 to $2.89
per share.





For the
year ended September 30, 2010, total stock-based compensation charged to
operations for option-based arrangements amounted to $329,686.  At
September 30, 2010, there was approximately $266,785 of total unrecognized
compensation expense related to non-exercisable option-based compensation
arrangements under the Plan.





For the
year ended September 30, 2009, total stock-based compensation charged to
operations for option-based arrangements amounted to $133,998.  At
September 30, 2009, there was approximately $71,437 of total unrecognized
compensation expense related to non-exercisable option-based compensation
arrangements under the Plan.




F-19




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





During
the year ended September 30, 2010, the Company issued 81,179 shares of common
stock valued at an average of $2.72 per share to directors in lieu of Director’s
Fees totaling $221,643.





During
the year ended September 30, 2009, the Company issued 40,075 shares of common
stock valued at an average of $1.97 per share to a director in lieu
of Director’s fees totaling $50,165.





The fair
value of the stock options granted issued were estimated on the date of grant
using the Black Scholes option-pricing model.  Based on the list of
assumptions presented below with numbers shown for the most recent grant, the
weighted average fair values of the options granted during the years ended
September 30, 2010 and 2009 is $0.58 and $0.28 per share,
respectively.





2010
                    
                    
                    2009Expected
      life in years
                    
                    
                    3
                    
                    
                    
                    3Risk-free
      interest rate
                    
                    
                    4.23
                    %
                    
                    
                    4.02
                    %Expected
      volatility
                    
                    
                    68.33
                    %
                    
                    
                    29.96
                    %Dividend
      yield
                    
                    
                    0.00
                    %
                    
                    
                    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 within the valuation model. The
expected term of options granted represents the period of time that 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.





Employee
Stock Purchase Plan





On
September 28, 2010, the Company adopted an Amended and Restated Employee Stock
Purchase Plan.  The existing plan was amended to extend the
termination date to September 28, 2020.  The Employee Stock Purchase
Plan permits substantially all employees to purchase common stock at a purchase
price of 85% of the fair market value of the shares.  Under the Plan,
a total of 450,000 shares have been reserved for issuance of which 180,038 and
159,492 shares have been issued as of September 30, 2010 and 2009,
respectively.





During
any twelve month period, employees may not purchase more than the number of
shares for which the total purchase price exceeds $5,000.  During the
years ended September 30, 2010 and 2009, 20,546 shares, and 3,333 shares of
common stock were issued under the Plan for aggregate purchase prices of $43,828
and $3,543, respectively.





Note
10 – Retirement Plans





401(k)
Plans





The
Company has retirement savings plans available to substantially all full time
employees which are intended to qualify as deferred compensation plans under
Section 401(k) of the Internal Revenue Code (the “401k
Plans”).  Pursuant to the 401k Plans, employees may contribute up to
the maximum amount allowed by the 401k Plans or by law.  The Company
at its sole discretion may from time to time make discretionary matching
contributions as it deems advisable.  The Company made contributions
to the plans during the years ended September 30, 2010 and 2009 of $70,645 and
$55,093, respectively.





Defined
Benefit Pension Plan





EMF has a
defined benefit pension plan covering hourly employees.  The plan
provides defined benefits based on years of service and final average salary. As
of September 30, 2006, the plan was frozen.  Accordingly, accrued
benefit costs are classified as a current liability on the consolidated balance
sheet.  The following relates to the Company’s defined pension plan as
of September 30, 2010 and 2009:




F-20




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





2010
                      
                      
                      2009Pension
      benefit obligation as of September 30
                      
                      $
                      344,241
                      
                      
                      $
                      369,683Fair
      value of plan assets as of September 30
                      
                      
                      (295,468
                      )
                      
                      
                      (308,350
                      )$
                      48,773
                      
                      
                      $
                      61,333Amounts
      recognized on the balance sheet as:Accured
      benefit costs (in accrued expenses)
                      
                      $
                      65,395
                      
                      
                      $
                      61,333Discount
      rate on the benefit obligation - based on24-month
      average segmented rates
                      
                      
                      6.74
                      %
                      
                      
                      6.01
                      %Rate
      of expected return on the plan assets
                      
                      
                      5.00
                      %
                      
                      
                      5.00
                      %Pension
      expense (benefit)
                      
                      
                      -0-
                      
                      
                      $
                      (26,631
                      )Company
      contributions
                      
                      
                      -0-
                      
                      
                      $
                      6,093





Note
11 - Related Party Transactions





During
the years ended September 30, 2010 and 2009, building lease payments of $114,000
and $114,000 were paid to Optometrics Holdings, LLC in which Laura Lunardo,
Optometrics’ COO has a 50% interest.





During
the years ended September 30, 2010 and 2009, building lease payments of $780,433
and $760,985, were paid to Charles River Realty, dba Bachrach, Inc., which is
owned by Gerald Entine and family, the Company's President of RMD
Research.  In addition, real estate taxes, building maintenance and
repair costs totaling $414,850 and $439,951 for the years ended September 30,
2010 and 2009 were paid to Bachrach, Inc.





On
September 30, 2008, a loan for $2,000,000 was completed with a company in which
the Company's President of RMD Research, Dr. Gerald Entine, and Vice-President
of RMD Instruments, Mr. Jacob Pastor, have greater than 90%
interest.  The loan had an interest rate of 9% and a balloon payment
of all principal was due on October 1, 2010.  Interest expense for the
year ended September 30, 2010 was $138,575.  The loan was repaid in
full on July 9, 2010.





Note
12 – Leases





The
Company has non-cancelable operating lease agreements, primarily for property,
that expire through 2014.  One of the Company’s facilities is leased
from a company controlled by the former owner of RMD, who is also currently
President of the Company’s RMD Research subsidiary.  This lease
expires in June 2013.  One of the Company’s facilities is leased from
a company controlled by the former owners of Optometrics, one of whom is also
currently the Optometrics’ Chief Operating Officer. This lease expires in March
2013.  Rent expense for the years ended September 30, 2010 and 2009
amounted to $1,100,697 and $874,985, respectively.  Future
non-cancelable minimum lease payments under property leases as of September 30,
2011 are as follows:





Years ending September 30,2011
                  
                  $
                  1,158,5522012
                  
                  $
                  1,193,8732013
                  
                  $
                  886,4582014
                  
                  $
                  31,750





Note
13 - Vendor Concentration





The
Company purchased $903,184 and $397,286 of its raw materials from one supplier
during the years ended September 30, 2010 and 2009. As of September 30, 2010 and
2009, amounts due to that supplier included in accounts payable were $183,952
and $0.




F-21




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





Note
14 – Supplemental Disclosure of Cash Flow Information:





2010
                        
                        
                        2009Cash
      paid during the year for:Interest
                        
                        $
                        607,080
                        
                        
                        $
                        721,343Income
      taxes
                        
                        $
                        1,510,183
                        
                        
                        $
                        142,416





Non-cash
investing and financing activities:




Acquisition
of Stock of Hilger Crystals, Ltd. on July 19, 2010:





Fair
      market value of current assets acquired
                  
                  $
                  1,670,713Property,
      plant and equipment
                  
                  
                  1,111,728Goodwill
                  
                  
                  2,513,054Fair
      market value of liabilities assumed
                  
                  
                  (542,549
                  )Total
      cost of acquisition
                  
                  $
                  4,752,946Less
      contingent consideration
                  
                  
                  (750,000
                  )Net
      cash paid for Hilger acquisition
                  
                  $
                  4,002,946





On
November 30, 2009, Dynasil issued an aggregate of 946,431 shares of its Common
Stock, $.0005 par value per share, as a result of the exercise of the conversion
rights by holders of 710,000 shares of its Series B 10% Cumulative Convertible
Preferred Stock (the "Series B Preferred Shares").





On July
9, 2009, Dynasil refinanced its existing debt by obtaining a $9,000,000
loan.  The proceeds were used as follows: (1) repayment of existing
bank debt of $6,373,315, (2) payment of the related party note payable of
$2,000,000 and (3) the remaining balance of $626,685 was used for working
capital purposes.





During
the years ended September 30, 2010 and 2009, preferred stock dividends paid are
net of $110,000 and $27,500, respectively, for the issuance of common stock in
lieu of dividends, and a decrease in dividends payable of $17,250 for the year
ended September 30, 2009.





Note
15 – Segment, Customer and Geographical Reporting





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.  The Company’s 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:





2010
                  
                  
                  2009Contract
      ResearchRevenues
                  
                  $
                  23,109,847
                  
                  
                  $
                  19,794,281Income
      from Operations
                  
                  
                  1,686,894
                  
                  
                  
                  1,483,968Income
      as a percent of revenues
                  
                  
                  7.3
                  %
                  
                  
                  7.5
                  %Photonics
      Products and InstrumentsRevenues
                  
                  $
                  19,859,915
                  
                  
                  $
                  14,569,393Income
      from Operations
                  
                  
                  3,105,268
                  
                  
                  
                  1,359,109Income
      as a percent of revenues
                  
                  
                  15.6
                  %
                  
                  
                  9.3
                  %TotalRevenues
                  
                  $
                  42,969,762
                  
                  
                  $
                  34,363,674Income
      from Operations
                  
                  
                  4,792,162
                  
                  
                  
                  2,843,077Income
      as a percent of revenues
                  
                  
                  11.2
                  %
                  
                  
                  8.3
                  %GoodwillContract
      Research
                  
                  $
                  4,754,825
                  
                  
                  $
                  4,754,825Photonics
      Products and Instruments
                  
                  $
                  8,836,462
                  
                  
                  $
                  6,299,571




F-22




DYNASIL
CORPORATION OF AMERICA AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010 and 2009





Customer
Financial Information





For the
year ended September 30, 2010, two of the top three customers for the Contract
Research segment were each various agencies of the U.S. Government and the third
is engaged in government-funded research. For the year ended September 30, 2010,
these customers made up 76% of Contract Research revenues.





For the
Products and Instruments segment, there was no customer whose revenue
represented more than 10% of the total segment revenues for either the quarter
ended or for the nine months ended September 30, 2010.





Geographic
Financial Information





Revenues
by geographic location in total and as a percentage of total revenues, for the
year ended September 30, 2010 are as follows:





Geographic Location
                  
                  Revenues
                  
                  
                  % of
                    TotalUnited
      States
                  
                  $
                  36,488,505
                  
                  
                  
                  84.9
                  %Europe
                  
                  
                  3,285,957
                  
                  
                  
                  7.7
                  %Other
                  
                  
                  3,195,300
                  
                  
                  
                  7.4
                  %$
                  42,969,762
                  
                  
                  
                  100.0
                  %





Note
16 – Subsequent Events





The
Company has evaluated subsequent events through the date the financial
statements were released.





On
October 22, 2010, Dynasil notified stockholders of its Series C 10% Cumulative
Convertible Preferred Stock that it would be completing the mandatory conversion
of all outstanding shares into shares of its Common Stock at the conversion
price of $2.50 per share since the common stock price for mandatory conversion
had been met.  The conversion will be effected on December 21, 2010. 
As a result, all 5,256,000 shares of Series C Preferred Stock that had been
outstanding will be cancelled and will be automatically converted on December
21, 2010, without any action required on the part of the holders of Series C
Preferred Stock, into an aggregate of 2,102,400 shares of Common Stock. 
Dividends on the Series C Preferred Stock will accrue through the conversion
date and will be paid to the holders of Series C Preferred Stock on the
regularly scheduled payment date of January 5, 2011.  Following the
conversion, the Company will no longer incur the annual Series C Preferred Stock
dividend cost of $525,600 in cash or common stock dividends, as
applicable.





On
December 14, 2010, the Company announced that the it’s common stock has been
approved for listing on the NASDAQ Global Market and that Dynasil shares are
scheduled to commence trading on the NASDAQ under the ticker symbol “DYSL” on
December 17, 2010.





On
December 17, 2010, the Company announced that Craig T. Dunham, President and
Chief Executive Officer, plans to retire as an executive officer during the next
nine months and remain as a Director.  The plan is for him to remain as CEO
as long as needed for the Board to select a successor and complete an effective
transition.


F-23




ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE





There
were no disputes or disagreements of any nature between the Company or its
management and its public auditors with respect to any aspect of accounting or
financial disclosure.





ITEM
9A. CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





As
required by Rule 13a-15(e) under the Exchange Act, our Chief Executive Officer
and Chief Financial Officer, with the participation of management, carried out
an evaluation of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of the end of the period covered by the
report and have determined that such disclosure controls and procedures are
effective.





Management’s
Report on Internal Control Over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange
Act). Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America.





Internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company,
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that receipts
and expenditures are being made only in accordance with authorizations of
management and directors of the Company, and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the
consolidated financial statements.  Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





The
Company’s management, with the participation and supervision of our Chief
Executive Officer and Chief Financial Officer, assessed the effectiveness of the
Company’s internal control over financial reporting as of September 30,
2010.  In making this assessment, the Company’s management used the
criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the
Treadway Commission in “Internal Control – Integrated Framework.”





Based
upon the Company’s assessment, management has concluded that, as of September
30, 2010, the Company’s internal control over financial reporting is effective
based upon those criteria.




CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING





There has
been no change in our internal control over financial reporting in connection
with our evaluation that occurred during our last fiscal quarter ended September
30, 2010 that materially affected, or is reasonably likely to materially affect
our internal control over financial reporting.





ITEM
9B.  OTHER INFORMATION





On
December 17, 2010, Dynasil issued a press release announcing financial results
for the fiscal year ended September 30, 2010 and a CEO succession plan for
2011.  A copy of the press release is filed herewith as
Exhibit 99.1.


15




PART III





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The
information required by this Item 10 is hereby incorporated by reference to
our definitive proxy statement to be filed by us within 120 days after the
close of our fiscal year.




ITEM
11.  EXECUTIVE COMPENSATION





The
information required by this Item 11 is hereby incorporated by reference to
our definitive proxy statement to be filed by us within 120 days after the
close of our fiscal year.





ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





The
information required by this Item 12 is hereby incorporated by reference to
our definitive proxy statement to be filed by us within 120 days after the
close of our fiscal year.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE





The
information required by this Item 13 is hereby incorporated by reference to
our definitive proxy statement to be filed by us within 120 days after the
close of our fiscal year.





ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES





The
information required by this Item 14 is hereby incorporated by reference to
our definitive proxy statement to be filed by us within 120 days after the
close of our fiscal year.





PART
IV





ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES





(a) The
following documents are filed pursuant to Item 601 of Regulation
S-K:





Page1.
      Financial Statements
                    
                    following
      14Report
      of Independent Registered Public Accounting Firm
                    
                    F-1Consolidated
      Financial Statements:Balance
      Sheet as of September 30, 2010 and 2009
                    
                    F-2Statements
      of Operations for the years ended September 30, 2010 and
    2009
                    
                    F-4Statements
      of Stockholders’ Equity for the years ended September 30, 2010 and
      2009
                    
                    F-5Statements
      of Cash Flows for the years ended September 30, 2010 and
    2009
                    
                    F-6Notes
      to Consolidated Financial Statements
                    
                    F-7




16


2.
Exhibits





Exhibit


Number





2.01           Asset
Purchase Agreement, dated January 18, 2008 between Precision Optics Corporation,
Inc. and Optometrics Corporation, filed as Exhibit 2.1 to Form 8-K filed on
January 22, 2008 and incorporated herein by reference.





2.02           Asset
Purchase Agreement, dated July 1, 2008 between Dynasil Corporation of America,
RMD Instruments Corp, RMD Instruments, LLC, Gerald Entine 1988 Family Trust,
Fritz Wald and Doris Wald, and Jacob H. Paster, filed as Exhibit 10.1 to Form
8-K filed on July 7, 2008 and incorporated herein by reference.





2.03           Plan
of Merger, dated July 1, 2008 by and among Dynasil Corporation of America, RMD
Acquisition Sub, Inc., Radiation Monitoring Devices, Inc., Gerald Entine 1988
Family Trust, Fritz Wald and Doris Wald, and Jacob H. Paster, filed as Exhibit
10.2 to Form 8-K filed on July 7, 2008 and incorporated herein by
reference.





2.04           Share
Purchase Agreement, dated July 19, 2010 among Hilger Crystals Limited, Newport
Spectra-Physics Limited, Newport Corporation and the Company, filed as Exhibit
10.1 to Form 8-K filed on July 23, 2010 and incorporated herein by
reference.





3.01           Certificate
of Incorporation of the Company, filed as Exhibit A to the Definitive Proxy
Statement filed on January 4, 2008 and incorporated herein by
reference.





3.02           Certificate
of Merger of Foreign Corporation into a Domestic Corporation, dated February 29,
2008, filed as Exhibit 3.02 to Form 8-A filed on December 15, 2010 and
incorporated herein by reference.





3.03           Certificate
of Amendment of Certificate of Incorporation, dated March 6, 2008, filed as
Exhibit 3.03 to Form 8-A filed on December 15, 2010 and incorporated herein by
reference.





3.04           Certificate
of Amendment of Certificate of Incorporation, dated February 26, 2009, filed as
Exhibit 3.1 to Form 10-Q filed on May 15, 2009 and incorporated herein by
reference.





3.05           Certificate
of Designation of Preferred Stock of Dynasil Corporation of America, dated March
27, 2009, filed as Exhibit 3.05 to Form 8-A filed on December 15, 2010 and
incorporated herein by reference.





3.06           Bylaws
of the Company, filed as Exhibit B to the Definitive Proxy Statement filed on
January 4, 2008 and incorporated herein by reference.





10.01*       Employment
Agreement of Craig T. Dunham, dated October 1, 2004, filed as Exhibit 10.9 to
Form 10-KSB filed on December 21, 2004 and incorporated herein by
reference.





10.02*       Amendment
to Employment Agreement of Craig T. Dunham, dated November 8, 2007, filed as
Exhibit 10.1 to Form 8-K filed on November 13, 2007 and incorporated herein by
reference.





10.03*       Employment
Agreement of Gerald Entine, filed as Exhibit 10.3 to Form 8-K filed on July 7,
2008 and incorporated herein by reference.





10.04*       Employment
Agreement of Richard Johnson, dated November 30, 2009, filed as Exhibit 10.1
to  Form 8-K filed on December 1, 2009 and incorporated herein by
reference.





10.05*       2010
Stock Incentive Plan, filed as Exhibit 99 to the Definitive Proxy Statement
filed on January 5, 2010 and incorporated herein by reference.





10.06          Term
Loan and Line of Credit Loan Agreement with Susquehanna Bank, dated July 1,
2008, filed as Exhibit 10.7 to Form 8-K filed on July 7, 2008 and incorporated
herein by reference.





10.07          Subordinated
Term Loan Note with RMD Instruments, LLC, dated September 30, 2008, filed as
Exhibit 10.1 to Form 8-K filed on October 6, 2008 and incorporated herein by
reference.


17




10.08          Amendment
to Subordinated Term Loan Note with RMD Instruments, LLC, dated December 19,
2008, filed as Exhibit 10.07 to Form 10K-SB filed on December 30, 2008 and
incorporated herein by reference.





10.09          Amendment
to Subordinated Term Note with RMD Instruments, LLC dated May 11, 2009, filed as
Exhibit 10.1 to Form 10-Q filed on May 15, 2009 and incorporated herein by
reference.





10.10          Change
in Promissory Note Terms Agreement with Susquehanna Bank, dated January 1, 2010
filed as Exhibit 10.1 to Form 10-Q filed on February 16, 2010 and incorporated
herein by reference.





10.11          Loan
and Security Agreement between the Company and Sovereign Bank, dated July 7,
2010, filed as Exhibit 10.1 to Form 8-K filed on July 14, 2010 and incorporated
herein by reference.





10.12          Lease
Agreement between Dynasil Corporation of America and Optometrics Holding LLC,
dated March 8, 2005, filed as Exhibit 2.2 to Form 8-K filed on May 24, 2005 and
incorporated herein by reference.





10.13          Lease
Agreement between RMD Instruments, Inc and Charles River Realty, dated July 1,
2008, filed as Exhibit 10.5 to Form 8-K filed on July 7, 2008 and incorporated
herein by reference.





10.14          Lease
Agreement between Radiation Monitoring Devices, Inc. and Charles River Realty,
dated July 1, 2008, filed as Exhibit 10.6 to Form 8-K filed on July 7, 2008 and
incorporated herein by reference.





21.1           
Subsidiaries of the Company, filed herewith.





23.1           
Consent of Haefele, Flanagan & Co., p.c., filed herewith.





31.1(a)        Rule
13a-14(a)/15d-14(a) Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.





31.1(b)        Rule
13a-14(a)/15d-14(a) Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.





32.1            
Section 1350 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished but not filed for purposes of the Securities Exchange Act of
1934) furnished herewith.





99.1        
    Press release, dated December 17, 2010, issued by
Dynasil Corporation of America announcing its financial results for the fourth
quarter ending September 30, 2010 filed herewith.







*
Management contract or compensatory plan or arrangement.




18




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.





Dynasil
Corporation of America





BY:
                /s/
      Craig DunhamCraig
      Dunham, President, CEO (Principal Executive
  Officer)





DATED:
                  December
      17, 2010





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.




Signature
                                                                
                                                                Title
                                                                
                                                                DateBY:
                                                                /s/ Peter Sulick
                                                                
                                                                Chairman
      of the Board of Directors,
                                                                
                                                                December 17, 2010Peter Sulick
                                                                
                                                                Chairman
      of the Audit CommitteeBY:
                                                                /s/ Cecil Ursprung
                                                                
                                                                Director
                                                                
                                                                December 17, 2010Cecil UrsprungBY:
                                                                /s/ James Saltzman
                                                                
                                                                Director,
      Vice-Chairman
                                                                
                                                                December 17, 2010James SaltzmanBY:
                                                                /s/ Gerald Entine
                                                                
                                                                Director,
      President RMD Research
                                                                
                                                                December 17, 2010Gerald EntineBY:
                                                                /s/
      Michael Joyner
                                                                
                                                                Director
                                                                
                                                                December 17, 2010Michael JoynerBY:
                                                                /s/ David Kronfeld
                                                                
                                                                Director
                                                                
                                                                December 17, 2010David KronfeldBY:
                                                                /s/ Craig T. Dunham
                                                                
                                                                Director,
      President and CEO
                                                                
                                                                December 17, 2010Craig T. Dunham
                                                                
                                                                (Principal
      Executive Officer)BY:
                                                                /s/ Richard A. Johnson
                                                                
                                                                CFO,
      Principal Financial and
                                                                
                                                                December 17, 2010Richard A. Johnson
                                                                
                                                                Accounting
      Officer




19