10-K

Use these links to rapidly review the document
MFIC CORPORATION TABLE OF CONTENTS
PART IV

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-11625

MFIC CORPORATION
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	04-2793022 (I.R.S. Employer Identification No.)
30 Ossipee Road, Newton, Massachusetts (Address of principal executive offices)	02464 (Zip Code)
(617) 969-5452 (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value

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

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

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

        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 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. ý

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Large accelerated filer o Accelerated filer o Non-accelerated filer o
(Do not check if a smaller
reporting company) Smaller reporting company ý

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o    No ý

        As of March 7, 2008, and June 30, 2007, 10,517,175 and 10,183,746 shares, respectively, of the registrant's Common Stock were outstanding, and the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant (without admitting that such person whose shares are not included in such calculation is an affiliate) was approximately $9,303,266 and $12,846,009, respectively, based on the last sale price as reported by the Over-the-Counter Bulletin Board on each such date.

MFIC CORPORATION

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	23
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 8.	Financial Statements and Supplementary Data	33
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	58
Item 9A(T).	Controls and Procedures	58
Item 9B.	Other Information	59
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	59
Item 11.	Executive Compensation	59
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	59
Item 13.	Certain Relationships and Related Transactions, and Director Independence	59
Item 14.	Principal Accounting Fees and Services	59
PART IV
Item 15.	Exhibits and Financial Statement Schedules	61
SIGNATURES		66

PART I

Item 1.    Business

Company Overview

        References herein to "we", "us", or "the Company" are to MFIC Corporation.

        We have, for over 20 years, specialized in manufacturing and marketing a broad line of materials processing systems, more specifically known as high shear fluid processing systems, which are systems used in numerous applications in the chemical, pharmaceutical, biotech, food and cosmetics industries.

        Our line of high shear fluid processor equipment, marketed under our Microfluidizer® trademark and trade name, process premixed formulations to produce small, uniform structures, usually of the submicron and nanoscale size (commonly defined as particles having dimensions less than 100 nanometers) including nanostructures, microemulsions and nanosuspensions. The equipment produces commercial quantities of such materials important to producers of pharmaceuticals, coatings and other products.

        Additionally, our equipment is used for cell disruption to harvest the cultivated contents of bacterial yeast, mammalian and /or plant cells and for liposomal encapsulation of materials for the cosmetics and biotech/biopharma industries.

        We continue our efforts to commercialize our proprietary equipment, processes and technology for the continuous production of precipitated submicron or nanoscale particles by interaction of discrete streams of reacting materials ("Microfluidics Reaction Technology" or "MRT"). We have undertaken commercialization efforts for our patented Multiple Stream Mixer/Reactor (MMR), which is a high pressure multiple stream mixer/reactor.

        In May 2007, we submitted a paper and presented a poster for a new product at the Nano Science and Technology Institute (NSTI) Nanotech 2007 Meeting. The presentation introduced a variant of our Microfluidics Reaction Technology, the Co-Reactor process and technology (Co-Reactor). The Co-Reactor utilizes our Microfluidizer processor equipped with a co-axial feed to, among other processes, advance the manufacturing nanosuspensions from the bottom up by chemical reactions or physical processes such as crystallization. It has been demonstrated for a variety of drugs using solvent and anti-solvent crystallization. We anticipate commercialization and introduction of Co-Reactor technology and equipment in late 2008. (See "Microfluidics Reaction Technology (MRT)" on pages 2 and 5 below).

        The technology embodied within our Microfluidizer high shear fluid processor is used for formulation of products that are normally very difficult to mix and stabilize. Microfluidizer processors through process intensification allow manufacturers in the chemical, pharmaceutical, cosmetic, and food processing industries to produce higher quality products with better characteristics on a more consistent basis than with other blending, mixing or homogenizing techniques. Further, we guarantee scale up of formulations and results on our processor equipment from flow rates as low as 100 to 200 milliliters per minute on our laboratory and bench top models to more than 15 gallons per minute on our production models.

        Additionally, the equipment is used for cell disruption to harvest the cultivated contents of bacterial, yeast, mammalian and/or plant cells and for liposomal encapsulation of materials for the cosmetics and biotech/biopharma industries.

        Our management believes that future commercialization and growth of nanotechnology may be, in large part, enabled by the manufacturing capability of our processing equipment and our Microfluidics Reaction Technology which is discussed below in more detail.

1

        We were incorporated in Delaware in 1983. The Company, formerly named Biotechnology Development Corporation, changed its name effective June 8, 1993 to Microfluidics International Corporation, and again changed its name effective July 12, 1999 to MFIC Corporation. We also operated another division, known as the Morehouse-COWLES Division, ("the Division"), from August, 1998 until February 4, 2004, which manufactured and sold a broad line of mechanical fluid materials processing systems used for a variety of dispersing, milling, and mixing applications across a variety of industries. (See "Former Company Business Division", below for additional discussion on the Division). Our principal executive offices are located at 30 Ossipee Road, in Newton, Massachusetts 02464 and our telephone number is (617) 969-5452.

Technologies

        Fluid Processing Equipment.    Our Microfluidizer high shear fluid processing equipment is based on patents and related technology that were licensed by us from Arthur D. Little & Co. in 1983 and subsequently purchased by us in 1985.

        Microfluidizer high shear fluid processors differ from conventional mechanical mixing and processing technologies in that our equipment utilizes highly pressurized liquid product streams that travel at high velocities in precisely defined microchannels producing high shear forces. In some configurations the liquid streams collide at ultra-high velocities in a small, confined space producing high forces of impact. There are no moving parts in this mixing and collision zone ("fixed geometry").

        Combined forces of shear and/or impact in the fixed geometry design act upon products to cause deagglomeration and particle size reduction. These forces result in what we believe are smaller, more uniform, highly stable, and reproducible dispersions and emulsions than can be produced by any other means. Microfluidizer processors also differ from conventional mixing and homogenization equipment in that Microfluidizer processors permit a linear scale up from milliliters per minute to gallons per minute with no basic change in product formulation or equipment design and engineering.

        The formulations processed may be liquid/liquid or liquid/solid combinations. This particle size reduction through shear and other forces is achieved through what we refer to as a "top down" process in which large structures are reduced to far smaller and uniform size to exhibit and enhanced product characteristics and performance.

        Microfluidics Reaction Technology (MRT)

        MMR—In recent years, we patented and attempted to commercialize our Multiple Stream Mixer Reactor (MMR), a device and technology that utilizes Microfluidics' impinging jet technology for very fast chemical and physical reactions on a continuous basis. A limitation of such system is a one-to-one component mixing ratio and some lack of control of residence time of reactants.

        Co-Reactor—In 2007, we presented data and a poster illustrating a special co-axially fed Microfluidizer processor that is able to use varying ratio of reactants and exhibit more control over residence times. This Microfluidics Co-Reactor is better suited to moderate and slower speed chemical reactions and physical reactions conducted on a continuous basis, such as crystallization. (See Microfluidics Reaction Technology below for additional discussion on MRT)

Commercial Applications

        Microfluidizer processor technology allows manufacturers in the chemical, pharmaceutical, biotechnology, cosmetic, and food processing industries to produce higher quality products with better characteristics on a more consistent basis than with other blending, mixing or homogenizing techniques. Further, the proprietary equipment enables manufacture of unique products which cannot otherwise be produced. Microfluidizer processor equipment is generally used in the processing of high value-added

2

end-products that require extremely small and uniform particle sizes. Newer applications include deagglomeration of carbon nanotubes for subsequent formatting or alignment for specific uses.

        Microfluidizer processor equipment can be used to mix and formulate stable emulsions, dispersions and liposomes, and for cell disruption.

        Emulsions are homogenous mixtures of oil and water components (or other normally immiscible components), which, if mixed properly, do not readily separate. Emulsions comprise many products, such as food additives, medicines (including injectable drugs), photographic films, and polymers. We believe that normally an emulsion processed with Microfluidizer processor equipment will exhibit improved stability and require reduced concentrations of costly emulsifying agents that are otherwise needed to create and/or maintain product stability.

        Dispersions are mixtures of fine solids suspended in liquid so that the two do not separate readily after processing. Similar to emulsions, dispersions are used in a variety of consumer and industrial products, including pharmaceutical products (including injectable drugs), coatings, pigment dispersions for inkjet inks and toners, phosphorescent coatings for TV screens and fluorescent lamps, and barium titanate for capacitors and toners.

        Liposomes are cell-like structures, formed from materials such as cholesterol and lecithin, which can be used to encapsulate medications or nutrients. Pharmaceutical and cosmetic manufacturers use liposomes as a delivery system to target active ingredients for specific anatomical sites and to prolong their efficacy. To date, liposomes have been used commercially in two predominant applications: medical diagnostic agents and cosmetics. Applications include the encapsulation of dye to be used as a marker in medical diagnostic tests and the encapsulation of ingredients for deeper skin penetration, or time-release control, as well as pharmaceutical, food and specialized agricultural applications.

        In the biotechnology industry, Microfluidizer processor equipment is currently used to harvest, by cell rupture, protein grown in bacteria, plant or mammalian cells. The controlled forces of shear produced by Microfluidizer processor equipment allow the cell wall to be ruptured without damage to, or contamination of, the cell contents. The Microfluidizer processor equipment eliminates grinding media contamination, thus minimizing downstream processing requirements.

        Microfluidizer processor equipment is generally used in commercial applications where a scientist, formulator or chemist is trying to develop or improve a product formulation for a high value-added end product. We believe that our laboratory equipment uniquely facilitates modern formulation development and production capability. Microfluidizer processor equipment is initially employed in a research laboratory, with the equipment subsequently being used in scale-up to pilot scale production of new or improved products, and ultimately, for production scale volumes as the improved product comes to market. From laboratory to production, we guarantee scale-up of formulations and results on our equipment from 10 milliliters per minute on our laboratory and bench top models up to more than 15 gallons per minute on our large production models.

        We currently manufacture and market the following lines of equipment:

        Pneumatic Laboratory Machines

        The HC Series.    The HC Series, also known as "Homogenizers," is a laboratory-scale series of equipment that is intended to impart moderate levels of energy into a customer's product with greater flow rates than the more energy intensive Microfluidizer processor devices. Operating pressures of products in our HC Series can range from 250 psi to as high as 8,000 psi, and will process as much as two liters of fluid per minute.

        The M-110 Series.    The M-110 Series is a laboratory product line that is designed primarily for research and development applications. Standard pneumatic (air-driven) models can generate

3

pressures as high as 23,000 psi and have a product flow rate on the order of one-half liter per minute.

        Electro-Hydraulic Laboratory Machines

        The M-110P was introduced in September 2007. It is a "plug and play" electro hydraulic machine that incorporates a 2 HP single phase motor 110v (or 220v). It requires an electrical supply of a 20 amp household type receptacle and can achieve process pressures of 30,000 psi with an average flow rate of 120 ml/min. It is a table top model that is air cooled and requires no cooling water for the hydraulic system. It incorporates proximity switches in place of air switches thus requiring no compressed air. It comes equipped with numerous standard features including ceramic plunger and diamond interaction chamber.

        The M-110EH includes an on-board electric-hydraulic pump system for high performance "lab scale" micro-mixing at processing pressures up to 30,000 psi and flow rates up to 320 ml/min. The M-110EH requires three phase 60Hz 208/230/460V electrical supply. It has numerous standard features including a ceramic plunger, diamond interaction chamber, and options including explosion-proof motor, and steam sterilization.

        The M-140 Series.    The M-140K Series is a laboratory-scale unit developed for customers in the chemical, biotechnology, pharmaceutical, cosmetic and food processing industries that require elevated operating pressures and higher shear forces to achieve better performance. The M-140K can achieve operating pressures up to 40,000 psi. The M-140K has a built-in hydraulic system and utilizes a bi-directional intensifier pump that provides a highly uniform pressure profile. It has been designed with many accessories and options including an explosion proof motor, control package and solvent seal quench. The M-140K has flow rates up to 500 ml/min.

        The M-210 Series.    The M-210 Series is a legacy pilot production unit and is primarily marketed to pharmaceutical, cosmetic and food product manufacturers who have successfully created a new or improved formulation on the M-110 Series unit and would like to increase their production capacity. The M-210 Series unit is typically used for testing formulations at greater volume levels before initiating full-scale production. For some customers (such as biotechnology and pharmaceutical product manufacturers), the M-210 Series may have the capacity to function as a production unit.

        The M-700 Series.    The M-700 Series was introduced at the end of fiscal 1998 and was initially designed, engineered, and constructed for use in "rugged" industrial environments such as coatings, paints and pigments research and manufacturing. This product line was especially designed to withstand such hazards as dust, grease, and water spray. Through use of our own proprietary design of an intensifier pump and other components, the system has also proven to be more cost-effective in many user applications.

        Because of the market demands from the pharmaceutical, biotech and cosmetic industries, the M-700 product line was upgraded to all stainless steel construction to conform to the U.S. Food and Drug Administration's current Good Manufacturing Practices (cGMP) requirements. (See discussion below under heading "Government Regulation"). We also offer steam in place (SIP) and ultra clean in place (UCIP) sterilization options on the M-700 Series. In addition, we recently completed the design of six standardized configurations to our M-700 Series equipment to meet the additional market demands from the pharmaceutical and biotech industries.

        The M-700 Series equipment is available in a variety of configurations and flow rates depending upon motor size and the number of intensifier pumps. The M-700 series equipment can achieve operating pressures up to 40,000 psi. On the low end of the spectrum is the 15 HP, single intensifier pump M-7115 machine with flow rates ranging from 0.9 gpm at 10,000 psi to 0.4 gpm at

4

30,000 psi. The next size up is the 25 HP, single intensifier pump, M-7125 machine with flow rates ranging from 2.3 gallons per minute ("gpm") at 10,000 psi to 0.6 gpm at 30,000 psi. The largest offering of the M-700 series product line is the 50 HP, dual intensifier pump M-7250 machine with flow rates ranging from 4.0 gpm at 10,000 psi to 1.2 gpm at 30,000 psi. The M-7250 machine is available with a recently introduced "constant pressure" option in which operating pressure is maintained to within 5% of peak operating pressure resulting in lengthened component life, reduced operating costs, and quieter operation.

        In September 2003, we introduced a new addition to the M-700 series product line, the Model M-710. The Model M-710 machine is equipped with a 100 HP, dual intensifier pump, with flow rates ranging from 15 gpm at 5,000 psi to 3.0 gpm at 30,000 psi. The Model M-710 has the equivalent throughput of the larger and more expensive M-610-100 HP model.

        Additionally, between 2003 and 2005 we introduced several new options and equipment features to the M-700 series product offerings including:

        (i.)   The M-700 Microfluidizer Containment System, which provides a hermetically sealed stainless steel containment isolator that fully encloses the Microfluidizer processor's high-pressure processing area and is utilized for the safety protection of personnel engaged in the processing of highly toxic cancer therapeutic drugs and other hazardous and potent materials.

        (ii.)  The M-700 Microfluidizer Split System configuration (separating the power source from the mixing/processing apparatus) accommodates demands of limited space within clean rooms and for noise abatement within pharmaceutical production facilities.

        (iii.) Level II Steam Sterility Option for all pilot and production systems used for production of injectable and other pharmaceuticals. This option enables steam-in-place (SIP) capability without need for disassembly and allows compliance with stringent regulatory production requirements.

        (iv.) Ultra Clean in Place (UCIP) option, which provides the ability to clean in place (CIP) Microfluidizer processor systems between product batch runs or before storage. This capability differentiates our Microfluidizer materials processor systems from all other competitive products. Several pilot and production systems incorporating this option have already been delivered.

        (v.)  "Constant Pressure" control option is now an available feature that eliminates virtually all process pressure variations which dramatically decreases the wear and fatigue on all M-7250 machines, while requiring fewer cycles or passes on the equipment to archive a given result.

        The M-610 Series.    The M-610 Series are legacy systems that consist of custom-built models used for large-scale production. These units have flow rates of up to 18 gallons per minute and generate operating pressures up to 40,000 psi. Generally, these models are available in 100 HP and 200 HP.

        Microfluidics Reaction Technology (MRT).

        We have introduced a patented Multiple Stream High Pressure Mixer Reactor (MMR) system as a continuous chemical reactor, which we believe may become a standard device for conducting high speed chemical reactions, many of which can be configured to produce nanoparticles. This system produces uniform nanoparticles on a continuous (versus batch) basis with phase purity previously unachievable with conventional batch reaction technology. This degree of reaction chemistry control can lead to cost-effective product improvements and the development and

5

manufacture of new nanomaterials in scalable quantities. Applications for the new technology include improving the performance of catalysts, planarization polishing media, superconductors, abrasive silica, recording media, photographic media and pigments. It also may be used in the development and production of unique pharmaceutical products as well as the conversion of existing insoluble drugs to nanosuspension forms which are then deliverable by conventional means and with high bioavailability. This system is constrained by its one-to-one component mixing ratio and some lack of control of residence time of reactants.

        To cover a broad range of applications, we have expanded our existing patented MMR technology that utilizes our impinging jet technology with a fixed component feed ratio of one to one for very fast reactions. A newer novel process and device is a proprietary coaxially fed reactor for moderate and slower speed reaction and those that require differential ratios of component feed stocks (our Co-Reactor). Our Co-Reactor approach introduces the multiple reactant streams coaxially, rather than by impingement and in selected differing ratios, which allows the predetermined residence time for slower reactions.

        A recent breakthrough has allowed the design of our Co-Reactor, a modified, coaxially fed Microfluidizer with capabilities to handle most continuous reaction applications. This simpler equipment design is expected to result in a lower cost yet more flexible system which should accelerate interest in MRT systems.

        It has been reported to the scientific community that our Co-Reactor can create high purity nano-particles to sizes not achievable with conventional particle size reduction methods, including our own Microfluidizer processors. Conventional processors, such as wet-milling, high pressure homogenization, micronization, and other techniques are considered to be "top down" methods that mechanically reduce particle sizes. Most often these "top-down" processes cannot produce enough energy to break through nature's barrier to reduce particles smaller than the primary crystal size which varies with each material of interest. This limitation is a roadblock that prevents a growing number of critical formulations from becoming available to the marketplace.

        Use of our Co-Reactor, through chemical and physical processes (such as crystallization), utilizes a proprietary "bottoms up" approach to produce high purity nanoparticles the size of which are not achievable with any known "top down" conventional formulation methods. The technology introduces uniform mixing in the nanometer scale of species that are present in the chemical or physical processes which enables nanoparticles to be formed and the rates of the processes to be expedited.

        Data supporting the significance of Microfluidics Co-Reactor Technology and its role in achieving crystallization of hydrophobic drugs was presented during a poster presentation at the Nano Science and Technology Institute (NSTI) Nanotech 2007 Conference on May 22, 2007.

        We are proceeding with projects involving other companies seeking to optimize or enable drug delivery, catalysts and coatings products, as well as an internal program on nanopolymer creation for drug delivery and other applications. While we cannot accurately assess or anticipate either the timing of receipt of an order or the delivery of our first Co-Reactor laboratory development system, we believe that such event will occur in the foreseeable future. We believe that the MRT system and technologies will make us a leader in the provision of systems for continuous production of uniform, reproducible, microparticles, nanoparticles and nanodroplets involving fast chemical reactions, crystallization and other reactions.

        Both reactors (MMR & Co-Reactor) and processes now fall under the umbrella of Microfluidics Reaction Technology.

6

Former Company Business Division

        Morehouse-COWLES Division.    On February 9, 2004, pursuant to an Asset Purchase Agreement dated February 5, 2004 between the Company and a wholly owned subsidiary of NuSil Corporation, a California corporation (NuSil), we sold substantially all of the assets and selected liabilities of our Morehouse-COWLES Division (the Division), to NuSil. Other than NuSil's prior purchases of products from the Division, there were no preexisting relationships between us and NuSil.

        Prior to February 9, 2004, the Company-operated Division manufactured grinding and dispersing equipment used in a broad number of industries including the coatings and ink industries. The products included high-speed single and multi-shaft dissolvers and dispersers, stone mills, and vertical and horizontal media mills. As one of the early inventors of dispersers, dissolvers, stone mills, and media mills, the one hundred-year-old COWLES name is an industry-accepted symbol of quality, reliable products. The Division manufactures products that are generally used for blending, mixing, deagglomeration and dispersion of paints and coatings, inks, adhesives, sealants, and pigment dispersions. These applications are more conventional whereby the formulations are less expensive to produce and the volumes of product produced are large. The Division product lines are used in broader, high volume, lower value-added applications requiring less stringent particle size reduction.

Marketing and Sales

        Our marketing and sales activities are conducted through a corporate marketing and sales group that is responsible for the worldwide marketing and sales of all products.

        Marketing programs include media advertising, a website, direct mail, seminars, trade shows and telemarketing. In addition, we have an active program of field demonstrations. As an aid to the marketing and sales activity for the equipment, we provide prospective customers with access to our applications laboratories. These laboratories, located in Newton, Massachusetts, Irvine, California, and Lampertheim, Germany, provide free processing and particle size and distribution analysis of a prospective customer's sample formulation. Additionally, a prospective customer may pay for subsequent laboratory time and services on a fee for services basis. Typically, about one third of such laboratory trials result in equipment orders within twelve months. Finally, we have an active domestic and foreign equipment rental program designed to allow customers to use Microfluidizer processor equipment at their own locations to experiment with and develop product formulations and processes. A rental period may last from weeks to several months. We have a rental pool of equipment to service the needs of customers, including laboratory and pilot production machines. A significant percentage of customers who rent our equipment elect to purchase the rental equipment or to purchase new equipment. For our policies on product warranties, see "Critical Accounting Policies—Product Warranties" under Item 7 of Part II.

        Distributors and sales agents worldwide are supported with trade advertising, collateral literature and trade show materials. The distributors and sales agents also advertise directly on their own behalf and attend regional and international trade shows.

        We sell our equipment in the United States, Central and South America, Mexico and Canada through a network of independent manufacturers' representative firms that are managed by our regional sales managers. In Europe, we sell our equipment through a network of independent regional sales agents who are managed by our European Sales organization. In Asia and the Pacific Rim, we sell through a network consisting of a distributor and independent manufacturer's representative firms. Customers in other geographical regions are assisted directly by our sales staff. In November 2005, we appointed a vice-president of sales and marketing, who oversees all regional sales managers, independent manufacturers' representatives, and distributors.

7

Customers

        The users of our systems are in various industries, including the chemical, pharmaceuticals, food, cosmetic and biotechnology industries. One company accounted for 7.2% of 2007 revenues, while another company accounted for 15.2% of 2006 revenues. Two companies each accounted for more than 10% of 2005 revenues. Mizuho Industrial Co. Ltd. (Mizuho), who is one of our distributors, and one customer, Teva Pharmaceuticals Industries Ltd., and its wholly-owned subsidiary, accounted for 4.3% and 7.2%, respectively, of our revenues in 2007; 9.2% and 15.2%, respectively, in 2006; and 19.5% and 18.9%, respectively, in 2005. Mizuho, our Japanese distributor of Microfluidizer processor equipment and spare parts, resells our equipment to numerous end-users in Japan, none of which individually represents 10% or more of our revenues. As of December 31, 2007, two customers accounted for 12.9% and 9.7% of the trade accounts receivable, respectively. As of December 31, 2006, two customers accounted for 14.4% and 13.6% of the trade accounts receivable, respectively. As of December 31, 2005, two customers accounted for 10.8% and 10.7% of the trade accounts receivable, respectively. A reduction or delay in orders from any of our significant customers could have a material adverse effect on our results of operations.

        We sell our products in various countries. Our revenues from sales in the United States accounted for approximately $7,707,000 in 2007; $7,418,000 in 2006; and $5,658,000 in 2005. Sales to the rest of the world accounted for revenues of approximately $5,285,000 in 2007; $8,236,000 in 2006, and $5,987,000 in 2005. Our revenues from sales in Japan accounted for approximately $553,000 in 2007; $1,439,000 in 2006; and $2,270,000 in 2005. Our revenues from sales in Korea accounted for approximately $1,129,000 in 2007; $1,494,000 in 2006; and $1,409,000 in 2005. Our revenues from sales in Canada accounted for approximately $141,000 in 2007; $1,218,000 in 2006 and $370,000 in 2005. Long-lived assets for the years ended 2007, 2006, and 2005 are located in the United States. Our sales in North America, including the United States, Canada and Mexico, accounted for approximately 60.4% of our revenues in 2007; 55.2% of our revenues in 2006; and 51.8% of our revenues in 2005; with almost all of those sales coming from the United States and Canada. Sales to the rest of the world accounted for approximately 39.6% of our revenues in 2007; 44.8% of our revenues in 2006; and 48.2% of our revenues in 2005. Sales through our exclusive distributors in Japan accounted for approximately 4.3% of our revenues in 2007; 9.2% of our revenues in 2006; and 19.5% of our revenues in 2005. Sales through our representative in Korea accounted for approximately 8.7% of our revenues in 2007; 9.5% of our revenues in 2006; and 12.1% of our revenues in 2005. For additional information on revenues, profit or loss, and total assets for each of the last three fiscal years, see "Financial Statements and Supplementary Data" under Item 8 of Part II. For risks related to our sales to customers in foreign countries, see "Risk Factors"—"We may be subjected to increased government regulation which could affect our ability to sell our products outside of the United States" and "Our international business operations expose us to a variety of risks" under Item 1A of Part I.

Competition

        The Microfluidizer processor equipment product line of high shear fluid processors has direct competition in its major markets, including pharmaceutical and coatings/chemical applications, but management believes that our products have a larger installed base and performance advantages over products of our competitors. We also believe that our "fixed-geometry" interaction chambers, which permit a linear scale up, offer a unique equipment advantage. We further believe that the Microfluidizer processor equipment product line offers the highest shear forces available in the process equipment market today. It has been proven that for critical formulations, Microfluidizer processors produce repeatable and uniform higher quality products for our customers.

        The M-700 Series of fluid processors, together with the M-210 and M-610 product lines, provide high shear fluid processing capabilities for sanitary, sterile, and industrial applications. We believe that the Microfluidizer processor product line provides a distinct advantage over the product lines of our

8

competitors with respect to the processing of abrasive slurries or solids dispersed in liquids in large part because of our unique, wear-resistant, diamond interaction chamber and the special design of the intensifier pumping system. Further, recent incorporation of our developed components in the M-700 series equipment has reduced the cost of these units, and they are priced competitively with lesser capability processing equipment.

        MRT may encounter significant competition and there are other companies that possess patents and claims to equipment or processes that claim to make production quantities of nanoparticles. Although we believe that our MMR and Co-Reactor system are superior in design and function, there can be no assurance that other companies will not pose a competitive impediment to sales of our MRT system.

        We face, and will continue to face, intense competition from other companies who manufacture and sell materials processing systems. We are subject to significant competition from organizations that are pursuing technologies and products that are similar to our technology and products. Our future success will depend in large part on maintaining our current technologically superior product line and competitive position in the fluid processing systems field. Rapid technological development by us or others may result in our products or technologies becoming obsolete before we recover the expenses we incur in connection with their development. Products offered by us could be made obsolete by less expensive or more effective technologies. There can be no assurance that we will be able to make the enhancements to our technology necessary to compete successfully with newly emerging technologies. We expect competition to intensify in the materials processing systems field as technical advances are made and become more widely known.

Research and Development

        It is our position that a greater proportion of our sales in the future will be for more advanced processor production systems that will incorporate features not currently included in many of the current production machines. In order to meet such a challenge going forward, it became necessary to hire additional research and development personnel. It also became necessary, as a result of this decision, to increase spending in research and development. Additional resources in both personnel and spending may be required in the future.

        Our research and development efforts are focused on: (i) developing new processing applications for the process industries; (ii) further enhancements to the functionality, reliability and performance of existing products, and (iii) development of the Microfluidics Reactor Technology by: (a) working with customers who assist in the development of the system with both applications knowledge and financial support, and (b) an internal development program relating to reaction chamber design and creation of a variety of nanomaterials. There can be no assurance that we will be able to meet the enhancement challenges posed by applications of our core Microfluidizer processor business. Likewise, there can be no assurance that we will be able to design and manufacture systems for our Microfluidics Reactor Technology applications that will deliver the desired result for specific applications. For the years ended December 31, 2007, 2006 and 2005, research and development costs for continuing operations were $1,863,000, $1,763,000, and $1,702,000, respectively. Patent coverage for the MMR has been obtained both in the United States and in Europe (with national entry in process) and we are prosecuting the patent application in Canada.

Cooperative Research Arrangements

        We subsidize research and development activities centered around Microfluidizer processor technology at a number of research centers and universities. Our subsidy of these activities takes the form of substantial reduction or elimination of the customary rental charges for Microfluidizer

9

processor equipment provided for use. We have, in past years, subsidized research and development in the following fields at the following universities:

University	Field of Research/Development
University of Massachusetts, Lowell	Biotechnology and nanotechnology
Massachusetts Institute of Technology	Nanoemulsions for biomedical applications
Marine Biological Laboratory	Cell disruption
Lehigh University	Polymer chemistry
Université Laval (Quebec)	Food science
Worcester Polytechnic Institute	Catalytic chemistry
Purdue University	Pharmaceuticals
University of Toronto	Genomic research and expression
University of Karlsruhe	Food formulations and products
Northeastern University	Pharmaceutical nanotechnology particles
The Hebrew University of Jerusalem	Colloid chemistry emulsion technology

        In addition to their research activities, these universities provide us with contacts at industrial companies that may utilize Microfluidizer processor technology. Most recently, we entered into a Research Collaboration Agreement with the University of Massachusetts, Lowell (UML) in September 2005 to develop new applications, processes and products in the area of nanomaterials utilizing our leading-edge materials processing and MMR equipment. This collaboration was extended through September 21, 2008 on August 28, 2007. To date, we and UML have funded four research grants, each utilizing the Microfluidizer processor. Additionally, on occasion, research reports, technical papers, and doctoral theses may be published, which document the use of Microfluidizer processor technology. Finally, we engage in many informal co-operative development efforts with our customers.

Patents and Proprietary Rights Protection

        To protect our proprietary rights, we rely on trademark laws, trade secrets, confidentiality agreements, contractual provisions and technical means. Our United States Microfluidizer processor equipment method patent expired on March 13, 2007 and our device patent expired on August 6, 2002. In addition, we neither applied for nor obtained patent or trademark protection for our Microfluidizer processor equipment or our interaction chamber in any country other than the United States and, as a result, our proprietary rights are not subject to the protection of patent or trade mark laws of foreign countries where the equipment is sold. We do not believe that the expiration of our device or method patents has resulted in or will result in any material detriment to us since we have made many alterations, improvements and advances to our equipment over the years with such modification and innovations having been treated by us as trade secrets.

        We intend to pursue patent protection in the United States and select foreign jurisdictions with respect to proprietary aspects of our Co-Reaction Technology. Patent filing is currently anticipated by the end of March 2008.

        In 1997 we completed development of a novel adaptation of our Microfluidizer processor equipment—a "Multiple Stream High Pressure Mixer/Reactor", commercially designated as the Microfluidizer Mixer/Reactor (MMR). In August 1997, we filed a patent application for the device and its processes with the United States Patent and Trademark Office (USPTO), and filed a Patent Cooperation Treaty (PCT) application on May 5, 1998. In July and November, 2000, the USPTO issued us notices of allowances of utility patent claims regarding the MMR and the use thereof. On

10

September 18, 2002, the European Patent Office advised us it would grant our MMR patent substantially as applied for, including our device and process claims. We are in the process of pursuing national entry in France, Germany, Italy, The Netherlands, and the United Kingdom. We are currently prosecuting our MMR patent in Canada.

        In order to afford additional protection to our intellectual property, in November 2006 we adopted a provision as part of our standard terms and conditions of purchase. Such provision is an acknowledgement and agreement by a purchaser of our merchandise and equipment (the "Equipment") that certain of our proprietary intellectual property including the design, operation and use of the Equipment's interaction chamber or reaction chamber constitutes our trade secret information (the "Trade Secret Information"). Such purchaser agrees that it will not (and will not aid, assist or permit any other person to): (i) tamper with the Equipment, (ii) utilize imaging equipment or other means to reveal the inner structures and/or designs of the Equipment, (iii) attempt to disassemble or reverse engineer the Equipment, including specifically the interaction or reaction chamber, or (iv) otherwise attempt to discover and/or utilize any of the Trade Secret Information. A purchaser is further prohibited from disclosing (or aiding, assisting or permitting third parties to disclose) any information which the purchaser may learn or discover about the materials and methods of construction, design, assembly, functioning, geometries, measurements and tolerances of the internal components of the Equipment. In the event of a violation of any of the above prohibitions, the purchaser has stipulated that it is liable to us and/or our subsidiary, Microfluidics Corporation, for any and all actual and potential, direct and indirect, incidental and consequential damages, including, without limitation, resulting lost profits, and all available equitable relief. We have made such provision applicable to purchasers, renters and subsidized users of the Equipment ("Users"). Despite the protection afforded by such provision, there can be no assurance that we will be able to monitor compliance by all Users or that if we become aware of a violation that we will be able to enforce our rights regarding such violation.

        We maintain confidentiality agreements with our employees and also maintain confidentiality agreements and non-competition agreements with those third parties to whom we disclose non-public technical information relating to our equipment. We believe that enforcement of the provisions of such agreements should adequately protect our proprietary information. However, in the event of a material breach of such agreements certain of our valuable intellectual property may be disclosed to third parties (including competitors). In such event, despite provisions for equitable relief and damages, we may suffer competitively and be materially and negatively impacted as a result of any unauthorized disclosure.

Manufacturing

        At present, we subcontract the manufacture and/or machining and finishing of many of the components of our equipment to third parties, with the remaining fabrication, assembly and performance testing undertaken by us. We have selected certain primary suppliers based upon pricing terms, quality of their products, and the vendor's performance record.

        The loss of any primary supplier could have a material, adverse effect on our business, financial condition, or results of operations. Therefore, we have identified alternative suppliers for our most critical components ("Alternative Sources"). There can be no assurance that a transition to such Alternative Sources will not entail transitional delays, quality assurance and quality control difficulties, or delivery problems, any or all of which would likely have an impact on our production of equipment and could have a material adverse effect on our business, financial condition, or results of operations.

11

Key Management/Personnel

        Our continued operation, innovation and growth are to some significant degree reliant on the continued services of our key executive officers and leading technical personnel. On various dates during 2007, we entered into employment agreements with several of our senior executives. Such agreements were filed with the Securities and Exchange Commission on Form 8-K during the year. Though we believe that we can identify and recruit replacement key management and technical personnel, there can be no assurance as to such availability, the length of time required to obtain such replacement management and technical personnel, the salary level that may have to be paid to obtain their respective services, or the impact on operations that may be experienced through the interim absence of such key management and technical personnel. The loss of key management or leading technical personnel could, therefore, have a material adverse effect on our business, financial condition, or results of operations.

Government Regulation

        Certain of our customers utilize our products in processes and production that are subject to governmental regulation. For example, the manufacturing and marketing of pharmaceutical products may require the approval of the U.S. Food and Drug Administration (FDA) within the United States and of comparable agencies in foreign countries. The FDA has established mandatory procedures, safety standards and protocols that apply to the manufacture, clinical testing and marketing of new pharmaceutical products in the United States. The process of seeking and obtaining FDA approval of a new product often takes a number of years and often involves the expenditure of substantial resources by our customers. The FDA approval process can result in long lead times that are attendant to manufacturing equipment orders for these applications.

        Further, in addition to product approvals, the FDA imposes requirements as to manufacturing practices, record keeping and reporting ("current Good Manufacturing Practices" or "cGMP"). cGMP-regulated companies are subject to inspections by the FDA (inclusive of Microfluidizer processor equipment) and product approvals may be withdrawn if cGMP are not met.

        At present, our customers include companies who are making FDA approved drugs, preparations, and products, including sunscreens and cosmetic lotions for external use and companies who utilize Microfluidizer processor equipment for the formulation or production of FDA approved parenteral (injectable) drugs or compounds including vaccines, and anesthesia.

        For our equipment entering Europe, CE compliance (Regulatory Compliance with European Safety Standards) is required. All products manufactured for European customers (and for any others who may request it) by us are CE compliant.

        Various laws, regulations and recommendations relating to safe working conditions, laboratory practices and the purchase, storage, movement, import and export, use and disposal of harmful or potentially harmful substances that may be used in connection with our research work are, or may be, applicable to our activities. These laws include, among others, the United States Atomic Energy Act, the Clean Air Act, the Clean Water Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, national restrictions on technology transfer, import, export and customs regulations and other present and possible future local, state or Federal regulation. The extent of adverse governmental regulation, which might result from future legislation or administrative action, cannot be accurately predicted. Certain agreements that may be entered into by us involving exclusive license rights may also be subject to antitrust regulatory control, the effect of which cannot be predicted.

        To date we have not been affected by any United States governmental restrictions on technology transfer, import, export and customs regulations and other present local, state or Federal regulation.

12

The extent of adverse governmental regulation, which might result from future legislation or administrative action, cannot be accurately predicted. In particular, the USA Patriot Act of 2001 and other governmental regulations may impose export restrictions on sale of equipment or transfer of technology to certain countries or groups. There can be no assurance that sale of our equipment will not be impacted by such legislation or designation. Depending upon which countries and sales may be designated for trade restriction such action could have a material adverse effect on our business, financial condition, or results of operations.

Backlog

        Our sales order backlog related to continuing operations of accepted and unfilled orders at March 7, 2008 and March 23, 2007, was approximately $4,710,000 and $3,567,000, respectively. Backlog represents orders in hand that typically take between one and six months to deliver. Backlog as of any particular date should not be relied upon as indicative of our net revenues for any future period.

Employees

        We have approximately 52 full-time employees as of March 7, 2008. None of the our employees are covered by a collective bargaining agreement, and the Company considers its relations with its employees to be satisfactory. we believe that our future success will depend in large part on our ability to attract and retain highly skilled employees.

Item 1A.    Risk Factors

        You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties occurs, our business, financial condition or operating results could be materially harmed. In that case the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we may face, although they reflect the risks that management believes are material at this time.

        We believe that this filing contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to regulatory risks and clinical uncertainties. Such statements are based on management's current expectations and are subject to facts that could cause results to differ materially from the forward-looking statements. For further information you are encouraged to review our filings with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q for the periods ended March 31, 2007, June 30, 2007 and September 30, 2007.

We have experienced operating losses from continuing operations in two of our last five fiscal years, including the fiscal year ended December 31, 2007, and we may not be able to achieve consistent profitability in the future.

        For two of the past five fiscal years, including the fiscal year ended December 31, 2007, we have experienced losses from continuing operations. During the fiscal year ended December 31, 2007, we had a net loss of $1,507,000, and it is possible that we will have a net loss in the current fiscal year as we make investments in our business in anticipation of future growth.

        Our continuing losses create substantial risks to us and our future viability, primarily as described in the following risk factor.

13

Our cash position has been reduced, and we may confront liquidity problems.

        Our cash and cash equivalents dropped from approximately $1,860,000 at December 31, 2006 to approximately $756,000 at December 31, 2007. Although management believes that our cash position, together with bank financing arrangements already in place, should be sufficient there can be no assurance that we will not confront liquidity issues if revenues do not increase.

        Management has committed to investing in the growth of our business, particularly with regard to making investments in sales and marketing. Those investments are likely to draw down our cash in advance of us receiving the additional revenues anticipated from such investments. As a result, if revenues do not increase as anticipated, or revenues are delayed beyond expectations, we could confront liquidity problems of varying degrees.

        Our credit facility is comprised of a revolving line of credit in the maximum principal amount of $1,000,000, under which we owed approximately $262,000 at December 31, 2007.

        As described above, we have a $1,000,000 revolving line of credit that is necessary to fund our liquidity needs from time to time under which we owed $262,000 at December 31, 2007. The line of credit is subject to repayment on demand by our lender. Although our lender has not indicated any desire to require repayment, the general tightening of the credit markets or a change in the lender's perception of us as an appropriate credit risk could result in a demand by the lender that we repay the line of credit in full. In such an event, there can be no assurance that we would be able to obtain alternate financing upon favorable terms, or at all.

        We are limited in our ability to acquire property and pay dividends, and we must maintain certain financial covenants as discussed in Liquidity and Capital Resources below. Our ability to operate is potentially impacted by our ability to achieve future compliance with the financial covenants of the credit facility.

        In the event of a breach of the covenants or events of default under the credit facility, there can be no assurance that we can obtain a waiver of such breach or default from the lender. Likewise, in the event that we cannot affect a cure or obtain a waiver of a breach or default under the credit facility there can be no assurance either that the lender will not terminate the credit facility or that we will be able to obtain alternate financing, either at all or on terms that are favorable to us. Either event could have a material adverse effect on our business, financial condition, or results of operations.

We face intense competition in many of our markets.

        Our Microfluidizer product line of high-shear fluid processors has direct competition in its major markets, including its most important markets in the pharmaceutical, biotechnology and coatings/chemical industries. The severity of the competition that we confront requires that we continuously invest in research and development in order to keep our product line competitive. Despite such expenditures, however, there can be no assurance that we will be able to meet the enhancement challenges posed by our competitors, or that we will be able to create or exploit the kinds of innovations, such as our Microfluidics Reaction Technology, needed to drive future sales.

        In addition, we face, and will continue to face, intense competition from other companies who manufacture and sell fluid processing systems used in particle size reduction, mixing, milling, dispersing, homogenizing, cell disruption and liposomal encapsulation applications. We expect competition to intensify in the fluid processing systems field as technical advances are made and become more widely known, and such increased competition may have a material adverse effect upon our business.

        Our future success will depend in large part on our ability to maintain a technologically superior product line. Rapid technological development by us or others may result in our products or technologies becoming obsolete before we recover the expenses we incur in connection with their

14

development. Products offered by us could be made obsolete by less expensive or more effective technologies. There can be no assurance that we will be able to make the enhancements to our technology necessary to compete successfully with newly emerging technologies.

We may experience uncertain economic trends that adversely impact our business.

        We may experience in the future reduced demand for our products as a result of the uncertainty in the general economic environment in which our customers and we operate. We cannot project the extent of the impact of the economic environment specific to our industry. If economic conditions worsen or if an economic slowdown occurs, we may experience a material adverse effect on our business, operating results and financial condition.

We rely on suppliers, vendors and subcontractors.

        We do not manufacture most of the components contained in our Microfluidizer materials processor equipment, but rather subcontract the manufacture of most components. Based on quality, price, and performance, we have selected certain suppliers, vendors, and subcontractors that provide parts, subassemblies, machining and finishing of components that are assembled by our production staff. Although we have identified alternate sources for such parts, components, machining and finishing, there can be no assurance that a transition to such alternative sources would not entail quality assurance and quality control difficulties, on-time delivery problems, or other transitional problems, any or all of which could have an impact on our production of equipment and could have a material adverse effect on our business, financial condition, or results of operations.

We face substantial concentration of our accounts receivables

        As of December 31, 2007, 12.9% and 9.7% of our trade accounts receivable were due from two customers, both of whom are long-established customers and neither of whom has presented credit issues in the past. Nevertheless, if either or both of these customers were to default on their obligations to us, such default would likely cause a material change in our near-term, and possibly long-term, financial prospects.

Many of our current and potential customers are from the pharmaceutical and biotechnology industries and are subject to risks faced by those industries.

        We derive a substantial portion of our revenues from pharmaceutical and biotechnology companies. We expect that pharmaceutical and biotechnology companies will continue to be one of our major sources of revenues for the foreseeable future. As a result, we are subject to risks and uncertainties that affect the pharmaceutical and biotechnology industries, such as pricing pressures as third-party payers continue challenging the pricing of medical products and services, government regulation, ongoing consolidation and uncertainty of technological change, and to reductions and delays in research and development expenditures by companies in these industries.

        In particular, the biotechnology industry is dependent on raising capital to fund operations. If biotechnology companies are unable to obtain the financing necessary to purchase our products, our business and results of operations could be materially adversely affected. As it relates to both the biotechnology and pharmaceutical industries, many companies have significant patents that have expired or are about to expire, which could result in reduced revenues for those companies. If pharmaceutical companies suffer reduced revenues as a result of these patent expirations, they may be unable to purchase our products, and our business and results of operations could be materially adversely affected.

15

        In addition, we are dependent, both directly and indirectly, upon general health care spending patterns, particularly in the research and development budgets of the pharmaceutical and biotechnology industries, as well as upon the financial condition and purchasing patterns of various governments and government agencies. Many of our customers, including universities, government research laboratories, private foundations and other institutions, obtain funding for the purchase of products from grants by governments or government agencies. There exists the risk of potential decrease in the level of governmental spending allocated to scientific and medical research, which could substantially reduce or even eliminate these grants. If government funding necessary to purchase our products were to decrease, our business and results of operations could be materially adversely affected.

We have only one manufacturing facility.

        We have a single manufacturing facility located in Newton, Massachusetts. Our success depends on the efficient and uninterrupted operation of that facility. Whether as a result of a fire, natural disaster, or other cause, any disruption to our manufacturing operations would significantly impair our ability to operate our business on a day-to-day basis. Although we maintain business interruption insurance, our business would be injured by any extended interruption of the operations of our manufacturing facility. Further, although we carry property and business interruption insurance, our coverage may not be adequate to compensate us for all losses that may occur. This insurance may not continue to be available to us. Finally, if we seek to replicate our manufacturing operations at another location, we will face a number of technical as well as financial challenges, which we may not be able to address successfully.

We rely on our trade secrets to protect our technology.

        Our Microfluidizer processor equipment method patent expired on March 13, 2007 and our device patent expired on August 6, 2002. In addition, we have neither sought patent protection for our Microfluidizer processor or our interaction chamber nor trademark protection of our Microfluidizer trade name in any country other than the United States. As such, our proprietary rights are not subject to the protection of patent or trademark laws of foreign countries where our equipment is sold. Although we have made many alterations, improvements and advances to our equipment over the years and continue to make such advancements with such modification and innovations having been and being treated by us as trade secrets, the lack of our patent protections will expose us to potential competition that would likely have a material adverse effect on us.

        To protect our other proprietary rights, we rely on a combination of trademark laws, trade secrets, confidentiality agreements, contractual provisions and technical means. In the event of a breach of these protections, there can be no assurance that these measures will prove to have been adequate to protect our interests, or that we will have sufficient resources to prosecute or prevail in an action against a third party.

We may be subjected to increased government regulation which could affect our ability to sell our products outside of the United States.

        Although United States governmental restrictions on technology transfer, import, export and customs regulations and other present local, state or federal regulation, have not had a significant affect on us historically, any future legislation or administrative action restricting our ability to sell our products to certain countries outside the United States could significantly affect our ability to make certain foreign sales. The extent of adverse governmental regulation, which might result from future legislation or administrative action, cannot be accurately predicted. In particular, the USA Patriot Act and other governmental regulations may impose export restrictions on sale of equipment or transfer of technology to certain countries or groups. There can be no assurance that sale of our equipment will not be impacted by any such legislation or designation. Depending upon which countries and sales may

16

be designated for trade restriction such action could have a material adverse effect on our business, financial condition, or results of operations. Also, certain agreements that may be entered into by us involving exclusive license rights may also be subject to national or supranational antitrust regulatory control, the effect of which cannot be predicted.

We rely on top management and technical personnel.

        Our continued operation, innovation and growth are to some significant degree reliant on the continued services of our executive officers and leading technical personnel. There can be no assurance that we will be able to retain such management and technical personnel if employment is offered by other companies better able to pay higher compensation, provide more and better benefits, or willing to offer longer term job security by entering into employment contracts with our employees. Further, there can be no assurance that key executive officers and leading technical personnel will not leave our employment, or either die or become disabled to an extent that they cannot render their services to us. Though we believe that we can identify and recruit replacement key management and technical personnel, there can be no assurance as to such availability, the length of time required to obtain such replacement management and technical personnel, the salary level that may have to be paid to obtain their respective services, or the impact on operations that may be experienced through the interim absence of such key management and technical personnel. The loss of our top management or leading technical personnel could, therefore, have a material adverse effect on our business, financial condition, or results of operations.

Our stock is listed on the OTC Bulletin Board and our stockholders may have limited liquidity.

        Our common stock is quoted on the OTC Bulletin Board, which provides significantly less liquidity than a securities exchange (such as the American or New York Stock Exchanges or The Nasdaq Stock Market). In general, over the past two years, fewer than 20,000 shares of our common stock have traded on a daily basis.

Our quarterly revenues and stock performance are variable.

        The timing of orders and subsequent shipment will significantly affect quarterly revenues and resulting net income results for particular quarters which may cause increased volatility in both our revenues and stock price.

We allow our customers to lease some of our products and those leases may not turn into sales.

        We sometimes lease our products to our customers prior to or instead of selling a product to a customer. Our products are expensive, and customers frequently want to test out a product's capabilities prior to purchase. We have had reasonable success in converting leases into subsequent sales of the same or a newer product; however, there is no guarantee that we will continue to be able to convert any of our leases into sales.

We may be subject to product liability claims from our customers or by persons harmed by our customers' products.

        We maintain what we deem to be reasonable levels of product liability coverage through insurance policies with a reasonably small deductible. Nonetheless, inasmuch as we sell our equipment to a number of customers who make pharmaceutical preparations and consumer cosmetics, there can be no assurance that if a consumer of end products is injured or dies from such product that a suit by an injured party (or a class of similar situated plaintiffs) will not include us as well as the maker of the drug or cosmetic. Although we may have no control over the manufacture of end-products made on our equipment, we may not be able to bar a plaintiff's claims against all parties whose products and

17

equipment were involved in the manufacturing process under a variety of legal theories of liability. We may be required to present a vigorous and costly defense if we cannot be dismissed from such an action. The cost of such legal defense may significantly impact our cash flow.

Our international business operations expose us to a variety of risks.

        For the years ended December 31, 2007, 2006, and 2005, shipments outside of North America accounted for approximately 39.6%, 44.8%, and 48.2%, respectively, of our net revenues in those periods. In particular, approximately 4.3%, 9.2%, and 19.5%, of our net revenues in 2007, 2006, and 2005, respectively, resulted from sales to Japan and approximately 8.7%, 9.5%, and 12.1% of those net revenues resulted from sales to Korea in 2007, 2006 and 2005, respectively. In addition, approximately 18.0%, 22.3%, and 13.0%, of our net revenues resulted from sales to Europe in 2007, 2006 and 2005, respectively. We expect that shipments outside of North America will continue to account for a significant portion of our total net product revenues.

        We attempt to reduce some of our risk related to sales and shipments outside of the United States by requiring that our contracts generally be paid in United States Dollars. Nevertheless, a downturn in the economies of Japan, Korea or Europe might reduce investment in new technology or products while a weakening of foreign currency against the United States Dollar would make our products more expensive, each of which could have a substantial impact on our operating results.

        In addition, a significant portion of our total net revenue is subject to the risks associated with shipping to foreign markets in general, including unexpected changes in legal and regulatory requirements; changes in tariffs; political and economic instability; risk of terrorism; difficulties in managing distributors and representatives; difficulties in protecting our intellectual property overseas; and natural disasters, any of which could have a negative impact on our operating results.

We may experience difficulties in the future in complying with Sarbanes-Oxley Section 404 ("Section 404"); and continued implementation and maintenance of internal controls necessary for continued compliance with Section 404 may result in our incurring of additional costs.

        We are required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002. We are also required to furnish a report by our management on our internal controls over financial reporting beginning with our annual report on Form 10-K for this fiscal year ended December 31, 2007. Such report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. While we have completed our self-assessment as to the effectiveness of internal control over financial reporting for the year ended December 31, 2007, which did not identify material weaknesses in our internal control systems, there can be no assurance that future material weaknesses in our internal control systems will not be identified as a result of changing financial or operating conditions. In addition, although we are currently not required to subject our internal controls to audit by our independent registered public accounting firm until at least our fiscal year ending December 31, 2008, there can be no assurance that an audit of our internal controls will not result in the identification of a material weakness. If we fail to maintain proper and effective internal controls in future periods, it could adversely affect our operating results, financial condition and our ability to run our business effectively and could cause investors to lose confidence in our financial reporting. In the event that it is determined that our internal control over financial reporting is not effective, as defined under Section 404, investor confidence in us may be adversely affected and could cause a decline in the market price of our stock.

18

Future changes in financial accounting standards may adversely affect our reported results of operations.

        A change in accounting standards can have a significant effect on our reported financial results. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. These new accounting pronouncements may adversely affect our reported financial results.

If our accounting estimates are not correct, our financial results could be adversely affected.

        Management judgment and estimates are necessarily required in the application of our Critical Accounting Policies. We discuss these estimates in the subsection entitled Critical Accounting Policies beginning on page 32. If our estimates are incorrect, our future financial operating results and financial condition could be adversely affected.

Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        Our corporate headquarters are in Newton, Massachusetts. We also maintain a sales office and laboratory facility in Lampertheim, Germany, and a sales and laboratory office in Irvine, California. We rent approximately 36,000 square feet of offices, production and research and development facilities at these locations for administrative, development and production activities. The lease terms expire at various times through December 2012 (with options under which we can extend the lease at the Newton facility through October 31, 2015). We believe these facilities will be adequate for operations for the next five years.

Item 3.    Legal Proceedings

        We are not a party to any legal proceedings, other than ordinary routine litigation incidental to our business, which we believe will not have a material affect on our financial position or results of operations.

Item 4.    Submission of Matters to a Vote of Security Holders

        No matters were submitted to a vote of our security holders during the quarter ended December 31, 2007.

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market

        Our common stock is traded on the Over-the-Counter Bulletin Board under the symbol MFIC. The following table sets forth the range of quarterly high and low bid quotations for the last two fiscal years, as furnished by the National Association of Securities Dealers Automated Quotation System. The

19

quotations represent interdealer quotations without adjustment for retail markups, markdowns, or commissions, and may not necessarily represent actual transactions.

	Fiscal Year 2007
	High		Low
4th Quarter	$	1.39	$	1.02
3rd Quarter		1.67		1.15
2nd Quarter		1.80		1.50
1st Quarter		2.65		1.45

	Fiscal Year 2006
	High		Low
4th Quarter	$	2.00	$	1.28
3rd Quarter		1.45		1.20
2nd Quarter		1.45		1.26
1st Quarter		1.64		1.27

Holders

        As of March 7, 2008, there were approximately 356 holders of record of our common stock.

Sales of Unregistered Securities

        On March 30, 2004, we completed a private placement of investment units (each unit consisting of one share of common stock and a 3-year warrant to purchase an additional ¹/2 share of common stock). A total of 1,426,616 units were sold, yielding gross proceeds of approximately $3,567,000. The units were priced at $2.50 each and the associated warrants to purchase 713,308 shares of common stock were exercisable at $3.05. Additionally, the placement agent for the offering received five-year warrants to purchase 213,992 shares of common stock at an exercise price of $3.20 per share. The value of the warrants granted to the placement agent was approximately $351,000. The investment units and warrants were issued pursuant to the exemption to the registration requirements of the Securities Act of 1933, as amended, available under Section 4(2) of that Act. The placement agent and the purchasers of the units were "accredited investors" pursuant to the rules of the Securities and Exchange Commission. We filed a registration statement on Form SB-2, which was declared effective on May 13, 2004, for purposes of registering the shares of common stock underlying the units and warrants. The warrants associated with the purchases of these units expired March 30, 2007. The warrants issued to the placement agent may be exercised in whole or in part at any time prior to their termination date in March, 2009. In addition, the warrants issued to the placement agent provide for certain adjustments to the exercise price upon the issuance by us of certain securities at a price below $3.20.

Issuance of Warrants

        On November 17, 2004, we entered into a general financial and advisory services agreement with Maxim Group LLC pursuant to which Maxim Group LLC was granted, on April, 1, 2005, a three-year warrant to purchase 100,000 shares of our common stock at an exercise price of $3.20 per share. These warrants were issued pursuant to the exemption to the registration requirements of the Securities Act of 1933, as amended, available under Section 4(2) of that Act. Maxim Group LLC was an "accredited investor" pursuant to the rules of the Securities and Exchange Commission. We filed a registration statement on Form SB-2, which was declared effective on June 5, 2006, for purposes of registering the shares of common stock underlying the warrants. Maxim Group LLC has waived its rights to receive, based upon the date that the registration statement on Form SB-2 was declared effective, an additional warrant to purchase shares of our common stock. The warrants may be exercised in whole or in part at

20

any time on or prior to April 1, 2008. In addition, the warrants provide for certain adjustments to the exercise price upon the issuance by us of certain securities at a price below $3.20.

Dividends

        We have never paid any cash dividends on our common stock and presently anticipate that no dividends on our common stock will be declared in the foreseeable future. Our current policy is to retain all of our earnings to finance future growth.

Securities Authorized for Issuance Under Equity Compensation Plans

        The equity compensation plan information in the table below is as of December 31, 2007. See also Note 11 to the Consolidated Financial Statements.

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)	(b)		(c)
Equity compensation plans approved by stockholders		1,585,427	$	1.35	590,000
Equity compensation plans not approved by stockholders		313,992	$	3.20	—
	Total	1,899,419	$	1.66	590,000

21

Performance Graph

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among MFIC Corporation, The AMEX Composite Index
And A Peer Group

*

$100 invested on 12/31/02 in stock or index-including reinvestment of dividends.
Fiscal year ending December 31.

	Cummulative Total Return as of December 31,
	12/02	12/03	12/04	12/05	12/06	12/07
MFIC Corporation	100.00	681.82	1181.82	409.09	466.67	351.52
AMEX Composite	100.00	143.18	175.20	215.26	257.04	299.37
Peer Group	100.00	114.22	130.94	57.10	44.44	25.66

        Our competitors are either larger integrated companies or privately-held companies. We have chosen a peer group consisting of companies with a market capitalization from $13 million to $26 million in the information technology sector of the American Stock Exchange. The peer group consists of the following issuers:

•	Conversion Services International Inc.	•	Ilinc Communications Inc
•	Elecsys Corporation	•	Jazz Technologies Inc
•	Henry Brothers Electronics Inc.	•	MPC Corporation
•	Image ware Systems Inc.	•	Pinnacle Data Systems Inc.
•	Intelligent Systems LP	•	Trans-Lux Corporation

22

Item 6.    Selected Financial Data

        The selected financial information presented below is derived from our audited consolidated financial statements for each of the five years in the period ended December 31, 2007. The information set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related Notes included elsewhere in this Form 10-K. All fiscal years noted below have been restated to reflect discontinued operations.

		For The Years Ended December 31,
		2007			2006			2005			2004			2003
		(in thousands, except share and per share data)
Consolidated Statement of Operations Data:
Total revenues		$	12,992		$	15,654		$	11,645		$	12,159		$	10,460
Total costs and expenses			14,174			14,450			12,416			11,462			9,694
(Loss) income from continuing operations before income taxes			(1,182	)		1,204			(771	)		697			766
Interest expense			(20	)		(35	)		(59	)		(69	)		(116	)
Interest income			64			50			26			27			10
Net (loss) income from continuing operations before income taxes			(1,138	)		1,219			(804	)		655			660
Income tax provision (benefit)			369			(58	)		185			(450	)		—
Net (loss) income from continuing operations before discontinued operations			(1,507	)		1,277			(989	)		1,105			660
Loss from discontinued operations (net of loss from disposal of discontinued operations of $1,422 in 2003)			—			—			—			(231	)		(4,110	)
Net (loss) income		$	(1,507	)	$	1,277		$	(989	)	$	874		$	(3,450	)
Basic amounts per common share:
	Basic net (loss) income per share from continuing operations	$	(0.15	)	$	0.13		$	(0.10	)	$	0.11		$	0.08
	Basic net (loss) income per share from discontinued operations		—			—			—			(0.02	)		(0.52	)
	Basic net (loss) income per share	$	(0.15	)	$	0.13		$	(0.10	)	$	0.09		$	(0.44	)
Diluted amounts per common share:
	Diluted net (loss) income per share from continuing operations	$	(0.15	)	$	0.12		$	(0.10	)	$	0.10		$	0.08
	Diluted net (loss) income per share from discontinued operations		—			—			—			(0.02	)		(0.52	)
	Diluted net (loss) income per share	$	(0.15	)	$	0.12		$	(0.10	)	$	0.08		$	(0.44	)
Weighted average shares outstanding:
	Shares used in computing net (loss) income per common share, basic		10,183,376			10,012,685			9,756,221			9,345,560			7,767,712
	Shares used in computing net (loss) income per common share, diluted		10,183,376			10,611,635			9,756,221			10,329,313			8,501,110

	As of December 31,
Consolidated Balance Sheet Data:
	2007		2006		2005		2004		2003
Cash and cash equivalents	$	756	$	1,860	$	1,452	$	2,028	$	50
Current assets		5,973		7,857		5,734		6,821		5,194
Working capital		4,383		5,644		4,273		5,180		574
Total assets		6,358		8,226		6,212		7,292		5,487
Long-term note (including current portion)		65		312		563		813		59
Total stockholders' equity		4,768		5,948		4,426		5,089		861

23

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Future Operating Results

        This report may contain forward-looking statements that are subject to certain risks and uncertainties including statements relating to our plan to achieve, maintain, and/or increase revenue growth, and/or operating profitability, and to achieve, maintain, and/or increase net operating profitability. Such statements are based on our current expectations and are subject to a number of factors and uncertainties that could cause actual results achieved by us to differ materially from those described in the forward-looking statements. We caution investors that there can be no assurance that the actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including but not limited to, the following risks and uncertainties: (i) whether the performance advantages of our Microfluidizer materials processing equipment will be realized commercially or that a commercial market for the equipment will continue to develop, (ii) whether the timing of orders will significantly affect quarter to quarter revenues and resulting net income results for a particular quarter, which may cause increased volatility in our stock price, (iii) whether we will have access to sufficient working capital through continued and improving cash flow from sales and ongoing borrowing availability, the latter being subject to our ability to maintain compliance with the covenants and terms of our loan agreement with our senior lender, (iv) whether our technology will be adopted by customers as a means of producing MMR innovative materials in large quantities, (v) whether we are able to deploy prototype MMR placements and then manufacture and introduce commercial production MMR equipment, (vi) whether we will achieve a greater proportion of our sales in the future through the sale of advanced processor production systems, and (vii) as well as those risks set forth in Item 1a, "Risk Factors." We assume no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise.

Overview

        We have, for over 20 years, specialized in manufacturing and marketing a broad line of high shear fluid processing systems used in numerous applications in the chemical, pharmaceutical, biotech, food and cosmetics industries.

        Our line of high shear fluid processor equipment, marketed under our Microfluidizer trademark and trade name, process premixed formulations to produce small uniform structures, usually of the submicron and nanoscale size (commonly defined as particles having dimensions less than 100 nanometers) including nanostructures, microemulsions and nanosuspensions. The equipment produces commercial quantities of such materials important to producers of pharmaceuticals, coatings and other products. Further, we guarantee scaleup of formulations and results on our processor equipment from 10 milliliters per minute on our laboratory and bench top models to more than 15 gallons per minute on our pilot and production models.

        The technology embodied within our Microfluidizer high shear fluid processor is used for formulation of products that are normally very difficult to mix and stabilize. Microfluidizer processors through process intensification allow manufacturers in the chemical, pharmaceutical, cosmetic, and food processing industries to produce higher quality products with better characteristics on a more consistent basis than with other blending, mixing or homogenizing techniques. Additionally, the equipment is used for cell disruption to harvest the cultivated contents of bacterial, yeast, mammalian and/or plant cells and for liposomal encapsulation of materials for the cosmetics and biotech/biopharma industries.

        We have begun to take steps toward commercializing our proprietary equipment, processes and technology for the continuous production of precipitated submicron or nanoscale particles by interaction of discrete streams of reacting materials, through a novel adaptation of our Microfluidizer processor equipment that permits the mixing of, and reactions between, streams of different solutions

24

at high pressures. We refer to this technology as a Multiple Stream High Pressure Mixer/Reactor (MMR). In August 1997, we filed a patent application for the device and its processes with the United States Patent and Trademark Office (USPTO), and filed a Patent Cooperation Treaty (PCT) application on May 5, 1998. In July and November 2000, we were issued by the USPTO notices of allowances of utility patent claims regarding the MMR and the use thereof.

        On September 18, 2002, the European Patent Office advised us it would grant its MMR patent substantially as applied for, including its device and process claims. We have gained national entry of the patent in France, Germany, Italy, The Netherlands, and the United Kingdom. We are still prosecuting the allowance of the patent in Canada. Our management believes that future commercialization and growth of nanotechnology may be, in large part, enabled by the manufacturing capability of our materials processor and MMR equipment.

        We intend to pursue patent protection in the United States and select foreign jurisdiction with respect to proprietary aspects of our Co-Reaction Technology. Patent filing is currently anticipated by the end of March 2008.

Results of Operations

Year Ended December 31, 2007 vs. December 31, 2006

Revenues

        Total revenues for the year ended December 31, 2007 were approximately $12,992,000, as compared to revenues of $15,654,000 for the comparable prior year, a decrease of approximately $2,662,000, or 17.0%.

        North American sales for the year ended December 31, 2007 decreased to approximately $7,848,000, a 9.10% decrease, as compared to sales of approximately $8,636,000 for the year ended December 31, 2006. The decrease in North American sales was principally due to a decrease in the sale of machines of approximately $161,000, and a decrease in the sale of spare parts of approximately $627,000. The overall decrease in sales of spare parts was largely attributable to a rescheduling of the shipment schedule for spare parts under an existing supply order from a customer ("the Customer"). During the three months ended June 2007, the Customer notified us that it was rescheduling the spare parts delivery under an existing order and lengthening the shipping schedule from its original conclusion date in December, 2007 to a new conclusion date in June, 2008. As a result, there has been a reduction in spare parts purchases from the customer of approximately $1,139,000 for the year ended December 31, 2007.

        Foreign sales were approximately $5,144,000 for the year ended December 31, 2007, compared to $7,018,000 for the year ended December 31, 2006, a decrease of $1,874,000, or 26.7%. The decrease in foreign sales was principally due to a decrease in the sale of machines of approximately $1,668,000, both to customers in Europe and in Asia, and a decrease in the sale of spare parts of approximately $206,000.

Cost of Goods Sold

        Cost of goods sold for the year ended December 31, 2007 was approximately $5,646,000, or 43.46% of revenue, compared to $7,001,000, or 44.72% of revenue, for the comparable prior year. The decrease in cost of goods sold in absolute dollars for the year ended December 31, 2007 reflects the overall decrease in sales. Our major product lines have different profit margins, as well as multiple profit margins within each product line. The decrease in cost of goods sold as a percentage of sales is attributable to both a decrease in sales by our distributors in Canada and Japan, who purchase machines and spare parts at a discount, and an increase in the average sales price per unit compared to the previous year.

25

Research and Development Expenses

        Research and development expenses for the year ended December 31, 2007 were approximately $1,863,000, compared to $1,763,000 for the comparable prior year, an increase of approximately $100,000, or 5.67%. The increase in research and development expenses was primarily due to a planned increase in payroll and related costs of $40,000, an increase in development costs related to product enhancement costs of approximately $37,000, and an increase in consultants costs of approximately $40,000, partially offset by a decrease in test supply costs of approximately $15,000.

Selling Expenses

        Selling expenses for the year ended December 31, 2007 were approximately $3,584,000, compared to $2,985,000 for the comparable prior year, an increase of $599,000, or 20.1%. The increase is primarily attributable to an increase in outside commissions of approximately $272,000, a planned increase in payroll and related costs of approximately $86,000, an increase in advertising expenses of approximately $65,000, an increase in travel & entertainment expenses of approximately $50,000 and an increase in occupancy costs of approximately $36,000.

        The significant increase in commission expense results from an increase in the sale of machines and spare parts by commissioned direct sales personnel and indirect sales representatives, with a decrease in non-commissionable sales, primarily to a major customer and distributors in Canada and Japan. Commissionable sales were 75.1% of total sales for the year ended December 31, 2007, versus 48.9% for the comparable period in 2006.

General and Administrative Expenses

        General and administrative expenses for the year ended December 31, 2007, were approximately $3,081,000, compared to $2,701,000 for the comparable prior year, an increase of $380,000, or 14.1%. The increase in general and administrative expenses is principally due to an increase in recruitment costs of approximately $144,000, primarily in connection with the hiring of a new Chief Executive Officer, an increase in consulting costs of approximately $140,000, principally due to the utilization of outside professionals to assist in our compliance with Sarbanes-Oxley regulations, an increase in public relations costs of approximately $65,000, an increase in corporate expenses of approximately $41,000, and an increase in occupancy costs of approximately $40,000. The total increase was partially offset by a decrease in accounting and legal of approximately $39,000. The increase in corporate expenses was principally due to our adoption of SFAS 123R as of January 1, 2006, and recognizing compensation expense in conjunction with share based payments to employees and directors for a total annual amount of $155,000, versus $130,000 for the year ended December 31, 2006.

Interest Income and Expense

        Interest expense for the year ended December 31, 2007 was approximately $20,000 compared to $35,000 for the comparable prior year, a decrease of approximately $15,000, or 42.9%. The decrease is due to the net pay down of the line of credit and a reduction of the term loan with our lender.

        Interest income for the year ended December 31, 2007 was approximately $64,000 compared to $50,000 for the comparable prior year, an increase of $14,000, or 28.0%. The increase is due to the increase in cash available for investing.

Income Tax Provision

        The Company has incurred a three year cumulative year loss of $1,219,000 for the period ended December 31, 2007, and in accordance with SFAS 109, a three year cumulative loss represents significant negative evidence to consider the basis to determine whether a deferred tax asset is

26

realizable. This fact generally precludes relying on projections of future taxable income to support the recovery of deferred tax assets. Consequently, the Company decided to apply the full valuation allowance against deferred taxes due to uncertainty regarding the realization of the deferred taxes in the near future.

        For the year ended December 31, 2007, the Company recognized a tax provision of approximately $369,000, reflecting the application of the full valuation allowance provided against deferred assets generated the prior years.

        The tax benefit or provision recognized for the years ended December 31, 2006 and 2005, respectively, has been based upon changes in the valuation reserve for deferred tax asset accounts. For the year ended December 31, 2006, we recognized a tax benefit of approximately $58,000. For the year ended December 31, 2005, we recognized a tax provision of approximately $185,000.

Results of Operations

Year Ended December 31, 2006 vs. December 31, 2005

Revenues

        Total revenues for the year ended December 31, 2006 were approximately $15,654,000, as compared to revenues of $11,645,000 for the comparable prior year, an increase of approximately $4,009,000, or 34.4%.

        North American sales for the year ended December 31, 2006 increased to approximately $8,636,000, a 43.3% increase, as compared to sales of approximately $6,028,000 for the year ended December 31, 2005. The increase in North American sales was principally due to an increase in the sale of machines of approximately $2,922,000, partially offset by a decrease in the sale of spare parts of approximately $314,000. Foreign sales were approximately $7,018,000 for the year ended December 31, 2006, compared to $5,617,000 for the year ended December 31, 2005, an increase of $1,401,000, or 24.9%. The increase in foreign sales was principally due to an increase in the sale of machines of approximately $1,466,000, partially offset by a decrease in the sale of spare parts of approximately $65,000. The overall increase in sales was due to two factors: (i) the number of machines sold increased over 2005, and (ii) we instituted an overall price increase of 10% for standard machines effective in the first quarter of fiscal year 2006.

Cost of Goods Sold

        Cost of goods sold for the year ended December 31, 2006 was approximately $7,001,000, or 44.7% of revenue, compared to $5,918,000, or 50.8% of revenue, for the comparable prior year. The increase in cost of goods sold in absolute dollars for the year ended December 31, 2006, reflects the overall increase in sales. Our major product lines have different profit margins, as well as multiple profit margins within each product line. The decrease in cost of goods sold as a percentage of sales is attributable to: (i) an average price increase of 10% for standard machines effective in the first quarter of fiscal year 2006, (ii) a higher volume of machines sold, and (iii) a product mix having more favorable overall gross margins. In addition, we also sold a non-standard piece of equipment (the "Non-Standard Equipment") in the year ended December 31, 2005 at a selling price which approximated the cost of the equipment resulting in a higher cost of goods as a percentage of revenues for that period. This Non-Standard Equipment was built and supplied to demonstrate certain advanced features and capabilities that are now offered as optional features on the M700 line of equipment. Cost of goods sold for products other than the Non-Standard Equipment was 49.6% in 2005.

27

Research and Development Expenses

        Research and development expenses for the year ended December 31, 2006 were approximately $1,763,000, compared to $1,702,000 for the comparable prior year, an increase of approximately $61,000, or 3.6%. The increase in research and development expenses was primarily due to a planned increase in payroll and related costs of approximately $167,000, and an increase in test supplies of approximately $29,000, partially offset by a decrease in development costs of approximately $78,000, and a decrease in consultant's costs of approximately $77,000.

Selling Expenses

        Selling expenses for the year ended December 31, 2006 were approximately $2,985,000, compared to $2,412,000 for the comparable prior year, an increase of $573,000, or 23.8%. The increase is primarily attributable to an increase in payroll and related expenses of approximately $270,000, an increase in outside commissions of approximately $222,000, and an increase in delivery costs of approximately $55,000, partially offset by a decrease in travel and related costs of approximately $31,000.

General and Administrative Expenses

        General and administrative expenses for the year ended December 31, 2006 were approximately $2,701,000, compared to $2,384,000 for the comparable prior year, an increase of $317,000, or 13.3%. The increase in general and administrative expenses is principally due to a planned increase in payroll of approximately $157,000, an increase in corporate expenses of approximately $141,000, and an increase in professional fees of approximately $121,000, partially offset by a decrease in consultant costs of approximately $86,000 and a decrease in occupancy costs of $29,000. The increase in corporate expenses was principally due to our adoption of SFAS 123R as of January 1, 2006, and recognizing compensation expense in conjunction with share based payments to employees and directors in the amount of $130,000. The increase in professional fees is partially due to utilization of outside professionals to improve our financial reporting, corporate governance and internal controls. The decrease in consulting costs is the result of the expiration of a one-year consulting agreement which expired on December 31, 2005.

Interest Income and Expense

        Interest expense for the year ended December 31, 2006 was approximately $35,000 compared to $59,000 for the comparable prior year, a decrease of approximately $24,000, or 40.7%. The decrease is due to the net pay down of the line of credit and a reduction of the term loan with our lender.

        Interest income for the year ended December 31, 2006 was approximately $50,000 compared to $26,000 for the comparable prior year, an increase of $24,000, or 92.3%. The increase is due to the increase in cash available for investing.

Income Tax Provision

        For the year ended December 31, 2006, we recognized a tax benefit of approximately $58,000. For the year ended December 31, 2005, we recognized a tax provision of approximately $185,000. The tax benefit and tax provision recognized for the years ended December 31, 2006 and 2005, respectively, are based upon our valuation of the deferred tax asset accounts.

28

Liquidity and Capital Resources

        As of December 31, 2007, we had approximately $756,000 in cash and cash equivalents, compared to $1,860,000 as of December 31, 2006. For the year ended December 31, 2007, we used cash from operations of approximately $1,040,000 to fund our net loss, our decrease in current liabilities, and an increase in inventories, partially offset by a decrease in trade receivables and prepaid expenses.

        For the year ended December 31, 2006, we had approximately $1,860,000 in cash and cash equivalents, compared to $1,452,000 as of December 31, 2005. For the year ended December 31, 2006, we generated cash from operations of approximately $649,000 from income from operations and an increase in current liabilities, partially offset by the funding of our increase in trade accounts receivable and inventory. For the year ended December 31, 2005, we used cash from operations of approximately $396,000 to fund our net loss, and our decrease in current liabilities, partially offset by a decrease in receivables, inventories and other current assets. For the years ended December 31, 2007, 2006, and 2005, we used cash from investing activities of approximately $176,000, $57,000, and $96,000, respectively, for the purchase of capital equipment.

        For the year ended December 31, 2007, we provided cash from financing activities of approximately $112,000 primarily as a result of $262,000 of current draws on the revolver loan, the issuance of common stock for options exercised, and proceeds from stock issued from the employee stock purchase plan partially offset by repayments of our term loan. For the year ended December 31, 2006, we used cash from financing activities of approximately $184,000, primarily as a result of repayments of our term loan, offset by the issuance of common stock for options exercised and from proceeds from stock issued from the employee stock purchase plan. For the year ended December 31, 2005, we used cash from financing activities of approximately $84,000 primarily as a result of repayments on our term loan; partially offset by the issuance of common stock for options exercised, from proceeds from stock issued from the employee stock purchase plan, and the collection of a note receivable.

        As of December 31, 2007, we maintain a revolving credit facility with Banknorth, N.A., (the Lender) providing us with a $1,000,000, revolving credit line that is subject to repayment on demand by the Lender. As of December 31, 2007, our balance due was $262,000 under our revolving credit line. We also have a $1,000,000 four-year term loan, that had a balance of $62,000 at December 31, 2007, which we paid in full as of March 4, 2008.

        Under the terms of the loan agreement, we have two covenants that we must meet on an annual basis. As of December 31, 2007, we were not in compliance with the debt service coverage ratio covenant of our Credit facility with the lender. On March 5, 2008, we obtained a waiver from the lender for this covenant. The second covenant required us to have a senior debt no more than four times its capital base; this covenant was met for year end 2007. Our ability to continue planned operations is dependent upon access to financing which is potentially impacted by our ability to achieve future compliance with financial covenants. We are currently in discussions with the Lender regarding obtaining a new term loan facility and an increase in the revolving credit line.

        Our contractual obligations as of December 31, 2007 are as follows:

			Payable In
(in thousands)	Total as of December 31, 2007
			2008		2009		2010		2011		2012
Long-term debt	$	62	$	62			$	—	$	—	$	—
Operating leases		1,737		457		441		442		373		24
Capital leases		3		3		—		—		—		—
	$	1,802	$	522	$	441	$	442	$	373	$	24

29

        Assuming that there is no significant change in our business, we believe that cash flows from operations, together with the credit facility, and the existing cash balances, will be sufficient to meet our working capital requirements for at least the next twelve months.

Off-Balance Sheet Arrangements

        We are not a party to any off-balance sheet arrangements.

Critical Accounting Policies

        Our significant accounting policies are summarized in Note 1 to our consolidated financial statements. However, certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our consolidated financial statements. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information provided by our strategic partners and information available from other outside sources, as appropriate. Actual results may differ significantly from the estimates contained in our consolidated financial statements. Our critical accounting policies are as follows:

•

Revenue Recognition.  We recognize revenue in accordance with Staff Accounting Bulletin ("SAB" No. 104, "Revenue Recognition in Financial Statements"). Revenue is recognized when all of the following criteria are met: i) persuasive evidence of an arrangement exists, ii) delivery has occurred, iii) the price to the customer is fixed and determinable, and iv) collectibility is reasonably assured. In revenue transactions where support services are requested, revenue is recognized on shipment since the support service obligation is not essential to the functionality of the delivered products. Revenue transactions involving non-essential support services obligations are those which can generally be completed in a short period of time at insignificant cost and the skills required to complete these support services are not unique to us and in many cases can be provided by third parties or the customers. The customer's purchase obligations are not contingent upon performance of support services, if any, by us. Proceeds received in advance of product shipment are recorded as customer advances in the consolidated balance sheets. Returns and customer credits are infrequent and recorded as a reduction to sales. Rights of returns are not included in sales arrangements. Discounts from list prices are recorded as a reduction to sales. On occasion, we provide machines for rent by customers. Income for the rental of equipment is recognized on a straight-line basis over the rental term. Rental income and product sales are classified in revenues in the consolidated statement of operations.



•

Accounts Receivable Valuation.  We perform various analyses to evaluate accounts receivable balances and record an allowance for bad debts based on the estimated collectibility of the accounts such that the amounts reflect estimated net realizable value. If actual uncollectible amounts significantly exceed the estimated allowance, our operating results would be significantly and adversely affected.



•

Inventory Valuation.  We value our inventory at the lower of our actual cost or the current estimated market value. We regularly review inventory quantities on hand and inventory commitments with suppliers and record a provision for excess and obsolete inventory based primarily on our historical usage for the prior twenty-four month period. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated change in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.



•

Product Warranties.  Our products are generally sold with a twelve month warranty provision that requires us to remedy deficiencies in quality or performance of our products at no cost to our

30

customers only after it has been determined that the cause of the deficiency is not due to the actions of the machine operator or product used in the machine. We have established a policy for replacing parts that wear out or break prematurely. The policy called for replacing the parts or repairing a machine within one year of the sale. Commencing in May of 2006, we amended our warranty by limiting to a period of 90 days our warranty coverage on certain critical wear items. We are now selling more advanced processor production systems than past years that may require more costly parts. A warranty reserve balance was established during the year ended December 31, 2005. We believe the reserve balance in the amount of $54,000 to be adequate as of December 31, 2007.

Recent Accounting Pronouncements

        In June 2006, The Financial Accounting Standards Board ("FASB") issued FASB Interpretation "Accounting for Uncertainty in Income Taxes," an interpretation of SFAS No. 109 ("FIN 48"). FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprise's financial statements. The Interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the more likely than not recognition criteria, FIN 48 requires the tax position be measured at the largest amount of benefit greater than fifty percent (50%) likely of being realized upon ultimate settlement. Effective January 1, 2007, we adopted FIN 48. and it did not have a material effect on our financial position and results of operations.

        In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." This new standard provides guidance for using fair value to measure assets and liabilities. The FASB believes SFAS No. 157 also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Adoption of SFAS No. 157 is not expected to have a material impact on our results of operations or financial position.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company's choice to use fair value on its earnings. SFAS No. 159 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. SFAS No. 159 does not eliminate disclosure requirements of other accounting standards, including fair value measurement disclosures in SFAS No. 157. This Statement is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007. Adoption of SFAS No. 159 is not expected to have a material impact on our results of operations or financial position.

        In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS") No. 141 (R)") SFAS No. 141 (R) requires an acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination,. SFAS No. 141 (R) is effective for fiscal years after December 15, 2008. We

31

expect to adopt SFAS No. 141 (R) on January 1, 2009, and we do not expect it to have a material effect on operations.

        In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in consolidated Financial Statements" ("SFAS No. 160"). SFAS No. 160 clarifies that a non-controlling or minority interest in a subsidiary is considered an ownership interest and accordingly, requires all entities to report such interests in subsidiaries as equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. We expect to adopt SFAS No. 160 on January 1, 2009, and we do not expect it to have a material effect on operations.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        Our financial instruments are generally not subjected to changes in market value as a result of changes in interest rates due to the short maturities of the instruments. Our fixed rate debt is not exposed to cash flow or interest rate changes but is exposed to fair market value changes in the event of refinancing this fixed rate debt. We do not have significant exposure to fluctuations in foreign exchange rates.

        We had an outstanding balance of $262,000 with a variable rate of 7.69% (equivalent to prime plus 0.44%) for borrowings outstanding under our revolving credit agreement at December 31, 2007. We estimate that an adverse change in the interest rates for this variable debt would not have a material effect on our earnings and cash flows on an annual basis.

        For additional information about our financial instruments, see Note 7 to the Consolidated Financial Statements.

32

Item 8.    Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of MFIC Corporation:

        We have audited the accompanying consolidated balance sheets of MFIC Corporation and subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years ended December 31, 2007. These 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. The financial statements of MFIC Corporation and subsidiaries for the one year ended December 31, 2005 were audited by other auditors whose report dated March 1, 2006, expressed an unqualified opinion on those financial statements.

        We conducted our audits in accordance with the auditing 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial position of MFIC Corporation and subsidiaries at December 31, 2007 and 2006 and the consolidated results of their operations and their cash flows for the two years ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

/s/ UHY LLP

Boston, Massachusetts
March 18, 2008

33

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of MFIC Corporation:

        We have audited the accompanying consolidated statements of operations, changes of stockholder's equity and cash flows of MFIC Corporation and subsidiaries for the year ended December 31, 2005. These 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 audit in accordance with the auditing 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated results of operations and cash flows of MFIC and subsidiaries for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ Brown & Brown, LLP

Boston, Massachusetts
March 1, 2006

34

MFIC CORPORATION

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

				December 31,
				2007			2006
ASSETS
Current assets:
	Cash and cash equivalents			$	756		$	1,860
	Accounts receivable, net of allowance of $41 and $38 as of December 31, 2007 and 2006, respectively				2,582			3,253
	Inventories				2,353			2,025
	Prepaid and other current assets				281			349
	Deferred income taxes				—			369
		Total current assets			5,972			7,856
Property and equipment, net					325			303
Patents and licenses, net					60			66
		Total assets		$	6,357		$	8,225
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Revolving credit line			$	262		$	—
	Current maturities of long-term debt and obligations under capital lease				65			259
	Accounts payable				129			247
	Accrued expenses				725			818
	Customer advances				409			853
	Income taxes payable				—			36
		Total current liabilities			1,590			2,213
Long-term liabilities:
	Long-term debt and obligations under capital leases, net of current maturities				—			65
		Total liabilities			1,590			2,278
Commitments (Note 12)
Stockholders' equity:
	Common stock; $.01 par value; 20,000,000 shares authorized; 10,517,178 and 10,349,812 shares issued; 10,256,732 and 10,089,366 shares outstanding as of December 31, 2007 and 2006, respectively				105			104
	Additional paid-in capital				17,378			17,052
	Accumulated deficit				(12,028	)		(10,521	)
	Treasury stock, 260,446 shares, at cost, as of December 31, 2007 and 2006				(688	)		(688	)
		Total stockholders' equity			4,767			5,947
			Total liabilities and stockholders' equity	$	6,357		$	8,225

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

35

MFIC CORPORATION

Consolidated Statements of Operations

(in thousands, except share and per share amounts)

		Years Ended December 31,
		2007			2006			2005
Revenues		$	12,992		$	15,654		$	11,645
Cost of sales			5,646			7,001			5,918
Gross profit			7,346			8,653			5,727
Operating expenses:
	Research and development		1,863			1,763			1,702
	Selling		3,584			2,985			2,412
	General and administrative		3,081			2,701			2,384
			8,528			7,449			6,498
(Loss) income from operations			(1,182	)		1,204			(771	)
Interest expense			(20	)		(35	)		(59	)
Interest income			64			50			26
(Loss) income before income tax provision			(1,138	)		1,219			(804	)
Income tax provision (benefit)			369			(58	)		185
Net (loss) income		$	(1,507	)	$	1,277		$	(989	)
Net (loss) income per common share:
	Basic	$	(0.15	)	$	0.13		$	(0.10	)
	Diluted	$	(0.15	)	$	0.12		$	(0.10	)
Weighted average number of common and common equivalent shares outstanding:
	Basic		10,183,376			10,012,685			9,756,221
	Diluted		10,183,376			10,611,635			9,756,221

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

36

MFIC CORPORATION

Consolidated Statements of Cash Flows

(in thousands)

					Years Ended December 31,
					2007			2006			2005
Cash flows from operating activities:
	Net (loss) income				$	(1,507	)	$	1,277		$	(989	)
	Adjustments to reconcile net (loss) income to net cash flows:
		Income tax provision (benefit)				369			(68	)		185
		Depreciation and amortization				170			174			187
		Allowance for doubtful accounts				3			(5	)		30
		Provision for obsolete inventory				8			9			22
		Share-based payments to consultants				—			—			119
		Acceleration of stock options				—			—			65
		Share-based compensation				218			141			22
		Changes in assets and liabilities:
			Accounts receivable			668			(1,383	)		162
			Other current assets			—			(116	)		45
			Inventories			(335	)		(185	)		17
			Prepaid expenses			56			61			(50	)
			Accounts payable			(118	)		131			(5	)
			Accrued expenses			(128	)		376			(47	)
			Customer advances			(444	)		237			(159	)
				Net cash flows (used in) provided by operating activities		(1,040	)		649			(396	)
Cash flows from investing activities:
	Purchase of property, plant and equipment					(176	)		(57	)		(96	)
				Net cash flows used in investing activities		(176	)		(57	)		(96	)
Cash flows from financing activities:
	Borrowings on revolver loan					262			—			—
	Principal repayments on long-term debt and obligations under capital leases					(259	)		(288	)		(288	)
	Repayment of subordinated debt from related party					—			—			(6	)
	Proceeds from notes receivable					—			—			91
	Net proceeds from issuance of common stock					109			104			119
				Net cash flows provided by (used in) financing activities		112			(184	)		(84	)
Net change in cash and cash equivalents						(1,104	)		408			(576	)
Cash and cash equivalents at beginning of period						1,860			1,452			2,028
Cash and cash equivalents at end of period					$	756		$	1,860		$	1,452
Supplemental Disclosure of Cash Flow Information:
	Assets acquired in exchange for notes				$	—		$	—		$	89
	Interest received					63			50			26
	Interest paid					20			34			61
	Taxes paid					—			10			—

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

37

MFIC Corporation

Consolidated Statements of Changes in Stockholders' Equity

(in thousands)

	Common Stock									Treasury Stock
(in thousands)	Number of Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Number of Shares	Amount			Total Stockholders' Equity
Balance at January 1, 2005	9,922	$	99	$	16,486		$	(10,809	)	260	$	(688	)	$	5,088
Issuance of common stock in connection with exercise of stock options	129		1		76										77
Issuance of common stock under employee stock purchase plan	23		1		42										43
Issuance of common stock in connection with exercise of warrants	—				119										119
Correction—exercised options	70		1		(1	)									—
Compensation expense related to director stock options	22				22										22
Compensation expense related to acceleration of stock options	—				65										65
Net loss								(989	)						(989	)
Balance at December 31, 2005	10,166	$	102	$	16,809		$	(11,798	)	260	$	(688	)	$	4,425
Issuance of common stock in connection with exercise of stock options	144		2		69										71
Issuance of common stock under employee stock purchase plan	29				33										33
Compensation expense related to stock options					130										130
Compensation expense related to director stock options	11				5										5
Compensation expense related to employee purchase plan					6										6
Net income								1,277							1,277
Balance at December 31, 2006	10,350	$	104	$	17,052		$	(10,521	)	260	$	(688	)	$	5,947
Issuance of common stock in connection with exercise of stock options	103		1		74										75
Issuance of common stock under employee stock purchase plan	28				34										34
Compensation expense related to stock options					154										154
Non-cash share based compensation expense—former officer	36				61										61
Compensation expense related to employee purchase plan					3										3
Net loss								(1,507	)						(1,507	)
Balance at December 31, 2007	10,517	$	105	$	17,378		$	(12,028	)	260	$	(688	)	$	4,767

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

38

MFIC

Notes to Consolidated Financial Statements

1. Organization and Summary of Significant Accounting Policies

Organization

        MFIC Corporation ("MFIC" or the "Company"), through its wholly-owned subsidiary, Microfluidics Corporation ("Microfluidics"), its operating division, operates in one segment, specializing in producing and marketing a broad line of proprietary fluid materials processing systems used for a variety of fluid grinding, mixing, milling, and blending applications across a variety of industries and for use in numerous applications within those industries. Microfluidizer materials processor systems are produced at Microfluidics.

Principles of Consolidation

        The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("Generally Accepted Accounting Principles") 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. Actual results could differ from those estimates.

Revenue Recognition

        Revenue Recognition. The company recognizes revenue in accordance with Staff Accounting Bulletin ("SAB" No. 104, "Revenue Recognition in Financial Statements". Revenue is recognized when all of the following criteria are met: i) persuasive evidence of an arrangement exists, ii) delivery has occurred, iii) the price to the customer is fixed and determinable, and iv) collectibility is reasonably assured. In revenue transactions where support services are requested, revenue is recognized on shipment since this supportive service obligation is not essential to the functionality of the delivered products. Revenue transactions involving non-essential support services obligations are those which can generally be completed in a short period of time at insignificant cost and the skills required to complete these installations are not unique to the Company and in many cases can be provided by third parties or the customers. The customer's purchase obligations are not contingent upon performance of support services, if any, by the Company. Proceeds received in advance of product shipment are recorded as customer advances in the consolidated balance sheets. Returns and customer credits are infrequent and recorded as a reduction to sales. Rights of returns are not included in sales arrangements. Discounts from list prices are recorded as a reduction to sales. On occasion, the Company provides machines for rent by customers. Income for the rental of equipment is recognized on a straight-line basis over the rental term. Rental income and product sales are classified in revenues in the consolidated statement of operations.

39

MFIC

Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

Cash and Cash Equivalents

        The Company considers the following highly liquid securities to be cash equivalents: (i) securities with initial maturity of 90 days or less, at the time of acquisition and (ii) securities with initial maturities greater than 90 days whose terms include a demand feature allowing the Company to liquidate the investment prior maturity.

Allowance for Doubtful Accounts

        The Company maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customer's financial condition and current economic trends. If the actual uncollected amounts significantly exceed the estimated allowance, the Company's operating results would be significantly adversely affected.

Inventories

        Inventories consist of material, labor and manufacturing overhead and are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis (FIFO).

        The Company periodically reviews quantities of inventory on hand and compares these amounts to expected usage of each particular product line. Reserves are established to record provisions for slow moving inventories in the period in which it becomes reasonably evident that the item is not useable, salable or the market value is less than cost.

Property and Equipment

        The Company's property and equipment is recorded at cost. Depreciation is computed using the straight-line method, based upon estimated useful lives of 3 to 7 years. Leasehold improvements are amortized using the straight-line method based upon the shorter of the estimated useful lives or remaining life of the lease. Expenditures for maintenance and repairs are expensed as incurred. Upon retirement or sale of property and equipment, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resulting gain, or loss is credited or charged to operations.

Long-Lived Assets

        In accordance with Statements of Financial Accounting Standards ("SFAS") No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviews long-lived assets and all amortizing intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets.

40

MFIC

Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

Patents, Licenses and Other Intangible Assets

        Patents, patent applications and rights are stated at acquisition cost. Amortization is recorded using the straight-line method over the shorter of the legal lives or useful life of the patents. Patents, licenses and other intangible assets are being amortized over a period of 3 to 17 years.

Reserve for Warranty Expenses

        Our products are generally sold with a twelve month warranty provision that requires us to remedy deficiencies in quality or performance of our products at no cost to our customers only after it has been determined that the cause of the deficiency is not due to the actions of the machine operator or product used in the machine. The Company has established a policy for replacing parts that wear out or break prematurely. The policy called for replacing the parts or repairing a machine within one year of the sale. Commencing in May of 2006, the Company amended its warranty by limiting to a period of 90 days its warranty coverage on certain critical wear items. The Company is now selling more advanced processor production systems than past years that may require more costly parts. A reserve balance was established during the year ended December 31, 2005. We believe the reserve balances in the amount of $54,000 and $74,000 as of December 31, 2007; and December 31, 2006, respectively to be adequate.

Research and Development Expenses

        The Company charges research and development expenses to operations as incurred.

Earnings (Loss) per Share

        Basic and diluted net loss per share is presented in conformity with SFAS No. 128, "Earnings per Share," for all periods presented. In accordance with SFAS No. 128, basic and diluted net loss per common share was determined by dividing net income or loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Options to purchase 1,585,427, 1,561,086, and 1,718,925 shares of common stock were outstanding for the years ended December 31, 2007, 2006, and 2005, respectively. Basic and diluted net loss per share is $.15, for the year ended December 2007. Basic and diluted net income per share is $.13 and $.12 respectively for the year ended December 31, 2006. Basic and diluted net loss per share are $.10 for the year ended December 31, 2005.

Fair Value of Financial Instruments

        The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short term nature of these accounts. The Company's bank debt, because it carries a variable interest rate, is stated at its approximate fair market value.

Income Taxes

        The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets or liabilities are computed based on the differences between the financial statement and income tax bases of assets and liabilities using the effective tax rate.

41

MFIC

Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

Deferred income tax expense or credits are based on changes in the asset or liability from period to period. These differences are temporary and are expected to reverse in the following periods. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the results of operations in the period that includes the enactment date under the law. The Company records a valuation allowance to reduce the carrying amounts of deferred assets if it is "more likely than not" that such assets will be realized.

        During the first quarter of 2007, the Company adopted FAS Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48), which supplements SFAS No. 109 "Accounting for Income Taxes" (SFAS No. 109), by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires that the tax effect(s) of a position be recognized only if it is "more likely than not" to be sustained based solely in its technical merits as of a reporting date.

        The "more likely than not" threshold represents a positive assertion by management that the Company is entitled to the economic benefits of a tax position. If a tax position is not considered "more likely than not" to be sustained based solely on its technical merits, no benefits of tax position are to be recognized. The 'more likely than not" threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, the Company is required to adjust their financial statements to reflect only those tax positions that are "more likely than not" to be sustained.

        The Company has incurred a three year cumulative year loss for the period ended December 31, 2007, and in accordance with SFAS 109, a three year cumulative loss represents significant negative evidence to consider the basis to determine whether a deferred tax asset is realizable. This fact generally precludes relying on projections of future taxable income to support the recovery of deferred tax assets. Consequently, the Company decided to apply the full valuation allowance against deferred taxes due to uncertainty regarding the realization of the deferred taxes in the near future.

        For the year December 31, 2007, the Company recognized a tax provision of approximately $369,000, reflecting the application of the full valuation allowance provided against deferred assets generated in prior years. The tax benefit or provision recognized for the years ended December 31, 2006 and 2005, respectively, has been based upon changes in the valuation reserve for deferred tax asset accounts. For the year ended December 31, 2006, we recognized a tax benefit of approximately $58,000. For the year ended December 31, 2005 we recognized a tax provision of approximately $185,000.

Stock-Based Compensation

        In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment—An Amendment of FASB Statements No. 123 and 95," which requires all companies to measure compensation cost for all share-based payments, including employee stock options, at fair value. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123, "Accounting for Stock-Based Compensation." However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value over the requisite service period. Pro forma disclosure is no longer an alternative. In March 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107, which expressed the views of the SEC

42

MFIC

Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

regarding the interaction between SFAS No. 123R and certain rules and regulations of the SEC. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as expected volatility and expected term.

        Prior to January 1, 2006, the Company applied the pro forma disclosure requirements under SFAS No. 123 and accounted for its stock-based employee compensation plans using the intrinsic value method under the recognition and measurement provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, no stock-based employee compensation cost was recognized in the statement of operations for the year ended December 31, 2005, related to the grant of stock options, as all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. However, in connection with the acceleration of vesting of certain stock options, as further described below, the Company recognized approximately $65,000 of compensation expense for "in-the-money" options.

        Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, using the modified prospective transition method. Under this transition method, compensation cost recognized in the statement of operations for the year ended December 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123; and (b) compensation cost for all share-based payments granted, modified or settled subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. In accordance with the modified prospective transition method, results for prior periods have not been restated.

        The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted for the year ended December 30, 2005. Since stock-based compensation expense for the year ended December 31, 2006 was calculated under the provisions of SFAS No. 123R, there is no disclosure of pro forma net income and net income per share for that period. For purposes of the pro forma disclosure for the year ended December 31, 2005, set forth in the table below, the value of the options is estimated using a Black-Scholes option pricing model.

43

MFIC

Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

        Had compensation cost for the Company's stock option grants been determined consistent with SFAS 123, the Company's net loss and net loss per share would approximate the pro forma amounts below:

(in thousands, except per share data)	Year Ended December 31, 2005
Net loss, as reported	$	(989	)
Less: Stock-based employee compensation expense determined under fair value based method for all employee awards, net of related tax effects		(130	)
Pro forma, net loss	$	(1,119	)
Basic net loss per share:
As reported	$	(0.10	)
Pro forma	$	(0.11	)
Diluted net loss per share:
As reported	$	(0.10	)
Pro forma	$	(0.11	)

        For the years ended December 31, 2007, and 2006, the Company recognized stock-based employee compensation expense of $215,000 and $130,000 respectively, which is included in General and Administrative expense of the Consolidated Statement of Operations. For the year ended December 31, 2007, the total expense balance includes $61,000 of compensation expense attributed to the exercise of stock options by the Company's former Chairman and CEO (see Note 11). The Company did not capitalize any stock-based compensation.

        The Company has established a valuation allowance for net deferred tax assets; accordingly, no significant tax benefit on the stock-based compensation was recorded during the year ended December 31, 2007.

        On December 31, 2005, upon recommendation of its Compensation Committee, the Company approved the accelerated vesting of all of the then outstanding unvested stock options ("Options"), pursuant to the Company's 1988 Employee Stock Option Plan, to purchase shares of common stock of the Company. Of the Options approved for acceleration, Options to purchase 480,915 shares of the Company's common stock became immediately exercisable on December 31, 2005. In connection with the acceleration of vesting, the Company recognized approximately $65,000 of compensation expense for "in-the-money" Options in the fourth quarter of fiscal 2005 as a one-time charge in accordance with APB No. 25. The remaining terms for each of the Options granted remain the same. With respect of the remaining Options to purchase 284,971 shares of the Company's common stock approved for acceleration, the option holders exercised their "opt-out" rights to forego acceleration. Accordingly, the Company recognized a non-cash compensation charge of approximately $87,000 in the year ended December 31, 2006 with regard to those Options. The decision to accelerate the vesting of these Options was made primarily to reduce non-cash compensation expense that would have been recorded in its income statement in the future periods upon the adoption of SFAS No. 123R on January 1, 2006.

44

MFIC

Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

        The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

        The fair value of each option granted during the years ended December 31, 2007, 2006 and 2005 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Years Ended December 31,
	2007		2006		2005
Dividend yield	None		None		None
Expected volatility	104.00		116.00		129.00
Risk-free interest rate	3.62	%	4.85	%	4.35	%
Expected life	5 years		5 years		5 years
Fair value of options granted	$1.16		$1.25		$2.07

        Dividend yield—The Company has never declared or paid any cash dividends on any of its capital stock and does not expect to do so in the foreseeable future. Accordingly, the Company uses an expected dividend yield of zero to calculate the grant-date fair value of a stock option.

        Expected volatility—The expected volatility is a measure of the amount by which the Company's stock price is expected to fluctuate during the expected term of options granted. The Company determines the expected volatility solely based upon the historical volatility of the Company's Common Stock over a period commensurate with the option's expected term. The Company does not believe that the future volatility of its Common Stock over an option's expected term is likely to differ significantly from the past.

        Risk-free interest rate—The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the option's expected term on the grant date.

        Expected life—The expected life of options granted represents the period of time for which the options are expected to be outstanding and is derived from the Company's historical stock option exercise experience and option expiration data.

        Other reasonable assumptions about these factors could provide different estimates of fair value. Future changes in stock price volatility, life of options, interest rates, forfeitures and dividend practices, if any, may require changes in our assumptions, which could materially affect the calculation of fair value.

        The weighted average fair value of stock options granted during the years ended December 31, 2007, 2006 and 2005 was $1.16, $1.25, and $2.07 per share, respectively. We estimate forfeitures related to options grants at an annual rate of 9% per year.

45

MFIC

Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

        Total unrecognized stock-based compensation expense related to unvested stock options, expected to be recognized over a weighted average period of 5 years, amounted to approximately $507,000 at December 31, 2007.

Recent Accounting Pronouncements

        In June 2006, The Financial Accounting Standards Board ("FASB"), issued FASB Interpretation "Accounting for Uncertainty in Income Taxes," an interpretation of SFAS No. 109, ("FIN 48"). FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprise's financial statements. The Interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the more likely than not recognition criteria, FIN 48 requires the tax position be measured at the largest amount of benefit greater than fifty percent (50%) likely of being realized upon ultimate settlement. Effective January 1, 2007, we adopted FIN 48 and it did not have a material effect on our financial position and results of operations.

        In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." This new standard provides guidance for using fair value to measure assets and liabilities. The FASB believes SFAS No. 157 also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Adoption of SFAS No. 157 is not expected to have a material impact on the Company's results of operations or financial position.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company's choice to use fair value on its earnings. SFAS No. 159 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. SFAS No. 159 does not eliminate disclosure requirements of other accounting standards, including fair value measurement disclosures in SFAS No. 157. This Statement is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007. Adoption of SFAS No. 159 is not expected to have a material impact on the Company's results of operations or financial position.

        In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 (revised 2007), "Business Combinations" (SFAS") No. 141 (R)") requires an acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination,. SFAS No. 141 (R) is effective for fiscal years after December 15,2008. We expect to

46

MFIC

Notes to Consolidated Financial Statements (Continued)

1. Organization and Summary of Significant Accounting Policies (Continued)

adopt SFAS No. 141 (R) on January 1, 2009, and we do not expect it to have a material effect on operations..

        In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in consolidated Financial Statements" ("SFAS No. 160"). SFAS No. 160 clarifies that a non controlling or minority interest in a subsidiary is considered an ownership interest and accordingly, requires all entities to report such interests in subsidiaries as equity in the consolidated financial statements. SFAS No. 160 in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. We expect to adopt SFAS No. 160 on January 1, 2009 and we do not expect it to have a material effect on operations.

2. Industry Segment, Geographic and Enterprise-Wide Reporting

        SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires companies to report selected information about operating segments, as well as enterprise-wide disclosures about products, services, geographic areas and major customers. Operating segments are determined based on the way management organizes its business for making operating decisions and assessing performance. The Company's chief decision-maker, as defined under SFAS No. 131, is the chief executive officer. The Company has determined that it conducts its operations in one business segment: the development, manufacture, marketing and sale of process and formulation equipment. The Company's sales are primarily to companies with processing needs in the chemical, pharmaceutical, food, cosmetic, and biotechnology industries. The Company has less than 1% of total assets in foreign countries. As a result, the financial information disclosed herein represents all of the material financial information related to the Company's principal operating segment.

        Approximate sales to customers by geographic markets, are as follows:

	Years Ended December 31,
(in thousands)
	2007		2006		2005
North America	$	7,848	$	8,636	$	6,028
Asia		2,800		3,525		4,100
Europe		2,344		3,493		1,517
	$	12,992	$	15,654	$	11,645

        The users of the Company's systems are in various industries, including the chemical, pharmaceuticals, food, cosmetic and biotechnology industries.

        Teva Pharmaceuticals Industries Ltd. (Teva) and its wholly-owned subsidiary, and Mizuho Industrial Co. Ltd. (Mizuho) accounted for 7.2% and 4.3% of the Company's revenues in 2007, respectively; 15.2% and 9.2%, respectively, in 2006; and 18.9% and 19.5%, respectively, in 2005.

        Mizuho, the Company's Japanese distributor of Microfluidizer processor equipment and spare parts, resells the Company's equipment to numerous end-users in Japan, none of which individually represents 10% or more of the Company's revenues. Two customers accounted for 12.9% and 9.7% of the trade accounts receivable as of December 31, 2007, respectively. Two customers accounted for 14.4% and 13.6% of the trade accounts receivable as of December 31, 2006, respectively. Two customers accounted for 10.8% and 10.7% of the trade accounts receivable as of December 31, 2005,

47

MFIC

Notes to Consolidated Financial Statements (Continued)

2. Industry Segment, Geographic and Enterprise-Wide Reporting (Continued)

respectively. A reduction or delay in orders from any of the Company's significant customers could have a material adverse effect on the Company's results of operations.

        The Company sells its products in various countries. The Company's sales in North America, including the United States, Canada, and Mexico, accounted for approximately 60.4% of the Company's revenues in 2007; approximately 55.2% of the Company's revenues in 2006; and approximately 51.8% of the Company's revenues in 2005 with almost all of those sales coming from United States and Canada. Sales to the rest of the world accounted for approximately 39.6% of the Company's revenues in 2007; approximately 44.8% of the Company's revenues in 2006; and approximately 48.2% of the Company's revenues in 2005. Sales through the Company's exclusive distributors in Japan accounted for approximately 4.3% of the Company's revenues in 2007; approximately 9.2% of the Company's revenues in 2006; and 19.5% of the Company's revenues in 2005. Sales through the Company's representative in Korea accounted for approximately 8.7% of the Company's revenues in 2007; approximately 9.5% of the Company's revenues in 2006; and 12.1% of the Company's revenues in 2005.

3. Inventories

        Inventories consist of the following:

	December 31,
(in thousands)
	2007			2006
Raw materials	$	2,140		$	1,957
Work-in progress		63			217
Finished goods		358			51
		2,561			2,225
Less: provision for excess inventory		(208	)		(200	)
	$	2,353		$	2,025

4. Property and Equipment

        Property and equipment consist of the following:

	December 31,
(in thousands)
	2007			2006
Furniture, fixtures and office equipment	$	686		$	546
Machinery, equipment and tooling		455			435
Leasehold improvements		96			94
		1,237			1,075
Less: accumulated depreciation and amortization		(912	)		(772	)
	$	325		$	303

        Depreciation expense for property and equipment for the years ended December 31, 2007, 2006 and 2005 was approximately $154,000, $160,000, and $173,000, respectively.

48

MFIC

Notes to Consolidated Financial Statements (Continued)

5. Intangibles and Other Assets

        In the last quarter of 2001, the Company capitalized approximately $65,000 of costs related to the Multiple-Stream Mixer High Pressure Reactor patent, with an additional $29,000 of costs related to this patent capitalized in 2004. These costs are being amortized over a 17-year period which we estimate to be the useful life for this asset. Amortization of these costs for the years ended December 31, 2007, 2006 and 2005 was approximately $6,000 each year.

        Costs incurred in connection with the debt refinancing that occurred on March 1, 2004 (See Note 7) are being amortized over four years, the initial term of the line of credit. The total of such costs was approximately $37,000. Amortization of these costs for the years ended December 31, 2007, 2006 and 2005 was approximately $10,000, $8,000, and $8,000 respectively.

6. Accrued Expenses

        Accrued expenses consist of the following:

	December 31,
(in thousands)
	2007		2006
Accrued expenses	$	273	$	240
Accrued wages and vacation pay		164		256
Accrued commissions		234		248
Accrued warranty		54		74
	$	725	$	818

7. Long-term Debt and Obligations Under Capital Lease

        Long-term debt and obligations under capital lease consist of the following:

		December 31,
(in thousands)
		2007			2006
Term loan		$	62		$	312
Obligations under capital lease			3			12
			65			324
Less: current portion			(65	)		(259	)
	Long-term debt, net of current portion	$	—		$	65

        On March 1, 2004, the Company and its Microfluidics Corporation subsidiary, as co-borrowers, entered into a revolving credit and term loan agreement with Banknorth, N.A. (the "Lender") providing the Company with a $2,000,000 demand revolving credit and four year term loan facility (the "Credit Facility"). The Credit Facility was comprised of (i) a $1,000,000 demand revolving line of credit (the "Revolving Credit Line"), and (ii) a $1,000,000 four year term promissory note (the "Term Loan") which was paid down in full as of March 3, 2008. The Revolving Credit Line obtains advances thereunder bearing interest at a rate equal to the prime rate (the Prime Rate for the United States borrowings form Banknorth, N.A. as publicly announced) (7.69% at December 31, 2007).

49

MFIC

Notes to Consolidated Financial Statements (Continued)

7. Long-term Debt and Obligations Under Capital Lease (Continued)

        All borrowings under the Revolving Credit Line were evidenced by a $1,000,000 demand promissory note (the "Revolving Note"), and (ii) a $1,000,000 term promissory note, amortized over a four year period but having a maturity date of March 3, 2008 and bearing a fixed interest rate of 5.67%. The Company and the Lender are currently in discussions regarding obtaining a new Term Loan Facility and an increase in the Revolving Credit Line.

        Loans under the Credit Facility are secured by a collateral pledge to the Lender of substantially all the assets of the Company and its subsidiaries. The Company's Microfluidics Corporation subsidiary guaranteed the Company's obligations to the Lender under the Credit Facility. The Company also pledged to the Lender all shares of Microfluidics Corporation owned by the Company. The Company is required to meet two covenants on an annual (calendar) basis as of December 31 of a given year as follows: (i) the Company's senior debt may not be more than four times the amount of its tangible capital base, and (ii) its debt service coverage ratio may not be less than 1.20 to 1. On November 20, 2006 the Company and the lender agreed to a modification of the definition of the Debt Service Coverage Ratio. The purpose of the modification was to eliminate significant non-cash items, such as stock-based employee compensation expense, from affecting the ratio.

        At December 31, 2007, the Company was not in compliance with the debt coverage ratio, and required a waiver from the lender, which was granted on March 5, 2008.

        Due to the subjective acceleration clause and the lock-box arrangement with the Lender, the Revolving Credit Line is classified as a current liability in the consolidated balance sheet. As of December 31, 2007 the outstanding balance on the Revolving Credit Line was $262,000. As of December 31, 2006 and 2005 there was no outstanding balance on the Revolving Credit Line. As of December 31, 2007, 2006 and 2005, the balance outstanding on the Term Loan was $62,000, $312,000 and $562,000, respectively.

        Obligations under capital lease consist of three (3) capitalized leases with bargain purchase options that the Company is obligated to pay over a two (2) year period.

        Future minimum capital lease payments required under the capital leases are as follows:

Years Ended December 31, (in thousands)
2008		4
Thereafter		—
		4
Less: interest expense		(1	)
Obligations under capital lease, net	$	3

8. Employee Benefit Plans

        The Company offers a 401(k) profit-sharing plan (the 401K Plan) to its employees. All Company and related entity employees who are eighteen (18) years of age and have completed one hour of service are eligible to participate in the 401K Plan. Employees may contribute from 1% to 20% of their compensation. The Company's contribution is discretionary, with contributions made from time to time as management deems advisable. The Company made no matching contributions during the years

50

MFIC

Notes to Consolidated Financial Statements (Continued)

8. Employee Benefit Plans (Continued)

ended December 31, 2007, 2006 and 2005. The Company also instituted a cafeteria plan in 1992, giving the employees certain pre-tax advantages on specific payroll deductions.

9. Income Taxes

        The provision (benefit) for income taxes consists of the following:

		Years Ended December 31,
(in thousands)
		2007		2006			2005
Current:
	Federal	$	—	$	21		$	—
	State		—		10			—
	Foreign		—		15			—
		$	—	$	46		$	—
Deferred:
	Federal	$	312	$	(88	)	$	141
	State		57		(16	)		44
	Foreign		—		—			—
		$	369	$	(104	)	$	185

        The deferred provision for the year ended December 31, 2007, is the result of an increase in the valuation allowance reserve that was recorded against the Company's deferred tax asset. The amount reported as an income tax benefit for the year ended December 31, 2006 is the result of a decrease to the valuation allowance reserve that was recorded against the Company's deferred tax assets.

        The total income tax provision (benefit) differs from the income tax at the statutory federal income tax rate due to the following:

		Years Ended December 31,
		2007		2006		2005
Federal income tax at statutory rate		34.0	%	34.0	%	34.0	%
State income taxes, net of federal benefits		5.3	%	6.3	%	6.3	%
Foreign		-2.0	%	0.0	%	0.0	%
Permanent adjustments		-5.4	%	4.2	%	-6.5	%
Net research and development and other tax credits		-5.0	%	0.0	%	-11.7	%
Valuation allowance		-58.7	%	-50.9	%	0.9	%
Other		-0.6	%	1.6	%	0.0	%
	Effective tax rate	-32.4	%	-4.8	%	23.0	%

51

MFIC

Notes to Consolidated Financial Statements (Continued)

9. Income Taxes (Continued)

        The following is a summary of the significant components of the Company's deferred tax assets and liabilities:

			December 31,
(in thousands)
			2007			2006
Deferred tax assets:
	Net operating loss carry forwards		$	3,384		$	3,186
	Research and development and other credits			66			79
	Accruals and allowances not currently deductible for tax purposes			168			169
	Depreciation and other			103			136
	Valuation allowance			(3,721	)		(3,201	)
		Total deferred tax assets	$	—		$	369

        As of December 31, 2007, the Company has available federal net operating loss carry forwards for income tax purposes of approximately $8,685,000, and state net operating loss carry forwards of approximately $5,814,000, which expire at various dates through 2027, federal research and development credit carry forwards of approximately $66,000 expiring in varying amounts during the period through 2021. Ownership changes, as defined in the Internal Revenue Code, may limit the amount of operating loss carry forwards that can be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years.

        The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying values and the tax basis on assets and liabilities. The Company regularly evaluates for recoverability its deferred tax assets and establishes a valuation allowance based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and implementation of tax-planning strategies.

        A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company has incurred a three year cumulative loss for the period ended December 31, 2007. In accordance with SFAS 109, a three year cumulative loss represents significant negative evidence to consider the basis to determine whether a deferred tax asset is realizable, and this fact generally precludes relying on projections of future taxable income to support the recovery of deferred tax assets. As a result of the Company's review of its available positive evidence supporting the deferred tax asset, the Company has established a valuation allowance for the full amount of the deferred tax asset as of December 31, 2007, due to uncertainty of realization. This resulted in an addition to the reserve balance in the amount of $369,000.

10. Stockholders' Equity

Private Placement

        On March 30, 2004, the Company completed a private placement of investment units (each unit consisting of one share of common stock and a 3-year warrant to purchase an additional ¹/2 share of common stock). A total of 1,426,616 units were sold, yielding gross proceeds of approximately $3,567,000. The units were priced at $2.50 each and the associated warrants to purchase 713,308 shares

52

MFIC

Notes to Consolidated Financial Statements (Continued)

10. Stockholders' Equity (Continued)

of common stock were exercisable at $3.05. Additionally, the placement agent for the offering received five-year warrants to purchase 213,992 shares of common stock at an exercise price of $3.20 per share. The investment units and warrants were issued pursuant to the exemption to the registration requirements of the Securities Act of 1933, as amended, available under Section 4(2) of that Act. The purchasers of the units (the "Purchasers") and the placement agent were "accredited investors" pursuant to the rules of the Securities and Exchange Commission. The Company filed a registration statement on Form SB-2, which was declared effective on May 13, 2004, for purposes of registering the shares of common stock underlying the units and warrants. The warrants associated with the purchases of these units expired on March 30, 2007. In addition, the investor warrants provided for certain adjustments to the exercise price upon the issuance by the Company of certain securities at a price below $3.05. The warrants issued to the placement agent may be exercised in whole or in part at any time on or prior to their termination date in March, 2009. In addition, the warrants issued to the placement agent provide for certain adjustments to the exercise price upon the issuance by the Company of certain securities at a price below $3.20. The value of the warrants granted to the placement agent was approximately $351,000, and was accounted for as a non-cash financing activity.

Warrants

        On November 17, 2004, the Company entered into a general financial and advisory services agreement with Maxim Group LLC pursuant to which Maxim Group LLC was granted, on April, 1, 2005, a three-year warrant to purchase 100,000 shares of the Company's common stock at an exercise price of $3.20 per share. These warrants were issued pursuant to the exemption to the registration requirements of the Securities Act of 1933, as amended, available under Section 4(2) of that Act. Maxim Group LLC was an "accredited investor" pursuant to the rules of the Securities and Exchange Commission. The Company filed a registration statement on Form SB-2, which was declared effective on June 5, 2006, for purposes of registering the shares of common stock underlying the warrants. Maxim Group LLC has waived its rights to receive, based upon the date that the registration statement on Form SB-2 was declared effective, an additional warrant to purchase shares of the Company's common stock. The warrants may be exercised in whole or in part at any time on or prior to April 1, 2008. In addition, the warrants provide for certain adjustments to the exercise price upon the issuance by the Company of certain securities at a price below $3.20. The estimated value of these warrants, included in general and administrative expense, was amortized to expense pursuant to the term of the agreement. The Company recognized $119,000 in expenses for the year ended December 31, 2005.

Employee Stock Purchase Plan

        The Company has an employee stock purchase plan (the "Purchase Plan"). Under the Purchase Plan, participants are granted options to purchase the Company's common stock twice a year at the lower of 85% of market value at the beginning or end of each period. Calculation of the number of options granted, and subsequent purchase of these shares, is based upon voluntary payroll deductions during each six-month period. The number of options granted to each employee under this plan is limited to a maximum amount of 1,000 shares for each six-month period. The number of shares issued pursuant to this plan totaled 27,864; 29,183 and 23,289; in 2007, 2006 and 2005 respectively.

53

MFIC

Notes to Consolidated Financial Statements (Continued)

11. Supplemental Disclosures for Stock-Based Compensation

Stock Options

        The Company has three (3) shareholder approved stock option plans as follows: (i) the 1988 Stock Plan, which authorized the grant of stock rights for up to 3,500,000 shares of common stock (the "1988 Plan"); (ii) the 1989 Non-Employee Director Stock Option Plan (the "1989 Plan"), which authorized the grant of nonqualified stock options for up to 500,000 shares of common stock; and (iii) the 2006 Stock Plan (the "2006 Plan") which authorizes the grant of stock rights for up to 4,000,000 shares of common stock, increased by the number of shares of common stock underlying unexercised options issued under either the 1988 Plan or the 1989 Plan (together, the "Prior Plans") that expired after June 20, 2006, and decreased by the number of shares of common stock issued and issuable pursuant to options outstanding under the Prior Plans. The 2006 Plan was approved by our shareholders at the Annual Meeting of Shareholders held on June 20, 2006. Upon adoption of the 2006 Plan by our shareholders, we ceased granting new options under the Prior Plans. The Prior Plans permitted, and the 2006 Plan permits, the granting of stock awards to employees, officers, and non-employee members of the Board of Directors. Options granted under the Prior Plans and the 2006 Plan permit vesting over a 3-to-5 year period and expire 5-to-10 years from the date of grant. At December 31, 2007, approximately 590,000 shares were available for future grants under the 2006 Plan and no shares were available for future grants under the Prior Plans.

        Although the Stock Option Plans do not provide for cashless exercise, the administrator of the Stock Option Plan allowed the former Chairman and CEO during the three months ended June 30, 2007 and former director during the nine months ended September 30, 2006, to transact a cashless exercise of stock options granted. The cashless exercise allows the former employee/director to not tender any cash or shares in an option exercise. Rather, the employer withholds the number of shares with a fair value equal to the option exercise price from the shares that would otherwise be issued upon exercise.

        During the year ended December 31, 2007, the Company issued 36,577 shares of common stock pursuant to the cashless exercise of options granted for the exercise of 50,000 shares of the Company's common stock. Also, during the year ended December 31, 2006, the Company issued 10,548 shares of common stock pursuant to cashless exercise of options granted of 15,000 shares on the Company's common stock. Since the stock Option Plans do not provide for a cashless exercise, these transactions were considered a modification of the respective stock option agreements entered into with the former Chairman and CEO and a former director. Accordingly, for the years ended December 31, 2007, and 2006, the Company recorded compensation expenses of approximately $61,000, and $5,000, respectively. These amounts were charged to General and Administrative expenses in the consolidated statements of operations.

        During the year ended December 31, 2007, the Company issued approximately 377,000 stock options at exercise prices equal to or greater than the fair market value of the Company's stock on the date of grant under the 2006 Stock Plan, and the 2006 Non-Employee Director Stock Option Plan. Approximately 213,000 shares were forfeited and approximately 109,000 shares were vested during the year ended December 31, 2007.

54

MFIC

Notes to Consolidated Financial Statements (Continued)

11. Supplemental Disclosures for Stock-Based Compensation (Continued)

        Activity under the Plans is as follows:

	Years Ended December 31,
	2007				2006				2005
	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Outstanding at beginning of period	1,561,086		$	1.45	1,718,925		$	1.37	1,788,213		$	1.14
Granted	376,982			1.16	58,412			1.24	424,900			2.14
Cancelled	(213,139	)		2.18	(62,052	)		2.03	(273,031	)		1.07
Exercised	(139,502	)		0.66	(154,199	)		0.49	(221,157	)		0.57
Outstanding at end of period	1,585,427		$	1.35	1,561,086		$	1.45	1,718,925		$	1.37
Exercisable at end of period	1,134,678		$	1.35	1,321,735		$	1.32	1,338,954		$	1.30

        Summarized information about stock options outstanding as of December 31, 2007 is as follows:

			Weighted average remaining contractual life (years)			Exercisable
				Weighted average exercise price
Range of exercise prices		Number of options outstanding				Number of options	Weighted average exercise price
	$0.30-$0.95	336,188	4.3	$	0.52	336,188	$	0.52
	$1.00-$1.95	932,177	8.5		1.21	524,692		1.25
	$2.06-$4.25	317,062	7.0		2.60	273,798		2.54
	$0.30-$4.25	1,585,427	6.6		1.35	1,134,678		1.35

12. Commitments

        The Company leases its facilities under non-cancelable operating leases expiring through December 2012. Future minimum rental payments under the operating leases at December 31, 2007 are as follows:

Years Ended December 31, (in thousands)
2008		$	457
2009			441
Thereafter			839
	Total lease payments	$	1,737

        Rent expense for the years ended December 31, 2007, 2006, and 2005, was approximately $498,000, $415,000 and $468,000, respectively. A portion of the Newton, Massachusetts rented facility was sublet to a non-affiliated company under a tenant-at-will arrangement until June 30, 2007 for an approximate total of $15,000.

55

MFIC

Notes to Consolidated Financial Statements (Continued)

13. Related Party Transactions

        On December 20, 1999 the Company signed an agreement in principle (the "Agreement") with the former owners (the "Sellers"); including entities controlled by the Sellers, of the Epworth Mill and Morehouse-COWLES businesses (the "Sellers"). The Agreement set forth the understandings among the parties concerning a restructuring of the Company's subordinated debt and resolution of various disputes at that time. On January 17, 2000, a definitive settlement agreement incorporating these subject matters was executed between the parties (the "Settlement Agreement"). In connection with the Settlement Agreement, a $300,000 subordinated note was replaced with a new $300,000 subordinated promissory note dated February 28, 2000 (the "2000 Subordinated Note"). The 2000 Subordinated Note had a maturity date of February 28, 2005, bearing interest at a rate of ten percent (10%) per annum. The final principal payment on the 2000 Subordinated Note was made on January 25, 2005 in the approximate amount of $6,000, including accrued interest.

14. Condensed Consolidated Quarterly Financial Data (unaudited)

        The following consolidated interim financial information is unaudited. Such information reflects all adjustments, consisting solely of normal recurring adjustments, which are in the opinion of management necessary for a fair presentation of the quarterly financial data.

		Year Ended December 31, 2007
(in thousands, except share and per share data)
		Qtr. 1			Qtr. 2			Qtr. 3			Qtr. 4
Revenues		$	2,801		$	3,557		$	2,311		$	4,323
Gross profit			1,608			2,104			1,193			2,441
(Loss) income before income tax provision (benefit)			(417	)		(107	)		(859	)		245
Income tax provision (benefit)												369
Net (loss)			(417	)		(107	)		(859	)		(124	)
Net (loss) per share:
	Basic net (loss) per share	$	(0.04	)	$	(0.01	)	$	(0.08	)	$	(0.02	)
	Diluted net (loss) per share	$	(0.04	)	$	(0.01	)	$	(0.08	)	$	(0.02	)

		Year Ended December 31, 2006
		Qtr. 1		Qtr. 2		Qtr. 3		Qtr. 4
Revenues		$	3,151	$	3,910	$	3,553	$	5,040
Gross profit			1,704		2,109		1,995		2,845
Income before income tax provision (benefit)			68		214		141		794
Income tax provision (benefit)			27		86		57		(228	)
Net income			42		128		85		1,022
Net income per share:
	Basic net income per share	$	—	$	0.01	$	0.01	$	0.10
	Diluted net income per share	$	—	$	0.01	$	0.01	$	0.10

56

MFIC

Notes to Consolidated Financial Statements (Continued)

15. Valuation and Qualifying Accounts:

(in thousands)		Balance at Beginning of Period		Additions Charged to Costs and Expenses		Deductions and Adjustments			Balance at End of Period
Allowance for Doubtful Accounts:
	For the year ended December 31, 2007	$	38	$	6	$	(3	)	$	41
	For the year ended December 31, 2006		43		9		(14	)		38
	For the year ended December 31, 2005		13		30		—			43
Inventory Reserve:
	For the year ended December 31, 2007	$	200	$	8	$	—		$	208
	For the year ended December 31, 2006		185		15		—			200
	For the year ended December 31, 2005		163		80		(58	)		185
Warranty Reserve:
	For the year ended December 31, 2007	$	74	$	14	$	(34	)	$	54
	For the year ended December 31, 2006		58		16		—			74
	For the year ended December 31, 2005		—		92		(34	)		58

57

Item 9.    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

        None.

Item 9A(T).    Controls and Procedures

        The certificates of the Company's chief executive officer and controller attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K include, in paragraph 4 of such certifications, information concerning the Company's disclosure controls and procedures, and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 9A for a more complete understanding of the matters covered by such certifications.

Disclosure Controls and Procedures

        The Company's management, with the participation of the Company's chief executive officer and controller, evaluated the effectiveness of the Company's disclosure controls and procedures as of December 31, 2007. The term "disclosure controls and procedures", as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its chief executive officer and controller, as appropriate, to allow timely decisions to be made regarding required disclosure. It should be noted that any system of controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met and that management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures as of December 31, 2007, the Company's chief executive officer and controller concluded that, as of such date, the Company's disclosure controls and procedures were effective at the reasonable assurance level.

Management's Annual Report on Internal Control Over Financial Reporting

        The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. A company's 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 generally accepted accounting principles. 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 generally accepted accounting principles, and that receipts and expenditures of the Company 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 interim or annual 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.

58

        The Company's management, with the participation of its chief executive officer and controller, conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2007 based on the framework in Internal Control. This Annual Report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this Annual Report. Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Company's management concluded that, as of December 31, 2007, the Company's internal control over financial reporting was effective based on those criteria.

Changes in Internal Control Over Financial Reporting

        There were no changes to the Company's internal control over financial reporting during the fourth quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B.    Other Information

        None.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

        The information required by this Item 10 will be incorporated by reference from our definitive proxy statement or will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end

Item 11.    Executive Compensation

        The information required by this Item 11 will be incorporated by reference from our definitive proxy statement or will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The information required by this Item 12 will be incorporated by reference from our definitive proxy statement or will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

        The information required by this Item 13 will be incorporated by reference from our definitive proxy statement or will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.

Item 14.    Principal Accounting Fees and Services

Audit Fees

        During the years ended December 31, 2007 and 2006, UHY LLP ("UHY"), was paid approximately $101,000 and $91,000, respectively for services rendered for the audit of our annual

59

financial statements and review of financial statements included in our reports on Form 10-Q or services that are normally provided by UHY in connection with statutory and regulatory filings or engagements for those fiscal years. All services were approved by the Audit Committee.

Audit Related Fees

        During the years ended December 31, 2007 and 2006, UHY was paid approximately $26,000, and $46,000, respectively, for assurance and related services that are reasonably related to the performance of audit or review of our financial statements and are not reported under Item 9(e)(1) of our definitive proxy statement. All services were approved by the Audit Committee.

Tax Fees

        During the years ended December 31, 2007 and 2006, UHY was paid approximately $11,000 and $22,000, respectively, for tax compliance, tax advice and tax planning services. The tax fees were related to the preparation of the corporate tax returns. All tax services were approved by the Audit Committee.

All Other Fees

        During the years ended December 31, 2007 and 2006, UHY received no payments for non-audit services. The fees were related to preparation and attendance at audit committee meetings. All of these services were approved by the Audit Committee.

        The Audit Committee pre-approves audit and non-audit services provided to us by the independent auditors (or subsequently approves non-audit services in those circumstances where a subsequent approval is necessary and permissible).

        The Audit Committee has considered whether the provision of non-core audit services to us by our principal auditor is compatible with maintaining independence, and have affirmed, in each instance, that the provision of such service was compatible with the principal auditor's independent role.

60

PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)

Financial Statements

The following Consolidated Financial Statements are included in Item 8:

	Page
Report of Independent Registered Public Accounting Firm	33
Report of Independent Registered Public Accounting Firm	34
Consolidated Balance Sheets as of December 31, 2007 and 2006	35
Consolidated Statements of Operations for the Three Years Ended December 31, 2007	36
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2007	37
Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 2007	38
Notes to Consolidated Financial Statements	39–57

(b)

Exhibit Index

Exhibit No.	Description
3(a)	Certificate of Incorporation for the Company, as amended (filed as Exhibit 2A to Registration Statement No. 0-11625 on Form 8-A and as Exhibit 3.1(a) to the Company's Report on Form 10-Q for the quarterly period ended September 30, 1999 and incorporated herein by reference).
3(b)	Amended and Restated By-Laws for the Company (filed as Exhibit 3.3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference).
10.2	1988 Stock Plan (filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 and incorporated herein by reference).
10.3	1989 Non-Employee Directors Stock Option Plan (filed as Exhibit 10.1 to the Company's registration statement on Form S-8 filed October 22, 1996 and incorporated herein by reference).
10.18	1988 Stock Plan as amended (filed as Exhibit 10(a) to the Company's Form 10-Q for the quarterly period ended March 31, 1997 and incorporated herein by reference).
10.19	Asset Purchase Agreement, dated as of June 19, 1998, by and among the Company, Epworth Manufacturing Company and Morehouse-COWLES, Inc. (filed as Exhibit 2.1 to Schedule 13D of Bret A. Lewis, File No. 005-35850, and incorporated herein by Reference).
10.20	Stockholders Agreement, dated August 14, 1998, by and among the Company and J.B. Jennings and Bret A. Lewis (filed as Exhibit 2.2 to Schedule 13D of Bret A. Lewis, File No. 005-35850, and incorporated herein by reference).
10.21	$500,000 Subordinated Promissory Note issued by the Company to Epworth Manufacturing Company (filed as Exhibit 99.2 to the Company's Form 8-K on August 27, 1998, File No. 000-11625, and incorporated herein by reference).

61

10.22	$300,000 Subordinated Promissory Note issued by the Company to Epworth Manufacturing Company (filed as Exhibit 99.2 to the Company's Form 8-K on August 27, 1998, File No. 000-11625, and incorporated herein by reference).
10.32	Subordinated Promissory Note on the Company in favor of Lake Shore Industries, Inc. in the amount of $300,000.00 dated February 28, 2000. (Filed as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.33	Settlement Agreement, dated January 17, 2000 by and among the Company, Bret A. Lewis, J. B. Jennings, Lake Shore Industries, Inc., and JLJ Properties, Inc., with $300,000 Subordinated Promissory Note dated February 28, 2000, issued by the Company to Lake Shore Industries, Inc. (FKA Epworth Manufacturing Company, Inc). (Filed as Exhibit 10.37 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.42	Lease for 30 Ossipee Road, Newton, Massachusetts dated October 19, 2001, between Microfluidics International Corporation and King Real Estate Corp., Trustee of 1238 Chestnut Street Trust under Declaration of Trust dated May 23, 1969, recorded with Middlesex South Registry of Deeds in Book 11682, Page 384. (Filed as Exhibit 10.47 to the Company's Annual Report on Form 10-K for the fiscal year ended December 21, 2001, and incorporated herein by reference.)
10.45	Second Amendment to Revolving Credit and Term Loan Agreement between the Company and PNC Bank, N.A. dated March 29, 2002. (Filed as Exhibit 10.50 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference.)
10.46	1986 Employee Stock Purchase Plan as Amended (Filed as Exhibit 10.51 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference.)
10.47	1988 Stock Plan as Amended. (Filed as Exhibit 10.52 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference.)
10.49	Third Amendment to Revolving Credit and Term Loan Agreement between the Company and PNC Bank N.A. dated February 19, 2003. (Filed as Exhibit 10.54 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, and incorporated herein by reference)
10.50	Fourth Amendment and Waiver to Revolving Credit and Term Loan Agreement between the Company and PNC Bank, N.A. dated February 6, 2004 (filed as Exhibit 10.54 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).
10.51	Asset Purchase Agreement dated February 5, 2004, by and among MFIC Corporation and Morehouse Cowles, Inc. (filed as Exhibit 2 to the Company's Form 8K dated February 13, 2004, and incorporated herein by reference).
10.52	Revolving Line of Credit Note in the amount of $1,000,000 in favor of Banknorth, N.A. dated March 3, 2004 (Filed as Exhibit 10.56 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).

62

10.54	Secured Term Note in the amount of $1,000,000 in favor of Banknorth, N.A. dated March 3, 2004 (Filed as Exhibit 10.58 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).
10.55	Loan and Security Agreement between Banknorth, N.A. and the Company dated March 3, 2004 (Filed as Exhibit 10.59 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).
10.56	Trademark Security Agreement of the Company in favor of Banknorth, N.A., dated March 3, 2004 (Filed as Exhibit 10.60 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).
10.57	Patent Security Agreement of the Company in favor of Banknorth, N.A., dated March 3, 2004 (Filed as Exhibit 10.61 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).
10.58	Placement Agency Agreement between the Company and Casimir Capital L.P. dated February 13, 2004 (Filed as Exhibit 10.62 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).
10.59	First Amendment to Placement Agency Agreement between the Company and Casimir Capital L.P. dated March 12, 2004 (Filed as Exhibit 10.63 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).
10.60	Registration Rights Agreement between the Company and Purchasers dated March 16, 2004 (Filed as Exhibit 10.64 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).
10.61	Lease between ABB and MFIC Corporation dated April 1, 2004 for space at Lampertheim, Germany (filed as Exhibit 10.65 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference).
10.62	Letter Agreement between Maxim Group LLC and MFIC Corporation dated November 17, 2004 to provide general financial advisory and investment banking services to the Company (filed as Exhibit 10.66 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference).
10.63	Research Collaboration Agreement between University of Massachusetts, Lowell and MFIC Corporation, dated September 21, 2005 (filed as Exhibit 10.63 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, and incorporated herein by reference).
10.64	Warrant issued to Maxim Group LLC dated April 1, 2005 (filed as Exhibit 10.64 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, and incorporated herein by reference).
10.65	Form of Warrant issued to placement agent under the Placement Agency Agreement (filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference).
10.66	Form of Warrant issued to investors in the private placement described in the Placement Agency Agreement (filed as Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference).

63

10.67	2006 Stock Plan (filed as Exhibit 10.1 to the Company's Form 8-K on August 11, 2006 and incorporated herein by reference).
10.68	Letter Agreement between MFIC Corporation and Maxim Group LLC dated February 24, 2006 concerning the warrant issued to Maxim Group LLC. (filed as Exhibit 10.68 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and incorporated herein by reference).
10.69	Lease for 30 Ossipee Road, Newton, Massachusetts dated November 6, 2006, between MFIC Corporation and King Real Estate Corp., Trustee of 1238 Chestnut Street Trust under Declaration of Trust dated May 23, 1969, recorded with Middlesex South Registry of Deeds in Book 11682, Page 384. (filed as Exhibit 10.69 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and incorporated herein by reference).
10.70	TD Banknorth Loan Modification Agreement dated November 20, 2006. (filed as Exhibit 10.70 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and incorporated herein by reference).
10.71	Letter Agreement between MFIC Corporation and Maxim Group LLC dated March 23, 2007 concerning the warrant issued to Maxim Group LLC. (filed as Exhibit 10.71 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and incorporated herein by reference).
10.72	Executive Employment Agreement by and between the Company and Irwin J. Gruverman dated as of April 6, 2007 (filed as Exhibit 10.1 to the Company's Form 8-K on April 12, 2007 and incorporated herein by reference).
10.73	Executive Employment Agreement by and between the Company and Robert P. Bruno dated as of April 26, 2007 (filed as Exhibit 10.1 to the Company's Form 8-K on May 2, 2007 and incorporated herein by reference).
10.74	Executive Employment Agreement by and between the Company and Dennis Riordan dated as of April 26, 2007 (filed as Exhibit 10.2 to the Company's Form 8-K on May 2, 2007 and incorporated herein by reference).
10.75	Executive Employment Agreement by and between the Company and Jack M. Swig dated as of April 26, 2007 (filed as Exhibit 10.3 to the Company's Form 8-K on May 2, 2007 and incorporated herein by reference).
10.76	Resignation letter dated September 17, 2007 from Irwin J. Gruverman to the Company (filed as Exhibit 10.1 to the Company's Form 8-K on September 20, 2007 and incorporated herein by reference).
10.77	Resignation Agreement dated September 17, 2007 by and between Irwin J. Gruverman and the Company (filed as Exhibit 10.2 to the Company's Form 8-K on September 20, 2007 and incorporated herein by reference).
10.78	Affirmation and Release Agreement dated September 17, 2007 by and between Irwin J. Gruverman and the Company (filed as Exhibit 10.3 to the Company's Form 8-K on September 20, 2007 and incorporated herein by reference).
10.79	Employment Agreement dated as of November 14, 2007 by and between Michael C. Ferrara and the Company (filed as Exhibit 10.1 to the Company's Form 8-K on November 19, 2007 and incorporated herein by reference).

64

10.80	*	Lease for 17755 Sky Park East, Suite 100, Irvine, CA, 92614 between MFIC Corporation and The Knoll Company dated November 28, 2007.
10.81	*	Banknorth, N.A. waiver letter dated March 5, 2008.
14		Code of Ethics, as adopted by the Company (Filed as Exhibit 14 to the Company's Form 10-K dated December 31, 2006, and incorporated herein by reference.)
21		Subsidiary of the Company, Microfluidics Corporation, a Delaware corporation
23(a)	*	Consent of UHY LLP
23(b)	*	Consent of Brown & Brown, LLP
31.1	*	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	*	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*

Filed herewith.

65

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the city of Newton, Commonwealth of Massachusetts, on the 17^th day of March, 2008.

MFIC CORPORATION
By:	/s/  MICHAEL C. FERRARA Michael C. Ferrara Chief Executive Officer

        Pursuant to the requirements of the Securities and 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 dates indicated.

Signature	Title	Date
/s/  MICHAEL C. FERRARA Michael C. Ferrara	Chief Executive Officer (Principal Executive Officer and Director)	March 17, 2008
/s/  DENNIS P. RIORDAN Dennis P. Riordan	Controller (Principal Financial and Accounting Officer)	March 17, 2008
/s/  JAMES N. LITTLE James N. Little	Director Chairman of the Board of Directors	March 17, 2008
/s/  LEO PIERRE ROY Leo Pierre Roy	Director	March 17, 2008
/s/  GEORGE UVEGES George Uveges	Director	March 17, 2008
/s/  ERIC G. WALTERS Eric G. Walters	Director	March 17, 2008

66

EX-10.80

Exhibit 10.80

CALIFORNIA

INDUSTRIAL LEASE

AIRPORT BUSINESS CENTER

Dated:  November 28, 2007

1.             BASIC LEASE TERMS.  For purposes of this Lease, the following terms have the following definitions and meanings:

(a)           Landlord:  AIRPORT INDUSTRIAL COMPLEX, a California limited partnership

Landlord’s Address (For Notices):

AIRPORT INDUSTRIAL COMPLEX
c/o The Koll Company

17755 Sky Park East, Suite 100

Irvine, CA 92614

Attention:  Jeri Town, Property Manager

With a copy to:

The Koll Company

4343 Von Karman Avenue, Suite 150

Newport Beach, California  92660

Attn:  Regional Asset Manager Airport Business Center.

Landlord’s Address (For Payment of Rent):

Airport Industrial Complex

Dept. 2619-001

Los Angeles, CA 90084-2619

(b)           Tenant:  MFIC CORPORATION, a Delaware corporation

Tenant’s Trade Name:  Microfluidics

Tenant’s Address for Premises:                                      Tenant’s Address for Notices:

17971 Sky Park Circle, Suite B                                            30 Ossipee Road

Irvine, CA  92614                                                                  Newton, MA  02464-9101

(c)           Premises:  Suite(s) B of Building 3301 (the “Building”) of AIRPORT BUSINESS CENTER (the “Project”), located at 17971 Sky Park Circle, in the City of Irvine (“City”), County of Orange (“County”), State of California (“State”) as shown on Exhibit “A-I”.  The Premises contain approximately 1,092 Rentable Square Feet (subject to adjustment as provided in this Lease).

(d)           Tenant’s Share of Operating Expenses:  .09 %

(e)           Term:  61  calendar months

(f)            Commencement Date:  December 1, 2007

(g)           Expiration Date:  December 31, 2012

(h)           Monthly Base Rent :

PERIOD COVERED:	MONTHLY BASE RENT:
12/01/07 — 12/31/07	$	0.00
01/01/08 — 12/31/08	$	1,583.40
01/01/09 — 12/31/09	$	1,654.71
01/01/10 — 12/31/10	$	1,729.07
01/01/11 — 12/31/11	$	1,806.93
01/01/12 — 12/31/12	$	1,888.29

(i)            Monthly Operating Expense Charge:

PERIOD COVERED:	MONTHLY OPERATING EXPENSE CHARGE:
12/01/07 — 12/31/07	$	0.00
01/01/08 — 12/31/10	$	66.00
01/01/11 — 12/31/12	$	88.00

(j)            Security Deposit: $2,101.29

(k)           Non-Refundable Cleaning Fee Portion of Security Deposit:  $125.00

(l)            Permitted Use:  General office and no other use without the express written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion.

(m)          Broker(s): Koll Industrial Properties — representing Landlord and The Saywitz Company (Robert Ritschel) representing Tenant.

1

(n)           Guarantor(s):  None.

(o)           Interest Rate:  The greater of ten percent (10%) per annum or two percent (2%) in excess of the prime lending or reference rate of Wells Fargo Bank N.A., or any successor bank in effect on the twenty-fifth (25th) day of the calendar month immediately prior to the event giving rise to the Interest Rate imposition; provided, however, the Interest Rate will in no event exceed the maximum interest rate permitted to be charged by applicable law.

(p)           Exhibits:  Exhibit “A-1” and Exhibit “C” through Exhibit “G”, inclusive, which Exhibits are attached to this Lease and incorporated herein by this reference.

This Paragraph 1 represents a summary of the basic terms and definitions of this Lease.  In the event of any inconsistency between the terms contained in this Paragraph 1 and any specific provision of this Lease, the terms of the more specific provision shall prevail.

2.             PREMISES AND COMMON AREAS.

(a)           Premises.  Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises upon and subject to the terms, covenants and conditions contained in this Lease to be performed by each party.

(b)           Tenant’s Use of Common Areas.  During the Term of this Lease, Tenant shall have the nonexclusive right to use in common with all other occupants of the Project,  the following common areas of the Project (collectively, the “Common Areas”):  the parking facilities of the Project which serve the Building, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, and similar areas and facilities situated within the Project and appurtenant to the Building which are not reserved for the exclusive use of any Project occupants.

(c)           Landlord’s Reservation of Rights.  Provided that Landlord uses commercially reasonable efforts to not materially and adversely interfere with Tenant’s use of the Premises, Landlord reserves for itself and for all other owner(s) and operator(s) of the Common Areas and the balance of the Project, the right from time to time to: (i)  install, use, maintain, repair, replace and relocate pipes, ducts, conduits, wires and appurtenant meters and equipment above the ceiling surfaces, below the floor surfaces and within the walls of the Building; (ii) make changes to the design and layout of the Project, including, without limitation, changes to buildings, driveways, entrances, loading and unloading areas, direction of traffic, landscaped areas and walkways, parking spaces and parking areas; and (iii) use or close temporarily the Common Areas, and/or other portions of the Project while engaged in making improvements, repairs or alterations to the Building, the Project, or any portion thereof.

3.             TERM.  The term of this Lease (“Term”) will be for the period designated in Subparagraph 1(e), commencing on the Commencement Date, and ending on the Expiration Date.  Each consecutive twelve (12) month period of the Term of this Lease, commencing on the Commencement Date, will be referred to herein as a “Lease Year”.

4.             POSSESSION.

(a)           Delivery of Possession.  Landlord will deliver possession of the Premises to Tenant in its current “as-is” condition on December 1, 2007.  If, for any reason not caused by Tenant, Landlord cannot deliver possession of the Premises to Tenant on the Commencement Date, this Lease will not be void or voidable, nor will Landlord be liable to Tenant for any loss or damage resulting from such delay, but in such event, the Commencement Date and Tenant’s obligation to pay rent will not commence until Landlord delivers possession to Tenant.  If the delay in possession is caused by Tenant, then the Term and Tenant’s obligation to pay rent will commence as of the Commencement Date even though Tenant does not yet have possession.  Notwithstanding the foregoing, Landlord will not be obligated to deliver possession of the Premises to Tenant (but Tenant will be liable for rent if Landlord can otherwise deliver the Premises to Tenant) until Landlord has received from Tenant all of the following:  (i) a copy of this Lease fully executed by Tenant and the guaranty of Tenant’s obligations under this Lease, if any, executed by the Guarantor(s); (ii) the Security Deposit and the first installment of Monthly Base Rent; and (iii) copies of policies of insurance or certificates thereof as required under Paragraph 19 of this Lease.

(b)           Condition of Premises.  Except as otherwise set forth in Section 4(a) above, Landlord shall have no obligation whatsoever to improve or otherwise fund any improvements to the Premises in conjunction with this Lease.  By taking possession of the Premises, Tenant will be deemed to have accepted the Premises in its “as-is” condition on the date of delivery of possession and to have acknowledged that all work to be completed by Landlord as described on Exhibit “B” has been completed and there are no additional items needing work or repair by Landlord.  Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building, the Project or any portions thereof or with respect to the suitability of same for the conduct of Tenant’s business and Tenant further acknowledges that Landlord will have no obligation to construct or complete any additional buildings or improvements within the Project.

(c)           Lease Confirmation.  Concurrently with the delivery of the Premises by Landlord, Landlord shall deliver to Tenant and Tenant shall execute a written statement in the form attached hereto as Exhibit “G”, attached hereto (the “Tenant Commencement Certificate”) confirming the Commencement Date of the Lease and the Expiration Date of the Lease.  If Tenant fails to sign and return the Tenant Commencement Certificate to Landlord upon the delivery of the Premises by Landlord, the Tenant Commencement Certificate as sent by Landlord shall be deemed to have correctly set forth the Commencement Date and the other matters addressed in the Certificate.  The form of certificate shown in Exhibit “G” may also be used in conjunction with amendments to this Lease, if any, and Tenant shall execute the same within ten (10) days after receipt of a request therefor from Landlord.

(d)           Early Occupancy.  Any occupancy of the Premises by Tenant prior to the Commencement Date (“Early Possession”) will be subject to all of Tenant’s obligations under this Lease (except that Tenant will not be obligated to pay Base Rent during such early occupancy until it commences operations at the Premises).  Tenant shall provide Landlord with copies of certificates of insurance, complying in all respects with the terms of this Lease for all insurance required to be provided hereunder prior to entering the Premises.  Tenant hereby releases and discharges Landlord, its contractors, agents, employees and manager from and against any and all claims of loss, damage or injury to persons or property, including without limitation any product inventory, which is alleged to have occurred during the period of Early Possession.  Landlord makes no representation or warranty about safety of the Premises during any

2

period of Early Possession, as construction and other activities will be ongoing.  Tenant shall coordinate its activities in the Premises during Early Possession with Landlord and Landlord’s contractor.

5.             RENT.

(a)           Monthly Base Rent.  Tenant agrees to pay Landlord the Monthly Base Rent for the Premises (subject to adjustment as hereinafter provided) in advance on the first day of each calendar month during the Term without prior notice or demand, except that Tenant agrees to pay the Monthly Base Rent for the first month of the Term directly to Landlord concurrently with Tenant’s delivery of the executed Lease to Landlord.  The obligation of Tenant to pay Monthly Base Rent and other sums to Landlord and the obligations of Landlord under this Lease are independent obligations.  All rent must be paid to Landlord, without any deduction or offset, in lawful money of the United States of America, at the address designated by Landlord or to such other person or at such other place as Landlord may from time to time designate in writing.  Monthly Base Rent will be adjusted during the Term of this Lease as provided in Subparagraph 1(h) of this Lease.

(b)           Additional Rent.  All amounts and charges to be paid by Tenant hereunder, including, without limitation, payments for Operating Expenses, insurance and repairs, will be considered additional rent for purposes of this Lease, and the word “rent” as used in this Lease will include all such additional rent unless the context specifically or clearly implies that only Monthly Base Rent is intended.

(c)           Late Payments.  Late payments of Monthly Base Rent and/or any item of additional rent will be subject to interest and a late charge as provided in Subparagraph 22(f) below.

6.             OPERATING EXPENSES.

(a)           Operating Expenses.  Throughout the Term of this Lease, commencing on the Commencement Date, Tenant agrees to pay Landlord as additional rent in accordance with the terms of this Paragraph 6, Tenant’s Share of Operating Expenses for the taxes and insurance for the Project and all costs and expenses for the operation, maintenance, repair, and replacement of the Project including, without limitation:  (i) any form of real property tax assessment, license fee, license tax, business license fee, commercial rental tax, levy, charge, improvement bond  or similar imposition of any kind or nature imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, including, without limitation, any new taxes which are in substitution for or in addition to any current taxes payable hereunder; (ii) any and all assessments under any covenants, conditions and restrictions affecting the Project; (iii) water, sewer and other utility charges; (iv) costs of insurance obtained by Landlord pursuant to Paragraph 19 of the Lease; (v) waste disposal and janitorial services; (vi) security; (vii) labor; (viii) management costs including, without limitation: (A) wages and salaries (and payroll taxes and similar charges ) of property management employees, and (B) management office rental, supplies, equipment and related operating expenses and management fees; (ix) supplies, materials, equipment and tools including rental of personal property; (x) repair and maintenance of the structural portions of the buildings with the Project, including the plumbing, heating, ventilating, air-conditioning and electrical systems installed or furnished by Landlord; (xi) maintenance, costs and upkeep of all parking and other Common Areas; (xii) depreciation on a straight line basis and rental of personal property used in maintenance; (xiii) amortization on a straight line basis over the useful life [together with interest at the Interest Rate on the unamortized balance] of all capitalized expenditures which are: (A) reasonably intended to produce a reduction in operating charges or energy consumption; or (B) required under any governmental law or regulation that was not applicable to the Project at the time it was originally constructed; or (C) for replacement of any Project equipment needed to operate the Project at the same quality levels as prior to the replacement; (xiv) gardening and landscaping; (xv) maintenance of signs (other than signs of tenants of the Project); (xvi) personal property taxes levied on or attributable to personal property used in connection with the Common Areas; (xvii) reasonable accounting, audit, verification, legal and other consulting fees; and (xviii) costs and expenses of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning, refuse removal, security and similar items, including appropriate reserves.

(b)           Determination of Tenant’s Monthly Operating Expense Charge.  Tenant’s Monthly Operating Expense Charge shall be determined as provided in Subparagraph 1(i) of this Lease.  If Tenant’s Monthly Operating Expense Charge is scheduled for each year of the Lease Term, as shown in Subparagraph 1(i), then Subparagraph 6(c), Subparagraph 6(d) and Subparagraph 6(e) below will not apply.

(c)           Estimate Statement.  Prior to the Commencement Date and on or about March 1st of each subsequent calendar year during the Term of this Lease, Landlord will endeavor to deliver to Tenant a statement (“Estimate Statement”) wherein Landlord will estimate both the Operating Expenses and Tenant’s Monthly Operating Expense Charge for the then current calendar year.  Tenant agrees to pay Landlord, as additional rent, Tenant’s estimated Monthly Operating Expense Charge each month thereafter, beginning with the next installment of rent due, until such time as Landlord issues a revised Estimate Statement or the Estimate Statement for the succeeding calendar year; except that, concurrently with the regular monthly rent payment next due following the receipt of each such Estimate Statement, Tenant agrees to pay Landlord an amount equal to one monthly installment of Tenant’s estimated Monthly Operating Expense Charge (less any applicable Operating Expenses already paid) multiplied by the number of months from January, in the current calendar year, to the month of such rent payment next due, all months inclusive.  If at any time during the Term of this Lease, but not more often than quarterly, Landlord reasonably determines that Tenant’s Share of Operating Expenses for the current calendar year will be greater than the amount set forth in the then current Estimate Statement, Landlord may issue a revised Estimate Statement and Tenant agrees to pay Landlord, within ten (10) days of receipt of the revised Estimate Statement, the difference between the amount owed by Tenant under such revised Estimate Statement and the amount owed by Tenant under the original Estimate Statement for the portion of the then current calendar year which has expired.  Thereafter Tenant agrees to pay Tenant’s Monthly Operating Expense Charge based on such revised Estimate Statement until Tenant receives the next calendar year’s Estimate Statement or a new revised Estimate Statement for the current calendar year.

(d)           Actual Statement.  By March 1st of each calendar year during the Term of this Lease, Landlord will also endeavor to deliver to Tenant a statement (“Actual Statement”) which states Tenant’s Share of the actual Operating Expenses for the preceding calendar year.  If the Actual Statement reveals that Tenant’s Share of the actual Operating Expenses is more than the total Additional Rent paid by Tenant for Operating Expenses on account of the preceding calendar year, Tenant agrees to pay Landlord the difference in a lump sum within ten (10) days of receipt of the Actual Statement.  If the Actual Statement reveals that Tenant’s Share of the actual Operating Expenses is less than the Additional Rent paid by Tenant for Operating Expenses on account of the preceding calendar year, Landlord will credit

3

any overpayment toward the next monthly installment(s) of Tenant’s Share of the Operating Expenses due under this Lease.

(e)           Miscellaneous.  Any delay or failure by Landlord in delivering any Estimate Statement or Actual Statement pursuant to this Paragraph 6 will not constitute a waiver of its right to require an increase in rent nor will it relieve Tenant of its obligations pursuant to this Paragraph 6, except that Tenant will not be obligated to make any payments based on such Estimate Statement or Actual Statement until ten (10) days after receipt of such Estimate Statement or Actual Statement.  If Tenant does not object to any Estimate Statement or Actual Statement within thirty (30) days after Tenant receives any such statement, such statement will be deemed final and binding on Tenant.  Even though the Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant’s Share of the actual Operating Expenses for the year in which this Lease terminates, Tenant agrees to promptly pay any increase due over the estimated expenses paid and, conversely, any overpayment made in the event said expenses decrease shall promptly be rebated by Landlord to Tenant.  Such obligation will be a continuing one which will survive the expiration or termination of this Lease.  Prior to the expiration or sooner termination of the Lease Term and Landlord’s acceptance of Tenant’s surrender of the Premises, Landlord will have the right to estimate the actual Operating Expenses for the then current Lease Year and to collect from Tenant prior to Tenant’s surrender of the Premises, Tenant’s Share of any excess of such actual Operating Expenses over the estimated Operating Expenses paid by Tenant in such Lease Year.

7.             SECURITY DEPOSIT AND CLEANING FEE.  Upon Tenant’s execution of this Lease, Tenant will deposit with Landlord the Security Deposit designated in Subparagraph 1(j).  The Security Deposit will be held by Landlord as security for the full and faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the Term hereof.  The Security Deposit is not, and may not be construed by Tenant to constitute, rent for the last month or any portion thereof.  If Tenant defaults with respect to any provisions of this Lease including, but not limited to, the provisions relating to the payment of rent or additional rent, Landlord may (but will not be required to) use, apply or retain all or any part of the Security Deposit for the payment of any rent or any other sum in default, or for the payment of any other amount which Landlord may spend by reason of Tenant’s default or to compensate Landlord for any loss or damage which Landlord may suffer by reason of Tenant’s default.  If any portion of the Security Deposit is so used or applied, Tenant agrees, within ten (10) days after Landlord’s written demand therefor, to deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount and Tenant’s failure to do so shall constitute a default under this Lease.  Landlord is not required to keep Tenant’s Security Deposit separate from its general funds, and Tenant is not entitled to interest on such Security Deposit.  If Tenant is not in default at the expiration or termination of this Lease, Landlord will return the Security Deposit to Tenant, less the non-refundable Cleaning Fee portion designated in Subparagraph 1(k).  Landlord’s obligations with respect to the Security Deposit are those of a debtor and not of a trustee.  Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code and agrees that the provisions of this Section 7 shall govern the treatment of Tenant’s Security Deposit in all respects for this Lease.

8.             USE.

(a)           Tenant’s Use of the Premises.  The Premises may be used for the use or uses set forth in Subparagraph 1(l) only, and Tenant will not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion.  Nothing in this Lease will be deemed to give Tenant any exclusive right to such use in the Project.

(b)           Compliance.  At Tenant’s sole cost and expense, Tenant agrees to procure, maintain and hold available for Landlord’s inspection, all governmental licenses and permits required for the proper and lawful conduct of Tenant’s business from the Premises, if any.  Tenant agrees not to use, alter or occupy the Premises or allow the Premises to be used, altered and occupied in violation of, and Tenant, at its sole cost and expense, agrees to use and occupy the Premises, and cause the Premises to be used and occupied, in compliance with:  (i) any and all laws, statutes, zoning restrictions, ordinances, rules, regulations, orders and rulings now or hereafter in force and any requirements of any insurer, insurance authority or duly constituted public authority having jurisdiction over the Premises, the Building or the Project now or hereafter in force, (ii) the requirements of the Board of Fire Underwriters and any other similar body, (iii) the Certificate of Occupancy issued for the Building, and (iv) any recorded covenants, conditions and restrictions and similar regulatory agreements, if any, which affect the use, occupation or alteration of the Premises, the Building and/or the Project.  Tenant agrees to comply with the Rules and Regulations referenced in Paragraph 28 below.  Tenant agrees not to do or permit anything to be done in or about the Premises which will in any manner obstruct or interfere with the rights of other tenants or occupants of the Project, or injure or unreasonably annoy them, or use or allow the Premises to be used for any unlawful or unreasonably objectionable purpose.  Tenant agrees not to place or store any articles or materials outside of the Premises or to cause, maintain or permit any nuisance or waste in, on, under or about the Premises or elsewhere within the Project.  Tenant shall not use or allow the Premises to be used for lodging, bathing or the washing of clothes.

(c)           Hazardous Materials.  Except for ordinary and general office supplies, such as copier toner, liquid paper, glue, ink and common household cleaning materials (some or all of which may constitute “Hazardous Materials” as defined in this Lease), Tenant agrees not to cause or permit any Hazardous Materials to be brought upon, stored, used, handled, generated, released or disposed of on, in, under or about the Premises, the Building, the Common Areas or any other portion of the Project by Tenant, its agents, employees, subtenants, assignees, licensees, contractors or invitees (collectively, “Tenant’s Parties”), without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion.  Concurrently with the execution of this Lease and annually thereafter, within ten (10) days of written request from Landlord, Tenant agrees to complete and deliver to Landlord an Environmental Questionnaire in the form of Exhibit “F” attached hereto.  Upon the expiration or earlier termination of this Lease, Tenant agrees to promptly remove from the Premises, the Building and the Project, at its sole cost and expense, any and all Hazardous Materials, including any equipment or systems containing Hazardous Materials which are installed, brought upon, stored, used, generated or released upon, in, under or about the Premises, the Building and/or the Project or any portion thereof by Tenant or any of Tenant’s Parties.  To the fullest extent permitted by law, Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord and Landlord’s partners, officers, directors, employees, agents, successors and assigns (collectively, “Landlord Indemnified Parties”) from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including, without limitation, clean-up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys’ fees, consultant fees and expert fees and court costs) which arise or result from the presence of Hazardous Materials on, in, under or about the Premises, the Building or any other portion of the Project and which are caused or permitted by Tenant or any of Tenant’s Parties.  Tenant agrees to promptly notify Landlord of any release of Hazardous Materials in the Premises, the

4

Building or any other portion of the Project which Tenant becomes aware of during the Term of this Lease, whether caused by Tenant or any other persons or entities.  In the event of any release of Hazardous Materials caused or permitted by Tenant or any of Tenant’s Parties, Landlord shall have the right, but not the obligation, to cause Tenant to immediately take all steps Landlord deems necessary or appropriate to remediate such release and prevent any similar future release to the satisfaction of Landlord and Landlord’s mortgagee(s).  At all times during the Term of this Lease, Landlord will have the right, but not the obligation, to enter upon the Premises to inspect, investigate, sample and/or monitor the Premises to determine if Tenant is in compliance with the terms of this Lease regarding Hazardous Materials.  As used in this Lease, the term “Hazardous Materials” shall mean and include any hazardous or toxic materials, substances or wastes as now or hereafter designated under any law, statute, ordinance, rule, regulation, order or ruling of any agency of the State, the United States Government or any local governmental authority, including, without limitation, asbestos, petroleum, petroleum hydrocarbons and petroleum based products, urea formaldehyde foam insulation, polychlorinated biphenyls (“PCBs”), and freon and other chlorofluorocarbons.  The provisions of this Subparagraph 8(c) will survive the expiration or earlier termination of this Lease.

(d)           Refuse and Sewage.  Tenant agrees not to keep any trash, garbage, waste or other refuse on the Premises except in sanitary containers and agrees to regularly and frequently remove same from the Premises.  Tenant shall keep all containers or other equipment used for storage of such materials in a clean and sanitary condition.  Tenant shall properly dispose of all sanitary sewage and shall not use the sewage disposal system for the disposal of anything except sanitary sewage.  Tenant shall keep the sewage disposal system free of all obstructions and in good operating condition.  If the volume of Tenant’s trash becomes excessive in Landlord’s judgment, Landlord shall have the right to charge Tenant for additional trash disposal services and/or to require that Tenant contract directly for additional trash disposal services at Tenant’s sole cost and expense.

9.             NOTICES.  Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery (including delivery by overnight courier or an express mailing service) or by mail, if sent by registered or certified mail.  Notices to Tenant shall be sufficient if delivered to Tenant at the Premises and notices to Landlord shall be sufficient if delivered to Landlord at the address designated in Subparagraph 1(a).  Either party may specify a different address for notice purposes by written notice to the other, except that the Landlord may in any event use the Premises as Tenant’s address for notice purposes.

10.          BROKERS.  The parties acknowledge that the broker(s) who negotiated this Lease are stated in Subparagraph 1(m).  Landlord and Tenant each agree to promptly indemnify, protect, defend and hold harmless the other from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including attorneys’ fees and court costs) resulting from any breach by the indemnifying party of the foregoing representation, including, without limitation, any claims that may be asserted by any broker, agent or finder undisclosed by the indemnifying party.  The foregoing mutual indemnity shall survive the expiration or earlier termination of this Lease.  Tenant agrees that Landlord will not recognize or compensate any third party broker with regards to any renewals and/or expansions.

11.          SURRENDER; HOLDING OVER.

(a)           Surrender.  The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not constitute a merger, and shall, at the option of Landlord, operate as an assignment to Landlord of any or all subleases or subtenancies.  Upon the expiration or earlier termination of this Lease, Tenant agrees to timely and peaceably surrender the Premises to Landlord broom clean and in a state of good order, repair and condition, ordinary wear and tear and casualty damage excepted, with all of Tenant’s personal property and alterations removed from the Premises to the extent required under Paragraph 13 and all damage caused by such removal repaired as required by Paragraph 13.  The delivery of keys to any employee of Landlord or to Landlord’s agent or any employee thereof alone will not be sufficient to constitute a termination of this Lease or a surrender of the Premises.

(b)           Holding Over.  If Tenant holds over after the expiration or earlier termination of the Term, Landlord may, at its option, treat Tenant as a tenant at sufferance only, and evict Tenant immediately, or consent in writing to the continued occupancy by Tenant which shall be subject to all of the terms, covenants and conditions of this Lease, so far as applicable, including the payment of Operating Expenses, except that the Monthly Base Rent for any month or partial month during which Tenant holds over shall be equal to two hundred percent (200%) of the Monthly Base Rent in effect under this Lease immediately prior to such holdover.  Acceptance by Landlord of rent after such expiration or earlier termination will not result in a renewal of this Lease.  If Tenant fails to surrender the Premises upon the expiration of this Lease in accordance with the terms of this Paragraph 11 despite demand to do so by Landlord, Tenant agrees to promptly indemnify, protect, defend and hold Landlord harmless from all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including attorneys’ fees and costs), including, without limitation, costs and expenses incurred by Landlord in returning the Premises to the condition in which Tenant was to surrender it and claims made by any succeeding tenant founded on or resulting from Tenant’s failure to timely surrender the Premises in accordance with the terms of this Lease.  The provisions of this Subparagraph 11(b) will survive the expiration or earlier termination of this Lease.

12.          TAXES ON TENANT’S PROPERTY.  Tenant agrees to pay before delinquency, all taxes and assessments (real and personal) levied against Tenant’s business operations or any personal property, improvements, alterations, trade fixtures or merchandise placed by Tenant in or about the Premises.

13.          ALTERATIONS.  Tenant shall not make any alterations to the Premises or any other aspect of the Project, without Landlord’s prior written consent, which consent Landlord may withhold in its reasonable but subjective discretion.  Notwithstanding the foregoing to the contrary, Tenant shall not make (i) any structural alterations, improvements or additions to the Premises, or (ii) any alterations, improvements or additions to the Premises which (a) will adversely impact the Building’s mechanical, electrical or heating, ventilation or air conditioning systems, or (b) will adversely impact the structure of the Building, or (c) are visible from the exterior of the Premises, or (d) which will result in the penetration or puncturing of the roof or floor, without, in each case, first obtaining Landlord’s prior written consent or approval to such Alterations (which consent or approval shall be in the Landlord’s sole and absolute discretion).  All permitted alterations must be performed in compliance with Landlord’s standard rules and regulations regarding alterations.  All alterations will become the property of Landlord and will remain upon and be surrendered with the Premises at the end of the Term of this Lease; provided, however, Landlord may require Tenant to remove any or all alterations at the end of the Term of this Lease.  If Tenant fails to remove by the expiration or earlier termination of this Lease all of its personal property, or any alterations identified by Landlord for removal, Landlord may, at its option, treat such failure as a hold-over pursuant to Subparagraph 11(b) above, and/or Landlord may (without liability to Tenant for loss thereof) treat such personal

5

property and/or alterations as abandoned and, at Tenant’s sole cost and expense and in addition to Landlord’s other rights and remedies under this Lease, at law or in equity: (a) remove and store such items; and/or (b) upon ten (10) days’ prior notice to Tenant, sell, discard or otherwise dispose of all or any such items at private or public sale for such price as Landlord may obtain or by other commercially reasonable means.  Tenant shall be liable for all costs of disposition of Tenant’s abandoned property and Landlord shall have no liability to Tenant with respect to any such abandoned property.  Landlord agrees to apply the proceeds of any sale of any such property to any amounts due to Landlord under this Lease from Tenant (including Landlord’s attorneys’ fees and other costs incurred in the removal, storage and/or sale of such items), with any remainder to be paid to Tenant.

14.          REPAIRS.

(a)           Landlord’s Obligations.  Landlord agrees to repair and maintain the structural portions of the Building, including the foundations, bearing and exterior walls (excluding glass), subflooring and roof (excluding skylights), and the unexposed electrical, plumbing and sewer systems, including those portions of such systems which are outside the Premises, gutters and downspouts on the Building and the heating, ventilating and air conditioning systems which serve the Premises (provided that it shall be the Tenant’s obligation to maintain a service contract on the HVAC unit(s) as set forth in Section 14.(b) below), unless such maintenance and repairs are caused in part or in whole by the act, neglect or omission of any duty by Tenant, its agents, servants, employees or invitees, in which case Tenant will pay to Landlord, as additional rent, the reasonable cost of such maintenance and repairs.  Landlord’s obligation with respect to the HVAC unit(s) shall be limited to the replacement of such units if such replacement is necessary despite Tenant’s maintenance efforts.  The costs of maintenance and repairs performed by Landlord will be included in Operating Expenses.  Except as provided in this Subparagraph 14(a), Landlord has no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof.  Landlord will not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant.  Tenant will not be entitled to any abatement of rent and Landlord will not have any liability by reason of any injury to or interference with Tenant’s business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or in or to fixtures, appurtenances and equipment therein.  Tenant waives the right to make repairs at Landlord’s expense under any law, statute, ordinance, rule, regulation, order or ruling (including, without limitation, to the extent the Premises are located in California, the provisions of California Civil Code Sections 1941 and 1942 and any successor statutes or laws of a similar nature).

(b)           Tenant’s Obligations.  Tenant agrees to keep, maintain and preserve the Premises in a state of condition and repair consistent with the Building and, when and if needed, at Tenant’s sole cost and expense, to make all repairs to the Premises and every part thereof including, without limitation, all walls, storefronts, floors, ceilings, interior and exterior doors and windows and fixtures interior plumbing and HVAC (heating ventilation, and air conditioning) systems and equipment.  Tenant shall maintain a preventive maintenance contract providing for the regular inspection and maintenance of the heating and air conditioning system by a licensed heating and air conditioning contractor, unless Landlord maintains such equipment under Section 14.(a) above.  Tenant shall provide Landlord with written proof of said preventive maintenance contract within thirty (30) days of the Commencement Date of Lease.  Any such maintenance and repairs will be performed by Landlord’s contractor, or at Landlord’s option, by such contractor or contractors as Tenant may choose from an approved list to be submitted by Landlord.  Tenant agrees to pay all costs and expenses incurred in such maintenance and repair within seven (7) days after billing by such contractor or contractors.  If Tenant refuses or neglects to repair and maintain the Premises properly as required hereunder to the reasonable satisfaction of Landlord, Landlord, at any time following ten (10) days from the date on which Landlord makes a written demand on Tenant to effect such repair and maintenance, may enter upon the Premises and make such repairs and/or maintenance, and upon completion thereof, Tenant agrees to pay to Landlord as additional rent, Landlord’s costs for making such repairs plus an amount not to exceed ten percent (10%) of such costs for overhead, within ten (10) days of receipt from Landlord of a written itemized bill therefor.  Any amounts not reimbursed by Tenant within such ten (10) day period will bear interest at the Interest Rate until paid by Tenant.

15.          LIENS.  Tenant agrees not to permit any mechanic’s, materialmen’s or other liens to be filed against all or any part of the Project, the Building or the Premises, nor against Tenant’s leasehold interest in the Premises, by reason of or in connection with any repairs, alterations, improvements or other work contracted for or undertaken by Tenant or any other act or omission of Tenant or Tenant’s agents, employees, contractors, licensees or invitees.  At Landlord’s request, Tenant agrees to provide Landlord with enforceable, conditional and final lien releases (or other evidence reasonably requested by Landlord to demonstrate protection from liens) from all persons furnishing labor and/or materials at the Premises.  Landlord will have the right at all reasonable times to post on the Premises and record any notices of non-responsibility which it deems necessary for protection from such liens.  If any such liens are filed, Tenant will, at its sole cost and expense, promptly cause such liens to be released of record or bonded so that it no longer affects title to the Project, the Building or the Premises.  If Tenant fails to cause any such liens to be so released or bonded within ten (10) days after filing thereof, such failure will be deemed a material breach by Tenant under this Lease without the benefit of any additional notice or cure period described in Paragraph 22 below, and Landlord may, without waiving its rights and remedies based on such breach, and without releasing Tenant from any of its obligations, cause such liens to be released by any means it shall deem proper, including payment in satisfaction of the claims giving rise to such liens.  Tenant agrees to pay to Landlord within ten (10) days after receipt of invoice from Landlord, any sum paid by Landlord to remove such liens, together with interest at the Interest Rate from the date of such payment by Landlord.  Tenant shall also indemnify each and all of the Landlord Indemnified Parties against any damages, losses or costs arising out of any such mechanic’s, materialmen’s or other liens filed against all or any part of the Project, Building or the Premises by reason of or in connection with any repairs, alterations, improvements or other work contracted for or undertaken by Tenant or any other act or omission of Tenant or Tenant’s agents, employees, contractors, licensees or invitees.

16.          ENTRY BY LANDLORD.  Landlord and its employees and agents will at all reasonable times have the right to enter the Premises to inspect the same, to show the Premises to prospective purchasers or tenants, to post notices of non-responsibility, and/or to repair the Premises as permitted or required by this Lease.  In exercising such entry rights, Landlord will endeavor to minimize, as reasonably practicable, the interference with Tenant’s business, and will provide Tenant with reasonable advance notice of any such entry (except in emergency situations).  Landlord will at all times have and retain a key with which to unlock all doors in the Premises, excluding Tenant’s vaults and safes.  Tenant shall not alter any lock or install any new or additional locks or bolts on any door of the Premises without Landlord’s prior written consent and without providing Landlord with a key to all such locks.  Except in the case of the gross negligence or willful misconduct of Landlord, any entry to the Premises obtained by Landlord  will not be construed or deemed to be a

6

forcible or unlawful entry into the Premises, or an eviction of Tenant from the Premises and Landlord will not be liable to Tenant for any damages or losses resulting from any such entry.

17.          UTILITIES AND SERVICES.

(a)           Throughout the Term of this Lease, Tenant shall pay directly to the utility company providing such service all costs for water, gas, heat, light, power, sewer, electricity, telephone and other services metered, chargeable or provided to the Premises.  Landlord will not be liable to Tenant for any failure to furnish any of the foregoing utilities and services if such failure is caused by all or any of the following: (i) accident, breakage or repairs; (ii) strikes, lockouts or other labor disturbance or labor dispute of any character; (iii) governmental regulation, moratorium or other governmental action or inaction; (iv) inability despite the exercise of reasonable diligence to obtain electricity, water or fuel; or (v) any other cause beyond Landlord’s reasonable control.  In addition, in the event of any stoppage or interruption of services or utilities, Tenant shall not be entitled to any abatement or reduction of rent (except as expressly provided in Subparagraph 20(f) or Subparagraph 21(b) if such failure results from a damage or taking described therein), no eviction of Tenant will result from such failure and Tenant will not be relieved from the performance of any covenant or agreement in this Lease because of such failure.  In the event of any failure, stoppage or interruption thereof, Landlord agrees to diligently attempt to resume service promptly.

(b)           The electricity for the Premises is currently in Landlord’s name.  Tenant agrees to contact Southern California Edison at (800) 990-7788 within ten (10) days from the date Tenant takes possession of the Premises and have the bill for electricity put into Tenant’s name.  Tenant shall reimburse Landlord for any interim charges actually billed to Landlord for electricity from the date Tenant takes possession of the Premises until the date the bill is put into Tenant’s name.  In the event Tenant fails to put the bill for electricity in Tenant’s name within ten (10) days from the date Tenant takes possession of the Premises, Landlord shall have the right to contact Southern California Edison on the eleventh (11th) day after Tenant takes possession of the Premises and have the electricity for the Premises turned off.  Tenant hereby acknowledges that Tenant has the absolute responsibility to contact Southern California Edison and have electrical service put into Tenant’s name. In the event Tenant fails to put the bill for electrical service into Tenant’s name as required hereinabove and Landlord has electrical service turned off, Tenant understands that there will be no electrical service to the Premises. In such event, Tenant releases and holds Landlord harmless from any claims, demands, liabilities, damages, expenses, actions and causes of action based on, arising out of, or related thereto.  Tenant waives the right to additional notice of any kind from Landlord and/or Southern California Edison and specifically waives any rights or remedies provided by Civil Code Section 789.3.

18.          ASSUMPTION OF RISK AND INDEMNIFICATION.

(a)           Assumption of Risk.  Tenant, as a material part of the consideration to Landlord, agrees that neither Landlord nor any Landlord Indemnified Parties (as defined in Subparagraph 8(c) above) will be liable to Tenant for, and Tenant expressly assumes the risk of and waives any and all claims it may have against Landlord or any Landlord Indemnified Parties with respect to, (i) any and all damage to property or injury to persons in, upon or about the Premises, the Building or the Project resulting from the act or omission (except for the grossly negligent or intentionally wrongful act or omission) of Landlord, (ii) any such damage caused by other tenants or persons in or about the Building or the Project, or caused by quasi-public work,  (iii) any damage to property entrusted to employees of the Building, (iv) any loss of or damage to property by theft or otherwise, or (v) any injury or damage to persons or property resulting from any casualty, explosion, falling plaster or other masonry or glass, steam, gas, electricity, water or rain which may leak from any part of the Building or any other portion of the Project or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place, or resulting from dampness.  Neither Landlord nor any Landlord Indemnified Parties will be liable for consequential damages arising out of any loss of the use of the Premises or any equipment, property or facilities therein by Tenant or any Tenant Parties (as defined in Subparagraph 8(c) above) or for interference with light.  Tenant agrees to give prompt notice to Landlord in case of fire or accidents in the Premises or the Building, or of defects therein or in the fixtures or equipment.

(b)           Indemnification.  Tenant will be liable for, and agrees, to the maximum extent permissible under applicable law, to promptly indemnify, protect, defend and hold harmless Landlord and all Landlord Indemnified Parties, from and against, any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs, including attorneys’ fees and court costs (collectively, “Indemnified Claims”), arising or resulting from (i) any act or omission of Tenant or any Tenant Parties; (ii) the use of the Premises and Common Areas and conduct of Tenant’s business by Tenant or any Tenant Parties, or any other activity, work or thing done, permitted or suffered by Tenant or any Tenant Parties, in or about the Premises, the Building or elsewhere within the Project; and/or (iii) any default by Tenant of any obligations on Tenant’s part to be performed under the terms of this Lease.  In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon notice from Landlord, agrees to promptly defend the same at Tenant’s sole cost and expense by counsel approved in writing by Landlord, which approval Landlord will not unreasonably withhold.

(c)           Survival; No Release of Insurers.  Tenant’s indemnification obligations under Subparagraph 18(b) will survive the expiration or earlier termination of this Lease.  Tenant’s covenants, agreements and indemnification obligation in Subparagraph 18(a) and Subparagraph 18(b) above, are not intended to and will not relieve any insurance carrier of its obligations under policies required to be carried by Tenant pursuant to the provisions of this Lease.

19.          INSURANCE.

(a)           Tenant’s Insurance.  Commencing on the date of final mutual execution and delivery of this Lease and continuing throughout the entire Term hereof and any other period of occupancy, Tenant agrees to keep in full force and effect, at its sole cost and expense, the insurance specified on Exhibit “E” attached hereto.  Landlord reserves the right to require any other form or forms of insurance as Tenant or Landlord or any mortgagees of Landlord may reasonably require from time to time in form, in amounts, and for insurance risks against which, a prudent tenant would protect itself, but only to the extent coverage for such risks and amounts are available in the insurance market at commercially acceptable rates.  Landlord makes no representation that the limits of liability required to be carried by Tenant under the terms of this Lease are adequate to protect Tenant’s interests and Tenant should obtain such additional insurance or increased liability limits as Tenant deems appropriate.

(b)           Supplemental Tenant Insurance Requirements.  All policies must be in a form reasonably satisfactory to Landlord and issued by an insurer admitted to do business in the State.  All policies must be issued by insurers with a policyholder rating of “A” and a financial rating of “X” in the most recent version of Best’s Key Rating

7

Guide.  All policies must contain a requirement to notify Landlord (and Landlord’s property manager and any mortgagees or ground lessors of Landlord who are named as additional insureds, if any) in writing not less than thirty (30) days prior to any material change, reduction in coverage, cancellation or other termination thereof.  Tenant agrees to deliver to Landlord, as soon as practicable after placing the required insurance, but in any event within the time frame specified in Subparagraph 19(a) above, certificate(s) of insurance and/or if required by Landlord, certified copies of each policy evidencing the existence of such insurance and Tenant’s compliance with the provisions of this Paragraph 19.  Tenant agrees to cause replacement policies or certificates to be delivered to Landlord not less than thirty (30) days prior to the expiration of any such policy or policies.  If any such initial or replacement policies or certificates are not furnished within the time(s) specified herein, Landlord will have the right, but not the obligation, to obtain such insurance as Landlord deems necessary to protect Landlord’s interests at Tenant’s expense.  Tenant’s insurance under Subparagraph 19(a)(iii) and Subparagraph 19(a)(iv) must name Landlord and Landlord’s property manager (and at Landlord’s request, Landlord’s mortgagees and ground lessors of which Tenant has been informed in writing) as additional insureds and must also contain a provision that the insurance afforded by such policy is primary insurance and any insurance carried by Landlord and Landlord’s property manager or Landlord’s mortgagees or ground lessors, if any, will be excess over and non-contributing with Tenant’s insurance

(c)           Waiver of Right of Recovery.  Tenant and Landlord each assumes all risk with respect to damage to or theft of its respective property located at the Premises and with respect to Tenant, interruption of its business and agrees to look solely to its own insurance in the case of any damage to its property or and with respect to Tenant, interruption to its business.  Landlord, Tenant, each waive any right of recovery against the other and their respective agents, employees, contractors and managers for any loss or damage with respect to its property, or the Premises or the Building.  Failure of a party to insure shall not void this waiver.  Any fire, extended coverage or property insurance policy maintained by Tenant or Landlord shall contain a waiver of subrogation provision.  The waivers of right or recovery contained in this provision shall apply EVEN IF THE LOSS OR DAMAGE TO WHICH THIS PROVISION APPLIES IS CAUSED SOLELY OR IN PART BY THE NEGLIGENCE OF LANDLORD OR TENANT.

(d)           Business Interruption.  Landlord shall not be responsible for, and Tenant releases and discharges Landlord from, and Tenant further waives any right of recovery from Landlord and its agents, employees, contractors and managers for, any loss for or from business interruption or loss of use of the Premises or Property suffered by Tenant in connection with Tenant’s use or occupancy of the Premises, EVEN IF SUCH LOSS IS CAUSED SOLELY OR IN PART BY THE NEGLIGENCE OF LANDLORD.

20.          DAMAGE OR DESTRUCTION.

(a)           Partial Destruction.  If the Premises or the Building are damaged by fire or other casualty to an extent not exceeding twenty-five percent (25%) of the full replacement cost thereof, and Landlord’s contractor reasonably estimates in a writing delivered to Landlord and Tenant that the damage thereto may be repaired, reconstructed or restored to substantially its condition immediately prior to such damage within one hundred eighty (180) days from the date of such casualty, and Landlord will receive insurance proceeds sufficient to cover the costs of such repairs, reconstruction and restoration (including proceeds from Tenant and/or Tenant’s insurance which Tenant is required to deliver to Landlord pursuant to Subparagraph 20(d) below to cover Tenant’s obligation for the costs of repair, reconstruction and restoration of any portion of the tenant improvements and any alterations for which Tenant is responsible under this Lease), then Landlord agrees to commence and proceed diligently with the work of repair, reconstruction and restoration and this Lease will continue in full force and effect.

(b)           Substantial Destruction.  Any damage or destruction to the Premises or the Building which Landlord is not obligated to repair pursuant to Subparagraph 20(a) above  will be deemed a substantial destruction.  In the event of a substantial destruction, Landlord may elect to either:  (i) repair, reconstruct and restore the portion of the Building or the Premises damaged by such casualty, in which case this Lease will continue in full force and effect, subject to Tenant’s termination right contained in Subparagraph 20(c) below; or (ii) terminate this Lease effective as of the date which is thirty (30) days after Tenant’s receipt of Landlord’s election to so terminate.

(c)           Termination Rights.  If Landlord elects to repair, reconstruct and restore pursuant to Subparagraph 20(b)(i) hereinabove, and if Landlord’s contractor estimates that as a result of such damage, Tenant cannot be given reasonable use of and access to the Premises within two hundred forty (240) days after the date of such damage, then either Landlord or Tenant may terminate this Lease effective upon delivery of written notice to the other within ten (10) days after Landlord delivers notice to Tenant of its election to so repair, reconstruct or restore; provided, however, Tenant shall have no right to terminate this Lease if Landlord can relocate Tenant to other comparable Premises in the Building or the Project within one hundred eighty (180) days after the date of such damage.

(d)           Tenant’s Costs and Insurance Proceeds.  In the event of any damage or destruction of all or any part of the Premises, Tenant agrees to immediately (i) notify Landlord thereof, and (ii) deliver to Landlord all property insurance proceeds received by Tenant with respect to any tenant improvements installed by or at the cost of Tenant and any alterations, but excluding proceeds for Tenant’s furniture, fixtures, equipment and other personal property, whether or not this Lease is terminated as permitted in this Paragraph 20, and Tenant hereby assigns to Landlord all rights to receive such insurance proceeds.  If for any reason (including Tenant’s failure to obtain required insurance), Tenant fails to receive insurance proceeds covering the full replacement cost of any tenant improvements and any alterations which are damaged, Tenant will be deemed to have self-insured the replacement cost of such items, and upon any damage or destruction thereto, Tenant agrees to immediately pay to Landlord the full replacement cost of such items, less any insurance proceeds actually received by Landlord from Landlord’s or Tenant’s insurance with respect to such items.

(e)           Abatement of Rent.  In the event of any damage, repair, reconstruction and/or restoration described in this Paragraph 20, rent will be abated or reduced, as the case may be, from the date of such casualty in proportion to the degree to which Tenant’s use of the Premises is impaired during such period of repair until such use is restored.  Except for abatement of rent as provided hereinabove, Tenant will not be entitled to any compensation or damages for loss of, or interference with, Tenant’s business or use or access of all or any part of the Premises or for lost profits or any other consequential damages of any kind or nature, which result from any such damage, repair, reconstruction or restoration.

(f)            Damage Near End of Term.  Landlord and Tenant shall each have the right to terminate this Lease if any damage to the Premises or the Building occurs during the last twelve (12) months of the Term of this Lease where Landlord’s contractor estimates in a writing delivered to Landlord and Tenant that the repair, reconstruction or restoration of such damage cannot be completed within sixty (60) days after the date of such casualty.  If either party desires to

8

terminate this Lease under this Subparagraph (f), it shall provide written notice to the other party of such election within ten (10) days after receipt of Landlord’s contractor’s repair estimates.

(g)           Waiver of Termination Right.  Landlord and Tenant agree that the foregoing provisions of this Paragraph 20 are to govern their respective rights and obligations in the event of any damage or destruction and supersede and are in lieu of the provisions of any applicable law, statute, ordinance, rule, regulation, order or ruling now or hereafter in force which provide remedies for damage or destruction of leased premises (including, without limitation, to the extent the Premises are located in California, the provisions of California Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 and any successor statute or laws of a similar nature).

21.          EMINENT DOMAIN.

(a)           Substantial Taking.  If the whole of the Premises, or such part thereof as shall substantially interfere with Tenant’s use and occupancy of the Premises, as contemplated by this Lease, is taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, either party will have the right to terminate this Lease effective as of the date possession is required to be surrendered to such authority.

(b)           Partial Taking; Abatement of Rent.  In the event of a taking of a portion of the Premises which does not substantially interfere with Tenant’s use and occupancy of the Premises including any temporary taking of ninety (90) days or less, then, neither party will have the right to terminate this Lease and Landlord will thereafter proceed to make a functional unit of the remaining portion of the Premises (but only to the extent Landlord receives proceeds therefor from the condemning authority), and rent will be abated with respect to the part of the Premises which Tenant is deprived of on account of such taking.  Notwithstanding the immediately preceding sentence to the contrary, if any part of the Building or the Project is taken (whether or not such taking substantially interferes with Tenant’s use of the Premises), Landlord may terminate this Lease upon thirty (30) days’ prior written notice to Tenant if Landlord also terminates the leases of the other tenants of the Building which are leasing comparably sized space for comparable lease terms.

(c)           Condemnation Award.  In connection with any taking of the Premises or the Building, Landlord will be entitled to receive the entire amount of any award which may be made or given in such taking or condemnation, without deduction or apportionment for any estate or interest of Tenant, it being expressly understood and agreed by Tenant that no portion of any such award will be allowed or paid to Tenant for any so-called bonus or excess value of this Lease, and such bonus or excess value will be the sole property of Landlord.  Tenant agrees not to assert any claim against Landlord or the taking authority for any compensation because of such taking (including any claim for bonus or excess value of this Lease); provided, however, if any portion of the Premises is taken, Tenant will have the right to recover from the condemning authority (but not from Landlord) any compensation as may be separately awarded or recoverable by Tenant for the taking of Tenant’s furniture, fixtures, equipment and other personal property within the Premises, for Tenant’s relocation expenses, and for any loss of goodwill or other damage to Tenant’s business by reason of such taking.

22.          DEFAULTS AND REMEDIES.

(a)           Defaults.  The occurrence of any one or more of the following events will be deemed a default by Tenant:

(i)The abandonment or vacation of the Premises by Tenant.

(ii)The failure by Tenant to make any payment of rent or additional rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure continues for a period of three (3) days after written notice thereof from Landlord to Tenant; provided, however, that any such notice will be in lieu of, and not in addition to, any notice required under applicable law (including, without limitation, to the extent the Premises are located in California, the provisions of California Code of Civil Procedure Section 1161 regarding unlawful detainer actions or any successor statute or law of a similar nature).

(iii)The failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Subparagraph 22(a)(i) or Subparagraph 22(a)(ii) above, where such failure continues for a period of five (5) days after written notice thereof from Landlord to Tenant.  The provisions of any such notice will be in lieu of, and not in addition to, any notice required under applicable law (including, without limitation, to the extent the Premises are located in California, California Code of Civil Procedure Section 1161 regarding unlawful detainer actions and any successor statute or similar law).  If the nature of Tenant’s default is such that more than five (5) days are reasonably required for its cure, then Tenant will not be deemed to be in default if Tenant, with Landlord’s concurrence, commences such cure within such five (5) day period and thereafter diligently prosecutes such cure to completion.

(iv)(A)          The making by Tenant of any general assignment for the benefit of creditors; (B) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (C) the appointment of a trustee or receiver to take possession of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or (D) the attachment, execution or other judicial seizure of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease where such seizure is not discharged within thirty (30) days.

(b)           Landlord’s Remedies; Termination.  In the event of any default by Tenant, in addition to any other remedies available to Landlord at law or in equity under applicable law (including, without limitation, to the extent the Premises are located in California, the remedies of Civil Code Section 1951.4 and any successor statute or similar law), Landlord will have the immediate right and option to terminate this Lease and all rights of Tenant hereunder.  If Landlord elects to terminate this Lease then, to the extent permitted under applicable law, Landlord may recover from Tenant:  (i) 

9

the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rent loss that Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rent loss that Tenant proves could be reasonably avoided; plus (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which, in the ordinary course of things, results therefrom including, but not limited to: attorneys’ fees and costs; brokers’ commissions; the costs of refurbishment, alterations, renovation and repair of the Premises, and removal (including the repair of any damage caused by such removal) and storage (or disposal) of Tenant’s personal property, equipment, fixtures, alterations, the tenant improvements and any other items which Tenant is required under this Lease to remove but does not remove, as well as the unamortized value of any free rent, reduced rent, free parking, reduced rate parking and any tenant improvement allowance or other costs or economic concessions provided, paid, granted or incurred by Landlord pursuant to this Lease.  As used in Subparagraphs 22(b)(i) and Subparagraphs 22(b)(ii) above, the “worth at the time of award” is computed by allowing interest at the Interest Rate.  As used in Subparagraph 22(b)(iii) above, the “worth at the time of award” is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).

(c)           Landlord’s Remedies; Re-Entry Rights.  In the event of any default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord will also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere and/or disposed of at the sole cost and expense of and for the account of Tenant in accordance with the provisions of Paragraph 13 of this Lease or any other procedures permitted by applicable law.  No re-entry or taking possession of the Premises by Landlord pursuant to this Subparagraph 22(c) will be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction.

(d)           Landlord’s Remedies; Re-Letting.  If Landlord does not elect to terminate this Lease, Landlord may from time to time, without terminating this Lease, either recover all rent as it becomes due or relet the Premises or any part thereof on terms and conditions as Landlord in its sole and absolute discretion may deem advisable with the right to make alterations and repairs to the Premises in connection with such reletting.  If Landlord elects to relet the Premises, then rents received by Landlord from such reletting will be applied: first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any cost of such reletting; third, to the payment of the cost of any alterations and repairs to the Premises incurred in connection with such reletting; fourth, to the payment of rent due and unpaid hereunder and the residue, if any, will be held by Landlord and applied to payment of future rent as the same may become due and payable hereunder.  Should that portion of such rents received from such reletting during any month, which is applied to the payment of rent hereunder, be less than the rent payable during that month by Tenant hereunder, then Tenant agrees to pay such deficiency to Landlord immediately upon demand therefor by Landlord.  Such deficiency will be calculated and paid monthly.

(e)           Landlord’s Remedies; Performance for Tenant.  All covenants and agreements to be performed by Tenant under any of the terms of this Lease are to be performed by Tenant at Tenant’s sole cost and expense and without any abatement of rent.  If Tenant fails to pay any sum of money owed to any party other than Landlord, for which it is liable under this Lease, or if Tenant fails to perform any other act on its part to be performed hereunder, and such failure continues for ten (10) days after notice thereof by Landlord, Landlord may, without waiving or releasing Tenant from its obligations, but shall not be obligated to, make any such payment or perform any such other act to be made or performed by Tenant.  Tenant agrees to reimburse Landlord upon demand for all sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the Interest Rate, from the date of such payment by Landlord until reimbursed by Tenant.  This remedy shall be in addition to any other right or remedy of Landlord set forth in this Paragraph 22.

(f)            Late Payment.  If Tenant fails to pay any installment of rent when due or if Tenant fails to make any other payment for which Tenant is obligated under this Lease when due, such late amount will accrue interest at the Interest Rate until such amount is paid by Tenant to Landlord.  In addition, Tenant agrees to pay to Landlord concurrently with such late payment amount, as additional rent, a late charge equal to ten percent (10%) of the amount due to compensate Landlord for the extra costs Landlord will incur as a result of such late payment.  Landlord and Tenant agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of any such late payment.  Acceptance of any such interest and late charge will not constitute a waiver of the Tenant’s default with respect to the overdue amount, or prevent Landlord from exercising any of the other rights and remedies available to Landlord.  If Tenant incurs a late charge more than three (3) times in any period of twelve (12) months during the Lease Term, then, notwithstanding that Tenant cures the late payments for which such late charges are imposed, Landlord will have the right to require Tenant thereafter to pay all installments of Monthly Base Rent quarterly in advance in the form of a cashier’s check throughout the remainder of the Lease Term.  Any payments of any kind returned for insufficient funds will be subject to an additional handling charge of $40.00, and thereafter, Landlord may require Tenant to pay all future payments of rent or other sums due by money order or cashier’s check.

(g)           Rights and Remedies Cumulative.  All rights, options and remedies of Landlord contained in this Lease will be construed and held to be cumulative, and no one of them will be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law or in equity, whether or not stated in this Lease.  Nothing in this Paragraph 22 will be deemed to limit or otherwise affect Tenant’s indemnification of Landlord pursuant to any provision of this Lease.

23.          LANDLORD’S DEFAULT.  Landlord will not be in default in the performance of any obligation required to be performed by Landlord under this Lease unless Landlord fails to perform such obligation within thirty (30) days after the receipt of written notice from Tenant specifying in detail Landlord’s failure to perform; provided however, that if the nature of Landlord’s obligation is such that more than thirty (30) days are required for performance, then Landlord will not be deemed in default if it commences such performance within such thirty (30) day period and thereafter diligently pursues the same to completion.  Upon any default by Landlord, Tenant may exercise any of its rights provided at law or in equity, subject to the limitations on liability set forth in Paragraph 35 of this Lease.

24.          ASSIGNMENT AND SUBLETTING.

(a)           Restriction on Transfer.  Except as otherwise expressly provided in this Paragraph 24, Tenant will not, either voluntarily or by operation of law, assign or encumber this Lease or any interest herein or sublet the Premises

10

or any part thereof, or permit the use or occupancy of the Premises by any party other than Tenant (any such assignment, encumbrance, sublease or the like will sometimes be referred to as a “Transfer”), without the prior written consent of Landlord, which consent Landlord will not unreasonably withhold.  For purposes of this Paragraph 24, if Tenant is a corporation, partnership or other entity, any transfer, assignment, encumbrance or hypothecation of fifty percent (50%) or more (individually or in the aggregate) of any stock or other ownership interest in such entity, and/or any transfer, assignment, hypothecation or encumbrance of any controlling ownership or voting interest in such entity, will be deemed a Transfer and will be subject to all of the restrictions and provisions contained in this Paragraph 24; provided, however, this provision will not apply to public corporations, the stock of which is traded through a public stock exchange or over the counter system.

(b)           Transfer Notice.  If Tenant desires to effect a Transfer, then at least thirty (30) days prior to the date when Tenant desires the Transfer to be effective (the “Transfer Date”), Tenant agrees to give Landlord a notice (the “Transfer Notice”), stating the name, address and business of the proposed assignee, sublessee or other transferee (sometimes referred to hereinafter as “Transferee”), reasonable information (including references) concerning the character, ownership, and financial condition of the proposed Transferee, the Transfer Date, any ownership or commercial relationship between Tenant and the proposed Transferee, and the consideration and all other material terms and conditions of the proposed Transfer, all in such detail as Landlord may reasonably require.

(c)           Landlord’s Options.  Within fifteen (15) days of Landlord’s receipt of any Transfer Notice, and any additional information requested by Landlord concerning the proposed Transferee’s financial responsibility, Landlord will notify Tenant of its election to do one of the following:  (i) consent to the proposed Transfer subject to such reasonable conditions as Landlord may impose in providing such consent; (ii) refuse such consent, which refusal shall be on reasonable grounds; or (iii) terminate this Lease as to all or such portion of the Premises which is proposed to be sublet or assigned and recapture all or such portion of the Premises for reletting by Landlord.

(d)           Additional Conditions.  A condition to Landlord’s consent to any Transfer of this Lease will be the delivery to Landlord of a true copy of the fully executed instrument of assignment, sublease, transfer or hypothecation, in form and substance reasonably satisfactory to Landlord.  Tenant agrees to pay to Landlord, as additional rent, all sums and other consideration payable to and for the benefit of Tenant by the assignee or sublessee in excess of the rent payable under this Lease for the same period and portion of the Premises.  In calculating excess rent or other consideration which may be payable to Landlord under this paragraph, Tenant will be entitled to deduct commercially reasonable third party brokerage commissions and attorneys’ fees and other amounts reasonably and actually expended by Tenant in connection with such assignment or subletting if acceptable written evidence of such expenditures is provided to Landlord.  Notwithstanding anything herein to the contrary, no Transfer will release Tenant of Tenant’s obligations under this Lease or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder.  Landlord may require that any Transferee remit directly to Landlord on a monthly basis, all monies due Tenant by said Transferee.  Consent by Landlord to one Transfer will not be deemed consent to any subsequent Transfer.  In the event of default by any Transferee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee or successor.  If Tenant effects a Transfer or requests the consent of Landlord to any Transfer (whether or not such Transfer is consummated), then, upon demand, Tenant agrees to pay Landlord a non-refundable administrative fee of not less than One Hundred Dollars ($100.00) and not more than Five Hundred Dollars ($500.00), plus Landlord’s reasonable attorneys’ fees.

25.          SUBORDINATION.  Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any mortgagee or beneficiary with a deed of trust encumbering the Building and/or the Project, or any lessor of a ground or underlying lease with respect to the Building, this Lease will be subject and subordinate at all times to:  (i) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Building; and (ii) the lien of any mortgage or deed of trust which may now exist or hereafter be executed for which the Building, the Project or any leases thereof, or Landlord’s interest and estate in any of said items, is specified as security.  Notwithstanding the foregoing, Landlord reserves the right to subordinate any such ground leases or underlying leases or any such liens to this Lease.  If any such ground lease or underlying lease terminates for any reason or any such mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, at the election of Landlord’s successor in interest, Tenant agrees to attorn to and become the tenant of such successor in which event Tenant’s right to possession of the Premises will not be disturbed as long as Tenant is not in default under this Lease.  Tenant hereby waives its rights under any law which gives or purports to give Tenant any right to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event of any such foreclosure proceeding or sale.  Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form reasonably required by Landlord, any additional documents evidencing the priority or subordination of this Lease and Tenant’s attornment agreement with respect to any such ground lease or underlying leases or the lien of any such mortgage or deed of trust.  If Tenant fails to sign and return any such documents within ten (10) days of receipt, Tenant will be in default hereunder.

26.          ESTOPPEL CERTIFICATE.  Within ten (10) days following any written request which Landlord may make from time to time, Tenant agrees to execute and deliver to Landlord an estoppel certificate, in Landlord’s standard form or as may reasonably be required by Landlord’s lender.  Landlord and Tenant intend that any statement delivered pursuant to this Paragraph 26 may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or any interest therein.  Tenant’s failure to deliver such statement within such time will be conclusive upon Tenant (i) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) that there are no uncured defaults in Landlord’s performance, and (iii) that not more than one (1) month’s rent has been paid in advance.  Without limiting the foregoing, if Tenant fails to deliver any such statement within such ten (10) day period, Landlord may deliver to Tenant an additional request for such statement and Tenant’s failure to deliver such statement to Landlord within ten (10) days after delivery of such additional request will constitute a default under this Lease.  Tenant agrees to indemnify and protect Landlord from and against any and all claims, damages, losses, liabilities and expenses (including attorneys’ fees and costs) attributable to any failure by Tenant to timely deliver any such estoppel certificate to Landlord as required by this Paragraph 26.

27.          BUILDING PLANNING.  If Landlord requires the Premises for use in conjunction with another suite or for other reasons connected with the planning program for the Building or the Project, Landlord will have the right, upon thirty (30) days’ prior written notice to Tenant, to move Tenant to other space in the Building of substantially similar size as the Premises, and with tenant improvements of substantially similar age, quality and layout as then existing in the Premises.  Any such relocation will be at Landlord’s cost and expense, including the cost of providing such substantially similar tenant improvements (but not any furniture or personal property) and Tenant’s reasonable moving, telephone installation

11

and stationary reprinting costs.  If Landlord so relocates Tenant, the terms and conditions of this Lease will remain in full force and effect and apply to the new space, except that (a) a revised Exhibit “A” will become part of this Lease and will reflect the location of the new space, (b) Paragraph 1 of this Lease will be amended to include and state all correct data as to the new space, (c) the new space will thereafter be deemed to be the “Premises”, and (d) all economic terms and conditions (e.g. rent, total Operating Expense Allowance, etc.) will be adjusted on a per square foot basis based on the total number of rentable square feet of area contained in the new space.  Landlord and Tenant agree to cooperate fully with one another in order to minimize the inconvenience to Tenant resulting from any such relocation.

28.          RULES AND REGULATIONS.  Tenant agrees to faithfully observe and comply with the “Rules and Regulations,” a copy of which is attached hereto and incorporated herein by this reference as Exhibit “D,” and all reasonable and nondiscriminatory modifications thereof and additions thereto from time to time put into effect by Landlord.  Landlord will not be responsible to Tenant for the violation or non-performance by any other tenant or occupant of the Building of any of the Rules and Regulations.

29.          MODIFICATION AND CURE RIGHTS OF LANDLORD’S MORTGAGEES AND LESSORS.  Tenant, within ten (10) days after request therefor, agrees to execute any reasonable amendments to this Lease which may be requested by any lender or ground lessor of the Project, provided any such amendments do not increase the obligations of Tenant under this Lease or adversely affect the leasehold estate created by this Lease.  In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgage covering the Premises or ground lessor of Landlord whose address has been furnished to Tenant, and Tenant agrees to offer such beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the default (including with respect to any such beneficiary or mortgagee, time to obtain possession of the Premises, subject to this Lease and Tenant’s rights hereunder, by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure).

30.          DEFINITION OF LANDLORD.  The term “Landlord,” as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, means and includes only the owner or owners, at the time in question, of the fee title of the Premises or the lessees under any ground lease, if any.  In the event of any transfer, assignment or other conveyance or transfers of any such title (other than a transfer for security purposes only), Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) will be automatically relieved from and after the date of such transfer, assignment or conveyance of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, so long as the transferee assumes in writing all such covenants and obligations of Landlord arising after the date of such transfer.  Landlord and Landlord’s transferees and assignees have the absolute right to transfer all or any portion of their respective title and interest in the Project, the Building, the Premises and/or this Lease without the consent of Tenant, and such transfer or subsequent transfer will not be deemed a violation on Landlord’s part of any of the terms and conditions of this Lease.

31.          WAIVER.  The waiver by either party of any breach of any term, covenant or condition herein contained will not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained, nor will any custom or practice which may develop between the parties in the administration of the terms hereof be deemed a waiver of or in any way affect the right of either party to insist upon performance in strict accordance with said terms.  The subsequent acceptance of rent or any other payment hereunder by Landlord will not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord’s knowledge of such preceding breach at the time of acceptance of such rent.  No acceptance by Landlord of a lesser sum than the basic rent and additional rent or other sum then due will be deemed to be other than on account of the earliest installment of such rent or other amount due, nor will any endorsement or statement on any check or any letter accompanying any check be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such installment or other amount or pursue any other remedy provided in this Lease.  The consent or approval of Landlord to or of any act by Tenant requiring Landlord’s consent or approval will not be deemed to waive or render unnecessary Landlord’s consent or approval to or of any subsequent similar acts by Tenant.

32.          PARKING.  So long as this Lease is in effect and provided Tenant is not in default hereunder, Landlord grants to Tenant, Tenant’s visitors and guests a non-exclusive license to use the parking areas which serve the Building subject to the terms and conditions of this Paragraph 32 and the Rules and Regulations regarding parking contained in Exhibit “D” attached hereto.  Tenant will not use or allow any of Tenant’s employees or guests to use any parking spaces which have been specifically assigned by Landlord to other tenants or occupants or for other uses such as visitor parking or which have been designated by any governmental entity as being restricted to certain uses.  Landlord may assign any unreserved and unassigned parking spaces and/or make all or any portion of such spaces reserved, if Landlord reasonably determines that it is necessary for orderly and efficient parking or for any other reasonable reason.  Tenant agrees to cause its employees, subtenants, assignees, contractors, suppliers, customers and invitees to comply with the Rules and Regulations.  Landlord  reserves the right from time to time to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities as it deems reasonably necessary for the operation of the parking facilities.

33.          FORCE MAJEURE.  If either Landlord or Tenant is delayed, hindered in or prevented from the performance of any act required under this Lease by reason of strikes, lock-outs, labor troubles, inability to procure standard materials, failure of power, restrictive governmental laws, regulations or orders or governmental action or inaction (including failure, refusal or delay in issuing permits, approvals and/or authorizations which is not the result of the action or inaction of the party claiming such delay), riots, civil unrest or insurrection, war, fire, earthquake, flood or other natural disaster, unusual and unforeseeable delay which results from an interruption of any public utilities (e.g., electricity, gas, water, telephone) or other unusual and unforeseeable delay not within the reasonable control of the party delayed in performing work or doing acts required under the provisions of this Lease, then performance of such act will be excused for the period of the delay and the period for the performance of any such act will be extended for a period equivalent to the period of such delay.  Notwithstanding the foregoing, the provisions of this Paragraph 33 will not operate to excuse Tenant from prompt payment of rent or any other payments required under the provisions of this Lease.

34.          SIGNS.  Landlord will designate the location on the Premises, if any, for one Tenant identification sign.  Tenant has no right to install Tenant identification signs in any other location in, on or about the Premises or the Project and will not display or erect any other signs, displays or other advertising materials that are visible from the exterior of the Building or from within the Building in any interior or exterior common areas.  The size, design, color and other physical aspects of any and all permitted sign(s) will be subject to (i) Landlord’s written approval prior to installation, which approval may be withheld in Landlord’s discretion, (ii) any covenants, conditions or restrictions and sign criteria governing the Project, and (iii) any applicable municipal or governmental permits and approvals.  The current sign criteria for the

12

Project is shown on Exhibit C attached hereto.  Tenant will be solely responsible for all costs for installation, maintenance, repair and removal of any Tenant identification sign(s).  If Tenant fails to remove Tenant’s sign(s) upon termination of this Lease and repair any damage caused by such removal, Landlord may do so at Tenant’s sole cost and expense.  Tenant agrees to reimburse Landlord for all costs incurred by Landlord to effect any installation, maintenance or removal on Tenant’s account, which amount will be deemed additional rent, and may include, without limitation, all sums disbursed, incurred or deposited by Landlord including Landlord’s costs, expenses and actual attorneys’ fees with interest thereon at the Interest Rate from the date of Landlord’s demand until paid by Tenant.  Any sign rights granted to Tenant under this Lease are personal to Tenant and may not be assigned, transferred or otherwise conveyed to any assignee or subtenant of Tenant without Landlord’s prior written consent, which consent Landlord may withhold in its sole and absolute discretion.

35.          LIMITATION ON LIABILITY.  In consideration of the benefits accruing hereunder, Tenant on behalf of itself and all successors and assigns of Tenant covenants and agrees that, in the event of any actual or alleged failure, breach or default hereunder by Landlord:  (a) Tenant’s recourse against Landlord for monetary damages will be limited to Landlord’s interest in the Building including, subject to the prior rights of any Mortgagee, Landlord’s interest in the rents of the Building and any insurance proceeds payable to Landlord; (b) except as may be necessary to secure jurisdiction of the partnership, no partner of Landlord shall be sued or named as a party in any suit or action and no service of process shall be made against any partner, member, shareholder, officer or director of Landlord; (c)  no partner, member, shareholder, officer or director of Landlord shall be required to answer or otherwise plead to any service of process; (d)  no judgment will be taken against any partner, member, shareholder, officer or director of Landlord and any judgment taken against any partner, member, shareholder, officer or director of Landlord may be vacated and set aside at any time after the fact; (e) no writ of execution will be levied against the assets of any partner, member, shareholder, officer or director of Landlord; (f) the obligations under this Lease do not constitute personal obligations of the individual partners, members, directors, officers or shareholders of Landlord, and Tenant shall not seek recourse against the individual partners, members, directors, officers or shareholders of Landlord or any of their personal assets for satisfaction of any liability in respect to this Lease; and (g) these covenants and agreements are enforceable both by Landlord and also by any partner, member, shareholder, officer or director of Landlord.

36.          FINANCIAL STATEMENTS.  Prior to the execution of this Lease by Landlord and at any time during the Term of this Lease upon ten (10) days prior written notice from Landlord, Tenant agrees to provide Landlord with a current financial statement for Tenant and any guarantors of Tenant and financial statements for the two (2) years prior to the current financial statement year for Tenant and any guarantors of Tenant.  Such statements are to be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, audited by an independent certified public accountant.

37.          QUIET ENJOYMENT.  Landlord covenants and agrees with Tenant that upon Tenant paying the rent required under this Lease and paying all other charges and performing all of the covenants and provisions on Tenant’s part to be observed and performed under this Lease, Tenant may peaceably and quietly have, hold and enjoy the Premises in accordance with this Lease.

38.          MISCELLANEOUS.

(a)           Conflict of Laws.  This Lease shall be governed by and construed solely pursuant to the laws of the State, without giving effect to choice of law principles thereunder.

(b)           Successors and Assigns.  Except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns.

(c)           Professional Fees and Costs.  If either Landlord or Tenant should bring suit against the other with respect to this Lease, then all costs and expenses, including without limitation, actual professional fees and costs such as appraisers’, accountants’ and attorneys’ fees and costs, incurred by the party which prevails in such action, whether by final judgment or out of court settlement, shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment.  As used herein, attorneys’ fees and costs shall include, without limitation, attorneys’ fees, costs and expenses incurred in connection with any (i) post judgment motions; (ii) contempt proceedings; (iii) garnishment, levy and debtor and third party examination; (iv) discovery; and (v) bankruptcy litigation.  Tenant agrees to pay all collection agency fees and attorneys’ fees charged to Landlord in connection with any late payment or non-payment of rent or any other amounts due under this Lease including, without limitation, a fee of $75.00 for the preparation of any demand for delinquent rent or any notice to pay rent or quit.

(d)           Terms and Headings.  The words “Landlord” and “Tenant” as used herein shall include the plural as well as the singular.  Words used in any gender include other genders.  The paragraph headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof.

(e)           Time.  Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor.

(f)            Prior Agreement; Amendments.  This Lease constitutes and is intended by the parties to be a final, complete and exclusive statement of their entire agreement with respect to the subject matter of this Lease.  This Lease supersedes any and all prior and contemporaneous agreements and understandings of any kind relating to the subject matter of this Lease.  There are no other agreements, understandings, representations, warranties, or statements, either oral or in written form, concerning the subject matter of this Lease.  No alteration, modification, amendment or interpretation of this Lease shall be binding on the parties unless contained in a writing which is signed by both parties.

(g)           Separability.  The provisions of this Lease shall be considered separable such that if any provision or part of this Lease is ever held to be invalid, void or illegal under any law or ruling, all remaining provisions of this Lease shall remain in full force and effect to the maximum extent permitted by law.

(h)           Recording.  Neither Landlord nor Tenant shall record this Lease nor a short form memorandum thereof without the consent of the other.

13

(i)            Counterparts.  This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement.

(j)            Nondisclosure of Lease Terms.  Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord.  Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord’s relationship with other tenants.  Accordingly, Tenant agrees that it, and its partners, officers, directors, employees, agents and attorneys, shall not intentionally and voluntarily disclose the terms and conditions of this Lease to any newspaper or other publication or any other tenant or apparent prospective tenant of the Building or other portion of the Project, or real estate agent, either directly or indirectly, without the prior written consent of Landlord, provided, however, that Tenant may disclose the terms to prospective subtenants or assignees under this Lease.

(k)           Non-Discrimination.  Tenant acknowledges and agrees that there shall be no discrimination against, or segregation of, any person, group of persons, or entity on the basis of race, color, creed, religion, age, sex, marital status, national origin, or ancestry in the leasing, subleasing, transferring, assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portion thereof.

(l)            JointProduct.  This Lease is the result of arms-length negotiations between Landlord and Tenant and their respective attorneys.  Accordingly, neither party shall be deemed to be the author of this Lease and this Lease shall not be construed against either party.

39.          EXECUTION OF LEASE.

(a)           Joint and Several Obligations.  If more than one person executes this Lease as Tenant, their execution of this Lease will constitute their covenant and agreement that (i) each of them is jointly and severally liable for the keeping, observing and performing of all of the terms, covenants, conditions, provisions and agreements of this Lease to be kept, observed and performed by Tenant, and (ii) the term “Tenant” as used in this Lease means and includes each of them jointly and severally.  The act of or notice from, or notice or refund to, or the signature of any one or more of them, with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, expiration, termination or modification of this Lease, will be binding upon each and all of the persons executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or so given or received such notice or refund or so signed.

(b)           Tenant as Corporation or Partnership.  If Tenant executes this Lease as a corporation or partnership, then Tenant and the persons executing this Lease on behalf of Tenant represent and warrant that such entity is duly qualified and in good standing to do business in California and that the individuals executing this Lease on Tenant’s behalf are duly authorized to execute and deliver this Lease on its behalf, and in the case of a corporation, in accordance with a duly adopted resolution of the board of directors of Tenant, a copy of which is to be delivered to Landlord on execution hereof, if requested by Landlord, and in accordance with the by-laws of Tenant, and, in the case of a partnership, in accordance with the partnership agreement and the most current amendments thereto, if any, copies of which are to be delivered to Landlord on execution hereof, if requested by Landlord, and that this Lease is binding upon Tenant in accordance with its terms.

(c)           Examination of Lease.  Submission of this instrument by Landlord to Tenant for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant.

40.          TELECOMMUNICATIONS LINES.  Tenant shall be solely responsible for contacting the appropriate telephone company and contracting to have telephone and data lines brought to the Premises and connected to Tenant’s telecommunications equipment.  Tenant must obtain prior written approval for the installation of all such lines from the management office.  All work required in connection with the installation of such telephone and data lines shall be done by licensed contractors that have been pre-approved in writing by the management office.  Tenant shall be solely responsible for any and all costs connected with the installation, maintenance and repair of any telephone and data lines.  In addition, Tenant shall be solely responsible for any monthly charge incurred relative to such telephone and data lines.  Once telephone and data lines have been installed and connected to the Premises, such lines shall, at Landlord’s election, become the property of Landlord.  In the event Tenant vacates the Premises or relocates or expands within the Project, Tenant shall discontinue service to such lines but may NOT have the lines removed, re-routed or redirected for Tenant’s use without Landlord’s prior consent.

41.          LEASE GUARANTY.  Intentionally omitted.

42.          OFAC COMPLIANCE.

(a)           Certification.  Tenant certifies, represents, warrants and covenants that:

(i)It is not acting and will not act, directly or indirectly, for or on behalf of any person, group, entity, or nation named by any Executive Order or the United States Treasury Department as a terrorist, “Specially Designated National and Blocked Person”, or other banned or blocked person, entity, nation or transaction pursuant to any law, order, rule, or regulation that is enforced or administered by the Office of Foreign Assets Control; and

(ii)It is not engaged in this transaction, directly or indirectly on behalf of, or instigating or facilitating this transaction, directly or indirectly on behalf of, any such person, group, entity or nation.

(b)           Indemnity.  Tenant hereby agrees to defend (with counsel reasonably acceptable to Landlord), indemnify and hold harmless Landlord and the Landlord Indemnified Parties from and against any and all Indemnified Claims arising from or related to any such breach of the foregoing certifications, representations, warranties and covenants.

14

43.          HVAC.  Tenant represents to Landlord that Tenant has inspected the Premises and acknowledges that the Premises does not have an HVAC system; nevertheless, Tenant agrees that the Premises are suitable for Tenant’s intended use and Tenant accepts the Premises AS-IS.

[SIGNATURES ON NEXT PAGE]

15

SIGNATURE PAGE TO LEASE
BY AND BETWEEN AIRPORT INDUSTRIAL COMPLEX (“LANDLORD”) AND
MFIC CORPORATION, A DELAWARE CORPORATION (“TENANT”)

IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed by their duly authorized representatives.

TENANT:	LANDLORD:
MFIC CORPORATION, a Delaware corporation
	AIRPORT INDUSTRIAL COMPLEX,
	a California limited partnership
	By:	Koll Industrial Properties, LLC,
		a Delaware limited liability company, as agent
ROBERT P. BRUNO, President
		By:
			Diane Scott
DENNIS P. RIORDAN, Treasurer			Vice President — Asset Management
Date:        , 2007	Date:        , 2007

16

EXHIBIT “A-I”

PREMISES

EXHIBIT “A-1”

EXHIBIT “B”

INTENTIONALLY OMITTED

“EXHIBIT B-1”

EXHIBIT “C”

SIGN CRITERIA

1.             Recitals:

Signs and other graphics are an essential element of any community.  As such, their location, number, size and design consistency have a significant influence upon a community’s visual environment and a resultant effect upon a viewer’s perception of that community.

In communities where signs have not been property regulated, they have contributed to visual clutter, unpleasant impressions and even confusion.  In many of these instances signs have failed to achieve their original objective:  Communication of their intended message.

Under proper regulation, however, signs and other graphics may be designed and displayed to effectively communicate their message and at the same time be appropriate to their surroundings.  Signs so designed and displayed can contribute to community identity, and help create a community which is efficiently organized and visually attractive.  All new leases and renewals will contain this exhibit and management will strictly enforce its intent.

2.             Criteria:

Tenant shall be allowed only one sign regardless of size of occupancy.  No advertising placards, merchandise, banners, pennants, names, insignia, trademarks, or other descriptive material shall be affixed or maintained in a fashion to be displayed to the exterior of the suite or on the glass panes of the building, landscaped areas, streets or parking areas.  No alarm company stickers larger than 3-1/2” x 2-1/2” will be allowed.  Koll standard U.P.S. signs are available at the leasing office for the asking.  No other U.P.S. signage will be permissible.

3.             Signage Layout Submitted to Landlord for Approval:

A layout of each proposed sign showing copy/logo and color samples must be submitted to the Landlord for approval prior to fabrication and installation.

4.             Sign Specification/Method of Building Attachment:

The subject premises have an 18” x 48” aluminum receptacle/frame provided by and at the sole expense of the Landlord for insertion and placement of Tenant signage.  The Tenant’s sign/insert shall be constructed at the sole expense of the Tenant, constructed of Opaque Lumisite or second-surface Lumisite coated in white.  If it is necessary to coat the exterior surface to obtain the desired background color, the entire surface must be coated the same color with no masking and the coating must have a five (5) to seven (7) year exterior life expectancy without fading or peeling.  All lettering, legends and logos are to be computer-cut two (2) mil. high performance vinyl.  Hand painting in not permitted.

5.             Window Lettering:

No window lettering is permitted except for the Tenant’s business name only which may be placed in the window immediately adjacent to the main entry door.  Tenants with little or no adjacent glass may place their name on the door.  Copy is to be computer cut two (2) mil. high performance white vinyl in 3” helvetica medium lettering.  Lettering is to be centered between the window frames with a minimum 1-1/2” border on each side.  Lettering is not to be condensed more than 75%.  Letter height may be reduced up to 1/2” to stay within the other criteria.  If the business name still cannot be accommodated on one line then it may be placed on two (2) lines using a 2-1/2” letter height and 1-3/4” spacing between lines.  The top edge of the top line is to be 69” above the concrete slab.  Any and all other attachments to the glass will be in non-conformance.  Subtenant names, business services or types, and all other attachments to the glass or glazing, except as described above, shall be considered non-conforming and subject to removal.

6.             Window Tinting:

No mirrored or colored tinting will be authorized.  Before any tinting is applied to the Tenant’s windows, a sample must be submitted to the Landlord for written approval prior to installation.

7.             Landlord’s Right to Enforce:

This criteria establishes the uniform policies for all Tenant sign identification.  This criteria has been established for the purpose of maintaining the over all appearance of the complex and to provide our tenants with a consistent quality environment from which to conduct business.  Any sign, graphics or other material installed that does not conform to this criteria may be brought into conformity by the Landlord without notice.  Any cost incurred by the Landlord to remove non-conforming signs or to correct defacement from mounting of non-conforming signs shall be the responsibility of Tenant.

EXHIBIT “C-1”

EXHIBIT “D”

RULES AND REGULATIONS

A.            General Rules and Regulations. The following rules and regulations govern the use of the Building and the Common Areas. Tenant will be bound by such rules and regulations and agrees to cause Tenant’s Authorized Users, its employees, subtenants, assignees, contractors, suppliers, customers and invitees to observe the same.

1.             Except as specifically provided in the Lease to which these Rules and Regulations are attached, no sign, placard, picture, stickers, banners, advertisement, name or notice may be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord will have the right to remove, at Tenant’s expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls are to be printed, painted, affixed or inscribed at the expense of Tenant and under the direction of Landlord by a person or company designated or approved by Landlord.

2.             If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, or placed on any windowsill, which is visible from the exterior of the Premises, Tenant will immediately discontinue such use. Tenant agrees not to place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises, including, without limitation, stickers, tinting materials, foil shades, blinds or screens.

3.             Tenant will not obstruct any sidewalks, passages, exits or entrances of the Project. The sidewalks, passages, exits and entrances are not open to the general public, but are open, subject to reasonable regulations, to Tenant’s business invitees. Landlord will in all cases retain the right to control and prevent access thereto of all persons whose presence in the reasonable judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Project and its tenants, provided that nothing herein contained will be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal or unlawful activities. No tenant and no employee or invitee of any tenant will go upon the roof of the Building.

4.             Landlord expressly reserves the right to absolutely prohibit solicitation, canvassing, distribution of handbills or any other written material or goods, peddling, sales and displays of products, goods and wares in all portions of the Project except for such activities as may be expressly permitted under the Lease. Landlord reserves the right to restrict and regulate the use of the Common Areas of the Project by invitees of tenants providing services to tenants on a periodic or daily basis including food and beverage vendors. Such restrictions may include limitations on time, place, manner and duration of access to a tenant’s premises for such purposes.

5.             Landlord reserves the right to prevent access to the Project in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action.

6.             Landlord reserves the right to approve companies providing cleaning and janitorial services for the Premises. Tenant will not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises.

7.             Landlord will furnish Tenant, free of charge, with two keys to each exterior entry door lock to the Premises. Landlord may make a reasonable charge for any additional keys. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install any new additional lock or bolt on any door of the Premises. Tenant, upon the termination of its tenancy, will deliver to Landlord the keys to all doors which have been furnished to Tenant.

8.             If Tenant requires telegraphic, telephonic, burglar alarm, satellite dishes, antennae or similar services, it will first obtain Landlord’s approval, and comply with, Landlord’s reasonable rules and requirements applicable to such services, which may include separate licensing by, and fees paid to, Landlord, as well as all federal, state, and local regulations. Tenant will not transmit or receive any electromagnetic, microwave or other radiation which may be harmful or hazardous to any person or property in or about the Premises or elsewhere within the Project.

9.             No deliveries will be made which impede or interfere with other tenants or the operation of the Building.

10.           Tenant will not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant will not sleep, cook or wash clothes in the Premises or use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, intense glare, light or heat, nor will Tenant bring into or keep in or about the Premises any birds or animals.

11.           Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. Without the written consent of Landlord, Tenant will not use the name of the Building or the Project in connection with or in promoting or advertising the business of Tenant except as Tenant’s address.

12.           The toilet rooms, toilets, urinals, wash bowls and other apparatus will not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from any violation of this rule will be borne by the tenant who, or whose employees or invitees, break this rule.

13.           Tenant will not sell, or permit the sale at retail of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant will not make any building-to-building solicitation of business from other tenants in the Project. Tenant will not use the Premises for any business or activity other than that specifically provided for in this Lease. Tenant will not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Landlord’s prior written consent, which consent Landlord may withhold in its sole and absolute discretion.

EXHIBIT “D-1”

14.           Except for the ordinary hanging of pictures and wall decorations, Tenant will not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof, except in accordance with the provisions of the Lease pertaining to alterations. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant will not cut or bore holes for wires. Tenant will not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule.

15.           Landlord reserves the right to exclude or expel from the Project any person who, in Landlord’s judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Building.

16.           Tenant will store all its trash and garbage within its Premises or in other facilities provided by Landlord. Tenant will not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal is to be made in accordance with directions issued from time to time by Landlord.

17.           The Premises will not be used for lodging nor shall the Premises be used for any improper, immoral or objectionable purpose.

18.           Tenant agrees to comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency.

19.           Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. Tenant will not leave or store any equipment, materials or items of any kind outside the walls of the Premises.

20.           Tenant shall use at Tenant’s cost such pest extermination and control contractor(s) as Landlord may direct and at such intervals as Landlord may reasonably require.

21.           To the extent Landlord reasonably deems it necessary to exercise exclusive control over any portions of the Common Areas for the mutual benefit of the tenants in the Project, Landlord may do so subject to reasonable, non-discriminatory additional rules and regulations.

22.           Tenant’s requirements will be attended to only upon appropriate application to Landlord’s management office for the Project by an authorized individual of Tenant. Employees of Landlord will not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord.

23.           These Rules and Regulations are in addition to, and will not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of the Lease. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord will be construed as a waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Project.

24.           Landlord reserves the right to make such other and reasonable and non-discriminatory Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Project and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations herein above stated and any additional reasonable and non-discriminatory rules and regulations which are adopted. Tenant is responsible for the observance of all of the foregoing rules by Tenant’s employees, agents, clients, customers, invitees and guests.

25.           Tenant is specifically prohibited from smoking (cigarettes, cigars, pipes or other types of smoking) within the Premises.

B.            Parking Rules and Regulations. The following rules and regulations govern the use of the parking facilities which serve the Building. Tenant will be bound by such rules and regulations and agrees to cause its employees, subtenants, assignees, contractors, suppliers, customers and invitees to observe the same:

1.             Tenant will not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant’s employees, subtenants, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. No vehicles are to be left in the parking areas overnight and no vehicles are to be parked in the parking areas other than normally sized passenger automobiles, motorcycles and pick-up trucks. No extended term storage of vehicles is permitted.

2.             Vehicles must be parked entirely within painted stall lines of a single parking stall.

3.             All directional signs and arrows must be observed.

4.             The speed limit within all parking areas shall be five (5) miles per hour.

5.             Parking is prohibited: (a) in areas not striped for parking; (b) in aisles or on ramps; (c) where “no parking” signs are posted; (d) in cross-hatched areas; and (e) in such other areas as may be designated from time to time by Landlord or Landlord’s parking operator.

6.             Landlord reserves the right, without cost or liability to Landlord, to tow any vehicle if such vehicle’s audio theft alarm system remains engaged for an unreasonable period of time.

7.             Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited.

EXHIBIT “D-2”

8.             Landlord may refuse to permit any person to park in the parking facilities who violates these rules with unreasonable frequency, and any violation of these rules shall subject the violator’s car to removal, at such car owner’s expense. Tenant agrees to use its best efforts to acquaint its employees, subtenants, assignees, contractors, suppliers, customers and invitees with these parking provisions, rules and regulations.

9.             Landlord reserves the right, without cost or liability to Landlord, to tow any vehicles which are used or parked in violation of these rules and regulations.

10.           Landlord reserves the right from time to time to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities as it deems reasonably necessary for the operation of the parking facilities.

EXHIBIT “D-3”

EXHIBIT “E”

TENANT’S INSURANCE REQUIREMENTS

This outlines the insurance requirements of your Lease. To assure compliance with these terms, we suggest you send a copy of this Exhibit “E” to your insurer or agent. Initial Certificates must be provided to Landlord prior to occupancy of the Premises, renewals ten (10) days before expiration.

1.Commercial General Liability Insurance:

$1,000,000 Combined Single Limit, each occurrence

Bodily Injury, Property Damage, Personal Injury and Advertising Injury; Blanket Contractual Liability - Covering Indemnity Paragraph 18(b); Products and Completed Operations Liability; Landlord as an Additional Insured; Severability of Interest, permitting Cross liability among insureds; provision stating that tenant’s insurance is primary and non-contributing with any insurance carried by Landlord.

$1,000,000 Aggregate (minimum) this location

$1,000,000 Products/Completed Operations Aggregate

$ 50,000 Fire Legal Liability Limit, per fire

2.Tenant’s Property Insurance:

All Risks coverage of Property owned by Tenant or for which the Tenant is legally liable; replacement cost basis, covering no less than ninety percent (90%) of all values.*

3.Tenant’s Business Interruption Insurance:

All Risks coverage of operations at leased premises; covering one-years business interruption due to insured peril.*

4.Tenant’s Workers’ Compensation and Employer’s Liability Insurance (if requested):

Statutory Limits and terms required by state of leased premises; $1,000,000 Employer’s Liability Limit.

5.Tenant’s Automobile Insurance (if requested):

$1,000,000 Combined Limit per accident; covering all owned, non-owned, hired autos (Symbol 1 - any auto).

All insurance is to be with licensed insurers having a Best’s rating of “A 10” or better, and must include the following:

*Waiver of Subrogation in favor of Landlord (property and business interruption)
Thirty (30) day pre-notice of cancellation/non renewal to Landlord

PLEASE INCLUDE THE PREMISE ADDRESS AS THE INSURED LOCATION.

SEND CERTIFICATE TO AND NAME THE FOLLOWING AS ADDITIONAL INSUREDS:

AIRPORT INDUSTRIAL COMPLEX

KOLL INDUSTRIAL PROPERTIES, LLC

17755 Sky Park East, Suite 100

Irvine, CA 92614

(949) 261-2499

EXHIBIT “E”

EXHIBIT “F”

FORM OF ENVIRONMENTAL QUESTIONNAIRE

The purpose of this form is to obtain information regarding the use or proposed use of hazardous materials at the premises. Prospective tenants should answer the questions in light of their proposed operations at the premises. Existing tenants should answer the questions as they relate to ongoing operations at the premises and should update any information previously submitted. If additional space is needed to answer the questions, you may attach separate sheets of paper to this form.

1.             GENERAL INFORMATION

Name of Responding Company:
Check the Applicable Status:		Prospective Tenant	Existing Tenant
Mailing Address:
Contact Person and Title:
Telephone Number:(	)
Address of Leased Premises:
Length of Lease Term:
Describe the proposed operations to take place on the premises, including principal products manufactured or services to be conducted. Existing tenants should describe any proposed changes to ongoing operations.

2.             STORAGE OF HAZARDOUS MATERIALS

                2.1           Will any hazardous materials be used or stored on-site?

Wastes	Yes	No
Chemical Products	Yes	No

2.2Attach a list of any hazardous materials to be used or stored, the quantities that will be on-site at any given time, and the location and method of storage (e.g., 55-gallon drums on concrete pad).

3.STORAGE TANKS AND SUMPS

3.1Is any above or below ground storage of gasoline, diesel or other hazardous substances in tanks or sumps proposed or currently conducted at the premises?

Yes No

If yes, describe the materials to be stored, and the type, size and construction of the sump or tank. Attach copies of any permits obtained for the storage of such substances.

3.2Have any of the tanks or sumps been inspected or tested for leakage?

Yes No

If so, attach the results.

EXHIBIT “F”

3.3Have any spills or leaks occurred from such tanks or sumps?

Yes No

If so, describe.

3.4Were any regulatory agencies notified of the spill or leak?

Yes No

If so, attach copies of any spill reports filed, any clearance letters or other correspondence from regulatory agencies relating to the spill or leak.

3.5Have any underground storage tanks or sumps been taken out of service or removed?

Yes No

If yes, attach copies of any closure permits and clearance obtained from regulatory agencies relating to closure and removal of such tanks.

4.             SPILLS

4.1           During the past year, have any spills occurred at the premises?

Yes No

If yes, please describe the location of the spill.

4.2           Were any agencies notified in connection with such spills?

Yes No

If yes, attach copies of any spill reports or other correspondence with regulatory agencies.

4.3Were any clean-up actions undertaken in connection with the spills?

Yes No

Attach copies of any clearance letters obtained from any regulatory agencies involved and the results of any final soil or groundwater sampling done upon completion of the clean-up work.

5.             WASTE MANAGEMENT

5.1           Has your company been issued an EPA Hazardous Waste Generator I.D. Number?

Yes No

5.2           Has your company filed a biennial report as a hazardous waste generator?

Yes No

If so, attach a copy of the most recent report filed.

5.3Attach a list of the hazardous wastes, if any, generated or to be generated at the premises, its hazard class and the quantity generated on a monthly basis.

5.4           Describe the method(s) of disposal for each waste. Indicate where and how often disposal will take place.

On-site treatment or recovery

EXHIBIT “F”

Discharged to sewer

Transported and disposed of off-site

Incinerator

5.5Indicate the name of the person(s) responsible for maintaining copies of hazardous waste manifests completed for off-site shipments of hazardous waste.

5.6Is any treatment of processing of hazardous wastes currently conducted or proposed to be conducted at the premises:

Yes No

If yes, please describe any existing or proposed treatment methods.

5.7Attach copies of any hazardous waste permits or licenses issued to your company with respect to its operations at the premises.

6.WASTEWATER TREATMENT/DISCHARGE

6.1Do you discharge wastewater to:

storm drain?	sewer?
surface water?	no industrial discharge

6.2Is your wastewater treated before discharge?

Yes No

If yes, describe the type of treatment conducted.

6.3Attach copies of any wastewater discharge permits issued to your company with respect to its operations at the premises.

7.AIR DISCHARGES

7.1Do you have any filtration systems or stacks that discharge into the air?

Yes No

7.2Do you operate any of the following types of equipment or any other equipment requiring an air emissions permit?

Spray booth

Dip tank

Drying oven

Incinerator

Other (please describe)

No equipment requiring air permits

7.3Are air emissions from your operations monitored?

EXHIBIT “F”

Yes No

If so, indicate the frequency of monitoring and a description of the monitoring results.

7.4Attach copies of any air emissions permits pertaining to your operations at the premises.

8.HAZARDOUS MATERIALS DISCLOSURES

8.1Does your company handle hazardous materials in a quantity equal to or exceeding an aggregate of 500 pounds, 55 gallons, or 200 cubic feet per month?

Yes No

8.2Has your company prepared a hazardous materials management plan pursuant to any applicable requirements of a local fire department or governmental agency

Yes No

If so, attach a copy of the business plan.

8.3Has your company adopted any voluntary environmental, health or safety program?

Yes No

If so, attach a copy of the program.

9.ENFORCEMENT ACTIONS, COMPLAINTS

9.1Has your company ever been subject to any agency enforcement actions, administrative orders, or consent decrees?

Yes No

If so, describe the actions and any continuing compliance obligations imposed as a result of these actions.

9.2Has your company ever received requests for information, notice or demand letters, or any other inquiries regarding its operations?

Yes No

9.3Have there ever been, or are there now pending, any lawsuits against the company regarding any environmental or health and safety concerns?

Yes No

9.4Has an environmental audit ever been conducted at your company’s current facility?

Yes No

If so, identify who conducted the audit and when it was conducted.

COMPANY:

a

By:

Name/Title:

Date:

EXHIBIT “F”

EXHIBIT “G”

TENANT COMMENCEMENT CERTIFICATE

To:		(“Landlord”)
From:		(“Tenant”)
Date:		, 200
RE:	Property Address:

The undersigned, as an authorized representative of the Tenant under that certain Lease (the “Lease”) dated                               , 200  , as modified (if applicable) by amendment(s) dated                               , 200  , hereby certifies that:

1.Tenant has accepted possession and entered into occupancy of the Premises described in the Lease as of                               , 200  .

2.The Commencement Date of the Lease [or the commencement of the term for the expansion of the Premises] was/is:                               , 200  .

3.The Expiration Date of the Lease is:                               , 200  .

4.The Lease is in full force and effect.

Very truly yours,

TENANT

a

[NOT FOR EXECUTION — SAMPLE ONLY]

By:

Name:

Title:

EXHIBIT “G”

EX-10.81

Exhibit 10.81

                                                                                                                March 5, 2008

Microfluidics Corporation, as Agent

30 Ossipee Road

Newton, Massachusetts, 02464-9101

Attn: Dennis P. Riordan, Controller

Re; Loan and Security Agreement ( All Assets) dated as of March 3, 2004 (the “Loan Agreement”), between  and among MFIC Corporation, a Delaware Corporation, (“MFIC”) and Microfluidics Corporation, a Delaware Corporation, (“Microfluidics”) (MFIC and Micofluidics are hereafter collectively referred to as the “Borrower”) and TD Banknorth, N.A. (formerly known as Banknorth N.A.  the “Lender”) and Related Documents (the “Transaction Documents”)

Gentlemen:

                The following Event of Default has occurred under the Loan Agreement and the Transaction Documents, namely the failure of the Borrower to maintain the required Debt Service Coverage Ratio as required pursuant to Section 13.02 for the fiscal year ending December 31, 2007.

                The Lender hereby waives enforcement of its rights against the Borrower arising from this Event of Default to the extent, and only the extent, that this specific Event of Default occurred or existed under the Loan Agreement as of the fiscal year ending December 31, 2007. This waiver shall be effective only for the specific Event of Default listed herein and only through or as of the date specified above, and in no event shall this waiver be deemed to be a waiver of (a) enforcement of the Lender’s rights with respect to any other Events of Default now existing or hereafter arising, or (b) the Borrower’s compliance with (i) the covenants or other provisions of the Loan Agreement and Transaction Documents from and after the date specified above, or (ii) any other covenants or provisions thereof.

                In consideration of the execution by the Lender of this waiver of default letter, the Borrower agrees to pay to the Lender, as of the date hereof, a fully earned, non-refundable fee in the amount of One Thousand ($1,000.00) Dollars.

                Nothing contained in this letter nor any communications between the Lender and the Borrower shall be a waiver of any rights or remedies the Lender has or may have against the Borrower, except as specifically provided herein. The lender hereby reserves and preserves all of its rights and remedies against the Borrower under the Loan Agreement, the Transaction Documents and applicable law.

Very truly yours,
TD Banknorth, N.A.
By:
	Brant A. McDougall, Senior Vice President

EX-23.(A)

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 23.(a)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in Registration Statement Nos. 333-115006 and 333-132895 on Form SB-2 and Registration Statement Nos. 33-6300, 33-19372, 33-38928, 33-38925, 33-86726, 333-14607, 333-29949, 333-85988, 333-99233, and 333-143557 on Form S-8 of our report dated March 18, 2008, pertaining to the consolidated financial statements of MFIC Corporation which appears in the Annual Report on Form 10-K for the year ended December 31, 2007.

/s/ UHY LLP

Boston, Massachusetts
March 18, 2008

QuickLinks

Exhibit 23.(a)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-23.(B)

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 23.(b)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in Registration Statement Nos. 333-115006 and 333-132895 on Form SB-2 and Registration Statement Nos. 33-6300, 33-19372, 33-38928, 33-38925, 33-86726, 333-14607, 333-29949, 333-85988, 333-99233, and 333-143557 on Form S-8 of our report dated March 1, 2006, pertaining to the consolidated financial statements of MFIC Corporation which appears in the Annual Report on Form 10-K for the year ended December 31, 2005.

/s/ Brown & Brown, LLP

Boston, Massachusetts
March 18, 2008

QuickLinks

Exhibit 23.(b)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-31.1

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 31.1

CERTIFICATION

I, Michael C. Ferrara, hereby certify that:

1.

I have reviewed this Annual Report on Form 10-K of MFIC Corporation (the "Company");

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.

The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.

Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and

5.

The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):

a.

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.

Date: March 17, 2008

/s/  MICHAEL C. FERRARA Michael C. Ferrara
Chief Executive Officer
(Principal Executive Officer)

QuickLinks

Exhibit 31.1

EX-31.2

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 31.2

CERTIFICATION

I, Dennis P. Riordan, hereby certify that:

1.

I have reviewed this Annual Report on Form 10-K of MFIC Corporation (the "Company");

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.

The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.

Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and

5.

The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):

a.

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.

Date: March 17, 2008

/s/  DENNIS P. RIORDAN

Dennis P. Riordan
Controller
(Principal Financial and Accounting Officer)

QuickLinks

Exhibit 31.2

EX-32.1

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Annual Report of MFIC Corporation, a Delaware corporation (the "Company") on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael C. Ferrara, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/  MICHAEL C. FERRARA Michael C. Ferrara Chief Executive Officer
Date: March 17, 2008

QuickLinks

Exhibit 32.1

EX-32.2

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Annual Report of MFIC Corporation, a Delaware corporation (the "Company") on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dennis P. Riordan, the Controller of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/  DENNIS P. RIORDAN Dennis P. Riordan Controller
Date: March 17, 2008

QuickLinks

Exhibit 32.2