REPORT OF INTERNAL INVESTIGATION TO THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF DYADIC INTERNATIONAL, INC. Submitted by: Moscowitz & Moscowitz, P.A. 1111 Brickell Avenue, Suite 2050 Miami, FL 33131 Phone: (305) 379-

INTERNAL INVESTIGATION

Brickell Avenue, Suite 2050

report is subject to both attorney/client privilege and work product

I. Independence and Scope of the Investigation

& Moscowitz, P.A., was engaged by the Audit Committee1 of the

Board of Directors of Dyadic International, Inc. ("Dyadic" or "the Company") on

May 14, 2007, to conduct an investigation as a result of its receipt of

allegations of improprieties in the operations and financial management of its

wholly-owned Asian subsidiary, Puridet (Asia) Limited ("Puridet"). The Company's

Board and management had determined that there was merit to those allegations

and decided to abandon Puridet. The Audit Committee commissioned this

investigation to determine whether any officers or employees of Dyadic

participated in these improprieties and/or failed a duty to disclose

been an independent investigation. Our firm had no prior attorney-client

relationship with Dyadic or with any of its officers, directors, or employees.

The Audit Committee placed no limitations on us in the conduct of this

a public biotechnology company incorporated in Delaware and based in Jupiter,

Florida. Dyadic's revenues are generated primarily through the sale of enzymes

used in the textile business. Dyadic was founded in 1979 by Mark A.

Emalfarb ("Emalfarb"),2 who was,

until he began a leave of absence in April 2007, its CEO and Chairman of the

Board. Dyadic went public in October 2004, through a reverse merger with a

public reporting company.

Audit Committee consists of three outside independent members of the Board of

Directors: Richard J. Berman, Harry Z. Rosengart and Stephen J.

December, 2003, Dyadic has conducted: (a) five separate capital-raising

transactions; (b) two buy-outs of minority shareholders of its indirect

wholly-owned subsidiaries; and (c) three redemption transactions, as

is the consolidation of several entities which were formed by

and certain family trusts own the largest shareholdings of Dyadic. The family

trusts have made substantial loans to the Company.

which manufactures and distributes primarily textile enzymes in Asia, is based

in Hong Kong. Puridet is now wholly-owned by Dyadic, through a holding company,

Geneva Investments Holdings Limited, a Virgin Islands corporation. Puridet owns

a PRC corporation, Dongguan Puridet Softener Company Limited ("Puridet

Dongguan"), which owns and operates a processing factory in Dongguan, PRC.

Puridet was founded by Robert Smeaton ("Smeaton") and two partners, Raymond

Tsang ("Tsang") and Raymond Chih ("Chih").3 In

October 1998, Dyadic acquired a majority equity interest in Puridet, which

became a voting majority interest in 2003. In April, 2006, Dyadic acquired the

remaining minority interests in Puridet which were still held by Smeaton and

sales in 2005 and 2006, as reflected in the Dyadic Form 10-KSB reports for those

years, were approximately 40% of Dyadic's total sales. Puridet did not, however,

contribute materially to Dyadic's bottom line, as its reported net profit (loss)

figures after taxes4 for the

past few years are as follows:

was bought out in and around 2000.

figures are drawn from the audited financial statements of Puridet. They have

been converted from Hong Kong dollars to U.S. dollars at the

was run and essentially dominated by Smeaton. Tsang was also employed by Puridet

in a managerial capacity. On April 11, 2007, Smeaton, who was 44 years old,

suddenly and unexpectedly died. Shortly after Smeaton's death, on April 15,

2007, Emalfarb received and then forwarded to Wayne Moor ("Moor"), Dyadic's then

CFO, an anonymous e-mail (followed by others, collectively the "2007

whistleblower e-mails") describing certain purported fraudulent activities that

allegedly had been and were being perpetrated by Smeaton, Tsang and the factory

manager in Dongguan against Dyadic. (Exhibit l.)5

e-mail began with a number of allegations against Yiu Man Chan, known as "Aman,"

the manager of the Puridet Dongguan plant. The e-mail alleged widespread

self-dealing by Aman, attributing his dominance to the fact that he was in

charge of all functions at the plant, including manufacturing, purchasing and

finances, and that his mistress and cousin held other vital roles. Because of

this, the e-mail alleged, Aman was able to take kickbacks from suppliers,

"rake-off" cash being transferred from the factory to Puridet Hong Kong, sell

inventory on the side and take payments from customers to allow them to purchase

without paying VAT. The e-mail also said that "Aman and Raymond [Tsang] have

several secret private companies outside," one of which got products at

favorable prices. (Ex. 1, at ME0279.)

prevailing on December 31 of each year as reported by the Bank of Canada on its

documents referred to in this report, with the exception of Dyadic's public

filings, are included in the volumes of exhibits accompanying this

forwarded the e-mail to Moor, who was in Hong Kong due to Smeaton's death. He

also responded to it, asking for backup paperwork to support the allegations and

giving Moor's and his cell numbers. The anonymous e-mailer responded on April

17, providing more detail and, for the first time, mentioning "Peishing," or as

it is more commonly written, "Pui Shing." (Ex. 2.) The e-mail reported

private company controlled by Aman and Raymond is called Dongguan Peishing

Washing Products Co., Ltd. The internal code in Puridet is called PS

.... PS is the major income resources of Aman and Raymond. PS can always get the

lowest price from Puridet Dongguan .... and the two accountants in Puridet

Dongguan Factory are actually Aman's people. They handle the accountants of PS

as well. Actually a lot of clients from some sales persons are lured to purchase

Puridet products from this company. Normally Aman will give people a lower price

without VAT than Puridet Dongguan.

was still in Hong Kong, began an inquiry into the events recited in these

anonymous e-mails.6 In an

interview with Michael Kent, a current Puridet employee, he learned that an

entity named "South Dragon" was a predecessor of Pui Shing and that these

entities were set up to book the accounts receivable of enzyme customers in

China who paid in cash and did not want to pay VAT so that these sales would not

appear on Puridet's books.