10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

Commission File Number: 0-11625

MFIC CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	04-2793022
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
30 Ossipee Road, P.O. Box 9101
Newton, Massachusetts	02464-9101
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:   (617) 969-5452

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 þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o

Indicate by check mark whether the registrant; (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes þ   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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)   Large Accelerated Filer o   Accelerated Filer o   Non-Accelerated Filer þ

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

The aggregate market value of Common Stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in determining such value is an affiliate), based upon the closing sale price of the Common Stock on June 30, 2005 and on March 28, 2006 respectively as reported on the NASDAQ Over-the-Counter Bulletin Board was approximately $19,993,000 and $11,407,000.

The number of shares outstanding of the registrant’s Common Stock as of March 28, 2006 was 9,963,845 shares.

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Company’s Annual Meeting of Stockholders are incorporated by reference into Part III.

MFIC Corporation
2005 Form 10-K Annual Report
Table of Contents

		Page
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	16
Item 2.	Description of Properties	16
Item 3.	Legal Proceedings	17
Item 4.	Submission of Matters to a Vote of Security Holders	17
	PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	17
Item 6.	Selected Financial Data	19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 8.	Financial Statements and Supplementary Data	31
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	31
Item 9A.	Controls and Procedures	31
Item 9B.	Other Information	31
Item 10.	Directors and Executive Officers of the Registrant	31
Item 11.	Executive Compensation	32
Item 12.	Security Ownership of Certain Beneficial Owners and Management	32
	PART III
Item 14.	Independent Accountant Fees for Fiscal 2005 and Fiscal 2004	32
Item 15.	Exhibits, Financial Statements Schedules and Reports on Form 8-K	33
Signatures
Certifications

This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including without limitation those discussed in Item 1A “Risks Factors” and Item 7 under the heading “Certain Factors and Cautionary Statement Regarding Forward-Looking Statements.”  Such forward-looking statements speak only as of the date on which they are made, and the Company cautions readers not to place undue reliance on such statements.

Microfluidizer® is a trademark of the Company, which has been registered with the United States Patent and Trademark Office. All other trademarks or trade names referred to herein are the property of their respective owners.

Item 1.BUSINESS:

Company Overview:

MFIC Corporation (MFIC or the Company) has, 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.

MFIC’s line of high shear fluid processor equipment, marketed under the Company’s Microfluidizer® trademark and trade name, create nanoparticles (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, the Company commercializes its proprietary equipment, processes and technology for the continuous creation of nanoparticles. The Company has undertaken commercialization efforts for its patented MicrofluidizerMixer/Reactor (MMR), which is a high pressure multiple stream mixer/reactor.

The Company’s technology embodied within its Microfluidizer high shear fluid processing technology is used for formulation of products that are normally very difficult to mix and stabilize. Microfluidizer processors 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.

The Company’s management believes that future commercialization and growth of nanotechnology may be, in large part, enabled by the manufacturing capability of the Company’s materials processor and MMR equipment. Further, the Company guarantees scaleup of formulations and results on its processor equipment from 10 milliliters per minute on its laboratory and benchtop models to more than 15 gallons per minute on its pilot and production models.

The Company was 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. From August, 1998 until its sale on February 9, 2004, the Company also operated another division, known as the Morehouse-COWLES Division, 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. The Company’s principal executive offices are located at 30 Ossipee Road, in Newton, Massachusetts 02464-9101 and its telephone number is (617) 969-5452.

The Technologies:

Fluid Processing Equipment.   The Company’s Microfluidizer high shear fluid processing equipment is based on patents and related technology that were licensed by the Company from Arthur D. Little & Co. in 1983 and subsequently purchased by the Company in 1985. The Company holds one unexpired United States patent related to the method used to intimately mix liquids and disperse particulate solids in micro emulsions. See “Patents and Proprietary Rights Protection.”

Microfluidizer high shear fluid processors differ from conventional mechanical mixing and processing technologies in that the Company’s equipment utilizes highly pressurized product streams that travel at high velocities in precisely defined microchannels producing high shear forces and then 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 impact in the fixed

1

geometry design act upon products to cause deagglomeration and particle size reduction. These forces result in what the Company believes 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 scaleup from 10 milliliters per minute to more than 15 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.

MMR.   The Company has introduced its patented Microfluidizer Mixer-Reactor (MMR) system as a continuous chemical reactor, which the Company believes may become a standard device for conducting chemical reactions, many of which can be configured to produce nanoparticles. This system produces uniform nanoparticles 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 manufacture of new nanomaterials in scalable quantities.

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 end-products that require extremely small and uniform particle sizes. New 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. The Company believes that, generally, 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 biodegradable 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 and impact produced by Microfluidizer processor equipment allow the cell wall to be ruptured without damage to, or

2

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. The Company believes that its 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, the Company guarantees scale-up of formulations and results on its equipment from 10 milliliters per minute on its laboratory and benchtop models up to more than 15 gallons per minute on its pilot and production models.

The Company currently manufactures and markets the following lines of equipment:

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 the Company’s 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 models can generate pressures as high as 23,000 psi and have a product flow rate on the order of one-half liter per minute. The M-110EH includes an on-board 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. It has numerous standard features including ceramic plungers, diamond interaction chambers, and options including explosion-proof motors, and steam sterilization.

The M-140 Series:   The M-140K Series is a laboratory-scale unit developed forcustomers 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 pilot 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.

More recently, because of the market demands of 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.

3

(See discussion under heading “Government Regulations”.) It also offers steam in place (SIP) and ultra clean in place (UCIP) options.

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 30,000 psi. The next size up is the 25 HP, single intensifier pump, M-7125 machine with flow rates ranging from 2.3 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 4.5 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, Microfluidics introduced a new addition to the M-700 series product line, the 100 HP, a dual intensifier pump, Model M-710 machine with flow rates ranging from 15 gpm at 5,000 psi to 3.0 gpm at 30,000 psi. This model has the equivalent throughput of the larger and more expensive M-610-100 HP model.

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

(i)    The M-700 Microfluidizer Containment System, which is utilized for the protection of personnel engaged in the processing of highly toxic cancer therapeutic drugs and other hazardous materials.

(ii)   The M-700 Microfluidizer Split System (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. In conjunction with this system, the Company also introduced a Level II Steam Sterility Option for all pilot and production systems used for production of injectable and other pharmaceuticals. This option enables compliance with stringent regulatory production requirements.

(iii)  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.

(iv)  Constant pressure is now an available feature that eliminates virtually all process pressure variations which dramatically improves the overall reliability of all M7250 and 710 machines.

The M-610 Series:   The M-610 Series consists 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.

Microfluidizer Mixer/Reactor (MMR):   The Company has introduced its patented Microfluidizer Mixer/Reactor (MMR) system as a continuous chemical reactor, which the Company believes may become a standard device for conducting chemical reactions, many of which can be configured to produce nanoparticles. This system produces uniform nanoparticles 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 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

4

media, photographic media and pigments. It also may be used in the development and production of unique pharmaceutical products. The Company is 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. The Company believes that it cannot accurately assess or anticipate either the timing of receipt of an order or the delivery of its first MMR laboratory development systems. However, management believes that such event will occur in the foreseeable future. The Company believes that the MMR systems and technology make it a leader in the provision of systems for continuous production of uniform, reproducible, microparticles, nanoparticles and nanodroplets.

Former Company Business Division:

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

Prior to February 9, 2004, the Company-operated Morehouse-COWLES 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 Morehouse-COWLES 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 Morehouse-COWLES product lines are used in broader, high volume, lower value-added applications requiring less stringent particle size reduction.

Marketing and Sales:

The Company’s 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, the Company has an active program of field demonstrations. As an aid to the marketing and sales activity for the equipment, the Company provides prospective customers with access to its 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, which includes equipment rentals. Typically, about one third of such trials result in equipment orders within twelve months. Finally, the Company has 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. The Company has a rental pool of equipment to service the needs of customers, including laboratory and pilot machines. A significant percentage of customers who rent the Company’s equipment elect to purchase rental equipment or to purchase new equipment.

5

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.

The Company sells its equipment in the United States through a network of independent manufacturers’ representative firms that are managed by the Company’s regional sales managers. In a portion of Canada, the Company has an exclusive distributor for the Company’s product line. In Europe, the Company sells its equipment through a network of independent regional sales agents who are managed by the Company’s European Sales organization. In Asia and the Pacific Rim, the Company sells through a network of distributors and independent manufacturer’s representative firms. Customers in other geographical regions are assisted directly by Company sales staff. In November 2005, the Company appointed a vice-president of sales and marketing, who oversees all regional sales managers, independent manufacturers’ representatives, and distributors.

Customers:

The users of the Company’s systems are in various industries, including the chemical, pharmaceuticals, food, cosmetic and biotechnology industries. Two companies each accounted for more than 10% of 2005 revenues. Mizuho Industrial Co. Ltd. (Mizuho) a distributor for the Company, and a customer who is a wholly owned subsidiary of Teva Pharmaceuticals Industries Ltd. (Teva) accounted respectively for 19.5% and 18.9% of the Company’s revenues from continuing operations in 2005, respectively; 20.5% and 12.8%, respectively, in 2004; and 20.6% and 10.6%, respectively, in 2003. 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 10.8% and 10.7% of the trade accounts receivable from continuing operations as of December 31, 2005, respectively. Three customers accounted for 15.1%, 14.7%, and 13.4% of the trade accounts receivable from continuing operations as of December 31, 2004, respectively. One customer accounted for 16.7% of the trade accounts receivable from continuing operations as of December 31, 2003. 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 51.8% of the Company’s revenues from continuing operations in 2005; approximately 51.1% of the Company’s revenues from continuing operations in 2004; and approximately 51.0% of the Company’s revenues from continuing operations in 2003, with almost all of those sales coming from United States and Canada. Sales to the rest of the world accounted for approximately 48.2% of the Company’s revenues from continuing operations in 2005; approximately 48.9% of the revenues from continuing operations in 2004; and approximately 49.0% of the revenues from continuing operations in 2003. Sales through the Company’s exclusive distributors in Japan accounted for approximately 19.5% of the Company revenues from continuing operations in 2005; 20.5% of the Company’s revenues from continuing operations in 2004; and 20.6% of the Company’s revenues from continuing operations in 2003. Sales through the Company’s representative in Korea accounted for approximately 12.1% of the Company’s revenues from continuing operations in 2005; 4.8% of the Company’s revenues from continuing operations in 2004; and 5.1% of the Company’s revenues from continuing operations in 2003.

Competition:

The patented 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 the Company’s products have a larger installed base and performance advantages over products of our competitors. The Company also believes that its “fixed-geometry” systems which permit a linear scale up for drops per minute to gallons per minute offer a unique equipment

6

advantage. The Company further believes that the Microfluidizer processor equipment product line offers the highest shear forces available in the process equipment market today. It has been proven in many instances that for critical formulations, Microfluidizer processors have produced better 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. The Company believes that the Microfluidizer processor product line provides a distinct advantage over the product lines of our competitors with respect to the processing of abrasive slurries or solids dispersed in liquids in large part because of the Company’s unique, wear-resistant, diamond interaction chamber and the special design of the intensifier pumping system. Further, recent incorporation of Company 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.

The MMR systems 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. At least one of these companies, Five Star Technologies Inc. (Five Star), has raised significant investment capital from venture capital sources ($4.5 million in its second round in October 2003) for its patented technology. Five Star claims the use of hydrodynamic cavitation to achieve production of nano and micro materials. Five Star also claims that its process is inherently scalable. Although the Company believes that its MMR system is superior in design and function there can be no assurance that Five Star, or others, will not pose a competitive impediment to sales of the Company’s MMR system.

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

Research and Development:

It is the Company’s position that a greater proportion of its 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.

The Company’s 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 Microfluidizer Mixer/Reactor (MMR) by: (a) working with customers who assist in the development of the system with both application knowledge and financial support, and (b) internal development program relating to reaction chamber design and creation of a variety of nanomaterials. There can be no assurance that the Company will be able to meet the enhancement challenges posed by applications of its core Microfluidizer processor business. Likewise there can be no assurance that the Company will be able to design and manufacture reaction chambers for

7

its MMR applications that will deliver the desired result for specific applications.Research and development costs for continuing operations were $1,701,870, $1,033,978, and $785,849, in 2005, 2004, and 2003, respectively. Patent coverage for the MMR has been obtained both in the United States and in Europe (with national entry in process) and the Company is prosecuting the patent application in Canada.

Cooperative Research Arrangements:

The Company subsidizes research and development activities centered around Microfluidizer processor technology at a number of research centers and universities. The Company’s subsidy of these activities takes the form of substantial reduction or elimination of the customary rental charges for Microfluidizer processor equipment provided for use. The Company has, 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

In addition to their research activities, these universities provide the Company with contacts at industrial companies that may utilize Microfluidizer processor technology. Most recently, the Company 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 MFIC’s leading-edge materials processing and MMR equipment. Additionally, on occasion, research reports, technical papers, and doctoral theses may be published, which document the use of Microfluidizer processor technology. Finally, the Company engages in many informal co-operative development efforts with its customers.

Patents and Proprietary Rights Protection:

To protect its proprietary rights, the Company relies on a combination of U.S. patent and trademark laws, trade secrets, confidentiality agreements, contractual provisions and technical means. In the event of patent infringement or breach of confidentiality, there can be no assurance that these measures will be adequate or that the Company will have sufficient resources to prosecute or prevail in an action against a third party. In addition, the Company neither applied for nor obtained patent or trademark protection for its Microfluidizer processor equipment’s interaction chamber in any country other than the United States and, as a result, its proprietary rights are not subject to the protection of patent or trademark laws of foreign countries where the Company’s equipment is sold. The Company’s Microfluidizer processor equipment method patent expires on March 13, 2007 and its device patent expired on August 6, 2002. The Company does not believe that the expiration of its device patent resulted in any material detriment to the Company since the Company has made many alterations, improvements and advances to its equipment over the years with such modification and innovations having been treated by the Company as trade secrets.

In 1997 the Company completed development of a novel adaptation of its Microfluidizer processor equipment—a “Multiple Stream High PressureMixer/Reactor”, commercially designated as the Microfluidizer Mixer/Reactor (MMR). In August 1997, the Company filed a patent application for the device and its processes with the United States Patent and Trademark Office (USPTO), and filed a Patent

8

Cooperation Treaty (PCT) application on May 5, 1998. In July and November, 2000, the USPTO issued to the Company notices of allowances of utility patent claims regarding the MMR and the use thereof. On September 18, 2002, the European Patent Office advised the Company it would grant its MMR patent substantially as applied for, including its device and process claims. The Company is in the process of pursuing national entry in France, Germany, Italy, The Netherlands, and the United Kingdom. The Company is currently prosecuting its MMR patent in Canada.

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

Manufacturing:

At present, the Company subcontracts the manufacture and/or machining and finishing of many of the components of its equipment to third parties, with the Company undertaking the remaining fabrication, assembly and performance testing. The Company has 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 the Company’s business, financial condition, or results of operations. Therefore, the Company has identified alternative suppliers for its 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, delivery problems, any or all of which would likely have an impact on the Company’s production of equipment and could have a material adverse effect on the Company’s business, financial condition, or results of operations.

Key Management / Personnel:

The Company’s continued operation, innovation and growth are to some significant degree reliant on the continued services of its key executive officers and leading technical personnel. The Company does not maintain employment contracts with its key management or leading technical personnel. Though the Company believes that it 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 the Company’s business, financial condition, or results of operations.

Government Regulation:

Certain of the Company’s customers utilize the Company’s 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

9

the Company’s 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, the Company’s 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 the Company’s 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 the Company 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 the Company’s research work are, or may be, applicable to its 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 the Company involving exclusive license rights may also be subject to antitrust regulatory control, the effect of which cannot be predicted.

To date the Company has 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. 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 the Company’s 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 the Company’s business, financial condition, or results of operations.

Backlog:

The Company’s sales order backlog related to continuing operations of accepted and unfilled orders at March 28, 2006, and March 11, 2005, was approximately $3,646,238 and $3,072,000, respectively. Backlog as of any particular date should not be relied upon as indicative of the Company’s net revenues for any future period.

Employees:

The Company has approximately 47 full-time employees as of March 28, 2006. None of the Company’s employees are covered by a collective bargaining agreement, and the Company considers its relations with its employees to be satisfactory. The Company believes that its future success will depend in large part on its ability to attract and retain highly skilled employees.

10

Item 1A.RISK FACTORS

In addition to the certain risks described in other sections in this annual report and our other filings with the Securities and Exchange Commission, prospective investors should consider the following before making any investment decision.

The Company faces a number of risks and uncertainties that could cause actual results or events to differ materially from those contained in any forward looking statement. Additional risks and uncertainties not presently known to the Company or that are currently deemed to be immaterial may also impair the Company’s business operations. Factors that could cause or contribute to such differences include, but are not limited to, the following:

The Company faces 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. There are a few small, direct competitors in geographical areas where our patents are not protected. The Company does not believe that these competitors, however, offer product lines of comparable breadth or scope as our products and the Company does not believe that they possess high-pressure engineering experience to the extent that the Company does. The Company does not regard the presence of these competitors as an impediment to our growth.

In addition, the Company faces, 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. The Company expects 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.

The Company is subject to significant competition from companies that are pursuing technologies and products that are similar to the Company’s technology and products.

Our future success will depend in large part on the Company’s ability to maintain a technologically superior product line. Rapid technological development by the Company or others may result in our products or technologies becoming obsolete before the Company recovers the expenses the Company incurs in connection with their development. Products offered by the Company could be made obsolete by less expensive or more effective technologies. There can be no assurance that the Company will be able to make the enhancements to our technology necessary to compete successfully with newly emerging technologies.

The Company relies on suppliers, vendors and subcontractors.

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

11

The Company has only one manufacturing facility

The Company has only one manufacturing facility located in Newton, Massachusetts. Our success depends on the efficient and uninterrupted operation of our manufacturing facility. Whether as a result of a fire, terrorist attack, natural disaster or other causes, any significant disruption, up to and including substantial destruction, would disrupt our manufacturing operations and significantly impair our ability to operate our business on a day-to-day basis. Although the Company maintains business interruption insurance, our business would be injured by any extended interruption of the operations of our manufacturing facility. Further, although the Company carries 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 the Company. Finally, if the Company seeks to replicate our manufacturing operations at another location, the Company will face a number of technical as well as financial challenges, which the Company may not be able to address successfully.

The Company relies on patents and trade secrets to protect our technology.

To protect its proprietary rights, the Company relies on a combination of U.S. patent and trademark laws, trade secrets, confidentiality agreements, contractual provisions and technical means. In the event of patent infringement or breach of confidentiality, there can be no assurance that these measures will be adequate or that the Company will have sufficient resources to prosecute or prevail in an action against a third party.

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

To protect its other proprietary rights, the Company relies 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 the Company’s interests, or that the Company will have sufficient resources to prosecute or prevail in an action against a third party. The Company maintains confidentiality and non-competition agreements with those parties to whom it discloses non-public technical information relating to its equipment. The Company believes that enforcement of the provisions of such agreements should adequately protect the Company’s proprietary information. However, in the event of a material breach of such agreements, certain of the Company’s valuable intellectual property may be disclosed to third parties (including competitors). In such event, despite provisions for equitable relief and damages in the event of such breaches, the Company may suffer competitively and be materially impacted as a result of such unauthorized disclosure.

In 1997, the Company completed development of a novel adaptation of its Microfluidizer® equipment—a Multiple Stream High Pressure Mixer/Reactor (MMR). In August 1997, the Company 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 to the Company notices of allowances of utility patent claims regarding the MMR and the use thereof. On September 18, 2002, the European Patent Office advised the Company it would grant its MMR patent substantially as applied for, including its device and process

12

claims. The Company is in the process of pursuing national entry in France, Germany, Italy, The Netherlands, and the United Kingdom.

The Company must continue its research and development efforts to maintain competitive.

The Company’s research and development efforts are focused on: (i) developing new processing applications for the process industries and further enhancing the functionality, reliability and performance of existing products, and (ii) development of the Multiple-Stream High Pressure Mixer/Reactor (MMR) by: (a) working with customers who assist in the development of the system with both application knowledge and financial support, and (b) internal development program relating to interaction chamber design and creation of a variety nanomaterials. There can be no assurance that the Company will be able to meet the enhancement challenges posed by applications of its core Microfluidizer® processor business. Likewise there can be no assurance that the Company will be able to design and manufacture chambers for its MMR applications that will deliver the desired result for specific applications. The inability to meet the enhancement challenges or design and manufacture chambers for its MMR applications may have a material adverse effect on the Company.

The Company’s ability to continue planned operations is dependent upon access to financing under a credit facility with its commercial lender.

The Company’s credit facility is comprised of a revolving line of credit in the maximum principal amount of $1,000,000 and a term loan note in a face amount of $1,000,000 under which the Company currently owes approximately $563,000 at December 31, 2005. Under the terms of the credit facility, the Company is subject to a number of restrictions that impact the Company’s use of funds. The Company is limited in ability to acquire property and pay dividends, and it must maintain certain financial covenants as defined. The Company’s ability to operate is potentially impacted by the Company’s ability to achieve future compliance with the financial covenants of the credit facility. The obligations due the lender are essentially demand obligations and under certain circumstances, including the lender’s determination that the Company’s prospect of payment of all or any part of the obligations due the lender are impaired, the lender may declare a default and accelerate payment of the obligations. Loans under the credit facility are secured by a collateral pledge to the lender of substantially all the assets of the Company and its subsidiary. In the event of a breach of the covenants or events of default under the credit facility there can be no assurance that the Company can obtain a waiver of such breach or default from its lender. Likewise, in the event of that the Company cannot effect 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 the Company will be able to obtain alternate financing, or that it can obtain alternate financing on terms that are favorable to the Company. Either event could have a material adverse effect on the Company’s business, financial condition, or results of operations.

Pursuant to its agreements with the lender, the Company may not issue, create or incur additional debt in excess of its obligations to lender, except in the ordinary course of business.

There can be no assurance that the Company will have access to sufficient working capital through continued and improving cash flow from sales and ongoing borrowing availability, the latter being subject to the Company’s ability to comply with the covenants and terms of the Company’s loan agreement with its senior lender.

The Company may become subject to increased government regulation which could affect our ability to sell our products outside of the United States.

Although the Company has not historically been significantly affected by any United Sates governmental restrictions on technology transfer, import, export and customs regulations and other

13

present local, state or federal regulation, 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 regulation 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 the Company’s equipment will not be impacted by any 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 the Company’s business, financial condition, or results of operations. Also, certain agreements that may be entered into by the Company involving exclusive license rights may also be subject to national or supranational antitrust regulatory control, the effect of which cannot be predicted.

The Company relies on our key management and technical personnel.

The Company’s continued operation, innovation and growth are to some significant degree reliant on the continued services of its key executive officers and leading technical personnel. The Company does not maintain employment contracts with its key management or leading technical personnel. There can be no assurance that the Company will be able to retain such key 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 the Company’s employees. Further, there can be no assurance that key executive officers and leading technical personnel will not either die or become disabled to an extent that they cannot render their services to the Company. Though the Company believes that it 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 the Company’s business, financial condition, or results of operations.

The Company’s stock is listed on the OTC Bulletin Board and stockholders may have limited liquidity.

The Company’s 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 LLC). In general, over the past two years, fewer than 100,000 shares of our common stock have traded on a daily basis. Management expects, when and if the Company qualifies, to seek a listing on a securities exchange, which may increase stockholders liquidity. There is uncertainty that the Company will ever be accepted for a listing on a securities exchange.

The Company anticipates that shipments of our products to relatively few customers will continue to account for a significant portion of our business.

Sales to our Japanese distributor accounted for 19.5% of our net revenues in 2005 and 20.5% of our revenues in 2004 and sales to a wholly owned subsidiary of Teva Pharmaceuticals accounted for 18.9% of our revenues in 2005 and 12.8% of our revenues in 2004. The Company expects that a limited number of customers may continue to account for a substantial portion of our net revenues for the foreseeable future. If our current customers delay or cancel their orders, or find other sources for our products, our resulting net income may be impacted.

Although the Company attempts to maintain good relationships with our current customers, the Company cannot be certain that our current customers will continue to place orders with us or that those orders will be significant. The Company continuously seeks out new customers, but there can be no

14

certainty that the Company will receive orders from new customers or that those new customers will continue to order from us.

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 the Company’s revenues and stock price.

The Company allows 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. The Company’s 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.

The Company may be subject to product liability claims from our customers or by persons harmed by our customers’ products.

The Company maintains what it deems to be reasonable levels of product liability coverage through insurance policies with a reasonably small deductible. Nonetheless, inasmuch as the Company sells its 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 sue the Company as well as the maker of the drug or cosmetic. Although the Company may have no control over the manufacture of end-products made on its equipments, it may not be able to bar a plaintiff’s claims against all parties who products and equipment were in involved in the manufacturing process under a variety of legal theories of liability. The Company may be required to present a vigorous and costly defense if it cannot be dismissed from such an action. The cost of such legal defense may significantly impact the cash flow of the Company.

The Company’s international business operations expose us to a variety of risks.

For the year ended December 31, 2005, shipments outside of North America accounted for approximately 48.2% of the Company’s total net revenues as compared to 48.9% in the prior year. In particular, approximately 19.5% and 20.5% of our net revenues in 2005 and 2004 resulted from sales to Japan and approximately 12.1% and 4.8% of our net revenues in 2005 and 2004 resulted from sales to Korea. In addition, approximately 13.0% and 17.9% of our net revenues resulted from sales to Europe in 2005 and 2004 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 across 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.

15

Changes in accounting treatment of stock options could adversely affect our operating results.

The Financial Accounting Standards Board has announced its decision to require companies to expense employee stock options in accordance with SFAS 123R, Accounting for Stock-Based Compensation, or SFAS 123R, for financial reporting purposes. Such stock option expensing would require us to value our employee stock option grants pursuant to an option valuation model, then amortize that value against our reported earnings over the vesting period in effect for those options.

Prior to January 1, 2006, the Company elected to accelerate all outstanding employee stock options (except those employee stock options held by employees who chose not to participate) to minimize the impact of SFAS 123R on its operating results. The Company estimated that by accelerating the vesting of the employee options, it would not incur approximately $400,000 of future compensation expense, net of taxes. In general, the Company issues stock options to certain of its employees (except for senior management) every two years and does not anticipate issuing options to a large number of employees until 2008. Nevertheless, all options issued on or after January 1, 2006 must be expensed in accordance with SFAS 123R. The impact of SFAS 123R on our financial results will depend on a variety of factors, including the number of options issued, the length of time until vesting and the amount required to be expensed. The Company has determined that there will be a non-cash charge of approximately $129,000 in 2006 as a result of this requirement.

Compliance with internal controls reporting requirements could increase our costs.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in their annual reports on Form 10-K. This report is required to contain an assessment by management of the effectiveness of such company’s internal controls over financial reporting. In addition, the public accounting firm auditing a public company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. We intend to expend resources in developing the necessary documentation and testing procedures required by Section 404. Going forward, there is a risk that we will not comply with all of the requirements imposed by Section 404. If the Company fails to implement required new or improved controls, we may be unable to comply with the requirements of Section 404 in a timely manner. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the Company’s financial statements, which could cause the market price of the Company’s common stock to decline and make it more difficult for the Company to finance its operations.

Under current rules, the Company is required to comply with the requirements of Section 404 by its first fiscal year ending on or after July 15, 2007.

Item 1B.UNRESOLVED STAFF COMMENTS

None.

Item 2.DESCRIPTION OF PROPERTIES

The Company’s corporate headquarters are in Newton, Massachusetts. The Company also maintains a sales office and laboratory facility in Lampertheim, Germany and a sales office in Irvine, California. The Company rents approximately 34,000 square feet of offices, production and research and development facilities at these locations for administrative, development and production activities. A portion of the space at the Newton, Massachusetts facility is sublet to a non-affiliated company for a total of $21,600 per annum under a tenant-at-will arrangement. The lease terms expire at various times through May 2007 (with an option under which the Company can extend the lease at the Newton facility through May 31, 2008). The Company believes these facilities will be adequate for operations for the next two years.

16

Item 3.LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company’s security holders during the quarter ended December 31, 2005.

Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market:

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

Quarters Ended	12/31 2005		9/30 2005		6/30 2005		3/31 2005		12/31 2004		9/30 2004		6/30 2004		3/31 2004
Low	$	1.26	$	1.58	$	1.50	$	1.90	$	1.57	$	1.10	$	1.50	$	2.25
High	$	1.95	$	2.78	$	2.90	$	3.99	$	3.90	$	2.34	$	3.11	$	4.30

Holders:

As of March 28, 2006, there were approximately 377 holders of record of the Company’s Common Stock.

Issuance of 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 (3) 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. The Company expects to file a registration statement for purposes of registering the shares of common stock underlying the warrants by April 15, 2006.

Dividends:

The Company has never paid any cash dividends on its Common Stock and presently anticipates that no dividends on its Common Stock will be declared in the foreseeable future. The Company’s current policy is to retain all of its earnings to finance future growth.

17

Equity Compensation Plan Information:

The information in the table below is as of December 31, 2005. See also the Consolidated Financial Statements—Note 9.

	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)
Plan category	(a)		(b)			(c)
Equity compensation plans Approved by security holders		1,718,925		$	1.39		757,946
Equity compensation plans not approved by security holders		958,970		3.09			N/A
Total		2,677,895		$	2.00		757,946

18

Item 6.SELECTED FINANCIAL DATA

The selected financial information presented below is derived from the audited consolidated financial statements of the Company for each of the five years in the period ended December 31, 2005. 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.

Selected Statement of Operations Data

	Year Ended December 31, 2005			Year Ended December 31, 2004			Year Ended December 31, 2003			Year Ended December 31, 2002				Year Ended December 31, 2001
Total revenues	$	11,645,481		$	12,158,919		$	10,459,631			$	9,514,180		$	11,210,375
Total costs and expenses	12,416,631			11,461,749			9,693,551				8,872,465			10,934,902
(Loss) income from continuing operations	(771,150		)	697,170			766,080				641,715			275,473
Interest expense	(58,510		)	(69,383		)	(116,097		)		(179,429		)	(261,754		)
Other expense	—			—			—				—			(53,142		)
Interest income	26,124			27,965			9,508				7,191			7,032
Net (loss) income from continuing operations before income taxes and extraordinary item	(803,536		)	655,752			659,491				469,477			(32,391		)
Income tax (expense) benefit	(185,000		)	450,000			—				—			—
Net (loss) income from continuing operations before discontinued operations and extraordinary item	(988,536		)	1,105,752			659,491				469,477			(32,391		)
(Loss) from discontinued operations (net of loss from disposal of discontinued operations of $1,422,715 in 2003)	—			(231,380		)	(4,109,925		)		(2,983,451		)	(492,795		)
Net (loss) income	(988,536		)	874,372			(3,450,434		)		(2,513,974		)	(525,186		)
Weighted-average shares outstanding:
Basic	9,756,221			9,345,560			7,767,712				7,426,586			7,375,102
Diluted	9,756,221			10,329,313			8,501,110				7,470,090			7,375,102
Basic amounts per common share:
Net (loss) income per share from continuing operations	$	(.10	)	$	.11		$	.08			$	.06		$	(.00	)
Basic net (loss) income per share from discontinued operations	—			$	(.02	)	$	(.52	)		$	(.40	)	$	(.07	)
Basic, as reported	$	(.10	)	$	.09		$	(.44	)		$	(.34	)	$	(.07	)
Diluted amounts per common share:
Diluted net (loss) income per share from continuing operations	$	(.10	)	$	.10		$	.08			$	.06		$	(.00	)
Diluted net (loss) income per share from discontinued operations	—			$	(.02	)	$	(.52	)		$	(.40	)	$	(.07	)
Diluted, as reported	$	(.10	)	$	.08		$	(.44	)		$	(.34	)	$	(.07	)

19

Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain Factors And Cautionary Statement Regarding Forward-Looking Statements

Management believes that this report contains forward-looking statements that are subject to certain risks and uncertainties including statements relating to the Company’s 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 management’s current expectations and are subject to a number of factors and uncertainties that could cause actual results achieved by the Company to differ materially from those described in the forward-looking statements. The Company cautions 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 the Company’s 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, (iii) whether the Company will have access to sufficient working capital through continued and improving cash flow from sales and ongoing borrowing availability, the latter being subject to the Company’s ability to comply with the covenants and terms of the Company’s loan agreement with its senior lender, (iv) whether the Company’s technology will be adopted by customers as a means of producing MMR innovative materials in large quantities, (v) whether the Company is able to deploy prototype MMR placements and then manufacture and introduce commercial production MMR equipment as well as those risks set forth in Item 1A, “Risk Factors”, and (vi) whether the Company will achieve a greater proportion of its sales in the future through the sale of advanced processor production systems.

Critical Accounting Policies

The Company considers certain accounting policies related to revenue recognition and related receivables as well as the valuation of inventories to be critical policies due to the estimation processes involved in each.

Revenue Recognition

Revenue from the sale of machines and spare parts is generally recognized upon shipment of the product or when the earnings process is complete. Rental income for the lease of equipment is recognized on a straight-line basis over the term of the lease agreement. Rental income and equipment sales are classified as revenues in the consolidated statement of operations.

The Company has adopted Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements. The Company recognizes sales at the time of shipment of the system to the customer. Management believes the customer’s post-delivery acceptance provisions and installation are routine. The Company has never failed to successfully complete a system installation. With few exceptions, the Company limits its liability to the return of the equipment sold. Installation costs are predictable and insignificant to the total purchase price. The Company has demonstrated a history of customer acceptance subsequent to shipment and installation of these systems.

Judgments are required in evaluating the creditworthiness of our customers. In all instances, revenue is not recognized until the Company has determined that collection is reasonably assured. Should changes in conditions cause management to determine the aforementioned criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

20

Allowance for Doubtful Accounts.The Company’s policy is to maintain allowances for estimated losses resulting from the inability of our customers to make scheduled payments. The Company regularly evaluates the collectibility of our trade receivable balances based on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation to us we record a specific allowance to reduce the related receivable to the amount we expect to recover given all information presently available. We believe our reported allowances are adequate as of December 31, 2005 and 2004.

Inventory Valuation.The Company values its inventory at the lower of cost or net realizable value on a first-in-first-out method. Management regularly evaluates inventory quantities on hand and records a provision for obsolete or excess inventory levels greater than those of anticipated usage in the subsequent two years. There are external factors that may require an adjustment to the anticipated demand including, but not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices, and the availability of key components from our suppliers. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value.

Impairment.It has been the Company’s policy to review the carrying values of long-lived assets and amortizable intangibles for impairment under Statement of Financial Accounting Standards (“SFAS”) No. 144 whenever an event or changes in circumstances indicated that the carrying amount of an asset may not be recoverable.

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 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 calls for replacing the parts or repairing a machine within one year of the sale. The Company is now selling more advanced processor production systems than past years that may require more costly parts. A reserve balance has now been established. We believe the reserve balance in the amount of $58,000 to be adequate as of December 31, 2005.

Fiscal 2005 Compared to Fiscal 2004

Results of Continuing Operations

Total revenues for the year ended December 31, 2005 from continuing operations were $11,645,481 as compared to revenues of $12,158,919 for the year ended December 31, 2004, representing decrease of $513,438, or 4.2%.

North American sales for the year ended December 31, 2005 decreased to approximately $6,028,000, or 3.0%, as compared to North American sales of approximately $6,212,000 for the year ended December 31, 2004. This decrease in North American sales was principally due to a decrease in the sale of machines of approximately $1,478,000, and an increase in the sale of spare parts of approximately $1,294,000. Foreign sales were approximately $5,618,000 for the year ended December 31, 2005, compared to $5,947,000 for the year ended December 31, 2004, a decrease of $329,000, or 5.5%. This decrease in foreign sales was principally due to an increase in the sale of machines of approximately $1,044,000, and a decrease in the sale of spare parts of approximately $1,373,000. The decline in the sale of machines is a result, in part, of longer lead times associated with the increased complexity of manufactured automated operating controls, data acquisition systems, and sterilization features of systems orders received from biopharma customers. The decline is also the result of increased competition from several companies that sell laboratory units. The Company believes its laboratory machines are superior in terms of technology,

21

and that, with relatively minor modifications to these units that are currently in development, the Company hopes to regain market share.

Total cost of goods sold for 2005 was $5,917,994, or 50.8% of revenue, as compared to $5,607,755, or 46.1% of revenue for 2004. The increase in cost of goods sold reflects primarily the increased costs resulting from the manufacture and sales of production units, as opposed to manufacturing laboratory machines. Production units have a higher cost to manufacture, and correspondingly, a lower gross profit margin than laboratory machines. A substantial contributor to the increased cost of goods sold in 2005 was the Company’s production of a highly customized production system for the Korean Institute of Industrial Technology (KITECH). This customized production machine accounted for 2.8% of the total revenues for 2005 or approximately $324,000, and 5.2% of the total costs of goods sold for the year ended December 31, 2005 or approximately  $308,000.

The Company believes that the construction and design of this customized production system  for KITECH enhanced the Company’s knowledge and skills in producing advanced systems, and will allow the Company to quote other significant equipment orders at higher profit margins in the future. The Company also believes that, because KITECH provides high visibility for its equipment to companies that work with KITECH, it may lead those companies to consider purchasing our equipment to scale up the production of products developed on this system.

The Company’s major product lines have different profit margins, as well as multiple profit margins within each product line. In the course of the periods compared, there may be significant changes in the cost of revenues as a percentage of revenue depending on the mix of product sold. Also, the cost of sales as a percentage of revenue will differ between laboratory and pilot plant units sold, due to the difference in costs between air driven and electric-hydraulic units.

Total operating expenses for 2005 were $6,498,637 or 55.8% of revenue, as compared to $5,853,994 or 48.1% of revenue for 2004, which is an increase of $644,643 or 11.0%.

It is the Company’s position that a greater proportion of its 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 that challenge going forward, it became necessary to hire additional research and development personnel, and also to increase spending in research and development.

Research and development expenses for 2005 were $1,701,870 compared to $1,033,978 for 2004, an increase of $667,892 or 64.6%. The increase in research and development expenses is primarily due to a planned increase in payroll and related costs of approximately $419,000, an increase in consulting costs of approximately $134,000, and an increase in development costs of approximately $101,000. The development costs were primarily for outside contractors and supplies.

Selling expenses for 2005 decreased approximately $175,000, from $2,587,658 in 2004 to $2,412,550 or 6.8%. The decreases were due principally to a decrease in commission expense of approximately $136,000, a decrease of approximately $35,000 in delivery costs, a decrease of approximately $33,000 in payroll and related costs, a decrease in advertising expenses of approximately $19,000, partially offset by an increase in facility operating costs of approximately $40,000, and an increase in printing costs of approximately $20,000. The decrease in commission costs was caused by a decrease in direct sales. Sales made in Asia, where the Company’s products are sold primarily through distributors, were 35.2% of sales for the year ended December 31, 2005, compared to 31.0% of sales for the year ended December 31, 2004. Sales made to distributors are sold net of a discount, but without a commission. Accordingly, these sales generally reflect a lower gross margin offset by lower selling costs. The decrease in payroll was due to a reduction in personnel. The decrease in delivery costs was principally due to a change in vendors.  The increase in

22

printing costs was due to increased purchases of general brochures and cost data sheets compared to the previous year.

General and administrative expenses for 2005 increased by approximately $152,000, from $2,232,358 for the year ended December 31, 2004, to $2,384,217, or 6.8%. The increase in general and administrative expenses is primarily due to an increase in consultants costs of approximately $166,000, an increase in facility operating costs of approximately $74,000, an increase in corporate expenses of approximately $53,000, and an increase in professional fees of approximately $17,000, offset in part by a decrease in payroll costs of approximately $114,000. The increase in consultant costs was caused by the use of outside consultants that included a non-cash charge for warrants issued in the amount of $119,000, and a recruiting placement fee of $41,000. The increases in facility operating costs were primarily rent and energy related. The increase in corporate costs is due to the expense incurred in accelerating employees’ stock options of approximately $65,000.  The decrease in payroll is a result of a planned decrease in payroll costs, including both a reduction in personnel and no bonuses paid employees for 2005, due to the loss from operations.

Interest expense for 2005 decreased from $69,383 in 2004 to $58,510, a decrease of $10,873, or 15.7%. The decrease was principally due to a reduction in the term debt outstanding.

Interest income for 2005 decreased to $26,124 from $27,965 for 2004, a decrease of $1,841. The decrease is due to less cash available for investing.

Results of Discontinued Operations

In 1998, the Company purchased the assets and liabilities of Morehouse-COWLES, Inc. (Morehouse-COWLES). This was done to complete a strategic combination with Microfluidics, in order to enhance the Company’s position in the coatings market, which, at the time, was the dominant part of the Company’s business.

Since that time, the direction of the core business of the Company changed significantly from coatings to other areas, in particular the health care sector. The Company determined that it could no longer support the previous strategic plan and the Company, therefore, prepared a plan to divest the Morehouse-COWLES Division.

It was expected that the sale would positively impact the Company’s cash flow, and would allow the Company to focus on the core business, and expand its sales and marketing resources for the Company’s Microfluidizer processor systems line, and promote its new MMR nanoparticle production systems.

During the fourth quarter of 2003, management committed to a plan to sell substantially all the assets and associated liabilities of Morehouse-COWLES. Accordingly, at fiscal year end 2003, the Company reported the division as discontinued operations and reclassified the assets and associated liabilities as available for sale. The search for a buyer eventually resulted in NuSil Corporation, a California corporation (NuSil) making an offer in December 2003 to purchase the Morehouse-COWLES Division’s assets and related liabilities at a price that was acceptable to the Company.

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

The assets of the Division that were sold included accounts receivable, furniture, fixtures and equipment, inventory and supplies, books and records, bids, contracts, prepaid expenses, leases, intellectual property, goodwill, domain names and claims, all as described in the Asset Purchase Agreement (collectively, the Assets). In addition, certain rights and obligations arising after February 9,

23

2004 under the Division’s PacifiCare Group Health Insurance Policy were assigned. The Division’s cash or cash equivalents on hand on February 9, 2004 were excluded from the assets being sold. Under the Asset Purchase Agreement, the Division’s executory obligations under certain contracts and bids, and the Division’s accounts payable as of February 9, 2004 in the amount of $623,240, were assumed by NuSil.

The purchase price (other than the assumption of accounts payable described in the preceding paragraph) paid under the Asset Purchase Agreement was $918,238. Of the purchase price, $768,238 (the Closing Cash) was paid in cash, $100,000 was paid in the form of a Promissory Note (the Purchase Note) and $50,000 (the Holdback Payment) was withheld for payment at afuture date subject to any purchase price adjustments and offsets, as provided for in the Asset Purchase Agreement.

The Closing Cash was paid directly to PNC Bank, National Association (PNC), to be applied to MFIC’s outstanding balance under MFIC’s Revolving Credit Loan with PNC (the Revolving Credit Loan).

The aforementioned Purchase Note bore interest at 5 percent per annum, was secured by the Assets pursuant to a Security Agreement dated February 5, 2004 (the Security Agreement) between the parties and was subject to certain offsets as provided in the Asset Purchase Agreement. Principal and interest on the Purchase Note were payable on February 9, 2005. NuSil forwarded a payment to the Company on that date which, in conjunction with an allowable offset of approximately $8,300 paid by NuSil for the benefit of the Company, satisfied the claim.

Pursuant to the Asset Purchase Agreement, MFIC entered into a Noncompetition and Nonsolicitation Agreement, dated February 5, 2004, which limits MFIC’s ability to compete with the business of the Division for a period of five years.

The sale generated a loss of approximately $1,420,000. Due to the sale of the Morehouse-COWLES Division, goodwill associated with the 1998 purchase of this division in the amount of $2,100,000 was impaired in 2003.

In the three months ended March 31, 2004, the Company sold the assets and selected liabilities of the Division to NuSil. During the year ended December 31, 2005, the Company had no discontinued operations. Thus, all items of discontinued operations decreased 100% when compared to the comparable periods for the prior year.

Total Company revenues for the year ended December 31, 2005 from discontinued operations were $0, as compared to revenues of $323,635 for the comparable period for the prior year. The decrease during this period is due to the sale of the Division to NuSil on February 9, 2004.

Cost of goods sold for the year ended December 31, 2005 were $0, compared to $308,548 for the year ended December 31, 2004. The decrease in cost of goods sold is attributable to the sale of the Division to NuSil on February 9, 2004.

Total operating expenses for the year ended December 31, 2005, which include research and development, selling, and general administrative expenses, were $0, compared to $238,760 for the year ended December 31, 2004. The decrease in operating expenses is due to the sale of the Division to NuSil on February 9, 2004.

Fiscal 2004 Compared to Fiscal 2003

Results of Continuing Operations

Total revenues for the year ended December 31, 2004 from continuing operations were $12,158,919 as compared to revenues of $10,459,631 for the year ended December 31, 2003, representing an increase of $1,699,288, or 16%.

24

North American sales for the year ended December 31, 2004 were approximately $6,212,000, a 16% increase as compared to North American sales of approximately $5,337,000 for the year ended December 31, 2003. This increase in North American sales was principally due to an increase in the sale of machines of approximately $680,000. Foreign sales were approximately $5,947,000 for the year ended December 31, 2004 compared to $5,123,000 for the year ended December 31, 2003, an increase of $824,000, or 16%. The increase in foreign sales was principally due to an increase in the sale of spare parts of approximately $977,000 compared to 2003.

Total cost of goods sold for 2004 was $5,607,755 or 46% of revenue, as compared to $4,988,226 or 48% of revenue for 2003. The increase in cost of goods sold in absolute dollars reflects principally the increase in sales generated by the Company compared to the previous year. The Company’s major product lines have different profit margins, as well as multiple profit margins within each product line. In the course of the periods compared, there may be significant changes in the cost of revenues as a percentage of revenue depending on the mix of product sold. Also, the cost of sales as a percentage of revenue will differ between laboratory and pilot plant units sold, due to the difference in costs between air driven and electric-hydraulic units.

Total operating expenses for 2004 were $5,853,994, or 48% of revenue, as compared to $4,705,325, or 45% of revenue, for 2003, which is an increase of $1,148,669, or 24%.

Research and development expenses for 2004 were $1,033,978 compared to $785,849 for 2003, an increase of $248,129, or 32%. The increase in research and development expenses is principally due to an increase in payroll costs, as a result of both an increase in headcount and pay increases of approximately $253,000, an increase in consultants of approximately $41,000, an increase in travel and related costs of approximately $10,000, partially offset by a decrease in testing materials of approximately $79,000.

Selling expenses for 2004 increased approximately $400,000, or 18%, from $2,187,389 to $2,587,658. The increase was due principally to an increase in outside commissions of approximately $194,000, an increase in advertising costs of approximately $115,000, an increase in payroll costs of approximately $91,000, an increase in public relations costs of approximately $36,000, partially offset by a decrease in travel and related costs of approximately $38,000.

For the year ended December 31, 2004, general and administrative expenses increased by approximately $500,000, or 29%, from $1,732,087 for the year ended December 31, 2003, to $2,232,358. The increase in general and administrative expenses was principally due to an increase in payroll and related costs of approximately $241,000, professional fees of approximately $148,000, and investor relation expenses of approximately $73,000, general overhead costs of approximately $71,000, partially offset by a decrease in bad debt expense of approximately $76,000.

Interest expense for 2004 decreased to $69,383 from $116,097 for 2003, a decrease of $46,714, or 40%. The decrease was due primarily to the reduction in the line of credit caused by the paydown of the debt from proceeds received from the sale of the Morehouse-COWLES Division.

Interest income for 2004 increased to $27,965 from $9,508 in 2003, an increase of $18,457, or 194%. The increase is due to available cash being invested in money markets and certificates of deposit.

Results of Discontinued Operations

Total revenues for the year ended December 31, 2004 were $323,635 as compared to revenues of $3,655,237 for the year ended December 31, 2003, representing a decrease of $3,331,602, or 91%.

The decrease in revenue is due to the sale of the discontinued operation to NuSil Corporation (NuSil) on February 9, 2004.

25

Total cost of goods sold for 2004 was $308,548, or 95% of revenue, as compared to $2,601,957, or 71% of revenue for 2003. The decrease in cost of goods sold in absolute dollars is due to the sale of the discontinued operation to NuSil Corporation (NuSil) on February 9, 2004.

Total operating expenses for 2004 were $238,760, or 74% of revenue, as compared to $1,640,490, or 45% of revenue, for 2003, which is a decrease of $1,401,730, or 85%.

Research and development expenses for 2004 were $37,413 compared to $318,105 for 2003, a decrease of $280,692, or 88%. The decrease in research and development expenses was due to the sale of the discontinued operation to NuSil Corporation (NuSil) on February 9, 2004.

Selling expenses for 2004 decreased approximately $729,243, or 84%, from $863,337 to $134,094. The decrease in selling expenses is due to the sale of the discontinued operation to NuSil Corporation (NuSil) on February 9, 2004.

For the year ended December 31, 2004, general and administrative expenses decreased by $391,795 from $459,048 for the year ended December 31, 2003, to $67,253, or 85%. The decrease in general and administrative expenses is due to the sale of the discontinued operation to NuSil Corporation (NuSil) on February 9, 2004.

26

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth, for the periods presented, certain data from our consolidated statements of operations. In the opinion of our management, the unaudited quarterly consolidated statement of operations data have been prepared on substantially the same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods presented. This information should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.

Summarized unaudited quarterly financial data are as follows

	Fiscal 2005 Quarters
	First			Second			Third			Fourth
Revenues	$	2,536,469		$	3,163,645		$	2,881,267		$	3,064,100
Gross profit	1,387,540			1,556,366			1,354,132			1,429,449
Net (loss) from continuing operations before income tax benefit (expense)	(193,066		)	(36,193		)	(297,291		)	(276,986		)
Income tax benefit (expense)	77,000			—			—			(262,000		)
Net (loss)	(116,066		)	(36,193		)	(297,291		)	(538,986		)
Basic net (loss) income per share from continuing operations:	$	(0.01	)	$	(0.00	)	$	(0.03	)	$	(0.06	)
Diluted net (loss) income per share from continuing operations	$	(0.01	)	$	(0.00	)	$	(0.03	)	$	(0.06	)

	Fiscal 2004 Quarters
	First			Second		Third		Fourth
Revenues	$	2,251,452		$	3,081,977	$	3,163,785	$	3,661,705
Gross profit	1,238,579			1,675,974		1,813,584		1,823,027
Net (loss) income from continuing operations before income tax benefit	(55,183		)	256,495		282,050		172,390
Income tax benefit	—			—		—		450,000
Net (loss) income from continuing operations	(55,183		)	256,495		282,050		622,390
(Loss) from discontinued operations	(231,380		)	—		—		—
Net (loss) income	(286,563		)	256,495		282,050		622,390
Basic net (loss) income per share:
Net (loss) income per share from continuing operations	$	(.01	)	$	.03	$	.03	$	.06
Basic net (loss) income per share from discontinued operations	$	(.02	)	$	.00	$	.00	$	.00
Basic, as reported	$	(.03	)	$	.03	$	.03	$	.06
Diluted net income (loss) per share:
Net (loss) income per share from continuing operations	$	(.01	)	$	.02	$	.03	$	.06
Diluted net loss per share from discontinued operations	$	(.02	)	$	.00	$	.00	$	.00
Diluted, as reported	$	(.03	)	$	.02	$	.03	$	.06

27

LIQUIDITY AND CAPITAL RESOURCES

On March 31, 2004, the Company completed a private placement offering of investment units (each unit consisting of one share of common stock and a 3-year warrant to purchase an additional one-half share of common stock). A total of 1,426,616 units were sold, yielding gross proceeds of $3,566,536. The units were priced at $2.50 and the associated warrants totaling 713,308 units are exercisable at $3.05. Additionally, the placement agent for the offering received 5-year warrants to purchase 142,662 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 shares of common stock underlying these warrants have been registered with the Securities and Exchange Commission.

The Company used cash of $396,456 and $142,299 in 2005 and 2004 respectively from operations and generated cash of $236,292 in 2003. In 2005, the Company’s principal operating cash requirements were to fund its net loss, its decrease in current liabilities, and an increase in prepaid expenses, offset by a decrease in receivables, inventories, and other current assets. In 2004, the Company’s principal operating cash requirements were to fund its increase in inventories, trade and other receivables, prepaid expenses, and a decrease in current liabilities, partially offset by net income. In 2003, the Company’s principal operating cash requirements were to fund its net loss, its increase in prepaid expenses, inventory, and a decrease in current liabilities, offset by a decrease in trade and other receivables, and other current assets.

The Company used cash of $96,048 generated cash of $513,083, and used cash of $53,172 for investing activities in 2005, 2004, and 2003, respectively. Net cash used in investing activities for 2005 was used for the purchase of capital equipment. Net cash provided by investing activities in 2004 was generated through the sale of the Morehouse-COWLES Division, partially offset by the purchase of capital equipment. Net cash used in investing activities for 2003 included the proceeds from the sale of assets, net of the purchase of capital equipment. The Company’s sale of assets principally related to used equipment. As of December 31, 2005, the Company had no material commitments for capital expenditures.

For financing activities, the Company used cash of $83,252 in 2005, generated cash of $1,607,060 in 2004, and used cash of $217,806 in 2003. In 2005, cash was generated from 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, offset by payments on a term note and subordinated debt to a related party. In 2004, cash was generated from the net proceeds from the private placement offering, the issuance of common stock for options exercised, proceeds from stock issued from the employee stock purchase plan, and net proceeds from a new term loan and line of credit from the New Lender, offset by payments on the previous line of credit, the term note and subordinated debt. In 2003, cash was used to pay down the line of credit, subordinated debt, and the line of credit term note, partially offset by the issuance of common stock.

The cash and cash equivalents at December 31, 2005 was $1,452,358, a decrease of $575,756 from the December 31, 2004 balance of $2,028,114.

On March 3, 2004, the Company entered into a Revolving Credit and Term Loan Agreement with a new lender, Banknorth, N.A. (the New Lender), providing the Company with a $2 million credit facility. The proceeds drawn down from the New Lender under the credit facility were used to pay off both the line of credit and term loan owed PNC Bank N.A. (the Previous Lender).

The Credit Facility was comprised of (i) a $1 million dollar four-year revolving line of credit, (Revolving Credit Line) and (ii) a $1 million dollar four year term promissory note (Term Loan). The Company borrows funds on the Revolving Credit Line at the prime rate. The $1 million Term Loan is payable ratably over a four year period at the fixed rate calculated equal to the Federal Home Loan Bank Classic Rate plus 2.5%, or 5.7%. See discussion of New Credit Facility in the notes to the Consolidated Financial Statements.

28

Under the terms of agreement with the New Lender, the Company has two covenants that it must meet on an annual basis. As of December 31, 2005, the Company was not in compliance with the debt service coverage ratio covenant of its Credit Facility with the New Lender. On March 23, 2006 the Company obtained a waiver from the New Lender for this covenant as of December 31, 2005. The Company expects to be in full compliance with both debt covenants related to the debt with the New Lender at December 31, 2006. As of December 31, 2005, the Company had no balance due and additional availability of up to $1,000,000 under its Revolving Credit Line, and a balance of $562,507 under its Term Loan facility.

The proceeds of the new line of credit and term note were used to pay off the balance due the Previous Lender. As of December 31, 2005 and March 21, 2006, the Company had borrowings of $562,507 and $500,008 outstanding under its Term Loan facility, respectively.

The Company’s ability to continue planned operations is dependent upon access to financing which is potentially impacted by the Company’s ability to achieve future compliance with the financial covenants.

Additionally, although the Company raised approximately $3.6 million in a private placement offering which closed in March 2004, the Company may, from time to time, seek to raise additional capital for various initiatives that management believes advance the interests of the Company. The terms upon which the Company may raise such additional capital may include private placements of its stock, which placements are usually priced at discount to the then-current market price of the Company’s stock (in order to compensate for the fact that the stock being sold is not freely-tradable) or upon other terms that management believes appropriate under the circumstances.

Assuming that there is no significant change in the Company’s business, the Company believes that cash flows from operations, together with existing cash balances, will be sufficient to meet its working capital and debt service requirements for at least the next twelve months.

The Company’s contractual obligations as of December 31, 2005 are as follows:

Contractual Obligations	At December 31, 2005			Fiscal Year 2006			Fiscal Year 2007			Fiscal Year 2008
Long term debt		$	562,507		$	250,000		$	250,000		$	62,507
Operating leases		503,565			355,189			148,376			—
Capital leases		50,546			38,507			12,039			—
Total contractual obligations		$	1,166,618		$	643,696		$	410,415		$	62,507

Recent Accounting Pronouncements

In November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs—an amendment of ARB No. 43” (“SFAS 151”), which is the result of its efforts to converge U.S. accounting standards for inventories with international Accounting Standards. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company believes there is no impact from this standard on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R addresses all forms of share-based payment (“SBP”) awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R will require the Company to expense SBP awards with compensation cost for SBP transactions measured at fair value. The FASB originally stated a preference for a lattice model because it believed that a lattice model more fully captures the unique characteristics of employee stock options in the estimate of fair value, as compared to the Black-Scholes model which the Company currently uses for

29

its disclosure. The FASB decided to remove its explicit preference for a lattice model and not require a single valuation methodology. SFAS No. 123R requires the Company to adopt the new accounting provisions beginning in our fiscal year 2006. The Company has evaluated the impact of this standard and expects that there will be a non-cash charge of approximately $129,000 on its consolidated financial statements.

In May 2005, the FASB issued FASB statement No. 154, Accounting Changes and Corrections. SFAS No. 154 addressed the accounting and reporting for changes in accounting principles. It replaces APB 20  and FIN 20, and is effective for all fiscal years beginning after December 15, 2005. It requires that the cumulative effect of a change in accounting principle be recorded directly in the opening retained earnings balance. The Company has evaluated this standard, and has determined there is no impact from this standard on our consolidated financial statements.

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s 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. The Company’s 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. The Company does not have significant exposure to fluctuations in foreign exchange rates.

The Company had no variable rate borrowings outstanding under its revolving credit agreement at December 31, 2005. Therefore, until the Company decides to borrow under its revolving credit agreement, an adverse change in interest rates for this variable rate debt would have no material effect on the Company’s earnings and cash flows on an annual basis.

For additional information about the Company’s financial instruments, see Note 6 to the Consolidated Financial Statements.

30

Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following Consolidated Financial Statements of the Company and its Subsidiaries appear at the end of this report starting on Page F-1 and include:

	Page
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets as of December 31, 2005 and 2004		F-2
Consolidated Statements of Operations for the years ended December 31, 2005, 2004, and 2003		F-3
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003		F-4
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2005, 2004, and 2003		F-5
Notes to Consolidated Financial Statements		F-6

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

None.

Item 9A.CONTROLS AND PROCEDURES

(a)   Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the fiscal quarter ended December 31, 2005, each of our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective to ensure that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b)   Changes in internal control over financial reporting. There were no significant changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.OTHER INFORMATION

None.

Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Code of Ethics

The Company has adopted a Code of Ethics that applies to all of the Company’s employees, officers and directors, and which is attached to this Report as Exhibit 14. Any person may receive a copy, without charge, of the Company’s Code of Ethics by sending a request for the Code of Ethics to MFIC Corporation., 30 Ossipee Road, Newton, MA 02464-9101, ATTN:  Investor Relations. The Code of Ethics is also viewable on the Company’s website at the following URL: http://www.mficcorp.com/nethics.html

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

31

Item 11.EXECUTIVE COMPENSATION

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

Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

Item 14.INDEPENDENT ACCOUNTANT FEES FOR FISCAL 2005 AND FISCAL 2004

Audit Fees

During the years ended December 31, 2005 and December 31, 2004, Brown & Brown, LLP was paid approximately $87,000, and $139,000 respectively for services rendered for the audit of the Company’s financial statements and review of financial statements included in the Company’s reports on Form 10-Q or services that are normally provided by Brown & Brown, LLP 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, 2005 and December 31, 2004, Brown & Brown, LLP was paid approximately $0, and $0 respectively for assurance and related services reasonably related to the performance of audit or review of the Company’s financial statements and are not reported under Item 9(e) of the Company’s definitive proxy statement.All services were approved by the Audit Committee.

Tax Fees

During the years ended December 31, 2005 and December 31, 2004, Brown & Brown LLP was paid approximately $16,000 and $14,000 respectively for tax compliance, tax advice and tax planning services. All tax services were approved by the Audit Committee.

All Other Fees

During the years ended December 31, 2005 and December 31, 2004, Brown & Brown LLP was paid approximately $27,000 and $56,000 respectively, for non-audit services. All of these services were approved by the Audit Committee.

The Audit Committee pre-approves audit and non-audit services provided to the Company 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 the Company by the Company’s 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.

32

Item 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   Consolidated Financial Statements.

The following Consolidated Financial Statements are included in Item 8:

	Page
Reports of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets as of December 31, 2005 and 2004		F-2
Consolidated Statements of Operations for the years ended December 31, 2005, 2004, and 2003		F-3
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003		F-4
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2005, 2004, and 2003		F-5
Notes to Consolidated Financial Statements		F-6

(b)   Exhibits.

The Company hereby files as part of this Form 10-K the Exhibits listed below.

(c)   Financial Statement Schedules.

The following Consolidated Financial Statement Schedule of the Registrant is filed as part of this report:

Schedule II—Valuation and Qualifying Accounts and Reserves

33

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, 2005 and 2004 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(c). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

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’ 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, 2005 and 2004 and the consolidated results of their operations and their cash flows for the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ BROWN & BROWN, LLP

Boston, Massachusetts
March 1, 2006, except for Note 6,
as to which the date is March 23, 2006

F-1

MFIC CORPORATION
CONSOLIDATED BALANCE SHEETS

	December 31,
	2005			2004
ASSETS
Current Assets:
Cash and cash equivalents	$	1,452,358		$	2,028,114
Accounts receivable, less allowance for doubtful accounts of $43,175 and $13,203 in 2005 and 2004, respectively.	1,864,451			2,056,522
Note receivable—NuSil	—			100,000
Note receivable—current	—			25,000
Inventories, net	1,849,446			1,888,138
Prepaid expenses	269,370			227,607
Other current assets	32,949			45,167
Deferred income taxes	265,000			450,000
TOTAL CURRENT ASSETS	5,733,574			6,820,548
Property and Equipment, at cost:
Furniture, fixtures and office equipment	507,852			451,341
Machinery and equipment	420,172			368,374
Leasehold improvements	89,935			85,795
	1,017,959			905,510
Less: accumulated depreciation and amortization	(611,589		)	(511,170		)
Net property and equipment	406,370			394,340
Patents, licenses and other assets (net of accumulated amortization of $231,515 in 2005 and $225,885 in 2004)	71,783			77,413
TOTAL ASSETS	$	6,211,727		$	7,292,301
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	115,461		$	120,841
Accrued expenses	148,609			162,554
Accrued commissions	160,491			193,073
Accrued compensation and vacation pay	74,313			132,970
Accrued warranty	58,000			—
Customer advances	615,929			775,327
Current portion of term note payable	250,000			250,000
Current portion of long-term debt- related party	—			6,250
Current portion—capital leases	38,507			—
TOTAL CURRENT LIABILITIES	1,461,310			1,641,015
Capital leases payable	12,039			—
Term note	312,507			562,503
Commitments (Note 10)
Stockholders’ Equity:
Common Stock, par value $.01 per share, 20,000,000 shares authorized; 10,166,430 and 9,921,984 shares issued; 9,905,984 and 9,661,538 shares outstanding at December 31, 2005 and 2004, respectively	101,665			99,220
Additional paid-in capital	16,809,007			16,485,828
Accumulated deficit	(11,797,100		)	(10,808,564		)
Less: Treasury Stock, at cost, 260,446 shares at December 31, 2005 and 2004, respectively	(687,701		)	(687,701		)
TOTAL STOCKHOLDERS’ EQUITY	4,425,871			5,088,783
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,211,727		$	7,292,301

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

F-2

MFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2005			2004			2003
Revenues	$	11,645,481		$	12,158,919		$	10,459,631
Cost of goods sold	5,917,994			5,607,755			4,988,226
Gross profit	5,727,487			6,551,164			5,471,405
Operating expenses:
Research and development	1,701,870			1,033,978			785,849
Selling	2,412,550			2,587,658			2,187,389
General and administrative	2,384,217			2,232,358			1,732,087
Total operating expenses	6,498,637			5,853,994			4,705,325
(Loss) income from continuing operations	(771,150		)	697,170			766,080
Interest expense	(58,510		)	(69,383		)	(116,097		)
Interest income	26,124			27,965			9,508
Net (loss) income from continuing operations before income tax (expense) benefit	(803,536		)	655,752			659,491
Income tax (expense) benefit	(185,000		)	450,000			—
Net (loss) income from continuing operations	(988,536		)	1,105,752			659,491
Loss from discontinued operations (net of loss from disposal of discontinued operations of $1,422,715 in 2003)	—			(231,380		)	(4,109,925		)
Net (loss) income	$	(988,536	)	$	874,372		$	(3,450,434	)
Weighted average number of common and common equivalent shares outstanding:
Basic	9,756,221			9,345,560			7,767,712
Diluted	9,756,221			10,329,313			8,501,110
Basic amounts per common share:
Net (loss) income per share from continuing operations	$	(0.10	)	$	.11		$	.08
Basic net (loss) per share from discontinued operations	$	—		$	(.02	)	$	(.52	)
Basic, as reported	$	(0.10	)	$	.09		$	(.44	)
Diluted amounts per common share:
Net (loss) income per share from continuing operations	$	(0.10	)	$	.10		$	.08
Diluted net (loss) per share from discontinued operations	$	—		$	(.02	)	$	(.52	)
Diluted, as reported	$	(0.10	)	$	.08		$	(.44	)

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

F-3

MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2005			2004			2003
Cash flows from operating activities:
Net (loss) income	$	(988,536	)	$	874,372		$	(3,450,434	)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Impairment of goodwill	—			—			2,100,000
Income tax expense (benefit)	185,000			(450,000		)	—
Disposal of discontinued operations	—			—			1,422,715
Depreciation and amortization	186,126			111,829			264,101
Provision for loss on trade receivables	29,972			(45,297		)	24,378
Provision for other receivables	—			46,190			76,000
Provision for obsolete and excess inventory	22,000			53,000			60,000
Provision for warranty expense	58,000			—			—
Gain on sale of assets	—			—			(26,931		)
Share based payments consultants	119,000			—			—
Acceleration—stock options	65,129			—			—
Share based compensation	21,987			—			—
Changes in assets and liabilities:
Receivables	162,099			(196,641		)	146,573
Inventories	16,692			(257,435		)	(49,733		)
Prepaid expenses	(49,530		)	(20,397		)	(50,209		)
Other current assets	45,567			(46,578		)	51,281
Current liabilities	(269,962		)	(15,127		)	(331,449		)
Assets and liabilities available for sale	—			(196,215		)	—
Net cash (used in) provided by operating activities	(396,456		)	(142,299		)	236,292
Cash flows from investing activities:
Proceeds from sale of fixed assets	—			—			26,931
Purchase of fixed assets	(96,048		)	(305,155		)	(96,532		)
Proceeds from note receivable	—			—			16,429
Proceeds from sale of assets available for sale	—			818,238			—
Net cash (used in) provided by investing activities	(96,048		)	513,083			(53,172		)
Cash flows from financing activities:
Principal payments on bank line of credit—PNC	—			(2,425,613		)	(256,374		)
Proceeds from term loan—Banknorth	—			1,000,000			—
Principal payments on term note—PNC	—			(58,735		)	(95,004		)
Principal payments on term loan—Banknorth	(249,996		)	(187,497		)	—
Principal payments- notes payable—capital leases	(38,165		)	—			—
Issuance of common stock under employee stock purchase plan	42,688			20,993			11,713
Issuance of common stock under employee stock option plan	76,820			343,973			144,859
Issuance of common stock purchased through warrants	—			—			52,000
Proceeds from private placement (net of closing costs of $577,601)	—			2,988,939			—
Proceeds from notes receivable—NuSil	91,651			—			—
Payments on subordinated debt-related party	(6,250		)	(75,000		)	(75,000		)
Net cash (used in) provided by financing activities	(83,252		)	1,607,060			(217,806		)
Net (decrease) increase in cash and cash equivalents	(575,756		)	1,977,844			(34,686		)
Cash and cash equivalents, beginning of year	2,028,114			50,270			84,956
Cash and cash equivalents, end of year	$	1,452,358		$	2,028,114		$	50,270
Supplemental disclosure of cash flow information:
Assets acquired in exchange for notes	$	88,711		$	—		$	—
Cash paid for interest	$	60,666		$	67,942		$	130,967

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

F-4

MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

	Number of Shares	$0.01 Par Value			Additional Paid-in Capital			Accumulated Deficit			Number of Shares		Stated at Cost			Total Stockholders’ Equity
Balance, December 31, 2002	7,705,064		$	77,051	$	12,945,520		$	(8,232,502	)		260,446	$	(687,701	)		$	4,102,368
Stock options exercised	186,377		1,863		142,996			—				—	—				144,859
Issuance of common stock under employee stock purchase plan	36,717		367		11,346			—				—	—				11,713
Stock warrants exercised	100,000		1,000		51,000			—				—	—				52,000
Net loss	—		—		—			(3,450,434		)		—	—				(3,450,434		)
Balance, December 31, 2003	8,028,158		80,281		13,150,862			(11,682,936		)		260,446	(687,701		)		860,506
Stock options exercised	440,532		4,406		339,567			—				—	—				343,973
Issuance of common stock from private placement	1,426,616		14,266		2,974,673			—				—	—				2,988,939
Issuance of common stock under employee stock purchase plan	26,678		267		20,726			—				—	—				20,993
Net income	—		—		—			874,372				—	—				874,372
Balance, December 31, 2004	9,921,984		99,220		16,485,828			(10,808,564		)		260,446	(687,701		)		5,088,783
Stock options exercised	128,796		1,288		75,532			—				—	—				76,820
Issue of common stock under employee stock purchase plan	23,289		233		42,455			—				—	—				42,688
Stock warrants issued	—		—		119,000			—				—	—				119,000
Correction—exercised options	70,374		704		(704		)	—				—	—				—
Stock based compensation—directors	21,987		220		21,767												21,987
Acceleration of stock options					65,129												65,129
Net loss	—		—		—			(988,536		)		—	—				(986,536		)
Balance, December 31, 2005	10,166,430		$	101,665	$	16,809,007		$	(11,797,100	)		260,446	$	(687,701	)		$	4,425,871

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

F-5

MFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1ORGANIZATION 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 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.

Managements Plan

The Company incurred a net loss before income tax expense from continuing operations of $803,536 for the year ended December 31, 2005. As of a result of the loss, the Company was not in compliance with its debt service coverage ratio covenant of its Credit Facility with Banknorth, N.A. (“the Lender”). The Company was granted a waiver of this covenant as of December 31, 2005, but must meet this covenant requirement in the future as of December 31, 2006. Assuming the Company does not continue to incur substantial operating losses, management believes that cash flows from operations and available credit from the Credit Facility, along with the existing cash balances, will be sufficient to meet its working capital requirements for at least the next twelve months. In the event that the Company continues to incur significant operating losses, the Company anticipates that it would be able to fund its working capital requirements for the next 12 months if it sufficiently decreased expenditures to avoid further operating losses. Although there can be no assurance of success, the Company’s management is confident that it could modify the Company’s business  plan and operation to achieve positive cash flows from its base level of operations and thereby have sufficient capital resources to accommodate its working capital requirements for the next 12 months.

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.

Reclassifications

Morehouse-COWLES Division: On February 9, 2004, pursuant to an Asset Purchase Agreement (the Asset Purchase Agreement) dated February 5, 2004 between MFIC and a wholly owned subsidiary of NuSil Corporation, a California corporation (NuSil), MFIC sold substantially all of  the assets and selected liabilities of its Morehouse-COWLES Division (the Division), to NuSil. As such, in accordance with Generally Accepted Accounting Principles, results of operations have been reclassified to reflect Morehouse-COWLES’ operating results, net of income taxes, as Discontinued Operations. Further, certain prior period balances have been reclassified to conform to the current period presentation.

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

F-6

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 from the sale of machines and spare parts is generally recognized upon shipment of the product or when the earnings process is complete. Rental income for the lease of equipment is recognized on a straight-line basis over the term of the lease agreement. Rental income and equipment sales are classified in revenues in the consolidated statement of operations.

The Company has adopted Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements. The Company recognizes sales at the time of shipment of the system to the customer. Management believes the customer’s post-delivery acceptance provisions and installation are routine. The Company has never failed to successfully complete a system installation. With few exceptions, the Company limits its liability to the return of the equipment sold. Installation costs are predictable and insignificant to the total purchase price. The Company has demonstrated a history of customer acceptance subsequent to shipment and installation of these systems.

The Company has adopted FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, (FIN46). The Company has evaluated this interpretation, and has determined that it has no Variable Interest Entities that would require consolidation within the Company’s December 31, 2005 Consolidated Financial Statements.

Cash and Cash Equivalents

The Company considers all highly liquid securities with initial maturities of 90 days or less, at the time of acquisition, to be cash equivalents.

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

F-7

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 (“SFAS No. 144”), 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.

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

The Company generally sells its products with a twelve month warranty that requires it to remedy deficiencies or quality on performance not caused by the actions of the customer. The Company has established a reserve for these costs, based upon historical data.

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 (“SFAS No. 128”), 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 1,718,925, 1,788,213 and 1,929,662 shares of common stock were outstanding for the years ended 2005, 2004, and 2003, respectively. Basic and diluted net loss per share are $(.10) for 2005. Basic and diluted net incomes per share are $.09 and $.08 respectively per share for 2004. Basic and diluted net loss per share are $(.44) per share for 2003.

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 (“SFAS No. 109”). 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 rates. Deferred income tax expense or credits are based on changes in the asset or liability from period to period.

F-8

The Company records a valuation allowance against any net deferred tax assets if it is more likely than not that they will not be realized.

Stock Based Compensation

As allowed by SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to account for stock-based compensation at intrinsic value with disclosure of the effects of fair value accounting on net income and earnings per share on a pro forma basis. At December 31, 2005, the Company had one stock incentive plan, which is described more fully in Note 9. The Company accounts for awards issued to employees under its stock incentive plan pursuant to the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net (loss) income and (loss) income per share if the Company had applied the fair value recognition provisions of SFAS No. 123:

	2005			2004			2003
Net (loss) income, as reported	$	(988,536	)	$	874,372		$	(3,450,434	)
Deduct: total stock-based expense determined under fair value based method for all awards net, met of related tax effects	(130,791		)	(231,886		)	(113,509		)
Pro forma net (loss) income	$	(1,119,327	)	$	642,486		$	(3,563,943	)
Net (loss) income per share:
Basic—as reported	$	(0.10	)	$	.09		$	(0.44	)
Diluted—as reported	$	(0.10	)	$	.08		$	(0.44	)
Basic—pro forma	$	(0.11	)	$	.07		$	(0.46	)
Diluted—pro forma	$	(0.11	)	$	.06		$	(0.46	)

Stock options granted to non-employees are accounted for in accordance with SFAS No. 123 and the Emerging Issues Task Force (EITF) AbstractNo. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and related interpretations, which generally requires the value of options to be periodically remeasured and charged to expense as they are earned over the performance period. Compensation related to stock appreciation rights and other variable stock option or award plans should be measured at the end of each period. The Company did not grant any stock options to non-employees, with the exception of granting options to non-employee directors, during 2005, 2004, or 2003.

Recent Accounting Pronouncements

In November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs—an amendment of ARB No. 43” (“SFAS No. 151”), which is the result of its efforts to converge U.S. accounting standards for inventories with international Accounting Standards. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company believes there is no impact from this standard on its consolidated financial statements.

F-9

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R addresses all forms of share-based payment (“SBP”) awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R requires the Company to expense SBP awards with compensation cost for SBP transactions measured at fair value. The FASB originally stated a preference for a lattice model because it believed that a lattice model more fully captures the unique characteristics of employee stock options in the estimate of fair value, as compared to the Black-Scholes model which the Company currently uses for its disclosure. The FASB decided to remove its explicit preference for a lattice model and not require a single valuation methodology. SFAS No. 123R requires the Company to adopt the new accounting provisions beginning in our fiscal year 2006. The Company is has evaluated the impact of this standard and expects that there will be a non-cash charge of approximately $129,000 on its consolidated financial statements.

In May 2005, the FASB issued FASB statement No. 154, Accounting Changes and Corrections. SFAS No. 154 addressed the accounting and reporting for changes in accounting principles. It replaces APB 20 and FIN 20, and is effective for all fiscal years beginning after December 15, 2005. It requires that the cumulative effect of a change in accounting principle be recorded directly in the opening retained earnings balance. The Company has evaluated this standard, and has determined there is no impact on our consolidated financial statements.

Note 2INDUSTRY SEGMENT, GEORGRAPHIC AND ENTERPRISE-WIDE  REPORTING

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, (“SFAS No. 131”), 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 chairman and 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 from continuing operations by geographic markets, are as follows:

	2005		2004		2003
North America	$	6,028,000	$	6,212,000	$	5,337,000
Asia	4,100,000		3,774,000		3,204,000
Europe	1,518,000		2,173,000		1,919,000
	$	11,646,000	$	12,159,000	$	10,460,000

Customers:

The users of the Company’s systems are in various industries, including the chemical, pharmaceuticals, food, cosmetic and biotechnology industries. Mizuho Industrial Co. Ltd. (Mizuho) and a wholly owned subsidiary of Teva Pharmaceuticals Industries Ltd. (Teva) accounted for 19.5% and 18.9% of the Company’s revenues from continuing operations in 2005, respectively; 20.5% and 12.8%, respectively, in 2004; and 20.6% and 10.6%, respectively, in 2003. 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 10.8% and 10.7% of the trade accounts receivable from continuing operations as

F-10

of December 31, 2005, respectively. Three customers accounted for 15.1%, 14.7%, and 13.4% of the trade accounts receivable as of December 31, 2004, respectively. One customer accounted for 16.7% of the trade accounts receivable as of December 31, 2003. 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 51.8% of the Company’s revenues from continuing operations in 2005; approximately 51.1% of the Company’s revenues from continuing operations in 2004; and approximately 51.0 % of the Company’s revenues from continuing operations in 2003, with almost all of those sales coming from United States and Canada. Sales to the rest of the world accounted for approximately 48.2% of the Company’s revenues from continuing operations in 2005; approximately 48.9% of the revenues from continuing operations in 2004; and approximately 49.0% of the revenues from continuing operations in 2003. Sales through the Company’s exclusive distributors in Japan accounted for approximately 19.5% of the Company revenues from continuing operations in 2005; 20.5% of the Company’s revenues from continuing operations in 2004; and 20.6% of the Company’s revenues from continuing operations in 2003. Sales through the Company’s representative in Korea accounted for approximately 12.1% of the Company’s revenues from continuing operations in 2005; 4.8% of the Company’s revenues from continuing operations in 2004; and 5.1% of the Company’s revenues from continuing operations in 2003.

Note 3INVENTORIES

The components of inventories are as follows at December 31:

	2005		2004
Raw materials	$	1,711,661	$	1,786,427
Work in progress	73,844		147,376
Finished goods	248,941		117,335
	2,034,446		2,051,138
Less: provision for excess inventory	185,000		163,000
TOTAL	$	1,849,446	$	1,888,138

Note 4ASSETS AVAILABLE FOR SALE

In the fourth quarter of 2003 the Company determined that its Morehouse-COWLES Division (the “Division”) was not strategic to the Company’s on-going objectives and in December 2003, management committed to a plan to sell substantially all the assets and associated liabilities of the Division. Accordingly, the Company reported the Division as a discontinued operation in accordance with SFAS No. 144. The consolidated financial statements were reclassified to segregate the assets and associated liabilities available for sale and operating results of these discontinued operations for all periods presented.

F-11

Summary Operating Results of the Discontinued Operations of Morehouse-COWLES are as follows:

	2005			2004			2003
Revenue		$	—	$	323,635		$	3,655,237
Cost of sales		—		308,548			2,601,957
Gross profit		—		15,087			1,053,280
Total operating expenses		—		238,760			3,740,490
		—
Loss from discontinued operations before cumulative effect of change in accounting principle and disposal		—		(223,673		)	(2,687,210		)
Loss on disposal of discontinued operations		—		(7,707		)	(1,422,715		)
Cumulative effect of change in accounting principle		—		—			—
Loss from discontinued operations		—		$	(231,380	)	$	(4,109,925	)

In December 2003, in conjunction with the establishment of management’s plan to sell the Morehouse-COWLES Division, the Company determined that the remaining goodwill of $2,100,000 was fully impaired and accordingly charged to Discontinued Operations.

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

The assets of the Division that were sold included accounts receivable, furniture, fixtures and equipment, inventory and supplies, books and records, bids, contracts, prepaid expenses, leases, intellectual property, goodwill, domain names and claims, all as described in the Asset Purchase Agreement (collectively, the “Assets”). In addition, certain rights and obligations arising after February 9, 2004 under the Division’s PacifiCare Group Health Insurance Policy were assigned. The Division’s cash on hand on February 9, 2004 were excluded from the assets being sold. Under the Asset Purchase Agreement, the Division’s executory obligations under certain contracts and bids, and the Division’s accounts payable as of February 9, 2004 in the amount of $623,240, were assumed by NuSil.

The purchase price (other than the assumption of accounts payable described in the preceding paragraph) paid under the Asset Purchase Agreement was $918,238. Of the purchase price, $768,238 (the “Closing Cash”) was paid in cash, $100,000 was paid in the form of a Promissory Note (the “Purchase Note”) and $50,000 (the “Holdback Payment”) was withheld for payment subject to any purchase price adjustments and offsets, as provided for in the Asset Purchase Agreement. In accordance with the Asset Purchase Agreement, this Company received the holdback payment on March 26, 2004.

The Closing Cash was paid directly to PNC Bank, National Association (“PNC”), to be applied to MFIC’s outstanding balance under MFIC’s Revolving Credit Loan with PNC (the “Revolving Credit Loan”).

The aforementioned Purchase Note bore interest at 5 percent per annum, and was secured by the Assets pursuant to a Security Agreement dated February 5, 2004 (the “Security Agreement”) between the parties and was subject to certain offsets as provided in the Asset Purchase Agreement. Principal and interest on the Purchase Note were payable on February 9, 2005. NuSil forwarded a payment to the Company on that date which, in conjunction with allowable offset of approximately $8,300 paid by NuSil for the benefit of the Company, satisfied the claim.

Pursuant to the Asset Purchase Agreement, MFIC entered into a Noncompetition and Nonsolicitation Agreement, dated February 5, 2004, which limits MFIC’s ability to compete with the business of the Division for a period of five years.

F-12

Note 5INTANGIBLES AND OTHER ASSETS

In 2001, the Company capitalized $64,528 of costs related to the Multiple-Stream Mixer High Pressure Reactor patent, with an additional $28,582 of costs related to this patent capitalized in 2004. These costs are being amortized over a 17-year period, beginning in the last quarter of 2001. Amortization of these costs was $5,630 in 2005, $9,747 in 2004, and $3,800 in 2003.

Costs incurred in connection with the debt refinancing that occurred on March 3, 2004 are being amortized over four years, the initial term of the line of credit. The total of such costs was approximately $36,533. Amortization of these costs amounted to $7,767 in 2005 and $8,978 in 2004.

Costs incurred in connection with the debt refinancing that occurred on February 28, 2000 were amortized over three years, the initial term of the line of credit. The total of such costs, which are fully amortized, was approximately $207,000. Amortization of these costs amounted to $11,534 in 2003.

Note 6DEBT

Long-term debt as of the following dates consisted of:

	December 31,
	2005			2004
10% subordinated note payable to related party	$	—		$	6,250
Term note payable	562,507			812,503
Capital lease notes payable	50,546			—
	613,053			818,753
Less current portion	(288,507		)	(256,250		)
Long term debt, net of current portion	$	324,546		$	562,503

The capital lease notes payable consist of three capitalized leases with bargain purchase options that the Company is obligated to pay over a three year period.

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

2006	$	40,475
2007	12,654
Total Capital lease payments	53,129
Less: Interest expense	2,583
Net	$50,546

Subordinated Note Payable

The subordinated note was payable to Lake Shore Industries Inc., a related party as defined and disclosed in Note 11 of the financial statements.

Credit Facility

On March 3, 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 “New 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”). The Revolving Credit Line obtains advances there under bearing interest at an interest rate equal to the prime rate (the Prime Rate for United States borrowings from Banknorth, N.A. as publicly announced

F-13

from time to time). 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 interest at an interest rate equal to the Federal Home Loan Bank Classic Rate at March 4, 2004 plus two and one-half percent (2.50%). Loans under the Credit Facility are secured by a collateral pledge to the New 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 New Lender under the Credit Facility. The Company also pledged to the New 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: (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. At December 31, 2005, the Company was not in compliance with the debt service coverage ratio, and required a waiver from the New Lender, which was granted on March 23, 2006. The Company will be required to meet both covenant requirements at December 31, 2006. The Company expects to be in compliance as of that date.

Due to the subjective acceleration clause, and the lock-box arrangement with the New Lender, the revolving credit line is classified as a current liability in the consolidated balance sheet. On December 31, 2005 and 2004, there was no outstanding balance on the Revolving Credit Line. The balance outstanding on the term loan was $562,507, at an interest rate of 5.67%.

Note 7EMPLOYEE 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 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 2005, 2004, or 2003. The Company also instituted a cafeteria plan in 1992, giving the employees certain pre-tax advantages on specific payroll deductions.

Note 8INCOME TAXES

The (expense) benefit for income taxes is as follows:

	Year ended December 31
	2005			2004		2003
Deferred:
Federal	$	(141,000	)	$	345,000		$	—
State	$	(44,000	)	105,000			—
	$	(185,000	)	$	450,000		$	—

The amount reported as an income tax expense for 2005 is the result of an increase to the valuation allowance reserve that was recorded against the Company’s deferred tax assets.

The amount reported as an income tax expense in 2004 is the result of the reversal of tax reserves recorded in prior years.

F-14

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

	2005		2004		2003
Federal income tax at statutory rate	34.00	%	34.0	%	34.0	%
State income taxes, net of federal benefit	6.3	%	6.3	%	6.3	%
Permanent adjustments	(6.5	)%	2.6	%	—
Net research and development and other tax credits	(11.7	)%	—		—
Valuation allowance	25.9	%	(42.8	)%	(40.3	)%
Reversal of valuation allowance recorded in prior years	(25.0	)%	(68.7	)%	—
Total income tax expense (benefit)	23.0	%	(68.6	)%	0	%

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

	Year ended December 31
	2005			2004
Deferred tax assets (liabilities) :
Purchased Intangibles	$	0		$	11,000
Net operating loss carry forwards	3,958,000			4,683,000
Research and development and other credits	93,000			180,000
Accruals and allowances not currently deductible for tax purposes	122,000			129,000
Depreciation and other	7,000			(440,000		)
Valuation allowance	(3,915,000		)	(4,063,000		)
Total deferred tax assets	$	265,000		$	450,000

At December 31, 2005, the Company has available federal net operating loss carryforwards for income tax purposes of approximately $10,274,000 and state net operating losses of approximately $7,420,000 which expire at various dates through 2025, federal research and development credit carry forwards of approximately $84,000 expiring in varying amounts during the period through 2011 and state research and development credit carryforwards of approximately $9,000 expiring in varying amounts during the period through 2011. Ownership changes, as defined in the Internal Revenue Code, may have limited the amount of new 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.

Based on our review of the evidence available, we believe that the valuation allowance is adequate as of the year ended December 31, 2005, based on our projected results for 2006. If there is any significant change between actual and budgeted results, we would revisit the valuation allowance at the end of June 30, 2006, and make the appropriate adjustment.

F-15

Note 9STOCKHOLDERS’ EQUITY

The Company adopted the 1988 Stock Plan (the Plan) as the successor plan to the 1987 Stock Plan, which, as amended at the 2002 stockholders’ meeting, authorizes the grant of Stock Rights for up to 3,500,000 shares of common stock, and the 1989 Non-Employee Director Stock Option Plan which, as amended at the 1996 stockholders’ meeting, authorizes the grant of nonqualified stock options for up to 500,000 shares of common stock.

Stock Option Plans

Options granted under the plans vest over a three-to-five-year period and expire 5 - 10 years from the grant date. At December 31, 2005, 757,946 shares were available for future grants under the plans. Information with respect to activity under the plans is as follows:

	Number of Shares			Weighted Average Exercise Price
Outstanding, December 31, 2001		1,612,980			0.88
Granted		532,045			0.52
Exercised		(19,375	)		0.31
Canceled		(115,000	)		0.60
Outstanding, December 31, 2002		2,010,650			0.90
Granted		257,409			0.47
Exercised		(186,377	)		0.78
Canceled		(152,020	)		1.13
Outstanding, December 31, 2003		1,929,662			0.74
Granted		392,668			2.27
Exercised		(440,532	)		0.79
Canceled		(93,585	)		0.67
Outstanding, December 31, 2004		1,788,213			1.14
Granted		424,900			2.14
Exercised		(221,157	)		.57
Canceled		(273,031	)		1.07
Outstanding, December 31, 2005		1,718,925			$	1.37
Exercisable, December 31, 2003		1,102,020			$	0.96
Exercisable, December 31, 2004		979,763			$	0.79
Exercisable, December 31, 2005		1,338,954			$	1.30

The following table summarizes information relating to outstanding and exercisable stock options as of December 31, 2005:

Outstanding							Exercisable
Exercise Price	Number of Shares	Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price			Number of Shares	Weighted Average Exercise Price
$ 0.30-.95	638,564		5.5		$	.50	530,439		$	.50
$ 1.00-1.75	603,215		7.0		1.23		517,715		$	1.45
$ 2.06-4.25	477,146		9.5		2.70		290,800		$	2.47
	1,718,925						1,338,954

F-16

Acceleration of Stock Options

The Company, upon recommendation of its Compensation Committee, approved the accelerated vesting of all currently outstanding unvested stock options (“Options”) to purchase shares of common stock of the Company. These Options were previously awarded to officers and employees under the Company’s 1988 Employee Stock Option Plan. The Company has recognized a one-time compensation expense in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No.25”), of approximately $65,000 in the fourth quarter of fiscal 2005 with respect to the acceleration of in-the-money options.

Options to purchase 480,915 shares of the Company’s common stock, which would otherwise have vested from time to time over the next five years, became immediately exercisable on December 31, 2005 as a result of the Board’s actions. The number of shares and exercise prices of the Options subject to acceleration are unchanged. The remaining terms for each of the Options granted remain the same.

The accelerated Options included 139,350 Options held by executive officers as identified in the Company’s June 3, 2005 proxy statement increased by subsequent grants dated December 6, 2005, and 341,565 Options held by other employees. Based on the Company’s closing stock price of $1.35 per share on the date of accelerated vesting, 48% of the total accelerated Options would have an exercise price above the closing market price at the time of acceleration. All of the accelerated Options have exercise prices between $.30 and $4.25 per share, with total weighted average exercise price per share $1.72.

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 Financial Accounting Standards Board Statement No. 123R (Share-Based Payment) on January 1, 2006. As of December 31, 2005, option holders exercised the opt-out right with respect to 284,971 Options, and the Company will recognize a one-time non-cash compensation charge of approximately $87,000 in 2006 with regard to those Options.

Correction Regarding Exercised Options

On April 7, 2004, an officer of the Company exercised 80,000 options that had been granted in 1998 at an exercised price of $1.2375 per share, for a total expenditure of $99,000.

A review of the 1988 employee stock plan occurred in 2005. At that time, it was discovered that the employee, due to his degree of ownership in the Company, could not exercise these options after five years, or 2003.

Instead of having the money returned, the employee exercised other options held and exercisable. The net result of the transaction was no overall change to equity, but an increase to Common Stock, and a corresponding decrease to Additional-Paid-In-Capital.

Accounting for Stock-Based Compensation

SFAS No. 123, Accounting for Stock-Based Compensation, requires the measurement of the fair value of stock options to be included in the statement of income or disclosed in the notes to the financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under APB Opinion No. 25, Accounting for Stock issued to Employees, and elect the disclosure-only alternative under No. SFAS 123.

F-17

The Company has computed the pro forma disclosures required under SFAS No. 123 for its stock compensation plan for employees during the years ended December 31, 2005, 2004 and 2003 using the Black-Scholes option pricing model under the fair value method as prescribed by SFAS No. 123. The assumptions used for the years ended December 31, 2005, 2004 and 2003 are as follows:

	December 31,
	2005		2004		2003
Risk-free interest rates	4.35	%	3.55	%	4.75	%
Expected lives	5 years		5 years		5 years
Expected volatility	129	%	106	%	164	%
Dividend yield	0	%	0	%	0	%

Private Placement

On March 31, 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 ½ share of common stock). A total of 1,426,616 units were sold, yielding gross proceeds of $3,566,540. The units were priced at $2.50 and the associated warrants are exercisable at $3.05. Additionally, the placement agent for the offering received 5 year warrants to purchase 142,662 shares of common stock at an exercise price of $3.20 per share.  The value of the warrants granted to the placement agent is approximately $351,000, and was accounted for as a non cash financing activity.

Warrants

On September 23, 1999, the Chief Executive Officer of the Company, Irwin J. Gruverman, was granted warrants to purchase up to 100,000 shares of the Company’s common stock at a price of $0.52 per share, having an expiration date of July 2, 2004. The warrants were exercised on November 25, 2003.

On November 17, 2004, the Company entered into a twelve month general financial and advisory services agreement with Maxim Group LLC (Maxim) pursuant to which Maxim was granted on April 1, 2005 a three (3) year warrant to Purchase 100,000 shares of the Company’s common stock at an exercise price of $3.20 per share. The Company expects to file a registration statement for purposes of registering the shares of common stock underlying the warrants by April 15, 2006. 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 23,289, 26,678 and 36,717, in 2005, 2004, and 2003, respectively.

F-18

Note 10COMMITMENTS

The Company leases its facilities under non-cancelable operating leases expiring through May 2007. Future minimum rental payments under the operating leases at December 31, 2005 are as follows:

2006	$	355,189
2007	148,376
Total Lease Payments	$	503,565

Rent expense for 2005, 2004, and 2003, was approximately $468,000, $357,000, $439,000, respectively. A portion of the space is sublet to a non-affiliated company under a tenant-at-will arrangement for a total of $21,600 per annum.

Note 11RELATED PARTY TRANSACTIONS

As discussed in Notes 6 and 12, the Company owed the former principals of Morehouse and Epworth $0, $6,250, and $81,250, at December 31, 2005, 2004, and 2003, respectively. Interest capitalized on the $300,000 note in connection with the Settlement Agreement discussed in Note 12 amounted to $88,750 and is being amortized over 5 years. Total payments in 2005, 2004 and 2003 were $54, $4,757 and $12,340, respectively.

Note 12SETTLEMENT AGREEMENT, DEBT RESTRUCTURING AND REFINANCING

On December 20, 1999 the Company signed an agreement in principle (the Agreement In Principle) with J.B. Jennings and Bret A. Lewis, the former owners of the Epworth Mill and Morehouse-COWLES businesses (the Sellers), Lake Shore Industries, Inc., and JLJ Properties, Inc., entities owned and controlled by the Sellers. The Agreement In Principle sets forth understandings among the parties concerning restructuring of the Company’s subordinated debt and resolution of various disputes. On January 17, 2000, a definitive settlement agreement incorporating these subject matters was executed between the parties (the Settlement Agreement). In connection with the closing of the Credit Facility, and pursuant to a Settlement Agreement dated January 17, 2000 with the Company’s subordinated debt holders, the subordinated debt of the Company was restructured in the following manner. The outstanding August 14, 1998 $500,000 subordinated promissory note, having a remaining $475,000 principal balance together with accrued interest at the Closing Date in the approximate amount of $77,500, and accrued interest on the August 14, 1998 $300,000 subordinated note were converted to 500,000 shares of MFIC restricted common stock (the Conversion Shares).

The fair market value of the Company’s Common Stock on the date of the Agreement In Principle was $0.31 per share. MFIC was granted the right for a three-year period to repurchase the Conversion Shares at a purchase price of $1.75 per share. The August 14, 1998 $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 and bore interest at a rate of ten percent (10%) per annum. The final payment on the note was made on January 25, 2005 for $6,304 including interest of $54.

F-19

Note 13QUARTERLY RESULTS OF OPERATIONS

Summarized unaudited quarterly financial data are as follows:

	Fiscal 2005 Quarters
	First			Second			Third			Fourth
Revenues	$	2,536,469		$	3,163,645		$	2,881,267		$	3,064,100
Gross profit	1,387,540			1,556,366			1,354,132			1,429,449
Net (loss) from continuing operations before income tax benefit (expense)	(193,066		)	(36,193		)	(297,291		)	(276,986		)
Income tax benefit (expense)	77,000			—			—			(262,000		)
Net (loss)	(116,066		)	(36,193		)	(297,291		)	(538,986		)
Basic net (loss) income per share from continuing operations:	$	(0.01	)	$	(0.00	)	$	(0.03	)	($0.06		)
Diluted net (loss) income per share from continuing operations	$	(0.01	)	$	(0.00	)	$	(0.03	)	$	(0.06	)

	Fiscal 2004 Quarters
	First			Second		Third		Fourth
Revenues	$	2,251,452		$	3,081,977	$	3,163,785	$	3,661,705
Gross profit	1,238,579			1,675,974		1,813,584		1,823,027
Net (loss) income from continuing operations before income tax benefit	(55,183		)	256,495		282,050		172,390
Income tax benefit	—			—		—		450,000
Net (loss) income from continuing operations	(55,183		)	256,495		282,050		622,390
(Loss) from discontinued operations	(231,380		)	—		—		—
Net (loss) income	(286,563		)	256,495		282,050		622,390
Basic net (loss) income per share:
Basic net (loss) income per share from continuing operations	$	(.01	)	$	.03	$	.03	$	.06
Basic net (loss) income per share from discontinued operations	$	(.02	)	$	.00	$	.00	$	.00
Basic, as reported	$	(.03	)	$	.03	$	.03	$	.06
Diluted net income (loss) per share:
Diluted net (loss) income per share from continuing operations	$	(.01	)	$	.02	$	.03	$	.06
Diluted net loss per share from discontinued operations	$	(.02	)	$	.00	$	.00	$	.00
Diluted, as reported	$	(.03	)	$	.02	$	.03	$	.06

F-20

Exhibit Index

Exhibit Number	Description of Exhibit
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).
4.2	Form of Warrant issued to placement agent under the Placement Agent Agreement (filed as Exhibit 10.62 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference).
4.3	Form of Warrant issued to investors in the private placement described in the Placement Agency Agreement (filed as Exhibit 10.62 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference).
10.1	1987 Stock Plan (filed as Exhibit 10(g) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1987 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).
10.4	Lease for 30 Ossipee Road, Newton, Massachusetts dated May 23, 1997 between Microfluidics International Corporation and J. Frank Gerrity, 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 3.10(a) to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 and incorporated herein by reference).
10.5	Letter of Understanding between Microfluidics International Corporation and Worcester Polytechnic Institute dated as of April 3, 1992 (filed as Exhibit 3.10(f) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.6	Agreement between Microfluidics International Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference). With amendments dated September 1, 1994 and March 31, 1995.
10.7	Amendment to agreement dated September 1, 1994 between Microfluidics International Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company’s Annual Report Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).

10.8	Amendment to agreement dated March 31, 1995 between Microfluidics International Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference)
10.9	License Agreement among Microfluidics International Corporation, Worcester Polytechnic Institute and Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit 3.10(h) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.10	Amendment to agreement dated September 1, 1994 between Microfluidics International Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference).
10.11	Letter, dated August 15, 1995, from Microfluidics International Corporation to Michael T. Rumley (filed as Exhibit 3.10(j) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference).
10.12	Letter, dated December 31, 1995 from Microfluidics International Corporation to Irwin J. Gruverman (filed as Exhibit 3.10(k) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference).
10.13	Warrant for the Purchase of Shares of Common Stock, dated July 14, 1993, in favor of Ladenburg, Thalmann & Co. Inc. (filed as Exhibit 3.10(l) to the Company’s Annual Report on Form  10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference).
10.14	Letter, dated December 31, 1996, from Microfluidics International Corporation to Irwin J. Gruverman (filed as Exhibit 3.10(o) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference).
10.15	Agreement between Microfluidics International Corporation and Catalytica, Inc. dated January 1, 1995 regarding participation in and management of the Advanced Technology Program (ATP). (filed as Exhibit 3.10(p) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference).
10.16	Consulting Agreement with James Little (filed as Exhibit 3.10(q) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference).
10.17	Supplemental Agreement between Catalytica Advanced Technologies, Inc. and Microfluidics International Corporation dated December 31, 1997 (filed as Exhibit 3.10(r) to the Company’s 10-K for the fiscal year ended December 31, 1997, 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).
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).
10.23	Revolving Credit and Term Loan Agreement among MFIC Corporation and National Bank of Canada dated February 28, 2000. (Filed as Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.24	Revolving Credit Note of the Company in favor of National Bank of Canada in the amount of $4,000,000.00 dated February 28, 2000. (Filed as Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.25	Term Note of the Company in favor of National Bank of Canada in the amount of $475,000.00 dated February 28, 2000. (Filed as Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.26	Security Agreement of the Company in favor of National Bank of Canada dated February 28, 2000. (Filed as Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.27	Trademark and Trademark Applications Security Agreement of the Company in favor of National Bank of Canada, dated February 28, 2000. (Filed as Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.28	Patent and Patent Applications Security Agreement of the Company in favor of National Bank of Canada, dated February 28, 2000. (Filed as Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.29	Unlimited Guaranty of Microfluidics Corporation in favor of National Bank of Canada dated February 28, 2000. (Filed as Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.30	Stock Pledge Agreement between the Company and National Bank of Canada dated February 28, 2000. (Filed as Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.31	Subordination Agreement among the Company, Lake Shore Industries, Inc. and National Bank of Canada dated as of February 28, 2000. (Filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 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.)
10.34	Letter, dated December 31, 1999, from MFIC Corporation to Irwin J. Gruverman and G&G Diagnostics Corp. (Filed as Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.35	Letter, dated December 31, 1999, from MFIC Corporation to Irwin J. Gruverman. (Filed as Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.36	First Amendment to Revolving Credit and Term Loan Agreement between the Company and National Bank of Canada dated March 30, 2000. (Filed as Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.37	Lease between ABB and Microfluidics dated April 14, 2000 for space at Lampertheim, Germany. (Filed as Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.38	Security Agreement between MFIC Corporation and J.M. Huber Corporation dated October 18, 2000. (Filed as Exhibit 10.42 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.39	Settlement agreement between MFIC Corporation and J.M. Huber Corporation dated December 18, 2000. (Filed as Exhibit 10.43 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.40	Letter, dated December 31, 2000, from MFIC Corporation to Irwin J. Gruverman and G&G Diagnostics Corporation. (Filed as Exhibit 10.45 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.41	Letter, dated December 31, 2000, from MFIC Corporation to Irwin J. Gruverman. (Filed as Exhibit 10.46 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.)
10.43	Consulting agreement with Vincent Cortina dated January 2, 2002. (Filed as Exhibit 10.48 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, and incorporated herein by reference.)

10.44	Letter dated December 31, 2001 from MFIC Corporation to Irwin J. Gruverman. (Filed as Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 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.)
10.48	Letter dated December 31, 2002 from MFIC Corporation to Irwin J. Gruverman. (filed as Exhibit 10.53 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, 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).
10.53	Letter dated December 31, 2003 from MFIC Corporation to Irwin Gruverman (Filed as Exhibit 10.57 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference).
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, 2004, 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.
*10.64	Warrant issued to Maxim Group LLC dated April 1, 2005
*14.	Code of Ethics, as adopted by the Company.
21.	Subsidiary of the Company, Microfluidics Corporation, a Delaware corporation
*23(a)	Consent of Brown & Brown, LLP
*31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.
*31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.
*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

**Management contracts or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15 (b) of this report.

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 30th day of March 2006.

By:	/s/ IRWIN J. GRUVERMAN
	Irwin J. Gruverman
	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/ IRWIN J. GRUVERMAN		Chief Executive Officer		March 30, 2006
Irwin J. Gruverman		(Principal Executive Officer), Chairman of
		the Board of Directors and Secretary
/s/ DENNIS P. RIORDAN		Controller		March 30, 2006
Dennis P. Riordan		(Principal Financial and Accounting Officer)
/s/ JAMES N. LITTLE		Director		March 30, 2006
James N. Little
/s/ VINCENT CORTINA		Director		March 30, 2006
Vincent Cortina
/s/ LEO PIERRE ROY		Director		March 30, 2006
Leo Pierre Roy
/s/ GEORGE UVEGES		Director		March 30, 2006
George Uveges
/s/ ERIC G. WALTERS		Director		March 30, 2006
Eric G. Walters

SCHEDULE II

MFIC CORPORATION

Valuation and Qualifying Accounts and Reserves
For the years ended December 31, 2005, 2004, and 2003

	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, 2005	$	13,203		$	30,015		$	43	$	43,175
For the year ended December 31, 2004	58,500			25,447			70,744		13.203
For the year ended December 31, 2003	33,500			25,000			—		58,500
INVENTORY RESERVE
For the year ended December 31, 2005	$	163,000		$	80,000		$	58,000	$	185,000
For the year ended December 31, 2004	110,000			98,000			45,000		163,000
For the year ended December 31, 2003	50,000			60,000			—		110,000
ACCUMULATED AMORTIZATION RELATED TO GOODWILL AND OTHER INTANGIBLES
For the year ended December 31, 2005	$	0		$	—		$	—	$	0
For the year ended December 31, 2004	6,918,244			—			6,918,244		—
For the year ended December 31, 2003	4,814,444			2,103,800			—		6,918,244
WARRANTY RESERVE
For the year ended December 31, 2005	$	0		$	91,511		$	33,511	$	58,000
For the year ended December 31, 2004	$	0		$	52,194		$	52,194	$	0
For the year ended December 31, 2003	$	0		$	48,415		$	48,415	$	0

S-1

EX-10.63

Exhibit 10.63

RESEARCH COLLABORATION AGREEMENT

— INVENTIONS AND MATERIALS —

This Agreement, effective as of September 21, 2005 (the “Effective Date”), is between the University of Massachusetts Lowell (“UML” or “Institution”), a public institution of higher education of the Commonwealth of Massachusetts, and MFIC Corporation, a Delaware corporation (“Sponsor”),

WHEREAS: UML has identified Sponsor’s proprietary Microfluidizer® processor and Microfluidizer® Mixer/Reactor technology as a potentially important sizing and reaction process component to its nanomanufacturing initiative,

WHEREAS: UML desires to evaluate this premise via research and development using Microfluidizer equipment,

WHEREAS: MIFC desires to evaluate their Microfluidizer® materials processor and Microfluidizer® Mixer/Reactor technologies for nanomanufacturing opportunities,

THEN:  Institution and Sponsor hereby agree to this Research Collaboration Agreement as defined by the following terms:

1.Definitions.

1.1.“Confidential Information” means confidential or proprietary information furnished by one party (the “Disclosing Party”) to the other party (the “Receiving Party”) in connection with the performance of the Research Project, provided that the information is specifically designated as confidential. Confidential Information includes, without limitation, trade secrets, know-how, inventions, technical data or specifications, testing methods, and research and development activities.1.2.  “Indemnitees” means either Institution and its trustees, officers, faculty, students, employees, and agents and their respective successors, heirs and assigns of Sponsor and its directors, officers, employees, and agents and their respective successors, heirs and assigns.

1.3.“Inventions” means any potentially patentable or copyrightable innovation based on the Research Results, which is conceived during the term of this Agreement by employees of Institution or Sponsor.

1.4.“Materials” means any tangible materials, including recorded data, writings, etc.

1.5.“Patent Rights” means all United States and foreign patent applications claiming an Invention, including any divisional, continuation, continuation-in-part (to the extent that the

claims are directed to an Invention), and foreign equivalents thereof, as well as any patents issued thereon or reissues or reexaminations thereof. “Institution Patent Rights” means Patent Rights claiming Inventions that are conceived or reduced to practice solely by employees of Institution or by employees of Sponsor utilizing Institution facilities, as determined under the patent laws of the United States, and assigned to Institution. “Joint Patent Rights” means Patent Rights claiming Inventions that are conceived or reduced to practice jointly by employees of Institution and employees of Sponsor, as determined under the patent laws of the United States, and assigned to institution or Sponsor.

1.6.“Principal Investigator” means an employee of Institution who has primary responsibility for the performance of the Research Project. The Principal Investigator is identified in Section 2.1 below.

1.7.“Proprietary Materials” means any proprietary Materials other than Project Materials that are furnished by one party (the “Supplier”) to the other party (the “Recipient”) in connection with performance of the Research Project.

1.8.“Research Project” means the activities described on Exhibit A (“Description of Research Project”), which Institution agrees to perform under the terms and conditions of this Agreement.

1.9.“Research Results” means all data, test results, laboratory notes, techniques, know-how, and any other information obtained in the performance of the Research Project. The term “Research Results” does not include Project Materials, patentable inventions, copyrighted or copyrightable works, trademarks or service marks, or other intellectual property based on the Research Results. As a matter of policy, Institution ordinarily will not assert trade secret protection for Research Results.

1.10.“Technical Representative” means an individual designated by Sponsor as its principal contact for consultation and communications with Institution and the Principal Investigator. The Technical Representative is identified in Section 2.1 below.

2.Performance of Research Project.

2.1.Principal Investigator and Technical Representative. Dr. Robert Nicolosi, who shall serve as the Project Manager, will have overall responsibility for the Research Project and will be one of the three faculty representatives that serve on the Advisory Committee. The Principal Investigator shall be Dr. Julie Chen, Director – UML Nanomanufacturing Center. She will manage the interaction required to identify specific research initiatives recommended by the Advisory Committee to be set up under this agreement. This Advisory Committee will be composed of Dr. Chen, Dr. Nicolosi and one other faculty representative and two Technical Representatives of Sponsor. When a project is identified, Dr. Chen will recommend a specific Principal Investigator for that project. If Dr. Chen ceases to serve as Principal Investigator for any reason, Institution will promptly notify Sponsor and Institution and Sponsor shall use good faith efforts to identify a mutually acceptable replacement within sixty (60) days. If a suitable replacement Principal Investigator cannot be identified within the sixty-day period, Sponsor may

terminate this Agreement as provided in Section 6.2. The Sponsor may change its Technical Representative upon thirty (30) days written notice to Institution.

2.2.Performance of Research Project. Institution shall use reasonable efforts to complete the Research Project; however, Institution makes no warranties regarding the completion of the Research Project or the achievement of any particular results. The Technical Representative may consult informally with the Principal Investigator, both in person and by telephone, regarding the performance of the Research Project. The Institution shall provide the Technical Representative reasonable access to Institution facilities where the Research Project is being conducted.

2.3Records, Materials, and Reports. The Project Manager shall prepare and maintain records containing all Research Results, including laboratory notebooks maintained in accordance with customary academic practice. During the term of this Agreement, at his/her convenience, the Principal Investigator shall provide the Technical Representative reasonable access to research records, and the Project Manager shall furnish Sponsor, upon request, reasonable amounts of any Project Materials, subject to availability. Within ninety (90) days after the expiration or termination of this Agreement, the Principal Investigator shall deliver to sponsor a final report describing all significant Research Results in reasonable detail. However, the Principal Investigator may extend this ninety-day deadline for a period of up to an additional thirty (30) days with the consent of Sponsor, which consent shall not be unreasonably withheld.

3.Responsibilities of Sponsor.

3.1.Contributions to Research Project. Sponsor shall contribute to the Research Project the support, equipment, personnel, technology, and other resources listed on Exhibit B (“Sponsor Contributions”). Sponsor may also furnish Institution and the Principal Investigator with certain Confidential Information or Proprietary Materials, which shall remain the property of Sponsor. Institution and the Principal Investigator reserve the right to refuse to accept any Confidential Information or Proprietary Materials offered by Sponsor. Exhibit C (“Sponsor Value Contribution to the Research Collaboration Agreement”) provides an estimated value of $545,000 as Sponsor’s contribution to this collaboration.

3.2.Consideration to Institution. The primary consideration is related to access to the Microfluidizer technologies for purposes of evaluation in UML’s Nanomanufacturing program directed towards new product applications and formulations.

In addition, for each project approved by the Advisory Committee, MFIC will bear the first $3,000 for each discrete project. Any additional monies required for the project will be provided by UML if the monies are available. A Project will proceed only if the Scope of Work, appropriate joint UML and MFIC personnel, a budget, and funds are available.

4.Confidential Information: Proprietary Materials: Publications.

4.1.Confidential information.

(a)Designation. Confidential Information that is disclosed in writing shall be marked with a legend (such as, “Confidential” or “Proprietary”), indicating its

confidential status. Confidential Information that is disclosed orally or visually shall be designated as such at the time of its disclosure and shall be documented in a written notice prepared by the Disclosing Party and delivered as soon as possible to the Receiving Party but at latestwithin thirty (30) days of the date of disclosure; the notice shall summarize the Confidential Information disclosed to the Receiving Party and reference the time and place of disclosure.

(b)Obligations. During the term of this Agreement and thereafter for a period of five (5) years, the Receiving Party shall (i) maintain all Confidential Information in confidence, except that the Receiving Party may disclose or permit the disclosure of Confidential Information to its directors, officers, employees, consultants, and advisors who are obligated to maintain the confidential nature of Confidential Information and who need to know Confidential Information for the performance of the Research Project; (ii) use all Confidential Information solely for the performance or furtherance of the Research Project; and (iii) allow its directors, officers, employees, consultants, and advisors to reproduce the Confidential Information only to the extent necessary for performance of the Research Project, with all reproductions being considered Confidential Information.

(c)Exceptions. The obligations of the Receiving Party under Section 4.1.(b) above do not apply to the extent that the Receiving Party can demonstrate that Confidential Information (i) was in the public domain prior to the time of its disclosure under this Agreement; however this exception shall not apply to any specific information merely because it is included in more general non-confidential information, nor to any specific combination of information merely because individual elements, but not the combination, are included in non-confidential information, (ii) entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act or omission by the Receiving Party; (iii) was independently developed or discovered by the Receiving Party without use of the Confidential Information, (iv) is or was disclosed to the Receiving Party at any time by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of confidentiality with respect to the Confidential Information; or (v) is, in the opinion of legal counsel to the Receiving Party required to be disclosed to comply with applicable laws or regulations, or with a court or administrative order, provided that the Disclosing Party receives reasonable prior written notice of that disclosure in order to afford the Disclosing Party the opportunity, at election and expense of the Disclosing Party, to respond to such request and /or to attempt to block such disclosure. Further, if such disclosure is compelled the Receiving Party shall disclose only the minimum of the Confidential Information that is required to be disclosed to comply with such order, law or regulation.

(d)Ownership and Return. The Receiving Party acknowledges that the Disclosing Party (or any third party entrusting its own information to the Disclosing Party) owns its Confidential Information in the possession of the Receiving Party. Upon the expiration or termination of this Agreement or at the request of the Disclosing Party, the Receiving party shall return to the Disclosing Party all originals, copies, and summaries of documents, materials, and other tangible manifestations of Confidential Information in

the possession or control of the Receiving Party, except that the Receiving Party may retain one (1) copy of the Confidential Information in the possession of its legal counsel solely for the purpose of monitoring its obligations under this Agreement.

4.2.Proprietary Materials.

(a)Limited Use and Transfer. The Recipient shall use Proprietary Materials only for the performance of the Research Project. The Recipient shall use the Proprietary Materials only in compliance with all applicable federal, state, and local laws and regulations. The Recipient shall not use the Proprietary Materials in any in vivo experiments on human subjects. The Recipient shall not transfer any Proprietary Materials to any third party without the prior written consent of the Supplier.

(b)Warranty Disclaimer. THE SUPPLIER MAKES NO REPRESENTATIONS, AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO PROPRIETARY MATERIALS. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF PROPRIETARY MATERIALS WILL NOT INFRINGE ANY PATENT RIGHTS OR OTHER PROPRIETARY RIGHTS OF A THIRD PARTY.

(c)The Recipient acknowledges that the Supplier (or any third party entrusting its Materials to the Supplier) claims ownership of its Proprietary Materials in the possession of the Recipient. The Recipient agrees to cause its employees to execute and deliver any documents of assignment or conveyance to effectuate the ownership rights of the Supplier in Proprietary Materials. Upon the expiration or termination of this Agreement, the Recipient shall at the instruction of Supplier either destroy or return any unused Proprietary Materials.

4.3.Publications. Institution and its employees may publicly disclose (through journals, lectures, or otherwise) the Research Results, provided that the Institution shall have provided a copy of the proposed disclosure to Sponsor at least sixty (60) days prior to the submission of any written publication and at least thirty (30) days prior to any oral public disclosure (the “Review Period”) to allow Sponsor to determine whether any Invention or its Confidential Information would be disclosed. The parties expressly agree that research grant proposals submitted to federal, state, or local agencies or non-profit organizations should not be subject to review under this Section. If Sponsor reasonably determines that the proposed disclosure would reveal an Invention or Sponsor Confidential Information, then Sponsor shall notify Institution and the Principal Investigator of the determination and its basis prior to the expiration of the Review Period. With respect to disclosure of an Invention, upon receipt of timely notice by Sponsor, the Institution agrees to delay submission of the written publication or presentation of the oral public disclosure until one (1) of the following events occurs: (i) Sponsor and Institution agree that no patentable Invention exists; (ii) Institution or Sponsor files a patent application claiming the relevant Invention pursuant to Article 5; (iii) Sponsor and Institution jointly agree upon deletions that prevent disclosure of any Invention; or (iv) a period of sixty (60) days elapses commencing with the effective date of notice to Institution. With respect to disclosure of Sponsor Confidential

Information, upon receipt of timely notice by Sponsor, the Institution shall use reasonable efforts to cause its employees to delete the Confidential Information from any proposed disclosure.

5.0Intellectual Property.

The parties agree to the following:

5.1.Assignment of Rights in Inventions and Project Materials. Either the Principal Investigator or the Project Manager, as appropriate, shall assign to Institution all rights in Inventions and commercial rights in Project Materials. The Principal Investigator shall certify that every person involved in the Research Project shall have signed the University Participation Agreement, which assigns to Institution all rights in Inventions and commercial rights in Project Materials. Sponsor represents and warrants that all of its employees and consultants who may be involved in the Research Project shall have agreed to assign to Sponsor all rights in Inventions and all commercial rights in Project Materials.

5.2.0wnership of Patent Rights and Project Materials. In accordance with United States patent law, Institution shall have sole ownership of all Institution Patent Rights and Institution and Sponsor shall have joint, undivided ownership of all Joint Patent Rights. Institution shall have sole ownership of commercial rights in Project Materials not claimed in the Patent Rights; however, if a Project Material incorporates one or more Sponsor Proprietary Materials, Institution may not exploit commercial rights in that Project Material without the written consent of Sponsor.

5.3.Notice of Inventions and Project Materials. The Principal Investigator or the Project Manager, as appropriate, shall promptly disclose to Institution the conception or reduction to practice of any Invention and the development or discovery of any commercially valuable Project Material that is not otherwise disclosed as an Invention. Institution and Sponsor shall provide prompt written notice to the other of the internal disclosure by its employees of any Invention. Institution and Sponsor shall discuss whether to obtain Patent Rights for the Invention and whether the Patent Rights would constitute Institution Patent Rights or Joint Patent Rights. Institution shall provide prompt written notice to Sponsor of the internal disclosure of any commercially valuable Project Material that is not otherwise disclosed as an Invention.

5.4.Responsibility for Patent Rights.

Subject to any Inter-Institutional Patent Management Agreement resulting from joint inventions, the following procedures will be followed.

(a)Primary Responsibility with Institution. Institution shall have primary responsibility for the preparation, filing, prosecution, and maintenance of all Institution Patent Rights, using patent counsel reasonably acceptable to Sponsor. Institution shall consult with Sponsor as to the preparation, filing, prosecution and maintenance of Patent Rights reasonably prior to any deadline or action with the United States Patent & Trademark Office or any foreign patent office and shall furnish Sponsor with copies of all relevant documents reasonably in advance of such consultation.

(b)Cooperation. Institution and Sponsor shall cooperate fully in the preparation, filing, prosecution, and maintenance of all Institution Patent Rights and Joint Patent Rights. Cooperation includes, without limitation, (i) promptly executing all papers and instruments or requiring employees of Institution or Sponsor to execute papers and instruments as reasonable and appropriate so as to enable Institution or Sponsor to file, prosecute, and maintain such Patent Rights in any country; and (ii) promptly informing the other party of matters that may affect the preparation, filing, prosecution, or maintenance of any such Patent Rights.

(c)Payment of Expenses. Within thirty (30) days after Institution invoices Sponsor for patent expenses related to Section 5.5 or from the Inter-Institutional Patent Management Agreement, Sponsor shall reimburse Institution for all reasonable patent-related expenses incurred by Institution pursuant to Subsection 5.4(a). Sponsor may elect, upon sixty (60) days written notice to Institution, to cease payment of the expenses associated with obtaining or maintaining patent protection of or one or more Patent Rights in one or more countries. In that event, Sponsor will lose all rights under this Agreement with respect to Patent Rights in those countries.

5.5.Option for Exclusive License. For work funded by the Sponsor, Institution grants Sponsor a first option to obtain a worldwide, royalty-bearing, exclusive license (with the right to sublicense) under its commercial rights in any Institution Patent Rights and Joint Patent Rights in the Field (the “Option Right”). Sponsor may exercise the Option Right with respect to a particular Patent Right by written notice to Institution, which is received by Institution not later than sixty (60) days after the disclosure to Sponsor of the relevant Invention (the “Option Period”). If sponsor elects not to exercise the Option Right, or fails to exercise the Option Right during the Option Period, Institution is free to license its commercial rights under the relevant Patent Right to any third party. If Sponsor does elect to exercise the Option Right, Institution and Sponsor shall negotiate in good faith a license agreement containing commercially reasonable terms. Institution and Sponsor are unable to reach agreement within six (6) months after Sponsor exercised the Option Right (the “Negotiation Period”), Institution may offer its commercial rights in the relevant Patent Right to any third parties. However, for a period of one (l) year after the Negotiation Period expires, Institution may only offer those rights to third parties on terms that are not more favorable than the last offer made by Institution to Sponsor, unless Institution first provides Sponsor with written notice of the more favorable offer and Sponsor either (i) declines in writing to accept the offer or (ii) fails to respond to the offer within thirty (30) days alter receiving the notice.

5.6Joint Inventions. In the case of joint inventions, the parties agree to execute an Inter-Institutional Patent Management Agreement using the University’s Agreement in which the following terms will apply:

•For new product applications in the areas related to nanoemulsions, nanosuspensions, other formats involving drugs, nutraceuticals, coatings, etc., the Institution will be named as the patent manager, will receive a fee of 15% for marketing and licensing these potential inventions before patent expenses and will distribute to Sponsor 15% of the revenue, which sum shall paid from the Chancellor’s share.

•For new process improvements in MFZR and MMR technologies, related to materials, design, etc., the Sponsor will be named as the patent manager, will receive a fee of 15% for marketing and licensing these potential inventions before patent expenses and will distribute 5% of the remaining applicable revenue to the Institution.

5.7Use of Research ResultsandProjectMaterials.Eachpartymay useResearch ResultsforanypurposeandtouseProjectMaterialsforinternalresearch(butnotina commercialproductorinconnectionwitha commercialservice);provided,however,thatinthe caseofSponsor,theusedoesnotinfringeanyclaimofa patentapplicationoranissuedpatent includedintheInstitutionPatentRightsforwhichSponsorhasfailedtoobtaina licenseas providedinSection 5.5.above.IfSponsordesirestoobtaina licenseunderthecommercial rightsofInstitutioninanyProjectMaterials,Institutionagreestodiscussthepossibilityof grantinga license,providedthatcommercialrights areavailableforlicensingwhenSponsor makesitsrequest.

5.8.CopyrightableWorks.Institutionoritsemployeesownanycopyrightedor copyrightableworks(includingreportsandpublications)thatarecreatedbyInstitution employeesintheperformanceoftheResearchProject.InstitutionandthePrincipalInvestigator herebygrantSponsoranirrevocable,royalty-free,nontransferable,nonexclusiverighttocopy anddistributeanyresearchreportsfurnishedtoSponsorunderthisAgreementand< b>toprepare, copy,anddistributederivativeworksbasedontheseresearchreports.

6.TermandTermination.

6.1.Term.ThisAgreementcommencesontheEffectiveDateandremainsineffect for12months,unlessearlierterminatedinaccordancewiththeprovisionsofthisAgreement.

6.2.LossofPrincipalInvestigator.If either thePrincipalInvestigator or the Project Manager shall leave Institution or otherwise terminates his or her involvementintheResearchProject,andifInstitutionandSponsorfail toidentitya mutuallyacceptablesubstituteasprovidedinSection 2.1.,Sponsormay terminate thisAgreementuponsixty(60)dayspriorwrittennoticetoInstitution.

6.3.TerminationforDefault.Ifeitherpartycommitsa materialbreachofits obligationsunderthisAgreementandfailstocurethatbreachwithinsixty(60)daysafter receivingwrittennoticethereof,theotherpartymay terminatethisAgreementimmediatelyupon writtennoticetothepartyinbreach.

6.4.ForceMajeure.Neitherpartywillberesponsiblefordelaysresultingfromcauses beyonditsreasonable,includingwithoutlimitationfire,explosion,flood,war,strike,orriot, Providedthatthenon-performingpartyusescommerciallyreasonableeffortstoavoidorremove thosecausesofnonperformanceandcontinuesperformanceunderthisAgreementwith reasonabledispatchwheneverthecausesareremoved.

6.5.EffectofTermination.Thefollowingprovisionssurvivetheexpirationor terminationofthisAgreement:Articles1, 4,and7;Sections2.3.(obligationtodeliverfinal report),3.2.(obligationtodeliverfinalaccounting),6.5,8.2.8.3.,8.5.,8.14.And8.15.In addition,theprovisionsofArticle 5 surviveterminationofthisAgreement,asnecessaryto effectuatetherightsofSponsor,unlessInstitutionhasterminatedthisAgreementbecauseof< b>a materialbreachbySponsorpursuanttoSection 6.3.

7.DisputeResolution.

7.1.ProceduresMandatory. Thepartiesshallresolvedisputesarisingoutoforrelatingto thisAgreementsolelybymeansoftheproceduressetforthinthisArticle.Theseprocedures constitutelegallybindingobligationsthatareanessentialprovisionofthisAgreement. However,allproceduresanddeadlinesspecifiedinthisArticle may bemodifiedbywritten agreementoftheparties.Ifeitherpartyfails toobservetheproceduresofthisArticle,as modifiedbytheirwrittenagreement,theotherpartymay bringanactionforspecific performanceinanycourtofcompetentjurisdiction.

7.2.DisputeResolutionProcedures.

(a)Negotiation.Ifthereisa disputearisingoutoforrelatingtothis Agreement,theaffectedpartyshall< b>notify theotherparty,andthepartiesshallattemptingood faithtoresolvethematterwithinten (10) daysafterthedatenoticeisreceived(the“Notice Date”).Anydisputesnotresolvedbygoodfaithdiscussionsshallbereferredtosenior executivesofeachparty,whoshallmeetata mutuallyacceptabletimeandlocationwithinthirty (30)daysaftertheNoticeDateand attempttonegotiatea settlement.

(b)Mediation.Ifthematterremainsunresolvedwithinsixty(60)daysafter theNoticeDate,orifthe seniorexecutivesfailtomeetwithinthirty(30)daysaftertheNotice Date,eitherpartymay initiatemediationuponwrittennoticetotheotherparty,whereuponboth partiesshallbeobligatedtoengageina mediationproceedingunderthethencurrentCenterfor PublicResources(“CPR”)ModelProcedureforMediationofBusinessDisputes, except that specific provisions of this Section override inconsistent provisions of the CPR Model Procedure. The mediator will be selected from the CPR Panels of Neutrals. If the parties cannot agree upon the selection of a mediator within ninety (90) days after the Notice Date, then upon the request of either party, the CPR shall appoint the mediator. The parties shall attempt to resolve the dispute through mediation until one of the following occurs: (i) the parties reach a written settlement; (ii) the mediator notifies the parties in writing that they have reached an impasse; (iii) the parties agree in writing that they have reached an impasse; or (iv) the parties have not reached a settlement within one hundred and twenty (l20) days after the Notice Date.

(c)Trial Without Jury. If the parties fail to resolve the dispute through the procedures of this Article 7, or if neither party elects to initiate mediation, either party may pursue any other remedies legally available to resolve the dispute. However, the parties waive any right to a jury trial in any legal proceeding under this Section.

7.3.Preservation of Rights Pending Resolution.

(a)Performance to Continue. Each party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out of or relating to this Agreement. However, either party may suspend performance of its obligations during any period in which the other party fails or refuses to perform its obligations.

(b)Provisional Remedies. Although the procedures specified in this Article 7 are the exclusive procedures for resolution of disputes arising out of or relating to this Agreement, either party may seek a preliminary injunction or other provisional equitable relief its reasonable judgment, that action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement.

(c)Statute of Limitations. The parties agree that all applicable statutes of limitation and time-based defenses (such as, estoppel and laches) will be tolled while the procedures set forth in Subsections 7.2. (a) and 7.2. (b) are pending. The parties shall take any actions necessary to effectuate this result.

8.Miscellaneous.

8.1.Compliance with Law and Policies. Sponsor agrees to comply with applicable law and the policies of Institution in the area of technology transfer, including the University of Massachusetts Policy on Conflicts of Interest Relating to Intellectual Property and Commercial Ventures, the University of Massachusetts Intellectual Property Policy, and the University of Massachusetts Policy on Faculty Consulting and Outside Activities and shall promptly notify Institution of any violation that Sponsor knows or has reason to believe has occurred or is likely to occur.

8.2.Indemnification.

(a)Indemnity. Sponsor shall indemnify, defend, and hold harmless Indemnities against any liability, damage, loss, or expense (including reasonable attorneys fees and expenses of litigation) incurred by or imposed upon any of the Indemnities in connection with any claims suits, actions, demands or judgments arising out of any theory of liability (including without limitation actions in the form of tort, warranty, or strict liability and regardless of whether the action has any factual basis) relating to this Agreement or concerning any product, process, or service that is made, used, or sold pursuant to any right or license granted under this Agreement. However, indemnification shall not apply to any liability, damage, loss or expense to the extent directly attributable to (i) the negligent activities, gross, wanton or willful conduct or intentional misconduct of the Indemnitees or (ii) the settlement of a claim, suit, action, or demand by Indemnitees without the prior written approval of Sponsor. To the extent allowed bylaw, institution shall indemnify Sponsor against any suit, claim or proceeding brought against Institution or Sponsor in which and to the extent that: (i) any alleged patent infringement arises from the use by Institution, without advance written approval or consent of Sponsor, of a combination of the Sponsor’s MFZR or MMR equipment with products not supplied by Sponsor, (ii) any material violation of any affirmative covenant or restriction including but not limited to not use the Proprietary Materials in any in vivo experiments on human subjects, non-permitted disclosure of Sponsors trade secrets and customer identities, or the use of .To the extent allowed by law, institution shall indemnify and hold Sponsor, its officers, directors and agents

harmless in such suit, claim or proceeding and any damages arising from any of the foregoing acts.

(b)Procedures. To the extent allowed bylaw, any of the Indemnities agree to provide the indemnifying party with prompt written notice of any claim, suit, action, demand, or judgment for which indemnification is sought from the indemnifying party under this Agreement. the indemnifying party agrees, at its own expense, to provide attorneys reasonably acceptable to Indemnitees to defend against a claim. To the extent allowed bylaw, the Indemnities shall cooperate fully with the indemnifying party in any defense and will permit the indemnifying party to conduct and control the defense and the disposition of the claim, suit, or action (including, all decisions relative to litigation, appeal, and settlement). However, to the extent allowed by law, any Indemnitee may retain its own counsel, at the expense of the indemnifying party, if representation by the counsel retained by the indemnifying party would be inappropriate because of actual or potential differences in the interests of the Indemnitee and any other party represented by that counsel. To the extent allowed by law, the indemnifying party agrees to keep Indemnitees informed of the progress in the defense and disposition of the claim and to consult with Indemnitees with regard to any proposed settlement.

8.3.Publicity Restrictions. Sponsor shall not use the name of Institution or any of its trustees, officers, faculty, students, employees, or agents, or any adaptation of their names, or any terms of this Agreement in any promotional material or other public announcement or disclosure without the prior written consent of Institution. The foregoing notwithstanding, Sponsor shall have the right to disclose that information without the consent of Institution in any prospectus, offering memorandum, or other document or filing required by applicable securities laws or other applicable law or regulation, provided that Sponsor gives Institution at least ten
(lO) days prior written notice of the proposed text for the purpose of allowing Institution to comment on the text.

8.4.Warranty Disclaimer. Institution makes no express warranties and disclaims any implied warranties as to any matter relating to this Agreement, including without limitation the performance or results of the Research Project; the availability of legal protection for any Research Results, Project Materials, Inventions, copyrightable works, or any other product of the Research Project; or the validity or enforceability of any Patent Right that may be obtained pursuant to this Agreement. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILTTY OR FITNESS FOR A PARTICULAR PURPOSE FOR ANY PROJECT MATERTALS OR RESEARCH RESULTS, OR THAT THE USE OF PROJECT MATERIALS OR RESEARCH RESULTS WILL NOT INFRINGE ANY PATENT RIGHTS OR OTHER PROPRIETARY RIGHTS OF A THIRD PARTY.

8.5.Notice to Other Investigators. The Principal Investigator shall furnish all investigators involved in the Research Project, including faculty, staff, students, and postdoctoral fellows, with written notice of their obligations under Articles 4 and 5 of this Agreement.

8.6.Research Partially Funded by Grants.

(a)Federal Government. To the extent that any Invention has been funded by the federal government, this Agreement and the grant of any rights in that Invention is subject to

and governed by federal law as set forth in 35 U.S.C. 9~ 201-21 i, and the regulations promulgated thereunder, as amended, or any successor statutes or regulations. If any term of this Agreement fails to conform to those laws and regulations, the relevant term shall be invalid and modified by the parties pursuant to Section 8.16.

(b)Other Organizations. To the extent that any Invention has been partially funded by a non-profit organization or state or local agency, this Agreement and the grant of any rights in that Invention is subject to and governed by the terms of the applicable research grant. If any term of this Agreement fails to conform to those terms, the relevant term shall be deemed an invalid provision and modified by the parties pursuant to Section 8.16. At the request of Sponsor, Institution shall make available to Sponsor the terms of any research grants that will partially fund the Research Project.

8.7.Tax-Exempt Status. Sponsor acknowledges that Institution, as a public institution of the Commonwealth of Massachusetts, is an exempt organization under the United States Internal Revenue Code of 2986, as amended. Sponsor also acknowledges that certain facilities in which the Research Project may be performed were financed through offerings of tax-exempt bonds. If the Internal Revenue Service determines, or if counsel to Institution reasonably determines, that any term of this Agreement jeopardizes the tax-exempt status of Institution or the bonds used to finance Institution facilities, the relevant term or provision therein shall be invalid and modified by the parties pursuant to Section 8. 16.

8.8.Relations, Parties. Each party is an independent contractor and not an agent or employee of the other party. Neither party may make any statements, representations, or commitments of any kind, or take any action, which is binding on the other party, except as may be explicitly provided for in this Agreement or authorized in writing by the other party.

8.9.Counterparts. This Agreement may be executed in one or more counterparts, each of which is deemed an original, and all of which together are deemed to be one and the same instrument.

8.10.Headings. All headings are for convenience only and do not affect the meaning of any provision of this Agreement.

8.11.Binding Effect. This Agreement is binding upon and inures to the benefit of the parties and their respective permitted successors and assigns.

8.12.Assignment. This Agreement may not be assigned by either party without the prior written consent of the other party, except that Sponsor may assign this Agreement to an affiliate or to a successor in connection with the merger, consolidation, or sale of all or substantially all of its assets or that portion of its business to which this Agreement relates.

8.13.Amendment and Waiver. This Agreement may be amended, supplemented, or otherwise modified only by means of a written instrument signed by both parties. Any waiver of any rights or failure to act in a specific instance shall relate only to that instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not

similar.

8.14.Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts irrespective of any conflicts of law principles.

8.15.Notice. Any notices required or permitted under this Agreement shall be in writing, shall specifically refer to this Agreement, and shall be sent by hand confirmed in writing, recognized national overnight courier, confirmed facsimile transmission, confirmed electronic mail, or registered or certified mail, postage prepaid, return receipt requested, to the following addresses or facsimile numbers of the parties:

If to Institution:

Office of Commercial Ventures and Intellectual Property University of Massachusetts Lowell

600 Suffolk Street, 2nd Floor South

Lowell, MA 01854

Attention:	Louis J. Petrovic
Title:	Director, CVIP/Lowell
Tel:	978-934-2577
Fax:	978-934-4043

If to Sponsor:

MFIC Corporation
30 Ossipee Road
Newton, MA 02464-9101
Attention:	Irwin J. Gruveman, P.E.
Title:	Chairman & CEO
Tel:	617-969-5452
Fax:	617-965-1213

All notices under this Agreement are effective upon receipt. A party may change its contact information immediately upon written notice to the other party in the manner provided in this Section.

8.16.Severability. In the event that any provision of this Agreement: (i) is held invalid or unenforceable for any reason, or (ii) jeopardizes the tax-exempt status of Institution or the bonds used to finance Institution facilities under circumstances set for the in Section 8.7, the invalidity, unenforceability, or offending language or provision shall not affect any other provision of this Agreement, and the parties shall negotiate in good faith to modify the Agreement to preserve (to the extent possible) their original intent. If the parties fail to reach a modified agreement within sixty (60) days after the relevant provision is held invalid or unenforceable, then the dispute shall be resolved according to Article 7. While the dispute is

pending resolution, this Agreement shall be construed as if the provision were deleted by agreement of the parties.

8.17.Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to its subject matter and supersedes all prior agreements or understandings between the parties relating to its subject matter.

The parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above.

UNIVERSITY OF MASSACHUSETTS,
LOWELL
By:
	William Hogan
	Chancellor

MIFC CORPORATION
By:
	Irwin J. Gruveman, P.E.
	Chairman & CEO

Exhibit A

The UML Nanomanufacturing research initiative will investigate in a series of research projects the sizing, encapsulation, reaction, and other potential applications of Microfluidizer® technology. Initial projects will be focused on the Sponsor’s Microfluidizer® Processor (MFZR) and Microfluidizer® Mixer/Reactor (MMR) technologies.

Projects for this research collaboration will be chosen after review of an Advisory Committee composed of Dr. Julie Chen, Dr. Robert Nicolosi and one other Institution faculty representative and two Technical Representatives of Sponsor.

Exhibit B

For this research collaboration, Sponsor will:

1.Consign an MMR lab system to be installed and located at UML.

2.Train users, consult on proposed uses, and advise on development.

3.Share MMR technology and MFZR technology/database subject to the confidentiality terms of this Research Collaboration Agreement.

4.Develop chamber design and optimization technology, and optimize process and post-process procedures, both general and specific, jointly with UML research investigators.

5.If additional MFZR and MMR equipment is needed, it will be provided at 70% of best third party price. Acquisition is dependent on UML’s ability to pay for the equipment.

6.For each project recommended by the Advisory Committee that is specifically oriented towards Sponsor’s research objectives, Sponsor will bear the first $3,000 for each discrete project. Any further monies needed will be provided by UML if the monies are available. Sponsor’s commitment to fund $3000 for recommended discrete projects in any twelve month period shall be capitated at $36,000. Sponsor shall not be obligated to fund additional projects in such timeframe, except as Sponsor in its sole discretion shall deem reasonable and appropriate.

7.Sponsor will support UML’s efforts to obtain funding from Federal, Massachusetts, Foundation, and commercial (strategic partner) sources. Such support could be in the form of subcontract, consignment of equipment, matching funds, in kind contributions, and other as required on a case by case basis, but only to the extent that Sponsor, in its sole discretion, shall determine is reasonable and warranted under the circumstances.

8.When needed, Sponsor will provide marketing inputs needed and required by the Advisory Committee and undertaken by various units (CVIP, College of Management, other) of UML. Such marketing inputs shall be provided in such reasonable amounts and at such times as shall be reasonably convenient to MFIC as shall not unduly interfere with Sponsor’s business, in Sponsor’s sole judgment.

Appendix C

MFIC (Sponsor) Value Contribution to Research Collaboration Agreement

MFIC Corporation, together with its subsidiary,Microfluidics Corporation, collectively “Sponsor”, has been in discussions since the summer, 2004 with the University of Massachusetts Lowell (the “University”) regarding the proposed Research Collaboration. During this period of time, Sponsor has devoted considerable time and attention to identifying and evaluating key terms and conditions to meet the University’s objectives in this collaboration.

As an indication of good faith and seriousness regarding the proposed Research Collaboration, Sponsor has already committed and proposes to commit significant monetary value and resources, including but not limited to:

1.A Microfluidizer® processor, valued at almost $100,000 has already been on loan to Professor Robert Nicolosi. This Microfluidizer processor resides in Dr. Nicolosi’s lab on the University’s South Campus.

2.Sponsor has already supported the ongoing operation of the Microfluidizerprocessor in Dr. Nicolosi’s lab, including provision of technical support, spare parts and service support. This work to date is valued at ~$10,000.

3.As part of the proposed future Research Collaboration, Sponsor has already agreed to provide one of only two state-of-the-art MMR systems, equipped with dual feed and chamber capability. The MMR has a current value of over $350,000 and Sponsor has agreed to having this MMR system physically reside on the campus of the University.

4.In support of the MMR system on campus at the University, Sponsor has also agreed to support with technical capability, spare parts and service to ensure full and continuous operation of the MMR system. This service component offering if sold commercially has a value of ~10% or $35,000 of the MMR system’s sale value over 2005.

5.The proposed Research Collaboration calls for the formation, assembly and participation of key members of both Sponsor and University to identify and evaluate ongoing research and development product applications using both Sponsor’s Microfluidizer processor and the MMR system. To this end, senior management at Sponsor are anticipating spending some days per month ensuring that the Research Collaboration is proceeding according to the agreed to plan, milestones and timeframe. We estimate the monetary value of this personnel effort and contribution by Sponsor to be worth in excess of $50,000 over 2005. Such valuation of Sponsor’s contribution is predicated upon the appropriate expenditure of time to the Research Collaboration activities by MFIC’s Vice President of R&D, Dr. Thomai Panagiotou.

Therefore, we estimate Sponsor’s monetary value to the Research Collaboration to be in excess of $545,000, and during 2005, in excess of the likely time and materials effort on the part of the University.

EX-10.64

Exhibit 10.64

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT.

COMMON STOCK PURCHASE WARRANT

No. W-   

To Purchase 100,000 Shares of Common Stock of

MFIC Corporation

THIS COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received,  Maxim Group LLC  (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after April 1, 2005 (the “Initial Exercise Date”) and on or prior to the close of business on the third anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from MFIC Corporation, a Delaware corporation (the “Company”), up to                shares (the “Warrant Shares”) of Common Stock, par value $.01 per share, of the Company (the “Common Stock”). The purchase price of one share of Common Stock (the “Exercise Price”) under this Warrant shall be $3.20 subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein.

1

1.             Title to Warrant. Prior to the Termination Date and subject to compliance with applicable laws and Section 7 of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company.

2.             Authorization of Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

3.             Exercise of Warrant.

(a)           Except as provided in Section 4 herein, exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank or by means of a cashless exercise pursuant to Section 3(c), the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for Warrant Shares purchased hereunder shall be delivered to the Holder within three (3) trading days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 prior to the issuance of such shares, have been paid. If the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the third trading day after the date of exercise, then the Holder will have the right to rescind such exercise.

(b)           If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

(c)           If at any time after one year from the date of issuance of this Warrant there is no effective registration statement registering the resale of the Warrant Shares by

2

the Holder, this Warrant may also be exercised, in whole or in part, at any time prior to the Termination Date, by means of a “cashless exercise” in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A) = the closing bid price on the trading day preceding the date of such election;

(B) =  the Exercise Price of the Warrants, as adjusted; and

(X) = the number of Warrant Shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant.

In addition to the Warrant Shares issuable upon any such cashless exercise, the Company shall also issue the Holder Series B Warrants to purchase that number of shares of Common Stock that would have been issuable if this Warrant had been exercised for cash.

4.             No Fractional Shares. No fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price.

5.             Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

6.             Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

7.             Transfer, Division and Combination.

(a)           Subject to compliance with any applicable securities laws and the conditions set forth in Sections 1 and 7(e) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor

3

a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

(b)           This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

(c)           The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7.

(d)           The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants.

(e)           If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an “accredited investor” as defined in Rule 501(a) promulgated under the Securities Act.

8.             No Rights as Shareholder until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price (or by means of a cashless exercise), the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment.

9.             Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

4

10.           Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday.

11.           Adjustments of Exercise Price and Number of Warrant Shares.

(a)           The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder, the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.

(b)           Exercise Price Adjustment. If the Company at any time while this Warrant is outstanding shall issue, or be deemed to have issued, Additional Shares of Common Stock (as hereinafter defined) without consideration or for consideration per share of Common Stock less than the then applicable Exercise Price (the “Dilutive Price”) (a “Triggering Issuance”) in effect immediately prior to such issuance, then forthwith upon the occurrence of any such event (the “Dilutive Event”) the Exercise Price shall be reduced so that the Exercise Price in effect immediately following the Dilutive Event will equal the Dilutive Price. Such adjustment shall be made whenever such shares of Common Stock or Capital Share Equivalents are issued. For purposes of this Section 11(b), “Common Stock Outstanding” as of a given date shall be the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

(c)           As used herein:

 “Additional Shares of Common Stock” shall mean all shares of Common Stock issued or deemed to be issued by the Company after the date hereof which represent a Dilutive Issuance. If the Company issues any Options or Convertible Securities (as hereinafter defined), the maximum number of shares of Common Stock issuable thereunder, shall be deemed to be

5

Additional Shares of Common Stock issued as of the time of such issue, if the consideration per share of such Additional Shares of Common Stock (as hereinafter determined) is less than then-applicable Exercise Price, until such time as such Options or Convertible Securities shall terminate or be exercised or converted into Common Stock, upon which time the number of shares of Common Stock actually thereupon issued shall be deemed to be Additional Shares of Common Stock. The Company shall be deemed to have issued the maximum number of shares of Common Stock potentially underlying any Options or Convertible Securities. Notwithstanding the foregoing, no issuance or deemed issuance nor Common Stock or options or warrants to purchase Common Stock issued to (i) officers, directors or employees of or consultants to the Company pursuant to any compensation agreement, plan or arrangement or the issuance of Common Stock upon the exercise of any such options or warrants, provided such securities were issued prior to the date hereof or pursuant to a stock option plan that was approved by the board of directors (ii) upon conversion of existing convertible securities outstanding as of the date hereof; (iii) upon exercise of outstanding warrants existing as of the date hereof  or this warrant; and (iv) an institution or bank lender in connection with a loan transaction or equipment lease, shall be deemed the issuance of Additional Shares of Common Stock.

“Options” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities.

“Convertible Securities” shall mean any evidences of indebtedness, shares (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Common Stock.

(d)           With respect to Options and Convertible Securities, “Consideration” per share of Additional Shares of Common Stock shall be determined by adding (x) the aggregate consideration received upon issuance of the Options or Convertible Securities divided by the number of shares receivable upon the exercise or conversion thereof and (y) the minimum possible consideration per share received per share upon the exercise, conversion or exchange of such Options or Convertible Securities for shares of Common Stock.

(e)           Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant this Section 11, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the increased number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment.

12.           Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, consolidate

6

or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation (“Other Property”), are to be received by or distributed to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, at the option of the Holder, upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, “common stock of the successor or acquiring corporation” shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets.

13.           Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.

14.           Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made.

15.           Notice of Corporate Action. If at any time:

(a)           the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any

7

right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or

(b)           there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or,

(c)           there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;

then, in any one or more of such cases (but not in such cases if the rights of the Holder or holders of Common Stock will not be materially affected thereby, as for example in the case of a merger to effect a change of domicile), the Company shall give to Holder (i) at least 20 days’ prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 20 days’ prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d).

16.           Authorized Shares. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the trading market upon which the Common Stock may be listed.

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the

8

observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant.

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

17.           Miscellaneous.

(a)           Jurisdiction. This Warrant shall constitute a contract under the laws of the Commonwealth of Massachusetts, without regard to its conflict of law, principles or rules.

(b)           Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

(c)           Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

(d)           Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered to:

Irwin Gruverman, CEO & Chairman

MFIC Corporation

30 Ossipee Road

Newton, MA 02464-9101

9

(e)           Limitation of Liability. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

(f)            Remedies. Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.

(g)           Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares.

(h)           Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

(i)            Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

(j)            Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

********************

10

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.

Dated:  April 1, 2005

MFIC CORPORATION
By:
	Name: Irwin Gruverman
	Title: Chief Executive Officer & Chairman

11

NOTICE OF EXERCISE

To:          MFIC Corporation

(1)  The undersigned hereby elects to purchase                      Warrant Shares of MFIC Corporation pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price, together with all applicable transfer taxes, if any.

(2)  Payment shall take the form of (check applicable box):

o in lawful money of the United States; or

o the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 3(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 3(c).

(3)           Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

Name:

Address:               

SS or Tax

ID number:

The Warrant Shares shall be delivered to the following:

[Warrant holder]
By:
	Name:
	Title:
Dated:

ASSIGNMENT FORM

(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

			whose address is
					.
		Dated:		,
	Holder’s Signature:
	Holder’s Address:
Signature Guaranteed:

NOTE:  The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

EX-14

Exhibit 14

MFIC CORPORATION

CODE OF ETHICS

General Philosophy

The honesty, integrity and sound judgment of our employees, officers and directors is essential to MFIC Corporation’s reputation and success. This Code of Ethics governs the actions and working relationships of MFIC Corporation employees, officers and directors with current and potential customers, consumers, fellow employees, competitors, government and self-regulatory agencies, the media, and anyone else with whom MFIC Corporation has contact.

This Code of Ethics:

•Requires the highest standards for honest and ethical conduct, including proper and ethical procedures for dealing with actual or apparent conflicts of interest between personal and professional relationships.

•Requires full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by MFIC Corporation with governmental and regulatory agencies.

•Requires compliance with applicable laws, rules and regulations.

•Addresses potential or apparent conflicts of interest and provides guidance for employees, officers and directors to communicate those conflicts to MFIC Corporation.

•Addresses misuse or misapplication of MFIC Corporation property and corporate opportunities.

•Requires the highest level of confidentiality and fair dealing within and outside the MFIC Corporation environment.

•Requires reporting of any illegal behavior.

Conflicts of Interest

A “conflict of interest” occurs when your private interest interferes or appears to interfere in any way with the interests of MFIC Corporation You are expected to avoid all situations that might lead to a real or apparent material conflict between your self-interest and your duties and responsibilities as an employee, officer or director of MFIC Corporation Any position or interest, financial or otherwise, which could materially conflict with your performance as an employee, officer or director of MFIC Corporation, or which affects or could reasonably be expected to affect your independence or judgment concerning transactions between MFIC Corporation, its customers, suppliers or competitors or otherwise reflects negatively on MFIC Corporation would be considered a conflict of interest.

Confidentiality

Nonpublic information regarding MFIC Corporation or its businesses, employees, customers and suppliers is confidential. As a MFIC Corporation employee, officer or director, you are trusted with confidential information. You are only to use such confidential information for the business purpose intended. You are not to share

confidential information with anyone outside of MFIC Corporation, including family and friends, or with other employees who do not need the information to carry out their duties. You may be required to sign a specific confidentiality agreement in the course of your employment at MFIC Corporation you remain under an obligation to keep all information confidential even if your employment with MFIC Corporation ends.

The following is a non-exclusive list of confidential information:

(i)Trade secrets, which include any business or technical information, such as formula, program, method, technique, compilation or information that is valuable because it is not generally known.

(ii)All rights to any invention or process developed by an employee using MFIC Corporation facilities or trade secret information, resulting from any work for MFIC Corporation, or relating to MFIC Corporation’s business, is considered to be “work-for-hire” under the United States copyright laws and shall belong to MFIC Corporation.

(iii)Proprietary information such as customer lists and customers’ confidential information.

Public and media communications involving MFIC Corporation must have prior clearance in compliance with the MFIC Corporation [Media Relations Policy].

Corporate Opportunities

Using confidential information about MFIC Corporation or its businesses, employees, officers, directors, customers, consumers or suppliers for personal benefit or disclosing such information to others outside your normal duties is prohibited.

Title 18 U.S. Code, Section 215, makes it a criminal offense for any MFIC Corporation employee to corruptly:

(i)solicit for himself or herself or for a third party anything or value from anyone in return for any business, service or confidential information of

(i)MFIC Corporation; or

(ii)accept anything of value (other than normal authorized compensation) from anyone in connection with the business of MFIC Corporation, either before or after a transaction is discussed or consummated.

Employees, officers and directors are prohibited from:

(i)Personally benefiting from opportunities that are discovered through the use of MFIC Corporation property, contacts, information or position.

(ii)(ii) Accepting employment or engaging in a business (including consulting or similar arrangements) that may conflict with the performance of your duties or MFIC Corporation’s interest.

(iii)Soliciting, demanding, accepting or agreeing to accept anything of value from any person in conjunction with the performance of your employment or duties at MFIC Corporation

(iv)Acting on behalf of MFIC Corporation in any transaction in which you or your immediate family has a significant direct or indirect financial interest.

2

There are certain situations in which you may accept a personal benefit from someone with whom you transact business such as:

(i)Accepting a gift in recognition of a commonly recognized event or occasion (such as a promotion, new job, wedding, retirement or holiday). An award in recognition of service and accomplishment may also be accepted without violating these guidelines so long as the gift does not exceed $100 from any one individual in any calendar year.

(ii)Accepting something of value if the benefit is available to the general public under the same conditions on which it is available to you.

(iii)Accepting meals, refreshments, travel arrangements and accommodations and entertainment of reasonable value in the course of a meeting or other occasion to conduct business or foster business relations if the expense would be reimbursed by MFIC Corporation as a business expense if the other party did not pay for it.

Insider Trading

It is both unethical and illegal to buy, sell, trade or otherwise participate in transactions involving MFIC Corporation common stock or other security while in possession of material information concerning MFIC Corporation that has not been released to the general public, but which when released may have an impact on the market price of the MFIC Corporation common stock or other equity security. It is also unethical and illegal to buy, sell, trade or otherwise participate in transactions involving the common stock or other security of any other company while in possession of similar non-public material information concerning such company. Any questions concerning the propriety of participating in a MFIC Corporation or other company stock or other security transaction should be directed to the MFIC Corporation General Counsel at (617) 969-5452, ext. 255.

Outside Business Relationships

Before agreeing to act as a director, officer, consultant, or advisor for any other business organization, you should notify your immediate supervisor. Directors should disclose all new directorships or potential directorships to the Chairman of the Nominating Committee to avoid any conflicts of interest and to maintain independence. MFIC Corporation encourages civic, charitable, educational and political activities as long as they do not interfere with the performance of your duties at MFIC Corporation. Before agreeing to participate in any civic or political activities, you should contact your immediate supervisor. Employees who are considering outside employment should notify their manager or supervisor. Employees in some positions of MFIC Corporation and its affiliates are prohibited by law from holding outside employment. Managers will review outside employment requests for potential conflicts of interest.

3

Fair Dealing

Each employee, officer and director should undertake to deal fairly with MFIC Corporation’s customers, suppliers, competitors and employees. Additionally, no one should take advantage of another through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair-dealing practices. Employees must disclose prior to or at their time of hire the existence of any employment agreement, non-compete or non-solicitation agreement, confidentiality agreement or similar agreement with a former employer that in any way restricts or prohibits the performance of any duties or responsibilities of their positions with MFIC Corporation. Copies of such agreements should be provided to Human Resources to permit evaluation of the agreement in light of the employee’s position. In no event shall an employee use any trade secrets, proprietary information or other similar property, acquired in the course of his or her employment with another employer, in the performance if his or her duties for or on behalf of MFIC Corporation Employees should not directly or indirectly accept bequests under a will or trust if such bequests have been made to them because of their employment with MFIC Corporation.

Protection and Proper Use of MFIC Corporation Property

All employees, officers and directors should protect MFIC Corporation’s property and assets and ensure their efficient and proper use. Theft, carelessness and waste can directly impact MFIC Corporation’s profitability, reputation and success. Permitting MFIC Corporation property (including data transmitted or stored electronically and computer resources) to be damaged, lost, or used in an unauthorized manner is strictly prohibited. Employees, officer and directors may not use corporate stationary for personal purposes.

Compliance with Laws, Rules and Regulations

This Code of Ethics is based on MFIC Corporation’s policy that all employees, officers and directors comply with the law. While the law prescribes a minimum standard of conduct, this Code of Ethics requires conduct that often exceeds the legal standard. Certain MFIC Corporation business units have policies and procedures governing topics covered by this Code of Ethics. These policies and procedures reflect the special requirements of these business units.

Reporting of Illegal or Unethical Behavior

All employees, officers and directors are expected to demonstrate the ability to properly manage their personal finances, particularly the prudent use of credit. MFIC Corporation recognizes that its customers must have faith and confidence in the honesty and character of its employees, officers and directors. In addition to the importance of maintaining customer confidence, there are specific laws that outline the actions MFIC Corporation must take regarding any known, or suspected, crime involving the affairs of MFIC Corporation. Fraud is an element of business that can significantly affect the reputation and success of MFIC Corporation. MFIC Corporation requires its employees, officers and directors to talk to supervisors, managers or other appropriate personnel to report and discuss any known or suspected criminal activity involving MFIC Corporation or its employees. If, during the course of employment, you become aware of any suspicious activity or behavior including

4

concerns regarding questionable accounting or auditing matters, you must report violations of laws, rules, regulations or this Code of Ethics to the General Counsel, Jack M. Swig, at 617-969-5452, ext. 255. Reporting activity will not subject the employee to discipline (absent a knowingly false report), and such reports shall be anonymous and confidential unless the employee chooses otherwise.

Administration and Waiver of Code of Ethics

This Code of Ethics shall be administered and monitored by the MFIC Corporation Human Resources Department. Any questions and further information on this Code of Ethics should be directed to this department.

All managers and direct supervisors are responsible for reviewing this Code of Ethics with their subordinates each time a new edition of the Code of Ethics is published. This Code of Ethics is also available on the MFIC Corporation web site at: www.mficcorp.com.

The provisions of the Ethics Policy will be included in the MFIC Corporation Employee Handbook. The Employee Handbook will be issued to all new employees and officers at the time of employment and reissued to existing employees and officers from time to time. Employees will be required to sign a receipt form for the Employee Handbook indicating they have read this Code of Ethics and comply with its provisions.

Employees, officers and directors of MFIC Corporation are expected to follow this Code of Ethics at all times. Generally, there should be no waivers to this Code of Ethics, however, in rare circumstances conflicts may arise that necessitate waivers. Waivers will be determined on a case-by-case basis by the MFIC Corporation Human Resources Department with the advice of the MFIC Corporation General Counsel. However, waivers for directors and executive officers must be determined by the board of directors. For members of the board of directors and executive officers, the board of directors shall have the sole and absolute discretionary authority to approve any deviation or waiver from this Code of Ethics. Any waiver and the grounds for such waiver by directors or executive officers shall be promptly disclosed to stockholders in the MFIC Corporation Annual Proxy Statement.

Known or suspected violations of this Code of Ethics will be investigated and may result in disciplinary action up to and including immediate termination of employment.

5

EX-23.(A)

Exhibit 23(a)

Brown & Brown, LLP | Boston | Westborough

Certified Public Accountants | Business and Financial Advisors

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement Nos. 33-6300, 33-19372, 33-38928, 33-38925, 33-86726, 333-14607, 333-29949, 333-85988, and 333-99233 of MFIC Corporation (the “Company”) on Forms S-8 of our report dated March 1, 2006, except for Note 6, as to which the date is March 23, 2006, pertaining to the consolidated financial statements and schedules of MFIC Corporation which appears in the Annual Report on Form 10-K for the years ended December 31, 2005 and 2004.

Boston, Massachusetts

March 30, 2006

90 Canal Street Boston, MA 02114 | Tel. 617 227-4645 | Fax 617 227-1256 | www.browncpas.com

1500 West Park Drive, Suite 200 Westborough, MA 01581 | Tel. 508 475-0400 | Fax 508 475-0405

EX-31.1

EXHIBIT 31.1

I,  Irwin J. Gruverman, certify that:

1.I have reviewed this annual report on Form 10-K of MFIC Corporation;

2.Based on my knowledge, this annual 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 annual report;

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

4.The registrant’s other certifying officer(s) 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)) for the registrant and we 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 registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls and procedures 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

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

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

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’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 registrant’s internal control over financial reporting.

Date: March 30, 2006

/s/ IRWIN J. GRUVERMAN

Irwin J. Gruverman

Chief Executive Officer (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

I,  Dennis P. Riordan, certify that:

I have reviewed this annual report on Form 10-K of MFIC Corporation;

1.I have reviewed this annual report on Form 10-K of MFIC Corporation;

2.Based on my knowledge, this annual 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 annual report;

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

4.The registrant’s other certifying officer(s) 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)) for the registrant and we 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 registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)evaluated the effectiveness of the registrant’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 covered by this report based on such evaluation; and

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

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

a)all significant deficiencies in the design and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’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 registrant’s internal control over financial reporting.

Date: March 30, 2006

/s/ DENNIS P. RIORDAN

Dennis P. Riordan

Controller (Principal Accounting Officer)

EX-32.1

EXHIBIT 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

In connection with the Annual Report of MFIC Corporation (the Company) on Form 10-K for the period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned officer of the Company does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

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

	By:	/s/  IRWIN J. GRUVERMAN
	Name:	Irwin J. Gruverman
	Title:	Chief Executive Officer (Principal Executive Officer)
Dated:  March 30, 2006

EX-32.2

EXHIBIT 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

In connection with the Annual Report of MFIC Corporation (the Company) on Form 10-K for the period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned officer of the Company does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

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

	By:	/s/  DENNIS P. RIORDAN
	Name:	Dennis P. Riordan
	Title:	Controller (Principal Financial and Accounting Officer)
Dated:  March 30, 2006