10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2006

OR

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

For the transition period from                                            to                                           

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, Newton, Massachusetts	02464
(Address of principal executive offices)	(Zip Code)

(617) 969-5452

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

o  Large Accelerated Filer       o  Accelerated Filer       þ  Non-Accelerated Filer

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

As of March 23, 2007 and June 30, 2006, 10,124,769 and 9,984,845 shares, respectively, of the registrant’s Common Stock were outstanding, and the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant (without admitting that such person whose shares are not included in such calculation is an affiliate) was approximately $19,048,000 and $10,868,000, respectively, based on the last sale price as reported by the Over-the-Counter Bulletin Board on each such date.

MFIC CORPORATION
Table of Contents

		Page
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	17
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
	PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	18
Item 6.	Selected Financial Data	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 8.	Financial Statements and Supplementary Data	F-1
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	33
Item 9A.	Controls and Procedures	33
Item 9B.	Other Information	33
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	34
Item 11.	Executive Compensation	34
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	34
Item 13.	Certain Relationships and Related Transactions, and Director Independence	34
Item 14.	Principal Accountant Fees and Services	34
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	36
Signatures

PART I

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, process premixed formulations to produce small, uniform structures, usually of the submicron and nanoscale size (commonly defined as particles having dimensions less than 100 nanometers) including nanostructures, microemulsions and nanosuspensions. The equipment produces commercial quantities of such materials important to producers of pharmaceuticals, coatings and other products.

Additionally, the Company commercializes its proprietary equipment, processes and technology for the continuous production of precipitated submicron or nanoscale particles by interaction of discrete streams of reacting materials. 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 processor is used for formulation of products that are normally very difficult to mix and stabilize. Microfluidizer processors through process intensification allow manufacturers in the chemical, pharmaceutical, cosmetic, and food processing industries to produce higher quality products with better characteristics on a more consistent basis than with other blending, mixing or homogenizing techniques. Additionally, the equipment is used for cell disruption to harvest the cultivated contents of bacterial, yeast, mammalian and/or plant cells and for liposomal encapsulation of materials for the cosmetics and biotech/biopharma industries.

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 bench top 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.

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.

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

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in this mixing and collision zone (“fixed geometry”). Combined forces of shear and impact in the fixed 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 milliliters per minute to gallons per minute with no basic change in product formulation or equipment design and engineering. The formulations processed may be liquid/liquid or liquid/solid combinations.

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. Recent advances have enabled simpler MMR variants, utilizing modified Microfluidizer processors , which the Company plans to market.

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. Newer applications include deagglomeration of carbon nanotubes for subsequent formatting or alignment for specific uses.

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

Emulsions are homogenous mixtures of oil and water components (or other normally immiscible components), which, if mixed properly, do not readily separate. Emulsions comprise many products, such as food additives, medicines (including injectable drugs), photographic films, and polymers. 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.

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

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

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

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

The M-700 Series equipment is available in a variety of configurations and flow rates depending upon motor size and the number of intensifier pumps. The M-700 series equipment can achieve operating pressures up to 40,000 psi. On the low end of the spectrum is the 15 HP, single intensifier pump M-7115 machine with flow rates ranging from 0.9 gpm at 10,000 psi to 0.4 gpm at 30,000 psi. The next size up is the 25 HP, single intensifier pump, M-7125 machine with flow rates ranging from 2.3 gallons per minute (“gpm”) at 10,000 psi to 0.6 gpm at 30,000 psi. The largest offering of the M-700 series product line is the 50 HP, dual intensifier pump M-7250 machine with flow rates ranging from 4.0 gpm at 10,000 psi to 1.2 gpm at 30,000 psi. The M-7250 machine is available with a recently introduced “constant pressure” option in which operating pressure is maintained to within 5% of peak operating pressure resulting in lengthened component life, reduced operating costs, and quieter operation.

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

Additionally, 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 provides a hermetically sealed stainless steel containment isolator that fully encloses the Microfluidizer processor’s high-pressure processing area and is utilized for the safety protection of personnel engaged in the processing of highly toxic cancer therapeutic drugs and other hazardous and potent materials.

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

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

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

(v.)   Constant Pressure control option is now an available feature that eliminates virtually all process pressure variations which dramatically improves the overall reliability of all M-7250 machines.

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

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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 on a continuous (versus batch) basis with phase purity previously unachievable with conventional batch reaction technology. This degree of reaction chemistry control can lead to cost-effective product improvements and the development and manufacture of new nanomaterials in scalable quantities. Applications for the new technology include improving the performance of catalysts, planarization polishing media, superconductors, abrasive silica, recording media, photographic media and pigments. It also may be used in the development and production of unique pharmaceutical products as well as the conversion of existing insoluble drugs to nanosuspension forms which are then deliverable by conventional means and with high bioavailability. 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 will make it a leader in the provision of systems for continuous production of uniform, reproducible, microparticles, nanoparticles and nanodroplets involving fast chemical reactions. A recent breakthrough has allowed design of a modified Microfluidizer with capabilities to handle most continuous reaction applications. This simpler equipment design is expected to result in a lower cost system which should accelerate interest in MMR systems.

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. Morehouse-COWLES 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

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customer’s sample formulation. Additionally, a prospective customer may pay for subsequent laboratory time and services on a fee for services basis. Typically, about one third of such laboratory trials result in equipment orders within twelve months. Finally, 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 production machines. A significant percentage of customers who rent the Company’s equipment elect to purchase the rental equipment or to purchase new equipment. For the Company’s policy on product warranties, see “Critical Accounting Policies—Product Warranties under Item 7.

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 consisting of a distributor 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. One company accounted for 10% of 2006 revenues. Two companies each accounted for more than 10% of 2005 revenues and 2004 revenues. Mizuho Industrial Co. Ltd. (Mizuho), a distributor for the Company, and one customer, Teva Pharmaceuticals Industries Ltd. (Teva) and its’ wholly owned subsidiary, accounted for 9.2% and 15.23%, respectively, of the Company’s revenues in 2006; 19.5% and 18.9%, respectively, in 2005; and 20.5% and 12.8%, respectively, in 2004. 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.

As of December 31, 2006, two customers accounted for 14.4% and 13.6% of the trade accounts receivable, respectively. As of December 31, 2005, two customers accounted for 10.8% and 10.7% of the trade accounts receivable, respectively. As of December 31, 2004, three customers accounted for 15.1%, 14.7%, and 13.4% of the trade accounts receivable, respectively. A reduction or delay in orders from any of the Company’s significant customers could have a material adverse effect on the Company’s results of operations.

The Company sells its products in various countries. The Company’s sales in North America, including the United States, Canada, and Mexico, accounted for approximately 55.2% of the Company’s revenues in 2006; 51.8% of the Company’s revenues in 2005; and approximately 51.1% of the Company’s revenues in 2004, with almost all of those sales coming from United States and Canada. Sales to the rest of the world accounted for approximately 44.8% of the Company’s revenues in 2006; 48.2% of the Company’s revenues in 2005; and approximately 48.9% of the revenues in 2004. Sales through the Company’s exclusive distributors in Japan accounted for approximately 9.2% of the Company revenues in 2006; 19.5% of the Company revenues in 2005; and 20.5% of the Company’s revenues in 2004. Sales through the Company’s

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representative in Korea accounted for approximately 9.5% of the Company’s revenues in 2006; 12.1% of the Company’s revenues in 2005; and 4.8% of the Company’s revenues in 2004.

Competition

The Microfluidizer processor equipment product line of high shear fluid processors has direct competition in its major markets, including pharmaceutical and coatings/chemical applications, but management believes that 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 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. Although the Company believes that its MMR system is superior in design and function, there can be no assurance that other companies 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

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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) an 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 systems for its MMR applications that will deliver the desired result for specific applications. For the years ended December 31, 2006, 2005 and 2004, research and development costs for continuing operations were $1,763,000, $1,702,000, and $1,034,000, 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
Northeastern University	Pharmaceutical nanotechnology particles
The Hebrew University of Jerusalem	Colloid chemistry emulsion technology

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 expired on March 13, 2007 and its device patent expired on August 6, 2002. The Company does not believe that the expiration of its device or method patents 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.

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In 1997 the Company completed development of a novel adaptation of its Microfluidizer processor equipment—a “Multiple Stream High Pressure Mixer/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 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.

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

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

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such Alternative Sources will not entail transitional delays, quality assurance and quality control difficulties, or delivery problems, any or all of which would likely have an impact on 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 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

10

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 23, 2007 and March 28, 2006, was approximately $3,567,000 and $3,646,000, 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 53 full-time employees as of March 23, 2007. 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.

Item 1A.Risk Factors

You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties occurs, our business, financial condition or operating results could be materially harmed. In that case the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we may face. We believe that this filing contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to regulatory risks and clinical uncertainties. Such statements are based on management’s current expectations and are subject to facts that could cause results to differ materially from the forward-looking statements. For further information you are encouraged to review MFIC Corporation’s filings with the Securities and Exchange Commission, including its Quarterly Reports on Form 10-Q for the periods ended March 31, 2006, June 30, 2006 and September 30, 2006. The Company assumes no continuing obligation to update the information contained in this filing.

We face intense competition in many of our markets.

Our Microfluidizer product line of high-shear fluid processors has direct competition in its major markets, including its most important markets in the pharmaceutical, biotechnology and coatings/chemical industries.

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.

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We are subject to significant competition from companies that are pursuing technologies and products that are similar to our 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.

We rely 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 would not entail quality assurance and quality control difficulties, on-time delivery problems, or other transitional problems, any or all of which could have an impact on the Company’s production of equipment and could have a material adverse effect on the Company’s business, financial condition, or results of operations.

Our customer base is concentrated, and a substantial portion of our sales are provided by just three customers.

Three customers accounted for an aggregate of 32.2% of the Company’s revenues for the year ended December 31, 2006. Historically, our largest single customer has been the Japanese distributor of our Microfluidizer processor equipment and spare parts, which accounted for 9.2% of our revenues for the year ended December 31, 2006, 19.5% of our revenues for the year ended December 31, 2005 and 20.5% of our revenues for the year ended December 31, 2004. Our next historically largest customer accounted for 15.23% of our revenues for the year ended December 31, 2006, 18.9% of our revenues for the year ended December 31, 2005 and 12.8% of our revenues for the year ended December 31, 2004. A third customer is a distributor in Canada who accounted for 7.8% of our revenues for the year ended December 31, 2006, 3.2% of our revenues for the year ended December 31, 2005 and 3.11% of our revenues for the year ended December 31, 2004. Although we are unaware of any plans by any of these customers to reduce their business with us, the loss of any one or more of these customers would be highly problematic for us, and would likely cause a material change in our near-term, and possibly long-term, financial prospects. In addition, a reduction or delay in orders from any of these customers could have a material adverse effect on the Company’s results of operations.

As of December 31, 2006, 14.4% and 13.6% of the Company’s trade accounts receivable were due from two customers, both of which are long-established customers of the Company and neither of which have presented credit issues in the past. Nevertheless, if either or both of these customers were to default on their obligations to us such default would likely cause a material change in our near-term, and possibly long-term, financial prospects.

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

We derive a substantial portion of our revenues from pharmaceutical and biotechnology companies. We expect that pharmaceutical and biotechnology companies will continue to be one of our major sources of revenues for the foreseeable future. As a result, we are subject to risks and uncertainties that affect the

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pharmaceutical and biotechnology industries, such as pricing pressures as third-party payers continue challenging the pricing of medical products and services, government regulation, ongoing consolidation and uncertainty of technological change, and to reductions and delays in research and development expenditures by companies in these industries.

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

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

We have only one manufacturing facility.

The Company has only one manufacturing facility located in Newton, Massachusetts. Our success depends on the efficient and uninterrupted operation of that facility. Whether as a result of a fire, natural disaster, or other cause, any disruption to our manufacturing operations would significantly impair our ability to operate our business on a day-to-day basis. Although 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.

We rely on our trade secrets to protect our technology.

The Company’s Microfluidizer processor equipment method patent expired 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.

In order to afford additional protection to its intellectual property, in November 2006 the Company adopted a provision as part of its standard terms and conditions of purchase. Such provision is an acknowledgement and agreement by a purchaser of the Company’s merchandise and equipment (the

13

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

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 and negatively impacted as a result of such unauthorized disclosure.

We must continue our research and development efforts to maintain our competitiveness.

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 development of new equipment models, 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 systems for its MMR applications that will deliver the desired result for specific applications. The inability to meet the enhancement challenges or design and manufacture systems for its MMR applications may have a material adverse effect on the Company.

Our ability to continue planned operations is dependent upon access to financing under a credit facility with our 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

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currently owed approximately $312,000 at December 31, 2006. 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 lender.

We may be subjected 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 States governmental restrictions on technology transfer, import, export and customs regulations and other 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 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 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.

We rely 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 leave the Company’s employment, or either die or become disabled to an extent that

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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.

Our stock is listed on the OTC Bulletin Board and our 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 national securities exchange, which may increase stockholders liquidity. There is uncertainty that the Company will ever be accepted for a listing on a securities exchange.

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.

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

We sometimes lease our products to our customers prior to or instead of selling a product to a customer. 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.

We 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 include 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 whose 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.

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

For the years ended December 31, 2006, 2005 and 2004, shipments outside of North America accounted for approximately 44.8%, 48.2% and 48.9%, respectively, of our net revenues in those periods. In particular, approximately 9.2%, 19.5% and 20.5% of our net revenues in 2006, 2005 and 2004, respectively, resulted from sales to Japan and approximately 9.5%, 12.1% and 4.8% of those net revenues resulted from sales to Korea in 2006, 2005 and 2004, respectively. In addition, approximately 22.3%, 13.0%

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and 17.9% of our net revenues resulted from sales to Europe in 2006, 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 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.

Compliance with internal controls reporting requirements will 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 a 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 a 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 certain requirements of Section 404 by its first fiscal year ending on or after December 15, 2007.

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

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

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

Management judgment and estimates are necessarily required in the application of our Critical Accounting Policies. We discuss these estimates in the subsection entitled Critical Accounting Policies beginning on page 30. If our estimates are incorrect, our future financial operating results and financial condition could be adversely affected.

Item 1B.Unresolved Staff Comments

None.

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Item 2.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 and laboratory office in Irvine, California. The Company rents approximately 35,000 square feet of offices, production and research and development facilities at these locations for administrative, development and production activities. The lease terms expire at various times through October, 2011 (with options under which the Company can extend the lease at the Newton facility through October 31, 2015). A portion of the space at the Newton, Massachusetts facility is sublet to a non-affiliated company (the “Sub-Lessee”) under a tenant-at-will arrangement. Through April 30, 2006, the Sub-Lessee’s lease obligation to the Company was $21,600 per annum, which was increased to $30,000 per annum on May 1, 2006. The Company believes these facilities will be adequate for operations for the next five years.

Item 3.Legal Proceedings

The Company is not a party to any legal proceedings, other than ordinary routine litigation incidental to its business, which the Company believes will not have a material affect on its financial position or results of operations.

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

No matters were submitted to a vote of the Company’s security holders during the quarter ended December 31, 2006.

PART II

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.

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

	Fiscal Year 2005
	High	Low
4th Quarter	$ 1.95	$ 1.26
3rd Quarter	2.78	1.58
2nd Quarter	2.90	1.50
1st Quarter	3.99	1.90

Holders

As of March 23, 2007, there were approximately 370 holders of record of the Company’s Common Stock.

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Sales of Unregistered Securities

On March 30, 2004, the Company completed a private placement of investment units (each unit consisting of one share of common stock and a 3-year warrant to purchase an additional ½ share of common stock). A total of 1,426,616 units were sold, yielding gross proceeds of approximately $3,567,000. The units were priced at $2.50 each and the associated warrants to purchase 713,308 shares of common stock are exercisable at $3.05. Additionally, the placement agent for the offering received five-year warrants to purchase 213,992 shares of common stock at an exercise price of $3.20 per share. The value of the warrants granted to the placement agent  was approximately $351,000. The investment units and warrants were issued pursuant to the exemption to the registration requirements of the Securities Act of 1933, as amended, available under Section 4(2) of that Act. The placement agent and the purchasers of the units (the “Purchasers”) were “accredited investors” pursuant to the rules of the Securities and Exchange Commission. The Company filed a registration statement on Form SB-2, which was declared effective on May 13, 2004, for purposes of registering the shares of common stock underlying the units and warrants. The warrants associated with the units are exercisable in whole or in part at any time on or prior to their termination date in March, 2007. In addition, these warrants provide for certain adjustments to the exercise price upon the issuance by the Company of certain securities at a price below $3.05. The warrants issued to the placement agent may be exercised in whole or in part at any time prior to their termination date in March 2009. In addition, the warrants issued to the placement agent provide for certain adjustments to the exercise price upon the issuance by the Company of certain securities at a price below $3.20.

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-year warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $3.20 per share. These warrants were issued pursuant to the exemption to the registration requirements of the Securities Act of 1933, as amended, available under Section 4(2) of that Act. Maxim Group LLC was an “accredited investor” pursuant to the rules of the Securities and Exchange Commission. The Company filed a registration statement on Form SB-2, which was declared effective on June 5, 2006, for purposes of registering the shares of common stock underlying the warrants. Maxim Group LLC has waived its rights to receive, based upon the date that the registration statement on Form SB-2 was declared effective, an additional warrant to purchase shares of the Company’s common stock. The warrants may be exercised in whole or in part at any time on or prior to April 1, 2008. In addition, the warrants provide for certain adjustments to the exercise price upon the issuance by the Company of certain securities at a price below $3.20.

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.

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Securities Authorized for Issuance Under Equity Compensation Plans

The equity compensation plan information in the table below is as of December 31, 2006. See also Note 12 to the Consolidated Financial Statements.

	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 stockholders		1,561,086		$ 1.45		754,000
Equity compensation plans not approved by stockholders		1,027,300		$ 3.10		—
Total		2,588,386		$ 2.10		754,000

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Performance Graph

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

*       $100 invested on 12/31/01 in stock or index-including reinvestment of dividends.

Fiscal year ending December 31.

	Cumulative Total Return as of December 31,
	2001	2002	2003	2004	2005	2006
MFIC Corporation	100.00	64.71	441.18	764.71	264.71	301.96
AMEX Composite	100.00	100.08	144.57	178.46	220.35	262.17
Peer Group	100.00	57.92	146.24	113.62	55.28	45.54

The Company’s competitors are either larger integrated companies or privately-held companies. The Company has chosen a peer group consisting of companies with a market capitalization from $7 million to $27 million in the information technology sector of the American Stock Exchange. The peer group consists of the following issuers:

·  Apogee Technology Inc.	·  Intelligent Systems LP
·  AXS-One Inc.	·  MPC Corporation
·  Blonder Tongue Laboratories Inc.	·  Pinnacle Data Systems Inc.
·  Cash Technology Inc.	·  Thinkengine Network Inc. ·  Trans-Lux Corporation
·  Conversion Services International Inc.
·  CVD Equipment Corporation	·  US Dataworks Inc.
·  Elecsys Corporation	·  Winland Electronics Inc.
·  Ilinc Communications Inc.	·  Wireless Xcessories Group Inc.

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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, 2006. The information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related Notes included elsewhere in this Form 10-K. All fiscal years noted below have been restated to reflect discontinued operations.

	For The Years Ended December 31,
	2006		2005		2004		2003		2002
	(in thousands, except share and per share data)
Consolidated Statement of Operations Data:
Total revenues	$    15,654		$  11,645		$    12,159		$  10,460		$    9,514
Total costs and expenses	14,450		12,416		11,462		9,694		8,872
Income (loss) from continuing operations before income taxes	1,204		(771	)	697		766		642
Interest expense	(35	)	(59	)	(69	)	(116	)	(179	)
Interest income	50		26		27		10		7
Net income (loss) from continuing operations before income taxes	1,219		(804	)	655		660		470
Income tax (benefit) provision	(58	)	185		(450	)	—		—
Net income (loss) from continuing operations before discontinued operations	1,277		(989	)	1,105		660		470
Loss from discontinued operations (net of loss from disposal of discontinued operations of $1,422 in 2003)	—		—		(231	)	(4,110	)	(2,983	)
Net income (loss)	$      1,277		$      (989	)	$         874		$   (3,450	)	$   (2,513	)
Basic amounts per common share:
Basic net income (loss) per share from continuing operations	$        0.13		$     (0.10	)	$        0.11		$      0.08		$      0.06
Basic net income (loss) per share from discontinued operations	—		—		(0.02	)	(0.52	)	(0.40	)
Basic net income (loss) per share	$        0.13		$     (0.10	)	$        0.09		$     (0.44	)	$     (0.34	)
Diluted amounts per common share:
Diluted net income (loss) per share from continuing operations	$        0.12		$     (0.10	)	$        0.10		$      0.08		$      0.06
Diluted net income (loss) per share from discontinued operations	—		—		(0.02	)	(0.52	)	(0.40	)
Diluted net income (loss) per share	$        0.12		$     (0.10	)	$        0.08		$     (0.44	)	$     (0.34	)
Weighted average shares outstanding:
Shares used in computing net loss per common share, basic	10,012,685		9,756,221		9,345,560		7,767,712		7,426,586
Shares used in computing net loss per common share, diluted	10,611,635		9,756,221		10,329,313		8,501,110		7,470,090

	As of December 31,
	2006	2005	2004	2003	2002
Consolidated Balance Sheet Data:
Cash and cash equivalents	$ 1,860	$ 1,452	$ 2,028	$   50	$   85
Current assets	7,857	5,734	6,821	5,194	9,159
Working capital	5,644	4,273	5,180	574	3,915
Total assets	8,226	6,212	7,292	5,487	9,487
Long-term note (including current portion)	312	563	813	59	154
Total stockholders’ equity	5,948	4,426	5,089	861	4,102

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

Future Operating Results

This report may contain forward-looking statements that are subject to certain risks and uncertainties including statements relating to 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 the Company’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, which may cause increased volatility in the Company’s stock price, (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 maintain compliance 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 (defined below) 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, (vi) whether the Company will achieve a greater proportion of its sales in the future through the sale of advanced processor production systems, and (vii) as well as those risks set forth in Item 1a, “Risk Factors.”  The Company assumes no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise.

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, process premixed formulations to produce small uniform structures, usually of the submicron and nanoscale size (commonly defined as particles having dimensions less than 100 nanometers) including nanostructures, microemulsions and nanosuspensions. The equipment produces commercial quantities of such materials important to producers of pharmaceuticals, coatings and other products. Further, the Company guarantees scaleup of formulations and results on its processor equipment from 10 milliliters per minute on its laboratory and bench top models to more than 15 gallons per minute on its pilot and production models.

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

The Company has begun to take steps toward commercializing its proprietary equipment, processes and technology for the continuous production of precipitated submicron or nanoscale particles by

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interaction of discrete streams of reacting materials, through a novel adaptation of its Microfluidizer processor equipment that permits the mixing of, and reactions between, streams of different solutions at high pressures. The Company refers to this technology as 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 claims. The Company has gained national entry of the patent in France, Germany, Italy, The Netherlands, and the United Kingdom. The Company is still prosecuting the allowance of the patent in Canada. 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.

Results of Operations

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

Revenues

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

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

Cost of Goods Sold

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

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Research and Development Expenses

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

Selling Expenses

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

General and Administrative Expenses

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

Interest Income and Expense

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

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

Income Tax Provision

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

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Year Ended December 31, 2005 vs. December 31, 2004

Results of Continuing Operations

Revenues

Total revenues for the year ended December 31, 2005 from continuing operations were approximately $11,645,000 as compared to revenues of $12,159,000 for the year ended December 31, 2004, representing a decrease of approximately $514,000, or 4.2%.

North American sales for the year ended December 31, 2005 decreased to approximately $6,028,000, or a 3.0% decrease, 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, offsetting an increase in the sale of spare parts of approximately $1,294,000. Foreign sales were approximately $5,617,000 for the year ended December 31, 2005, compared to $5,947,000 for the year ended December 31, 2004, a decrease of approximately $330,000, or 5.5%. The decrease in foreign sales was principally due to a decrease in the sale of spare parts of approximately $1,374,000, partially offset by an increase in the sale of machines of approximately $1,044,000. 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, and that, with relatively minor modifications to these units that are currently in development, the Company hopes to regain market share.

Cost of Goods Sold

Total cost of goods sold for the year ended December 31, 2005 was approximately $5,918,000, or 50.8% of revenue, as compared to $5,608,000, or 46.1% of revenue for the comparable prior year. The increase in cost of goods sold is primarily a result of the increased costs from the manufacture and sales of production units, as opposed to manufacturing laboratory machines. Production units have a higher cost to manufacture and a lower corresponding 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 approximately 2.8% of the total revenues for 2005 or approximately $324,000, and approximately 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.

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Research and Development Expenses

Research and development expenses for the year ended December 31, 2005 were approximately $1,702,000 compared to $1,034,000 for the comparable prior year, an increase of approximately $668,000 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.

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.

Selling Expenses

Selling expenses for the year ended December 31, 2005 were approximately $2,412,000 compared to $2,588,000 for the comparable prior year, a decrease of approximately $176,000 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 approximately 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 printing costs was due to increased purchases of general brochures and cost data sheets compared to the previous year.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2005 were approximately $2,384,000 compared to $2,232,000 for the comparable prior year, an increase of approximately $152,000 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 approximate amount of $119,000, and a recruiting placement fee of approximately $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 Income and Expense

Interest expense for the year ended December 31, 2005 was approximately $59,000 as compared to $69,000 for the comparable prior year, a decrease of approximately $10,000 or 14.5%. The decrease was principally due to a reduction in the term debt outstanding.

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Interest income for the year ended December 31, 2005 was approximately $26,000 as compared to $27,000 for the comparable prior year, a decrease of approximately $1,000 or 3.7%. The decrease is due to less cash available for investing.

Results of Discontinued Operations

In 1998, the Company purchased the assets and selected 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, 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 approximately $918,000. Of the purchase price approximately $768,000  was paid in cash (the “Closing Cash”), $100,000 was paid in the form of a Promissory Note (the “Purchase Note”) and $50,000 was withheld for payment at a future date subject to any purchase price adjustments and offsets (the “Holdback Payment”), as provided for in the Asset Purchase Agreement. In accordance with the Asset Purchase Agreement, the 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).

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The aforementioned Purchase Note bore interest at five percent (5%) 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 $8,000 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 in 2003. 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.

There were no revenues from discontinued operations recorded for the year ended December 31, 2005, as compared to revenues of $324,000 for the comparable prior year. The decrease during this period is due to the sale of the Division to NuSil on February 9, 2004.

There were no cost of goods sold from discontinued operations recorded for the year ended December 31, 2005, as compared to $309,000 for the comparable prior year. The decrease in cost of goods sold is attributable to the sale of the Division to NuSil on February 9, 2004.

There were no research and development, selling and general and administrative expenses from discontinued operations recorded for the year ended December 31, 2005, as compared to aggregate research and development, selling and general and administrative expenses of $239,000 for the comparable prior year. The decrease in these operating expenses is due to the sale of the Division to NuSil on February 9, 2004.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2006, the Company had approximately $1,860,000 in cash and cash equivalents, compared to $1,452,000 as of December 31, 2005. For the year ended December 31, 2006, the Company generated cash from operations of approximately $649,000 from income from operations and an increase in current liabilities, partially offset by the funding of its increase in trade accounts receivable and the increase in its inventory due to production requirements for orders. For the year ended December 31, 2005, the Company used cash from operations of approximately $396,000 to fund its net loss, and its decrease in current liabilities, offset by a decrease in receivables, inventories, and other current assets. For the year ended December 31, 2004, the Company used cash from operations of approximately $142,000 to fund its increase in inventories, trade and other receivables, prepaid expenses, and a decrease in current liabilities, partially offset by net income.

For the year ended December 31, 2006, the Company used cash from investing activities of approximately $57,000 for the purchase of capital equipment. For the year ended December 31, 2005, the Company used cash from investing activities of approximately $96,000 for the purchase of capital equipment. For the year ended December 31, 2004, the Company generated cash from investing activities of $513,000 primarily through the sale of the Morehouse-COWLES Division, partially offset by the purchase of capital equipment.

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For the year ended December 31, 2006, the Company  used cash from financing activities of approximately $184,000, primarily as a result of repayments of its term loan, offset by the issuance of common stock for options exercised and from proceeds from stock issued from the employee stock purchase plan. For the year ended December 31, 2005, the Company used cash from financing activities of approximately $84,000 primarily as a result of repayments on its term loan; and offset by the issuance of common stock for options exercised, from proceeds from stock issued from the employee stock purchase plan, and the collection of a note receivable. For the year ended December 31, 2004, the Company generated cash from financing activities of approximately $1,607,000 primarily through 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.

As of December 31, 2006, the Company maintains a revolving credit and term loan agreement with Banknorth, N.A., providing the Company with a $1,000,000, four-year revolving credit line and a $1,000,000 four-year term loan facility. As of December 31, 2006, there was no balance due under its revolving credit line and a balance of $312,000 under its term loan facility, having a due date of March 1, 2008.

The Company’s contractual obligations as of December 31, 2006 are as follows:

	Total as of  December 31,			Payable In
	2006			2007		2008		2009
	(in thousands)
Long-term debt		$	312	$	250	$	62	$	—
Operating leases		1,188		410		389		389
Capital leases		14		11		3		—
		$	1,514	$	671	$	454	$	389

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

Off-Balance Sheet Arrangements

The Company is not a party to any off-balance sheet arrangements.

Critical Accounting Policies

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

·Revenue Recognition.The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements.”  The Company recognizes revenue from product sales upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales

30

price is fixed or determinable and collection is deemed probable. If uncertainties regarding customer acceptance exist, the Company recognizes revenue when those uncertainties are resolved and title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue.

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

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

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

Recent Accounting Pronouncements

The Company has adopted SFAS No. 151, “Inventory Costs—an amendment of ARB No. 43,” which is the result of the FASB’s 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 is effective for inventory costs incurred during fiscal years beginning after September 15, 2005. The Company adopted SFAS No. 151 on January 1, 2006 and it did not have a material impact on our consolidated financial statements.

The Company has adopted SFAS No. 154, “Accounting Changes and Corrections.”  SFAS No. 154 addresses 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 material impact on our consolidated financial statements.

In June 2006, the FIN 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprise’s financial statements. The Interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position

31

meets the more likely than not recognition criteria, FIN 48 requires the tax position be measured at the largest amount of benefit greater than fifty percent (50%) likely of being realized upon ultimate settlement. This accounting standard is effective for fiscal years beginning after December 15, 2006. The effect, if any, of adopting FIN 48 on our financial position and results of operations has not been determined.

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, 2006. 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 8 to the Consolidated Financial Statements.

32

Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of MFIC Corporation:

We have audited the accompanying consolidated balance sheet of MFIC Corporation and subsidiaries as of December 31, 2006 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the one year period ended December 31, 2006. 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 based on our audits. The financial statements of MFIC Corporation and subsidiaries for the two years ended December 31, 2005 and 2004 were audited by other auditors whose reports dated March 1, 2006, except for Note 6, as to which the date is March 23, 2006, and March 2, 2005, respectively, expressed unqualified opinions on those financial statements.

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the Company’ 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, 2006 and the consolidated results of their operations and their cash flows for the year ended December 31, 2006, 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/ UHY LLP

Boston, Massachusetts

March 12, 2007

F-1

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 the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two 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 the consolidated results of their operations and their cash flows for the two 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-2

MFIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

	December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	1,860		$	1,452
Accounts receivable, net of allowance of $38 and $43 as of December 31, 2006 and 2005, respectively	3,253			1,864
Inventories, net	2,025			1,849
Prepaid and other current assets	350			304
Deferred income taxes	369			265
TOTAL CURRENT ASSETS	7,857			5,734
Property and equipment, net	303			406
Patents and licenses, net	66			72
TOTAL ASSETS	$	8,226		$	6,212
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and obligations under capital lease	$	259		$	289
Accounts payable	247			115
Accrued expenses	818			441
Customer advances	853			616
Income taxes payable	36			—
TOTAL CURRENT LIABILITIES	2,213			1,461
Long-term liabilities:
Long-term debt and obligations under capital leases, net of current maturities	65			325
Total liabilities	2,278			1,786
Commitments (Note 13)
Stockholders’ equity:
Common stock; $.01 par value; 20,000,000 shares authorized; 10,349,812 and 10,166,430 shares issued; 10,089,366 and 9,905,984 shares outstanding as of December 31, 2006 and 2005, respectively respectively	104			102
Additional paid-in capital	17,052			16,809
Accumulated deficit	(10,520		)	(11,797		)
Treasury stock, 260,446 shares, at cost, as of December 31, 2006 and 2005, respectively	(688		)	(688		)
TOTAL STOCKHOLDERS’ EQUITY	5,948			4,426
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	8,226		$	6,212

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

F-3

MFIC
Consolidated Statements of Operations
(in thousands, except share and per share amounts)

	Years Ended December 31,
	2006			2005			2004
Revenues	$	15,654		$	11,645		$	12,159
Cost of sales	7,001			5,918			5,608
Gross profit	8,653			5,727			6,551
Operating expenses:
Research and development	1,763			1,702			1,034
Selling	2,985			2,412			2,588
General and administrative	2,701			2,384			2,232
	7,449			6,498			5,854
Income (loss) from continuing operations	1,204			(771		)	697
Interest expense	(35		)	(59		)	(69		)
Interest income	50			26			27
Income (loss) from continuing operations before income tax provision (benefit)	1,219			(804		)	655
Income tax (benefit) provision	(58		)	185			(450		)
Net income (loss) from continuing operations	1,277			(989		)	1,105
Loss from discontinued operations	—			—			231
Net income (loss)	$	1,277		$	(989	)	$	874
Net income (loss) per common share, basic:
Net income (loss) per share from continuing operations	$	0.13		$	(0.10	)	$	0.11
Net (loss) per share from discontinued operations	—			—			(0.02		)
	$	0.13		$	(0.10	)	$	0.09
Net income (loss) per common share, diluted:
Net income (loss) per share from continuing operations	$	0.12		$	(0.10	)	$	0.10
Net (loss) per share from discontinued operations	—			—			(0.02		)
	$	0.12		$	(0.10	)	$	0.08
Weighted average number of common and common equivalent shares outstanding:
Basic	10,012,685			9,756,221			9,345,560
Diluted	10,611,635			9,756,221			10,329,313

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

F-4

MFIC CORPORATION
Consolidated Statements of Cash Flows
(in thousands)

	Years Ended December 31,
	2006			2005			2004
Cash flows from operating activities:
Net income (loss)	$	1,277		$	(989	)	$	874
Adjustments to reconcile net income (loss) to net cash flows:
Income tax (benefit) provision	(68		)	185			(450		)
Depreciation and amortization	174			187			112
Allowance for doubtful accounts	(5		)	30			(45		)
Provision for other receivables	—			—			46
Provision for obsolete inventory	9			22			53
Provision for warranty expense	16			58			—
Share-based payments to consultants	—			119			—
Acceleration of stock options	—			65			—
Share-based compensation	141			22			—
Changes in assets and liabilities:
Accounts receivable	(1,383		)	162			(197		)
Other current assets	(116		)	45			—
Inventories	(185		)	17			(257		)
Prepaid expenses	61			(50		)	(67		)
Accounts payable	131			(5		)	(761		)
Accrued expenses	91			(14		)	173
Customer advances	237			(159		)	552
Accrued commissions	87			(32		)	—
Accrued compensation and vacation pay	182			(59		)	21
Assets and liabilities available for sale	—			—			(196		)
Net cash flows provided by (used in) operating activities	649			(396		)	(142		)
Cash flows from investing activities:
Purchase of property, plant and equipment	(57		)	(96		)	(305		)
Proceeds from sale of assets available for sale	—			—			818
Net cash flows (used in) provided by investing activities	(57		)	(96		)	513
Cash flows from financing activities:
Net repayments on line of credit	—			—			(2,426		)
Proceeds from term loan	—			—			1,000
Principal repayments on long-term debt and obligations under capital leases	(288		)	(288		)	(246		)
Repayment of subordinated debt from related party	—			(6		)	(75		)
Proceeds from notes receivable	—			91			—
Proceeds from private placement, net of $578 in closing costs	—			—			2,989
Net proceeds from issuance of common stock	104			119			365
Net cash flows (used in) provided by financing activities	(184		)	(84		)	1,607
Net change in cash and cash equivalents	408			(576		)	1,978
Cash and cash equivalents at beginning of period	1,452			2,028			50
Cash and cash equivalents at end of period	$	1,860		$	1,452		$	2,028
Supplemental Disclosure of Cash Flow Information:
Assets acquired in exchange for notes	$	—		$	89		$	—
Interest received	50			26			28
Interest paid	34			61			68
Taxes paid	10			—			—

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

F-5

MFIC Corporation
Consolidated Statements of Changes in Stockholders’ Equity

	Common Stock					Additional								Treasury Stock						Total Stockholders’
(in thousands)	Number of Shares		Amount			Paid-in Capital				Accumulated Deficit				Number of Shares		Amount				Equity (Deficit)
Balance as of January 1, 2003		8,028		$	80		$	13,151			$	(11,683	)		260		$	(688	)		$	860
Issuance of common stock in connection with exercise of stock options		441		4			339														343
Issuance of common stock in connection with private placement		1,426		14			2,975														2,989
Issuance of common stock under employee stock purchase plan		27		1			21														22
Net income											874										874
Balance at December 31, 2004		9,922		99			16,486				(10,809		)		260		(688		)		5,088
Issuance of common stock in connection with exercise of stock options		129		1			76														77
Issuance of common stock under employee stock purchase plan		23		1			42														43
Issuance of common stock in connection with exercise of warrants		—		—			119														119
Correction—exercised options		70		1			(1		)												—
Compensation expense related to director stock options		22		—			22														22
Compensation expense related to acceleration of stock options		—		—			65														65
Net loss											(988		)								(988		)
Balance at December 31, 2005		10,166		102			16,809				(11,797		)		260		(688		)		4,426
Issuance of common stock in connection with exercise of stock options		144		2			69														71
Issuance of common stock under employee stock purchase plan		29		—			33														33
Compensation expense related to stock options							130														130
Compensation expense related to director stock options		11		—			5														5
Compensation expense related to employee purchase plan							6														6
Net income											1,277										1,277
Balance at December 31, 2006		10,350		$	104		$	17,052			$	(10,520	)		260		$	(688	)		$	5,948

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

F-6

MFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAl STATEMENTS

1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

Principles of Consolidation

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

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 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.

F-7

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 Financial Accounting Statements Board (“FASB”) Interpretation No. (“FIN”) 46R, “Consolidation of Variable Interest Entities.”  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, 2006 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 sale of property and equipment, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resulting gain, or loss is credited or charged to operations.

Long-Lived Assets

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

F-8

Patents, Licenses and Other Intangible Assets

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

Reserve for Warranty Expenses

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

Research and Development Expenses

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

Earnings (Loss) per Share

Basic and diluted net loss per share is presented in conformity with SFAS No. 128, “Earnings per Share,” for all periods presented. In accordance with SFAS No. 128, basic and diluted net loss per common share was determined by dividing net income or loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Options to purchase 1,561,086, 1,718,925 and 1,788,213 shares of common stock were outstanding for the years ended December 31, 2006, 2005, and 2004, respectively. Basic and diluted net incomes per share are $.13 and $.12, respectively, for the year ended December 31, 2006. Basic and diluted net loss per share are $(.10) for the year ended December 31, 2005. Basic and diluted net incomes per share are $.09 and $.08, respectively, for the year ended December 31, 2004.

Fair Value of Financial Instruments

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

Income Taxes

The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes.”  Under SFAS No. 109, deferred tax assets or liabilities are computed based on the differences between the financial statement and income tax bases of assets and liabilities using the effective tax rates. Deferred income tax expense or credits are based on changes in the asset or liability from period to period. 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

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment—An Amendment of FASB Statements No. 123 and 95,” which requires all companies to measure compensation cost for all

F-9

share-based payments, including employee stock options, at fair value. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123, “Accounting for Stock-Based Compensation.”  However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value over the requisite service period. Pro forma disclosure is no longer an alternative. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, which expressed the views of the SEC regarding the interaction between SFAS No. 123R and certain rules and regulations of the SEC. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as expected volatility and expected term.

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

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

For the year ended December 31, 2006, the Company recorded share-based compensation expense of approximately $130,000 for stock options that remain unvested as of December 31, 2006.

The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted for the years ended December 30, 2005 and 2004. Since stock-based compensation expense for the year ended December 31, 2006 was calculated under the provisions of SFAS No. 123R, there is no disclosure of pro forma net income and net income per share for that period. For purposes of the pro forma disclosure for the years ended December 31, 2005 and 2004 set forth in the table below, the value of the options is estimated using a Black-Scholes option pricing model.

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

	Years Ended December 31,
	2005				2004
	(in thousands, except per share data)
Net (loss) income, as reported		$	(989	)		$	874
Less: Stock-based employee compensation expense determined under fair value based method for all employee awards, net of related tax effects		(130		)		(232		)
Pro forma, net (loss) income		$	(1,119	)		$	642
Basic net (loss) income per share:
As reported		$	(0.10	)		$	0.09
Pro forma		$	(0.11	)		$	0.07
Diluted net (loss) income per share:
As reported		$	(0.10	)		$	0.09
Pro forma		$	(0.11	)		$	0.06

For the year ended December 31, 2006, the Company recognized stock-based employee compensation expense of $130,000 which is included in General and Administrative expense of the Consolidated Statement of Operations. The Company did not capitalize any stock-based compensation. The Company has established a valuation allowance for net deferred tax assets, accordingly, no significant tax benefit on the stock-based compensation was recorded during the year ended December 31, 2006.

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

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

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The fair value of each option granted during the years ended December 31, 2006, 2005 and 2004 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Years Ended December 31,
	2006			2005			2004
Dividend yield	None			None			None
Expected volatility	116.00			129.00			106.00
Risk-free interest rate	4.85		%	4.35		%	3.35		%
Expected life	5 years			5 years			5 years
Fair value of options granted	$	1.25		$	2.07		$	1.79

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

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

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

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

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

The weighted average fair value of stock options granted during the years ended December 31, 2006, 2005 and 2004 was $1.25, $2.07 and $1.79 per share, respectively. We estimate forfeitures related to options grants at an annual rate of 9% per year.

Total unrecognized stock-based compensation expense related to unvested stock options, expected to be recognized over a weighted average period of 5 years, amounted to approximately $352,000 at December 31, 2006.

Recent Accounting Pronouncements

The Company has adopted SFAS No. 151, “Inventory Costs—an amendment of ARB No. 43,” which is the result of the FASB’s 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 is effective for inventory costs incurred during fiscal years beginning after September 15, 2005. The Company adopted SFAS No. 151 on January 1, 2006 and it did not have a material impact on our consolidated financial statements.

The Company has adopted SFAS No. 154, “Accounting Changes and Corrections.”  SFAS No. 154 addresses the accounting and reporting for changes in accounting principles. It replaces APB 20 and

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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 material impact on our consolidated financial statements.

In June 2006, the FIN 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprise’s financial statements. The Interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the more likely than not recognition criteria, FIN 48 requires the tax position be measured at the largest amount of benefit greater than fifty percent (50%) likely of being realized upon ultimate settlement. This accounting standard is effective for fiscal years beginning after December 15, 2006. The effect, if any, of adopting FIN 48 on our financial position and results of operations has not been determined.

2.INDUSTRY SEGMENT, GEOGRAPHIC AND ENTERPRISE-WIDE REPORTING

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires companies to report selected information about operating segments, as well as enterprise-wide disclosures about products, services, geographic areas and major customers. Operating segments are determined based on the way management organizes its business for making operating decisions and assessing performance. The Company’s chief decision-maker, as defined under SFAS No. 131, is the 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 by geographic markets, are as follows:

	Years Ended December 31,
	2006		2005		2004
	(in thousands)
North America	$	8,636	$	6,028	$	6,212
Asia	3,525		4,100		3,774
Europe	3,493		1,517		2,173
	$	15,654	$	11,645	$	12,159

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 Teva Pharmaceuticals Industries Ltd. (Teva) and its’ wholly owned subsidiary accounted for 9.2% and 15.2% of the Company’s revenues in 2006, respectively; 19.5% and 18.9%, respectively, in 2005; and 20.5% and 12.8%, respectively, in 2004. 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 14.4% and 13.6% of the trade accounts receivable as of December 31, 2006, respectively. Two customers accounted for 10.8% and 10.7% of the trade accounts receivable as of December 31, 2005, respectively. Three customers accounted for 15.1%, 14.7%, and 13.4% of the trade accounts receivable as of December 31, 2004, respectively. A reduction or delay in orders from any of the Company’s significant customers could have a material adverse effect on the Company’s results of operations.

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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 55.2% of the Company’s revenues in 2006; approximately 51.8% of the Company’s revenues in 2005; and approximately 51.1% of the Company’s revenues in 2004; with almost all of those sales coming from United States and Canada. Sales to the rest of the world accounted for approximately 44.8% of the Company’s revenues in 2006; 48.2% of the Company’s revenues in 2005; and approximately 48.9% of the revenues in 2004. Sales through the Company’s exclusive distributors in Japan accounted for approximately 9.2% of the Company’s revenues in 2006; 19.5% of the Company’s revenues in 2005; and 20.5% of the Company’s revenues in 2004. Sales through the Company’s representative in Korea accounted for approximately 9.5% of the Company’s revenues in 2006; 12.1% of the Company’s revenues in 2005; and 4.8% of the Company’s revenues in 2004.

3.INVENTORIES

The components of inventories are as follows:

	December 31,
	2006			2005
	(in thousands)
Raw materials	$	1,957		$	1,711
Work-in progress	217			74
Finished goods	51			249
	2,225			2,034
Less: provision for excess inventory	(200		)	(185		)
	$	2,025		$	1,849

4.ASSETS 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.

Summary Operating Results of the Discontinued Operations of the Division for the year ended December 31, 2004 is as follows:

	2004
	(in thousands)
Revenues		$	324
Cost of sales		309
Gross profit		15
Total operating expenses		238
Loss from discontinued operations before disposal		(223		)
Loss on disposal of discontinued operations		(8		)
Loss from discontinued operations		$	(231	)

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 the Division, to NuSil. Other than

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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 approximate amount of $623,000, 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 $918,000. Of the purchase price, $768,000 (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, the 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 five percent (5%) 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 $8,000 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.

5.PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

	December 31,
	2006			2005
	(in thousands)
Furniture, fixtures and office equipment	$	546		$	508
Machinery, equipment and tooling	435			420
Leasehold improvements	94			90
	1,075			1,018
Less: accumulated depreciation and amortization	(772		)	(612		)
	$	303		$	406

Depreciation expense for property and equipment for the years ended December 31, 2006, 2005 and 2004 was approximately $160,000, $173,000 and $93,000, respectively.

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6.INTANGIBLES AND OTHER ASSETS

In 2001, the Company capitalized approximately $65,000 of costs related to the Multiple-Stream Mixer High Pressure Reactor patent, with an additional $29,000 of costs related to this patent capitalized in 2004. These costs are being amortized over a 17-year period, beginning in the last quarter of 2001. Amortization of these costs for the years ended December 31, 2006, 2005 and 2004 was approximately $6,000, $6,000, and $10,000, respectively.

Costs incurred in connection with the debt refinancing that occurred on March 1, 2004 (See Note 8) are being amortized over four years, the initial term of the line of credit. The total of such costs was approximately $37,000. Amortization of these costs for the years ended December 31, 2006, 2005 and 2004 was approximately $8,000, $8,000 and $9,000, respectively.

7.ACCRUED EXPENSES

Accrued expenses consist of the following:

	December 31,
	2006		2005
	(in thousands)
Accrued expenses	$	240	$	149
Accrued wages and vacation pay	256		74
Accrued commissions	248		160
Accrued warranty	74		58
	$	818	$	441

8.LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASE

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

	December 31,
	2006			2005
	(in thousands)
Term loan	$	312		$	563
Obligations under capital lease	12			51
	324			614
Less: current portion	(259		)	(289		)
Long-term debt, net of current portion	$	65		$	325

On March 1, 2004, the Company and its Microfluidics Corporation subsidiary, as co-borrowers, entered into a revolving credit and term loan agreement with Banknorth, N.A. (the “Lender”) providing the Company with a $2,000,000 demand revolving credit and four year term loan facility (the “Credit Facility”). The Credit Facility was comprised of (i) a $1,000,000 demand revolving line of credit (the “Revolving Credit Line”), and (ii) a $1,000,000 four year term promissory note (the “Term Loan”). The Revolving Credit Line obtains advances thereunder bearing interest at a rate equal to the prime rate (8.07% at December 31, 2006). 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 a rate equal to 5.67%. Loans under the Credit Facility are secured by a collateral pledge to the Lender of substantially all the assets of the Company and its subsidiaries. The Company’s Microfluidics Corporation subsidiary guaranteed the Company’s obligations to the Lender under the Credit Facility. The Company also pledged to the Lender all shares of Microfluidics Corporation owned by the Company. The Company is required to meet two covenants on an annual (calendar) basis as of December 31 of a given year as

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follows: (i) the Company’s senior debt may not be more than four times the amount of its tangible capital base, and (ii) its debt service coverage ratio may not be less than 1.20 to 1. On November 20, 2006 the Company and the lender agreed to a modification of the definition of the Debt Service Coverage Ratio. The purpose of the modification was to eliminate significant non-cash items, such as stock-based employee compensation expense, from affecting the ratio. At December 31, 2006, the Company was in compliance with the debt covenants.

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

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

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

Years Ended December 31,	(in thousands)
2007		$	10
2008		4
Thereafter		—
		14
Less: interest expense		(2		)
Obligations under capital lease, net		$	12

9.EMPLOYEE BENEFIT PLANS

The Company offers a 401(k) profit-sharing plan (the 401K Plan) to its employees. All Company and related entity employees who are eighteen (18) years of age and have completed one hour of service are eligible to participate in the 401K Plan. Employees may contribute from 1% to 20% of their compensation. The Company’s contribution is discretionary, with contributions made from time to time as management deems advisable. The Company made no matching contributions during the years ended December 31, 2006, 2005 or 2004. The Company also instituted a cafeteria plan in 1992, giving the employees certain pre-tax advantages on specific payroll deductions.

10.INCOME TAXES

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

	Years Ended December 31,
	2006			2005		2004
	(in thousands)
Current:
Federal	$	21		$	—	$	—
State	10			—		—
Foreign	15			—		—
	$	46		$	—	$	—
Deferred:
Federal	$	(88	)	$	141	$	(345	)
State	(16		)	44		(105		)
Foreign	—			—		—
	$	(104	)	$	185	$	(450	)

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The amount reported as an income tax expense for the year ended December 31, 2006 is the result of current tax associated with both the domestic operations , including an alternative minimum tax, and the foreign operations of the sales branch in Germany. The deferred provision is the result of a decrease to the valuation allowance reserve that was recorded against the Company’s deferred tax asset. The amount reported as an income tax expense for the year ended December 31, 2005 is the result of an increase to the valuation allowance reserve that was recorded against the Company’s deferred tax assets.

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

	Years Ended December 31,
	2006			2005			2004
Federal income tax at statutory rate		34.0	%		34.0	%		34.0	%
State income taxes, net of federal benefits		6.3	%		6.3	%		6.3	%
Permanent adjustments		4.2	%		-6.5	%		2.6	%
Net research and development and other tax credits		0.0	%		-11.7	%		0.0	%
Valuation allowance		-50.9	%		25.9	%		-42.8	%
Reversal of valuation allowance recorded in prior years		0.0	%		-25.0	%		-68.7	%
Other		1.6	%		0.0	%		0.0	%
Effective tax rate		-4.8	%		23.0	%		-68.6	%

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

	December 31,
	2006			2005
	(in thousands)
Deferred tax assets:
Net operating loss carry forwards	$	3,186		$	3,958
Research and development and other credits	79			93
Accruals and allowances not currently deductible for tax purposes	169			122
Depreciation and other	136			7
Valuation allowance	(3,201		)	(3,915		)
Total deferred tax assets	$	369		$	265

As of December 31, 2006, the Company has available federal net operating loss carry forwards for income tax purposes of approximately $8,311,000, and state net operating losses of approximately $5,743,000, which expire at various dates through 2026, federal research and development credit carry forwards of approximately $74,000 expiring in varying amounts during the period through 2021 and state research and development credit carryforwards of approximately $8,000 expiring in varying amounts during the period through 2011. Ownership changes, as defined in the Internal Revenue Code, may limit the amount of operating loss carry forwards that can be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years.

Based on our review of the evidence available, we believe that the valuation allowance is adequate as of the year ended December 31, 2006, based on our projected results for 2007. If there is any significant change between actual and budgeted results, we would revisit the valuation allowance at the end of each quarter, and make the appropriate adjustment.

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11.STOCKHOLDERS’ EQUITY

Private Placement

On March 30, 2004, the Company completed a private placement of investment units (each unit consisting of one share of common stock and a 3-year warrant to purchase an additional ½ share of common stock). A total of 1,426,616 units were sold, yielding gross proceeds of approximately $3,567,000. The units were priced at $2.50 each and the associated warrants to purchase 713,308 shares of common stock were exercisable at $3.05. Additionally, the placement agent for the offering received five-year warrants to purchase 213,992 shares of common stock at an exercise price of $3.20 per share. The investment units and warrants were issued pursuant to the exemption to the registration requirements of the Securities Act of 1933, as amended, available under Section 4(2) of that Act. The purchasers of the units (the “Purchasers”) and the placement agent were “accredited investors” pursuant to the rules of the Securities and Exchange Commission. The Company filed a registration statement on Form SB-2, which was declared effective on May 13, 2004, for purposes of registering the shares of common stock underlying the units and warrants. The warrants associated with the units are exercisable in whole or in part at any time on or prior to their termination date in March 2007. In addition, the investor warrants provided for certain adjustments to the exercise price upon the issuance by the Company of certain securities at a price below $3.05. The warrants issued to the placement agent may be exercised in whole or in part at any time on or prior to their termination date in March 2009. In addition, the warrants issued to the placement agent provide for certain adjustments to the exercise price upon the issuance by the Company of certain securities at a price below $3.20. The value of the warrants granted to the placement agent was approximately $351,000, and was accounted for as a non-cash financing activity.

Warrants

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

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (the “Purchase Plan”). Under the Purchase Plan, participants are granted options to purchase the Company’s common stock twice a year at the lower of 85% of market value at the beginning or end of each period. Calculation of the number of options granted, and subsequent purchase of these shares, is based upon voluntary payroll deductions during each six-month period. The number of options granted to each employee under this plan is limited to a maximum amount of 1,000 shares for each six-month period. The number of shares issued pursuant to this plan totaled 29,183, 23,289, and 26,678 , in 2006, 2005, and 2004, respectively.

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12.SUPPLEMENTAL DISCLOSURES FOR STOCK-BASED COMPENSATION

Stock Options

The Company has three (3) shareholder approved stock option plans as follows:  (i) the 1988 Stock Plan, which authorized the grant of stock rights for up to 3,500,000 shares of common stock (the “1988 Plan”); (ii) the 1989 Non-Employee Director Stock Option Plan (the “1989 Plan”), which authorizes the grant of nonqualified stock options for up to 500,000 shares of common stock; and (iii) the 2006 Stock Plan (the “2006 Plan”) which authorizes the grant of stock rights for up to 4,000,000 shares of common stock, increased by the number of shares of common stock underlying unexercised options issued under either the 1988 Plan or the 1989 Plan (together, the “Prior Plans”) that expired after June 20, 2006, and decreased by the number of shares of common stock issued and issuable pursuant to options outstanding under the Prior Plans. The 2006 Plan was approved by our shareholders at the Annual Meeting of Shareholders held on June 20, 2006. Upon adoption of the 2006 Plan by our shareholders, we ceased granting new options under the Prior Plans. The Prior Plans permitted, and the 2006 Plan permits, the granting of stock awards to employees, officers, and non-employee members of the Board of Directors. Options granted under the Prior Plans and the 2006 Plan permit vesting over a 3-to-5 year period and expire 5-to-10 years from the date of grant. At December 31, 2006, approximately 754,000 shares were available for future grants under the 2006 Plan and no shares were available for future grants under the Prior Plans.

During the year ended December 31, 2006, the Company issued 51,000 stock options at exercise prices equal to or greater than the fair market value of the Company’s stock on the date of grant under the 1988 Stock Plan, and the 1989 Non-Employee Director Stock Option Plan, and 7,412 shares under the 2006 Stock Plan. Approximately 62,000 shares were forfeited and approximately 176,000 shares were vested during the year ended December 31, 2006.

Activity under the Plans is as follows:

	Years Ended December 31,
	2006					2005					2004
	Number of Options		Weighted Average Exercise Price			Number of Options		Weighted Average Exercise Price			Number of Options		Weighted Average Exercise Price
Outstanding at beginning of period	1,718,925			$	1.37	1,788,213			$	1.14	1,929,662			$	0.74
Granted	58,412			1.24		424,900			2.14		392,668			2.27
Cancelled	(62,052	)		2.03		(273,031	)		1.07		(93,585	)		0.67
Exercised	(154,199	)		0.49		(221,157	)		0.57		(440,532	)		0.79
Outstanding at end of period	1,561,086			$	1.45	1,718,925			$	1.37	1,788,213			$	1.14
Exercisable at end of period	1,321,735			$	1.32	1,338,954			$	1.30	979,763			$	0.79

As of December 31, 2006, 754,000 shares were available for future grants under the Plans.

F-20

Summarized information about stock options outstanding as of December 31, 2006 are as follows:

			Weighted average		Weighted			Exercisable
Range of exercise prices	Number of options outstanding		remaining contractual life (years)		average exercise price			Number of options	Weighted average exercise price
$0.30 - $0.95		464,913		5.2		$	0.50	439,913		$	0.50
$1.00 - $1.75		652,427		7.3		1.28		554,390		1.25
$2.06 - $4.25		443,746		7.6		2.70		327,432		2.54
$0.30 - $4.25		1,561,086		6.6		—		1,321,735		—

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. Upon a review of the 1988 Plan, it was discovered that the officer, 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 officer exercised other options held and exercisable. The effect of this transaction was an equal increase to Common Stock and decrease to Additional Paid-In Capital, with no resultant affect to equity as a whole.

13.COMMITMENTS

The Company leases its facilities under non-cancelable operating leases expiring through October, 2011. Future minimum rental payments under the operating leases at December 31, 2006 are as follows:

Years Ended December 31,	(in thousands)
2007		$	410
2008		389
Thereafter		1,104
Total lease payments		$	1,903

Rent expense for the years ended December 31, 2006, 2005, and 2004, was approximately $415,000, $468,000 and $357,000, respectively. A portion of the Newton, Massachusetts rented facility is sublet to a non-affiliated company under a tenant-at-will arrangement for an approximate total of $30,000 per annum

14.RELATED PARTY TRANSACTIONS

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

F-21

15.CONDENSED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

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

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

	Year Ended December 31, 2005
	Qtr. 1			Qtr. 2			Qtr. 3			Qtr. 4
Revenues	$	2,536		$	3,164		$	2,881		$	3,064
Gross profit	1,388			1,556			1,354			1,429
Income (loss) from operations before income tax provision (benefit)	(193		)	(36		)	(297		)	(277		)
Income tax provision (benefit)	(77		)	—			—			262
Net (loss)	(116		)	(36		)	(297		)	(539		)
Net (loss) per share:
Basic net (loss) per share	$	(0.01	)	$	—		$	(0.03	)	$	(0.06	)
Diluted net (loss) per share	$	(0.01	)	$	—		$	(0.03	)	$	(0.06	)

16.VALUATION AND QUALIFYING ACCOUNTS

	Balance at Beginning of Period			Additions Charged to Costs and Expenses			Deductions and Adjustments				Balance at End of Period
	(in thousands)
Allowance for Doubtful Accounts:
For the year ended December 31, 2006		$	43		$	9		$	(14	)		$	38
For the year ended December 31, 2005		13			30			—				43
For the year ended December 31, 2004		59			25			(71		)		13
Inventory Reserve:
For the year ended December 31, 2006		$	185		$	15		$	—			$	200
For the year ended December 31, 2005		163			80			(58		)		185
For the year ended December 31, 2004		110			98			(45		)		163
Accumulated Amortization Related to Goodwill and Other Intangibles:
For the year ended December 31, 2006		$	—		$	—		$	—			$	—
For the year ended December 31, 2005		—			—			—				—
For the year ended December 31, 2004		6,918			—			(6,918		)		—
Warranty Reserve:
For the year ended December 31, 2006		$	58		$	16		$	—			$	74
For the year ended December 31, 2005		—			92			(34		)		58
For the year ended December 31, 2004		—			52			(52		)		—

F-22

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

On May 26, 2006, the partners of Brown & Brown, LLP (“B&B”) announced that they were joining UHY LLP (“UHY”), a New York limited liability partnership. UHY is an independent registered public accounting firm. On August 8, 2006, B&B notified MFIC Corporation (the “Company”) that, as a result of the merger, B&B would no longer provide audit and attestation services and that those services would now be handled by UHY, as B&B’s successor in interest. B&B requested that the Company accept and appoint UHY as the independent public auditors of the Company effective as of August 8, 2006.

None of the reports of B&B on the Company’s financial statements for any of the past three years or subsequent interim periods contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles.

During the three most recent fiscal years of the Company and any subsequent interim periods, there were no disagreements between the Company and B&B on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of B&B, would have caused it to make reference to the subject matter of the disagreements in connection with its report.

On August 8, 2006, the Company approved UHY, as the successor in interest to B&B, as the Company’s independent public accountant for the Company’s fiscal year ending December 31, 2006 and the interim periods prior to such year-end.

During the Company’s three most recent fiscal years or subsequent interim period, the Company has not consulted with UHY, or any of its affiliates or parent regarding the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, nor did the limited liability partnership of UHY, or any of its affiliates or parent provide advice to the Company, either written or oral, that was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue. Further, during the Company’s three most recent fiscal years or subsequent interim periods, the Company has not consulted with the limited liability partnership of UHY, or any of its affiliates or parent on any matter that was the subject of a disagreement or a reportable event.

The decision to acknowledge the merger of B&B and UHY and accept the services of UHY as the Company’s auditor as successor in interest to B&B was approved by the Audit Committee of the Company’s Board of Directors.

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, 2006, 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, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.OTHER INFORMATION

None.

33

PART III

Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

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 AND RELATED STOCKHOLDER MATTERS

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 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item 13 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.PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

During the years ended December 31, 2006 and 2005, UHY LLP (“UHY”), formerly Brown & Brown, LLP, was paid approximately $91,000, and $87,000 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 UHY in connection with statutory and regulatory filings or engagements for those fiscal years. All services were approved by the Audit Committee.

Audit Related Fees

During the years ended December 31, 2006 and 2005, UHY received no payments 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, 2006 and 2005, UHY was paid approximately $22,000 and $16,000, respectively, for tax compliance, tax advice and tax planning services. All tax services were approved by the Audit Committee.

34

All Other Fees

During the years ended December 31, 2006 and 2005, UHY was paid approximately $46,000 and $27,000, 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.

35

PART IV

Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)   Financial Statements

The following Consolidated Financial Statements are included in Item 8:

	Page
Report of Independent Registered Public Accounting Firm	F-1
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2006 and 2005	F-3
Consolidated Statements of Operations for the Three Years Ended December 31, 2006	F-4
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2006	F-5
Consolidated Statements of Changes in Stockholders’ Equity for the Three Years Ended December 31, 2006	F-6
Notes to Consolidated Financial Statements	F-7

(b)   Exhibit Index

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

36

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

37

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

38

10.67	2006 Stock Plan (filed as Exhibit 10.1 to the Company’s Form 8-K on August 11, 2006 and incorporated herein by reference).
10.68*	Letter Agreement between MFIC Corporation and Maxim Group LLC dated February 24, 2006 concerning the warrant issued to Maxim Group LLC.
10.69*	Lease for 30 Ossipee Road, Newton, Massachusetts dated November 6, 2006, between MFIC Corporation and King Real Estate Corp., Trustee of 1238 Chestnut Street Trust under Declaration of Trust dated May 23, 1969, recorded with Middlesex South Registry of Deeds in Book 11682, Page 384.
10.70*	TD Banknorth Loan Modification Agreement dated November 20, 2006.
10.71*	Letter Agreement between MFIC Corporation and Maxim Group LLC dated March 20, 2007 concerning the warrant issued to Maxim Group LLC.
14	Code of Ethics, as adopted by the Company (Filed as Exhibit 14 to the Company’s Form 10-K dated December 31, 2006, and incorporated herein by reference.)
21	Subsidiary of the Company, Microfluidics Corporation, a Delaware corporation
23(a)*	Consent of UHY LLP
23(b)*	Consent of Brown & Brown, LLP
31.1*	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith.

39

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 28th day of March, 2007.

MFIC CORPORATION
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 28, 2007
Irwin J. Gruverman		(Principal Executive Officer), Chairman of
		the Board of Directors and Secretary
/s/ DENNIS P. RIORDAN		Controller		March 28, 2007
Dennis P. Riordan		(Principal Financial and Accounting Officer)
/s/ JAMES N. LITTLE		Director		March 28, 2007
James N. Little
/s/ LEO PIERRE ROY		Director		March 28, 2007
Leo Pierre Roy
/s/ GEORGE UVEGES		Director		March 28, 2007
George Uveges
/s/ ERIC G. WALTERS		Director		March 28, 2007
Eric G. Walters

40

EX-10.68

Exhibit 10.68

February 24, 2006

Clifford A. Teller

Managing Director

Director of Investment Banking

Maxim Group LLC

405 Lexington Avenue

New York, NY 10174

Re: General Financial Advisory and Investment Banking Services Agreement between Maxim Group LLC (“Maxim”) and MFIC Corporation (the “Company” or “MFIC”) dated November 17, 2004 (the “Agreement”)

Dear Cliff,

We are well past the date of termination of the above Agreement. We have prepared a registration statement for 100,000 shares underlying Maxim’s stock purchase warrant that was part of the non-cash consideration paid to Maxim under the above Agreement.

Pursuant to agreement with Maxim, if a registration statement covering the sale of the shares issuable upon exercise of Maxim’s Common Stock Warrant is not declared effective on or before March 31, 2006, the Company would be required to issue to the holder upon exercise of the Common Stock Warrant an additional warrant to purchase shares of common stock of the Company.  As described more fully below, the Company is asking that Maxim extend the date by when the registration statement must be effective by either 30 days or 60 days depending upon whether the Securities and Exchange Commission (the “SEC”) elects to conduct a full review of the registration statement.

We have been advised by our counsel and auditors that the Company must include within the SB-2 (which has been prepared already) updated financial information that will not be available until the Company submits its Form 10-K.  The Securities and Exchange Commission (the “SEC”) has indicated that it will not review a filing such as an SB-2 if the SEC believes that such filing does not include the appropriate financial information.  We expect that the Form 10-K will be ready for filing on or about March 15, 2006, and the Company anticipates filing the SB-2 with the updated financial information promptly thereafter.

We have assumed that the imposition of a penalty if the Company does not meet the one year requirement for the effectiveness of the registration statement was prompted by a need to ensure that: (a) the Company would diligently take action to make the shares underlying the Maxim warrant salable, and (b) Maxim would want be able to exercise the Warrant and sell the shares if it so desired. We have exercised reasonable due diligence but find ourselves in a position where we believe regulatory authorities will not review and act upon the already prepared registration statement. We also note that the current trading price of the stock is well below the exercise “strike” price of the Warrant.

In light of the above we ask that Maxim agree to extend the time for the registration statement being declared effective by 30 days until April 30, 2006 in the event that the SEC does not conduct a full review of the registration statement.  The SEC should let the Company know within a week or two after the filing whether the SEC intends to conduct a full review.

If the SEC does choose to conduct a full review of the registration statement, we ask that Maxim agree to extend the time for the registration statement being declared effective by 60 days until May 30, 2006.  The additional time would be necessary because the Company would not have any control over the completion of the SEC’s full review.

We will, of course, supply you at your request, with the already edgarized SB-2 Registration Statement (unfiled) that we were prepared to file yesterday.

We ask that you respond promptly as we will have to revise our Form 10-K disclosure regarding the Maxim Warrant.

If you are amenable to granting to us extension, until April 30, 2006 or May 30, 2006 (based upon whether the SEC conducts a full review), in the time for the registration statement to be declared effective, please so indicate by signing below and returning this letter.

Thank you for your assistance and cooperation.

Yours truly,	Maxim Group LLC
/s/ IRWIN GRUVERMAN
Irwin Gruverman	By:	/s/ CLIFFORD A. TELLER
CEO and Chairman
MFIC Corporation	Title:	MD
	Date:	3/6/06

EX-10.69

Exhibit 10.69

LEASE

This lease (hereinafter “Lease”), entered into by and between KING REAL ESTATE CORPORATION, TRUSTEE OF THE 1238 CHESTNUT STREET TRUST (hereinafter “Landlord”) and MFIC Corporation, a Delaware corporation, with a present mailing address of 30 Ossipee Road, Newton, MA 02464 (hereinafter “Tenant”).  In consideration of the rents, covenants and agreements hereinafter reserved and contained on the part of Tenant to be observed and performed, Landlord demises and leases to Tenant and Tenant leases from Landlord the following premises upon the following terms, covenants and conditions.

1.DEMISED PREMISES

The demised premises located in the City of Newton, County of Middlesex, within buildings and property commonly known as the Chestnut Street Complex and referred to hereinafter as the “Building”, consists of the 15,400 square feet (hereinafter “SQFT”) on the 1st floor 30 Ossipee Road, 16,200 SQFT on the 2nd floor of Ossipee Road (the 1st  and 2nd floor rental space collectively being referred to as “30 Ossipee Road”), 192 SQFT next to the Boiler Room on the 1st Floor of 1238 Chestnut Street (the “Chestnut Street Space”) and two areas in the basement of Ossipee Road, comprised of 1,296 SQFT and 702 SQFT (referred to as the “Basement Space”), which demised premises are shown on Exhibit A1 and A2, attached hereto (and are collectively referred to hereinafter as the “Premises”).

The Tenant shall have, as appurtenant to the Premises, the non-exclusive right and easement to use in common with others entitled thereto (a) common areas in the Building and on the land on which it is located (said Building and land are hereinafter “Landlord’s Property”) including without limitation, sidewalks, loading facilities, entrances and exits from public highways, lobbies, hallways and stairways and such other facilities available to all tenants of the Building as may be designated from time to time by the Landlord, (b) (i) The Tenant has the following exclusive and non-exclusive right for Parking as shown in Exhibit “B”, which exclusive parking spaces shall be designated for Microfluidics use by Landlord’s provision of conspicuous marking or signage, and are comprised of twenty two (22) parking spaces in rows 1 and 2 on the parking deck adjacent to the Building (the “Deck Parking”) and eighteen (18) parking spaces in the basement parking space beneath the Deck Parking (the “Basement Parking”), comprised of all parking spaces along the Ossipee Road wall and eight (8) parking spaces in the center row of the Basement Parking. Additionally,  the Tenant shall have the non-exclusive right for Parking in the first  seven (7) spaces of the third row of the Deck Parking to be shared on  a “first  come first  served” basis, and (c) the pipes, ducts, conduits, utility likes, wires, sewerage system and appurtenant equipment serving the Premises; such rights shall always be subject to the reasonable rules and regulations from time to time established by Landlord, provided such rules and regulations shall not materially interfere with Tenant’s Permitted Use (hereinafter defined) of the Premises.

EXCEPTED AND RESERVED to Landlord is the space necessary to install, maintain and operate, by means of pipes, ducts, wires or otherwise those utilities and services required for Landlord’s Property, common facilities thereof and tenant premises (including the Premises). Landlord, its agents, contractors and employees shall have the right of access to and entry on the Premises for the purpose of such installation, maintenance or operation of the purposes of making repairs, alterations or additions to the Premises or to the Building if Landlord so elects. Except in cases of emergency, Landlord shall exercise the foregoing rights in such a manner as not to interfere unreasonably with Tenant’s use of the Premises between the hours of 8:00 a.m. and 6-00 p.m. Monday through Friday and between the hours of 8:00 a.m. and 1 -00 p.m. on Saturday, excluding all legal holidays (hereinafter “Business Hours”).  Landlord further reserves the right to change the street address and the name of the Building, (a) if required by the City of Newton, at any time and from time to time upon ninety (90) days prior notice to Tenant, without liability to Tenant. If the Landlord should otherwise wish to change the street address and the name of the Building it may only do so upon mutual written agreement with the Tenant, at any time and from time to time upon ninety (90) days prior notice to Tenant.

2.TERM

Tenant shall hold the Premises for a term of Five (5) years (hereinafter the “Term”) commencing, November 1, 2006 (hereinafter the “Term Commencement Date”) and terminating October 31, 2011. It is understood that Tenant may

occupy the Basement Space and Tenant may occupy the Chestnut Street Space (as soon as it has been constructed) prior to the Term Commencement Date if both parties have signed this Lease agreement.

3.PREPARATION OF THE PREMISES

3.1.         Landlord’s Work.  While the Premises will be leased as is, it is understood that Landlord agrees to perform any work for Tenant that Tenant requires (including but not limited to building a laboratory, providing additional structural support for second floor loading, provision of additional electrical service to the second floor, etc.) by March 31, 2007 (The “Landlord’s Work”).  Landlord shall pay for all charges relating the Landlord’s Work that it performs or has performed at the request of Tenant and Tenant will then reimburse Landlord for the entire cost of such work amortized throughout the remainder initial Term of the Lease after completion of the Landlord’s Work. Reimbursement will be made in equal monthly installments with the Rent (as defined below) and will be considered as Additional Rent (as defined below) under the terms of this Lease.  Said work shall be completed in accordance with Tenant’s plans and specifications, Tenant’s approval of contracts, conduct of work, work scheduling and shall be of first quality and in compliance with all relevant codes.

3.2.          Premises Deemed Completed.  The Premises shall be conclusively deemed ready for Tenant’s occupancy and substantially completed as soon as in view of delays or defaults, if any, of Tenants of its contractors, as hereinafter specified, and the elevator, plumbing, air conditioning and electric facilities are initially available to Tenant, in accordance with the obligations assumed by Landlord hereunder. Such facilities shall not be deemed to be unavailable if only minor or insubstantial details of construction, decoration or mechanical adjustments remain to be done. The Premises shall not be deemed to be unready for Tenant’s occupancy or incomplete if only minor or insubstantial details or construction, decoration or mechanical adjustments remain to be done in the Premises or any part thereof.

In the event the Premises are not ready for occupancy, the Premises will be deemed substantially completed and the Tenant’s obligations to pay Rent will commence if the delay in the availability of the Premises was caused; (1) by selection of non-building standard items, special work, changes, alterations or additions required or made by Tenant, (2) in whole or in part by Tenant through the delay of Tenant in submitting any plans or (3) in whole or in part by delay or default on the part of the Tenant or its contractors or agents,

Landlord’s certificate of substantial completion, given in good faith, or any other facts pertinent to this Section 3, and upon issuance of occupancy permit by the City of Newton, shall be deemed conclusive of the statements therein contained and binding upon Tenant. Any of Landlord’s Work in the Premises not fully completed by March 31, 2007 shall thereafter be so completed with reasonable diligence by Landlord, and in such a manner so as not to interfere unreasonably with Tenant’s use of the Premises.

3.3          Conclusiveness of Landlord’s Performance. Landlord shall be deemed to have performed all of its obligations under this Article 3 unless not later than ninety (90) days after the Term Commencement Date, Tenant shall give Landlord written notice specifying the respects in which Landlord has not performed any such obligations.

4.             RENT

The fixed rent (hereinafter “Fixed Rent”) payable by the Tenant during the Term shall be the annual rent of $389,496.00 per year ($32,458.00 per month).

$379,200.00 for 31,600 SQFT at 30 Ossipee Road

$    2,304.00 for 192 SQFT next to Boiler Room (Chestnut Street Space)

$    7,992.00 for 1,998 SQFT in the Basement (Basement Space)

Tenant’s obligations to pay Fixed Rent shall begin on November 1, 2006 pro rated for any completion delays.

Tenant shall also pay as Additional rent without notice, except as required under this Lease, and without any abatement, deduction or setoff, all sums, impositions, costs, expenses and other payments which Tenant in any

of the provisions of this Lease assumes or agrees to pay (the “Additional Rent”), and, in case of any nonpayment thereof, Landlord shall have in addition to any other rights and remedies, all of the rights and remedies provided by law or provided for in the Lease for the nonpayment of Fixed Rent.

All rent payments are due in advance without demand, deduction or set-off on the first day of each and every month during the Term and any extension or renewal thereof. Fixed Rent for any partial month shall be prorated.

In the event any Fixed Rent, additional rent or any other payments are not paid within ten (10) business days of the due date thereof, Tenant shall be charged a late fee of $100.00 for each late payment for each month or portion thereof that said payment remains outstanding. Said late fee shall be payable in addition to and not in exclusion of additional remedies herein provided to Landlord.

5.PLACE OF PAYMENT OF RENT

All payments of rent shall be made by Tenant to Landlord without notice or demand at such place as Landlord may from time to time designate in writing. The initial place for payment of rent shall be 1238 Chestnut Street Trust, Inc., P.O. Box 113, Newton Upper Falls, Massachusetts 02464-0113. Any extension of time for the payment of any installment of rent, or the acceptance of rent after the time at which it is due and payable shall not be a waiver of the rights of Landlord to insist on having all other payments made in the manner and at the times herein specified.

6.OPERATING EXPENSES AND REAL ESTATE TAXES

a.Operating Expenses

In the event that the total Operating Expenses (hereinafter defined) (commencing in calendar year of 2006) for any calendar year increase above the Operating Expenses for calendar year 2006 (hereinafter “Operating Expenses Base”). Tenant shall pay to Landlord, as additional rent hereunder, 25% of any share increase (hereinafter “Proportionate Share”). Landlord warrants that Tenant will occupy 25% of the total lease able space in the Property.

Landlord shall deliver to Tenant approximately ninety (90) days after the close of each calendar year in which any portion of the Term may fall, an itemized statement setting forth:

a.)The Operating Expenses for the preceding calendar year;

b.)The total amount of Tenant’s Proportionate Share of any increase in the Operating Expenses for the preceding calendar year over the Operating Expenses Base; and

c.)The balance, if any, due from or overpaid by Tenant for the preceding calendar year.

Tenant shall pay to Landlord the balance due from Tenant within thirty (30) days of the receipt of each statement. In the event such statement shows an overpayment by Tenant, Landlord shall refund the amount of such overpayment to Tenant, provided Tenant is not then in default in the performance of any of its obligations under this Lease.

In addition, on the first day of each month throughout the Term, Tenant shall pay to Landlord, on account towards Tenant’s Operating Expenses Base, one-twelfth of the total amount reasonably estimated by Landlord to be Tenant’s share thereof for the then current calendar year.

Any payment due under this Article for any portion of a calendar year shall be appropriately prorated. Landlord shall have the same rights and remedies for the nonpayment by Tenant of any amounts due hereunder as Landlord has for the failure of Tenant to pay rent.

The term “Operating Expenses” shall mean all bona fide costs at customary rates for all services and items supplied to Landlord’s Property that are consistent with those provided at comparable buildings located in Newton, Massachusetts, including without limitation expenses for the following:

A.Compensation and fringe benefits, workmen’s compensation, insurance premiums, wages and taxes paid to, for, or with respect to all persons directly engaged in operating, maintaining, or cleaning Landlord’s Property, including the Common Areas. The Common Areas shall mean the portions of Landlord’s Property for common use by or for the benefit of more than one tenant of the Building, including but not limited to stairways, elevators, interior corridors, basements, roof, and any common washrooms, toilets or other public facilities, parking areas and sidewalks;

B.All utilities and services, if any, furnished and supplied to the Common Area;

C.All utilities and services, if any, furnished and supplied generally to tenants in the Building utilizing the Building’s common systems;

D.Cost of building cleaning supplies and equipment:

E.Cost of maintenance, cleaning and repairs of Landlord’s Property;

F.Cost of snow removal and care of landscaping;

G.Expense for, or on account of the repair or replacement of equipment, , but not limited to, security, air-conditioning or heating equipment;

H.Premium for any insurance carried by Landlord covering Landlord’s Property, including but not limited to fire, casualty, rental interruptions and liability insurance; and

I.Customary and reasonable management fees, which shall not exceed five (5%) percent of the gross rents for the Building per year.

Depreciation and costs incurred for the exclusive benefit of Landlord or a specific tenant shall not be included in Operating Expenses.

6.2          Real Estate Taxes In the event that the Real Estate Taxes (hereinafter defined) for any tax year increase above the Real Estate Taxes for the fiscal tax year ending 2007 (hereinafter “Tax Base”), Tenant shall pay to Landlord as additional rent hereunder, its Proportionate Share (25%) of any such increase. Such payments shall be made in monthly installments on the first day of each month.

Landlord shall deliver to Tenant approximately ninety (90) days after the close of each tax year in which any portion of the Term may fall, an itemized statement setting forth:

A.The Real Estate Taxes for the preceding fiscal tax for the year 2007;

B.The total amount of Tenant’s Proportionate Share of the increase in Real Estate Taxes for the preceding tax year; and

C.The balance, if any, due from or overpaid by Tenant for the preceding tax year.

Tenant shall pay to Landlord the balance due from Tenant within thirty (30) days of the receipt of such statement shows an overpayment to Tenant, provided Tenant is not then in default in the performance of any of its obligations under this Lease.

Any payment due under this Article for any portion of a tax year shall be appropriately prorated. Landlord shall have the same rights and remedies for the non-payment by Tenant of any amounts due hereunder as Landlord has for the failure to Tenant to pay Fixed Rent.

The term “Real Estate Taxes” shall mean the sum of all taxes, rates and assessments, general and special, levied or imposed against the Building and Landlord’s Property and any improvements constructed thereon, including all taxes, rates and assessments, general and special, levied or imposed for school, public betterment, general or

local improvements. If the system of real estate taxation shall be altered or varied and any new tax shall be levied or imposed in the jurisdiction wherein Landlord’s Property is located, then any such new tax or levy shall be included within the term “Real Estate Taxes” The amount of the Real Estate Taxes which shall be deemed to have been levied or imposed with respect to Landlords’ Property and improvements shall be such amount as the legal authority imposing Real Estate Taxes shall have attributed thereto. In the absence of such attribution or if such legal authority shall include immovable other than Landlord’s Property and improvements in imposing such Real Estate Taxes, then such amount shall be established by Landlord in Landlord’s reasonable judgment.

In the event that Landlord obtains an abatement, reduction or refund of any Real Estate Taxes for a tax period during which Tenant was obligated to pay a share of the Real Estate Taxes, then Tenant shall receive its Proportionate Share of the net proceeds of such abatement, reduction or refund, and any interest paid to the Landlord on account of such abatement, reduction or refund, (after deduction of all reasonable costs, including legal and appraisal fees, incurred by Landlord in obtaining the same) but only to the extent and not in excess of any payment made by Tenant for such taxes as required under this Article 6. Landlord shall be under no obligation to seek such an abatement, reduction or refund. Tenant shall not contest by any proceedings the assessed valuation of Landlord’s Property or any part thereof for purposes of obtaining a reduction of its assessment or of any taxes.

Tenant shall pay prior to delinquency, all municipal, county, state or federal taxes which shall be levied, assessed or due and unpaid on any leasehold interest, on any investment of Tenant in the Premises, or on any personal property owed, installed or used by Tenant, or on Tenant’s right to occupy the Premises. Notwithstanding anything to the contrary, Tenant shall have the right at its sole cost and expense to contest the validity of and to seek an abatement of any of the foregoing taxes, excluding Real Estate Taxes.

7.QUIET ENJOYMENT

The Tenant, upon payment of the rent herein reserved and upon the performance of all the terms and conditions of this Lease, shall at all times during the Term and during any extension or renewal term, peaceably and quietly enjoy the Premises without any disturbance from Landlord or from any other person claiming through Landlord, subject, nevertheless, to the terms and conditions of this Lease and to the mortgages hereinafter mentioned.

8.USE OF THE PREMISES

A.The Premises may be used by Tenant or its assignees for the purpose of (1) receiving and shipping of research and manufacturing equipment; (2) light manufacturing  and assembly of research equipment and consumables and production-scale process equipment, performance testing of completed process equipment as is currently performed on the Premises and such larger equipment and manufacturing as Tenant’s customers may require; (3) laboratory research and development work; and (4) general administrative office work; and for no other purpose (hereinafter referred to “Permitted Use”); (5) sales/marketing activities including presentation of technical seminars and business meetings from time to time.

B.The Tenant shall not at any time use or occupy the Premises in violation of the certificate of occupancy or building permit issued for the Building or any applicable zoning ordinance. Landlord represents and warrants that the statements in the Lease of the nature of the business to be conducted on the Premises are lawful under the certificate of occupancy or building permit or is otherwise permitted by law.

9.ALTERATIONS

Except for those items specified elsewhere herein, no structural alterations, additions or improvements (hereinafter ‘‘Alterations’’) to the Premises shall be made by Tenant without the prior written consent of

Landlord, which shall not be unreasonably withheld. Tenant shall not paint over interior sandblasted brick walls. All work done in connection with any Alterations shall be done in a good and workmanlike manner employing materials of good quality and in compliance with all laws, rules, orders and regulations of governmental authorities having jurisdiction thereof. If Tenant employs outside contractors for Alterations to the Premises, Tenant shall be responsible to ensure that contractor abides by all reasonable procedures, rules and regulations as promulgated by the Landlord. Tenants shall indemnify and hold Landlord harmless from additional costs incurred in supplying services or repairing damage caused by Tenant’s contractors. Any such contractor shall be required to provide a certificate of liability insurance in the amount of $1,000,000.00 to perform work within the Building.  Any Alteration made by Tenant after such consent shall have been given, and any fixtures installed as part thereof shall, at Landlord’s option, become the property of Landlord upon the expiration or other sooner termination of this Lease. The Tenant shall yield up the Premises in good order and repair, reasonable wear and tear and damage by fire or casualty only excepted.

10.MAINTENANCE AND REPAIR

Except as otherwise provided in this Article and Articles 12 and 13, Landlord shall keep and maintain in good order and repairing the common facilities and structural portions of the Building including but not limited to the roof, exterior walls, windows, floor slabs, columns, elevators, public stairways and corridors, lavatories and utility systems and equipment external to the Premises (specifically excluding any such equipment installed by or on behalf of Tenant) serving the Premises of the Common Areas.

The Tenant shall make all non-structural repairs necessary to maintain the Premises in good order and repair, including, without limitation, all glass, doors and all interior utility systems and equipment serving solely the Premises exclusively and Tenant shall return to Premises to Landlord at the end of the Term in good condition, reasonable wear and tear and damage by fire or other casualty excepted. Tenant shall also be responsible for the cost of any repairs necessitated as the result of Tenant’s neglect, fault or excessive use of drainage facilities, or that of Tenant’s agents or employees.

All repairs made by either Landlord or Tenant shall be done in a good workmanlike manner in accordance with all applicable laws.

11.INSURANCE

b.     Tenant’s Insurance.  The Tenant shall save Landlord harmless and indemnified from and against all injury, loss, claim or damage to any person or property while on the Premises or Landlord’s Property arising out of the use or occupancy of the Premises by Tenant (unless caused by the act, neglect or default of Landlord, its employees, agents, licensees or contractors), and from and against all injury, loss, claim or damage to any person or property anywhere on the Premises or Landlord’s Property occasioned by any act, neglect or default of Tenant or of its employees, agents licensees or contractors. The Tenant shall maintain with respect to the Premises and Landlord’s Property comprehensive general liability and property damage insurance including the broad form comprehensive general liability endorsement and a contractual liability coverage endorsement in amounts not less than $2,000,000.00 combined single limit and an annual aggregate of at least $2,000,000.00. Such insurance shall insure Landlord as well as Tenant against injury to persons or damage to property as herein provided.

The Tenant shall maintain, at its sole cost and expense, fire and extended coverage insurance for all of its contents, furniture, furnishings, equipment, improvements, funds, personal property, floor coverings and fixtures located within or about the Premises, providing protection in an amount equal to One Hundred (100%) percent of the insurable value of said items.

All of Tenant’s insurance shall be with companies qualified to do business in Massachusetts, and shall be issued by insurance companies with a general policyholder’s rating of not less than A-13 and a financial rating of not less than Class X as rated in the most current ‘‘Best’s” Insurance Reports. Such insurance may be maintained by Tenant under a blanket policy or policies so-called, provided the coverage afforded Landlord is

not reduced or diminished by reason of the use of such blanket insurance policy, and provided further that the requirements set forth herein are otherwise satisfied.

In the event this Lease is extended beyond the original term hereof, and every five years thereafter, Tenant shall, upon written notice thereof from Landlord, increase the amount of the liability insurance required hereunder to an amount, which is the greater of:

a. The original amount of liability insurance required hereunder plus that percentage of said amount as is equal to the percent of increase, if any, in the Consumer Price Index for all urban consumers for Boston, Massachusetts published by the Bureau of Labor Statistics, U.S. Department of Labor (Index) as at the date of the required increase in liability insurance hereunder over the said Index as at the Term Commencement Date; or

b. The amount of liability insurance, as reasonably determined by Landlord, required in similar buildings in the Boston area.

The Tenant shall deposit with Landlord certificates of insurance that it is required to maintain under this Lease, at or prior to the Term Commencement Date, and thereafter, within twenty (20) days prior to the expiration of each such policy. Such policies shall provide that the policies may not be changed or canceled without at least (20) days’ prior written notice to Landlord.

The Tenant covenants that in the event it keeps upon the Premises or Landlord’s Property any substance of dangerous, inflammable or explosive characters or makes any use of the Premises which increases the rate of insurance on the Premises or Landlord’s Property, Tenant shall promptly pay to Landlord upon demand any such increase resulting there from, which shall be due and payable as additional rent hereunder.

11.2.Landlord’s Insurance.

Landlord shall maintain fire and extended coverage insurance on the Building (including the work performed under Section 3.1 herein) providing protection in any amount reasonably determined by Landlord to be adequate.

11.3.Waiver of Subrogation.

Any insurance carried by either party with respect to the Premises or property therein or occurrences thereon shall, if it can be so written without additional premium or with an additional premium, which the other party agrees to pay, include a clause or endorsement denying to the insurer rights of subrogation against the other party. Neither Landlord nor Tenant shall be liable to the other or to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage to any building, structure or other tangible property, or any resulting loss of income, or losses under worker’s compensation laws and benefits, even though such loss or damage might have been occasioned by the negligence of such party, its agents or employees if any such loss or damage is covered by insurance benefiting the party suffering such loss of damage or was required to be covered by insurance pursuant to this Lease.

12.DAMAGE TO THE PREMISES

12.1.        Landlord’s Right to Terminate.  If more than 30% of the net rentable square feet portion of the Premises or the Building is substantially damaged by fire or other casualty in a manner that would affect Tenant’s leasehold interest and ability to conduct its business, Landlord may terminate this Lease as of the date of such damage by giving Tenant written notice of such termination within sixty (60) days of such fire or casualty.

12.2.        Landlord’s Obligation to Repair.  In the event that Landlord elects not to terminate this Lease as aforesaid, then this Lease shall continue in full force and effect and Landlord shall promptly repair the damage and restore the Premises, excluding Tenant’s personal property, fixtures, furniture, equipment and floor coverings, to substantially the condition thereof immediately prior to such damage. Landlord’s obligation to repair such damage and restore the Premises shall be limited to the extent of the insurance proceeds and made available to Landlord. Landlord

shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting from delays in repairing such damage.

12.3.        Rent Abatement. For so long as such damage renders the Premises or a portion thereof unsuitable for the Permitted Use, a just and proportionately abatement of Fixed Rent, Operating Expenses and Real Estate Taxes  shall be made.

12.4. Tenant’s Option to Terminate. If the Premises are in Tenant’s reasonable judgment  rendered substantially unsuitable for the Permitted Use,  then Tenant may elect to terminate this Lease prior to the time such damage is repaired if an only if:

a.The Landlord fails to give written notice within sixty (60) days of said fire or casualty of its intention to restore the Premises; or

b.The Landlord fails to restore the Premises to a condition suitable for the Permitted Use within one hundred twenty (120~ days of said fire or casualty, provided such failure is not due to the action or inaction of Tenant, its employees or agents, or causes beyond the reasonable control of Landlord.

Tenant shall exercise its option to terminate by giving written notice to Landlord within thirty days after Landlord’s failure to notify or failure to restore, as specified above.

12.5. Definitions. The term “substantial damage” as used herein shall refer to damage of such character that the same cannot in the ordinary course be reasonably expected to be repaired within ninety (90) days from the time that such work would commence.

13.EMINENT DOMAIN

In the event that the whole of the Premises or Landlord’s Property shall be lawfully condemned or taken in any manner for public or quasi-public use, this Lease shall forthwith terminate as of the date of divesting of Landlord’s title.

In the event that only a part of the Premises or Landlord’s Property shall be so condemned or taken, then, if such condemnation or taking is Substantial as hereinafter defined, either Landlord or Tenant may by delivery of notice in writing to the other within sixty (60) days following the date on which Landlord’s title has been divested by such authority, terminate this Lease. “Substantial” shall mean any condemnation or taking which:

a.Results in the loss of reasonable access to the Premises;

b.Results in the loss of Tenant of twenty-five (25%) percent or more of the floor area of the Premises; or

c.Results in loss of facilities in the Building that supply heat, air conditioning, water, drainage, plumbing, electricity or other utilities to Premises.

If this Lease is not terminated as aforesaid or if such condemnation or taking is not substantial, then this Lease shall continue in full force and effect except that the Fixed Rent, Operating Expenses and Real Estate Taxes  shall be equitably abated as of the date of divesting of title. Landlord shall, with reasonable diligence and at its expense, restore the remaining portion of the Premises as nearly as practicable to the same condition as it was prior to such condemnation or taking. Landlord’s obligation to restore the remaining portion of the Premises shall be limited to the extent of the condemnation proceeds made available to Landlord.

In the event of any condemnation or taking, Landlord shall be entitled to receive the entire award in the condemnation proceedings, including any award made for the value of the estate vested by this Lease in Tenant, and Tenant hereby expressly assigns to Landlord any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof. Notwithstanding the foregoing, Tenant shall have the right to bring a separate condemnation proceeding for relocation expenses, unamortized leasehold improvements paid for by Tenant and trade fixtures payable in the manner and extent as, and if, provided by law.

14.LANDLORD’S SERVICES

14.1 Electric Current

a.             There is a separate electric meter (meters) for measuring electricity furnished to the Premises. Tenant shall contract with the company supplying electric current for the purchase and obtaining by Tenant of electrical current directly from such company, which shall be billed directly to, and paid for by, Tenant. This shall include all current used in the Premises, including but not limited to all electricity used for lighting, office equipment and machines.

b.             If Tenant shall require electrical current for use in the Premises in excess of the present capacities and if in Landlord’s reasonable judgment, Landlord’s facilities are inadequate for such excess requirements or such excess requirements will result in an additional burden on the Building systems and additional cost to Landlord on account thereof, then Landlord shall upon written request and at the sole cost and expense of Tenant, furnish and install such additional wires, conduits, feeders, switchboards and appurtenances as reasonably may be required to supply such additional requirements of Tenants, provided current therefore is available to Landlord, and provided further that the same shall be permitted by applicable laws and insurance regulations and shall not cause permanent damage to the Building or the Premises, cause or create a dangerous or hazardous condition, entail excessive or unreasonable alterations or repairs, or interfere with or disturb other tenants or occupants of the Building. Tenant shall reimburse Landlord on demand for all costs incurred by Landlord on account thereof.

c.             Tenant, at Tenant’s expense, shall purchase and install all replacement lamps (including, but not limited to, incandescent and fluorescent lights) used in the Premises.

d.             Landlord shall not in any way be liable to Tenant for any loss, damage or expense which Tenant may sustain or incur if the quantity, character or supply of electrical energy is changed or is no longer available or suitable for Tenant’s requirements.

e.             Tenant agrees that it shall not make any material alterations or material addition to the electrical equipment or appliances in the Premises without obtaining the prior written consent of Landlord in each instance, which consent will not be unreasonably withheld, and Tenant shall promptly advise Landlord of any other alterations or addition to such electrical equipment appliances.

14.2. Water. Landlord shall furnish cold water to the Premises or to a common area lavatory and drinking purposes. If Tenant requires uses or consumes water for any purpose other than for the aforementioned purposes, Landlord may (a) assess a reasonable charge for the additional water used or consumed by Tenant; or (b) install a water meter and thereby measure Tenant’s water consumption for all purposes. In the latter event, Landlord shall pay the cost of the meter and the cost of installation thereof and shall keep said meter and installation equipment in good working order and repair. Tenant agrees to pay for water consumed, as shown on said meter, together with the sewer use charge based on said meter charges as and when bills are rendered. On default in making such payment, Landlord may pay such charges and collect the same from Tenant as additional rent hereunder. All piping and other equipment and facilities for use of water outside the Building core will be installed and maintained by Landlord at Tenant’s sole cost and expense.

14.3. Gas. Landlord shall furnish any and all equipment  for the purpose of heating and air conditioning the Premises both during Tenant’s normal Business Hours, and Tenant shall pay, as additional rent hereunder, all costs in connection therewith. Landlord shall effect any necessary repairs or replacement of such equipments, while Tenant shall assume responsibility for any service contracts for such equipment and all customary maintenance and service costs associated therewith. If Tenant shall pay for repairs or replacement that is not within the scope of the customary service and maintenance then Landlord shall reimburse Tenant for such costs in a timely manner after presentation of paid invoices for such expense.

14.4. Interruption or Curtailment of Services. Landlord reserves the right, with notice, to interrupt, curtail, stop or suspend (a) the furnishing of elevator and other services, and (b) the operation of the plumbing and electric systems whenever necessary for repairs, alterations, replacements or improvements desirable or necessary to be made in the reasonable judgment of Landlord or whenever necessary due to accident or emergency, difficulty or inability in securing supplies or labor strikes, or any other cause beyond the reasonable

control of Landlord, whether such other cause be similar or dissimilar to those hereinabove specifically mentioned, until said cause has been removed. Except when caused by the gross negligence of Landlord or where such interruption, curtailment, stoppage or suspension continues for more than five (5) days there shall be no diminution or abatement of rent or other compensation due from Tenant to Landlord hereunder, nor shall this Lease be affected or any of Tenant’s obligations hereunder reduced, and Landlord shall have no responsibility or liability for any such interruption, curtailment, stoppage or suspension of services or system, except that Landlord shall exercise all due diligence to eliminate the cause of same.

14.5. Energy Conservation. Notwithstanding anything to the contrary contained in this Lease, Landlord may institute such reasonable policies, programs or measures as may be necessary, required or expedient for the conservation and/or preservation of energy or energy services, provided either the majority of similar buildings in Newton, Massachusetts are subject to similar policies, programs or measures, or such are necessary or required to comply with applicable governmental codes, rules, regulations or standards.

15.ACCESS

The Buildings shall remain open during all Business Hours, except as provided herein, and Tenant’s servants, employees, agents and business invitees shall have the free and uninterrupted right of access in common with others entitled thereto to the Premises during Business Hours. Subject to reasonable security measures, Tenant and its employees shall have access to the Premises at all other times.

16.SUBLEASE AND ASSIGNMENT

16. 1. Generally. Other than sublets or tenancies at will currently in effect with Tenant, Tenant shall not voluntarily, involuntarily or by operation of law assign, transfer, mortgage or otherwise encumber the Lease or any interest of Tenant therein, in whole or in part of the Premises or permit the Premises or any part thereof to be used or occupied by others, without the prior written consent of Landlord. Any subletting or assignment pursuant to this Article shall be subject to and conditioned upon the following:

a.At the time of any proposed subletting or assignment, Tenant shall not be in default under any of the terms, covenants or conditions of this lease;

b.The sub-lessee or assignee shall occupy only the Premises and conduct its business in accordance with the Permitted Use;

c.Prior to occupancy, Tenant and its assignee or sub-lessee shall execute, acknowledge and deliver to Landlord a fully executed counterpart of a written assignment of lease or a written sublease, as the case may be, by the terms of which:

1.In case of an assignment, Tenant shall assign to such assignee Tenant’s entire interest in this Lease, together with all prepaid rents hereunder, and the assignee shall accept said assignment and assume and agree to perform directly for the benefit of Landlord all of the terms, covenants and conditions of this Lease on Tenant’s part to be performed; or

2.In case of a subletting, the sub-lessee hereunder shall agree to be bound by an to perform all of the terms, covenants and conditions of this Lease on the Tenant’s part to be performed, except the payments or rents, charges and other sums reserved hereunder, which Tenant shall continue to be obligated to pay and shall pay to Landlord;

d.Tenant shall pay to Landlord monthly one-half of the excess of the rents and other charges received by Tenant pursuant to the assignment or sublease over the rents and other charges reserved to Landlord under this Lease attributable to the space assigned or sublet;

e.Tenant shall acknowledge that, notwithstanding such assignment or sublease and consent of Landlord thereto, Tenant shall not be released or discharged from any liability whatsoever under this Lease and will continue to be liable with the same force and effect as though no assignment or sublease had been made; and

f.Tenant shall pay to Landlord the sum of Five Hundred ($500) Dollars to cover Landlord’s administrative costs, overhead and attorneys’ fees in connection with each such assignment or subletting.

16.2. Landlord’s Consent. Landlord shall not unreasonably withhold its consent to a proposed transfer, sublease or assignment pursuant to the preceding Section 16.1. Landlord’s failure to consent shall be deemed unreasonable if the conditions set forth in Subsections 16.1 (a) - (f) are met and if:

a.The proposed assignment or subletting is to be made to a parent, subsidiary or successor corporation in connection with the reorganization of Tenant. to a partnership of which Tenant is a general partner, or with respect to a sale of Tenant’s stock or assets or merger with another entity, provided with net worth of such successor is at least equal to the net worth of Tenant as of the Term Commencement Date and the successor has a good reputation in the community; or

b.The proposed assignee or subtenant has a good credit rating, which shall be at least equal to that of Tenant as of the Term Commencement Date, and demonstrable ability to comply with the terms and conditions of this Lease, a good reputation in the community and the proposed use by such subtenant or assignee (even though Permitted Use) could not in Landlord’s reasonable opinion be expected to detract from the character of the Building at the time of the proposed assignment or sublease.

16.3. No. Waiver. The consent by Landlord to an assignment or subletting shall not in any way be construed to relieve Tenant from obtaining the express consent of Landlord to any further assignment or subletting for the use of all or any part of the Premises, nor shall the collection of rent by Landlord from any assignee, sub lessee or other occupant after default by Tenant be deemed a waiver of this covenant or the acceptance of such assignee, sub lessee or occupant as tenant or a release of Tenant from the further performance by Tenant of the obligations in this Lease on Tenant’s part to be performed.

17.SUBORDINATION

This Lease is subject and subordinate to any ground leases and real estate mortgages to any lender prior to or subsequent to the date to execution and delivery of this Lease and to all renewals, modifications, consolidations, replacements or extensions thereof, provided that each such ground lessor or mortgagee enters into an agreement recognizing Tenant under this Lease and providing that, in the event of foreclosure, Tenant shall remain undisturbed under this Lease if Tenant is not in default under any of the terms and conditions of the Lease. In confirmation of the foregoing, Tenant shall, upon the request of Landlord, promptly execute and deliver all such instruments as may be appropriate to subordinate this Lease to any mortgages securing notes issued by Landlord and to all advances made there under and to the interest thereon and all renewals, replacements and extensions thereof. At the request of Landlord, Tenant shall join in a subordination agreement requested by any mortgagee who desire to subordinate its mortgage to this Lease, provided, however, that the provisions of said mortgage relating to the receipt and application of insurance proceeds and condemnation awards shall in no event be subordinated to this Lease.

18.TENANT’S COVENANTS

The Tenant covenants and agrees as follows:

a.     Tenant shall perform promptly all of the obligations of Tenant set forth in this Lease, and shall pay when due all Rent, Fixed or additional, and all charges which by the terms of this Lease are to be paid by Tenant.

b.     Tenant shall use the Premises only for the Permitted Use, as set forth in Article 8.

c.     Tenant shall pay all costs on demand for all loss or damage suffered or incurred by Landlord caused by any nuisance or neglect suffered on the Premises or Landlord’s Property due to Tenant to its agents, employees, invitees or assignees.

d.     Tenant shall keep the interior of the Premises neat and in good order, repair and condition, shall keep all interior glass in good condition and shall replace any exterior glass broken by Tenant, its employees or agents with glass of the same quality.

e.     Tenant shall permit Landlord and its agents to examine the Premises at reasonable times and upon reasonable notice to Tenant and to show the Premises to prospective tenants commencing one year prior to the expiration of this Lease, unless and until Tenant shall have provided Landlord with notice of its intention to extend the Term hereof, in accordance with the provisions Section 36 herein below.

f.      Tenant shall pay all costs for utilities that are not supplied by Landlord that are charged directly to Tenant by any utility company.

g.     Tenant shall comply with all federal, state and municipal laws, codes and regulations and governmental health, safety and police requirements and obtain all required licenses and permits relating to the Premises or Tenant’s use thereof.

h.     Tenant shall cause any furniture, equipment or supplies to be moved in our out of the Building only upon the elevator designated by Landlord of that purpose and then only during such hours as may be established by Landlord.

i.      Tenant shall not injure, overload, deface or otherwise harm the Premises or Landlord’s Property, commit any nuisance, permit the emission of any objectionable odor or noise from the Premises, make any use of the Premises or Landlord’s Property which will increase the cost of Landlord’s insurance (unless Tenant pays for any such increased cost), store or dispose of trash or refuse on or otherwise obstruct the driveways, walks, halls, parking areas or other common areas.

j.      Tenant shall not suffer or permit strip or waste.

k.     Tenant shall not permit any use that may be deemed obnoxious to any other tenants in the Building or create a public or private nuisance.

l.      Tenant shall not place or maintain any merchandise, vending machines or other articles for the sale of goods or services on any sidewalk or ways adjacent to the Premises, or elsewhere on the exterior or in the interior of the Premises, except for sole us of company employees within the demised Premises.

m.    Tenant shall not conduct any auction, fire, bankruptcy or going-out-of-business sale without the approval of Landlord, which shall not be unreasonable witheld, nor use or permit the use of any sound apparatus for reproduction or transmission of music or sound that is audible beyond the physical interior of the Premises.

n.     Tenant shall not install any window air conditioning unit in or upon the Premises.

o.     At the expiration of the term or earlier termination of this Lease, Tenant shall surrender all keys to the Premises, remove all of its trade fixtures and personal property in the Premises and all Tenant’s signs and signage wherever located, repair all damage caused by such removal and yield up the Premises (including all Alterations made by Tenant), subject to Article 9 of this Lease, broom-clean and in the same good order and repair in which Tenant is obliged to keep and maintain the Premises by the provisions of the Lease. Any property not so removed shall be deemed abandoned and may be removed and disposed of by Landlord in such manner as Landlord shall determine and Tenant shall pay Landlord the entire cost and expense incurred by it for such removal and disposition and in making any incidental repairs and replacements to the Premises.  Tenant shall also pay for the use and occupancy of the Premises during performance of its obligations under this Article.

p.     Tenant shall not place a load upon any floor of the Premises or building exceeding the floor load per square foot area which such floor was designed to carry or structurally reinforced to permit and which is allowed by law. Business machines and mechanical equipment shall be placed and maintained by Tenant at Tenant’s expense in settings sufficient to absorb and prevent vibration, noise and annoyance. Any moving of such equipment shall be at the sole risk and hazard of Tenant and Tenant shall indemnify and save Landlord harmless against and from any liability, loss, injury, claim or suit resulting directly or indirectly from such moving.

q.     Other than existing installed signs, Tenant shall not place any signs or other forms of advertising on or about the exterior of the Premises or the Building, upon any sidewalks or ways adjacent to the Building or within the interior of the premises that are visible from the exterior of the Building with out the prior written consent of Landlord which shall not be unreasonably withheld. No signs shall be affixed in any manner to the windows of the Premises. Tenant shall hang it own drapes

or blinds which, when viewed from the exterior of the Building shall be white, whether the drapes or blinds are open or drawn closed.  Landlord acknowledges that Tenant’s present signage is acceptable and may remain throughout this Lease.

19.EVENTS OF DEFAULT

The following shall be deemed to be defaults hereunder:

a. If Tenant shall fail to pay the Fixed Rent, Operating Expenses or Real Estate Taxes when due hereunder and such failure continues for more than ten (10) business days after the date due, or if Tenant fails to pay any other charges provided for hereunder and such failure continues for more than ten (10) business days after written notice from Landlord designating such failure; or

b. If Tenant shall fails to comply with any other material obligation or covenant hereunder and such failure continues for more than thirty (30) days after written notice from Landlord to Tenant specifying such failure. Notwithstanding the foregoing, if such failure by its nature cannot be cured within thirty (30) days, Tenant shall be given such additional time as is reasonably necessary, provided Tenant has commenced diligently to correct said failure and thereafter diligently pursues such correction to completion; or

c. If any assignment shall be made by Tenant or any guarantor of this Lease for the benefit of creditors; or

d.If Tenant’s leasehold interest shall be taken on execution; or

e.     If a lien or other involuntary encumbrance is filed against Tenant’s leasehold interest to Tenant’s other property, which is not discharged or bonded against within forty five (45) days thereafter; or

f.      If a petition is filed by or against Tenant (not discharged within 45 days) of the Lease for adjudication as a bankrupt, or for reorganization or an arrangement under any provision of the Federal Bankruptcy Code as then in force and effect (not discharged with sixty (60) days from the filing of such petition) ; or

g.     If a receiver has been appointed for any part of Tenant’s property.

20.RIGHTS OF LANDLORD UPON TENANT’S DEFAULT.

20.1 Landlord’s Remedies. In the event any material default shall occur (notwithstanding any waiver, license or indulgence granted by Landlord with respect to the same or any other default in any former instance), Landlord shall have the right, then or at any time thereafter, at its sole election either:

a.     To terminate this Lease by written notice to Tenant, which termination shall take effect on the date of Landlord’s dispatch of said notice or on any later date (on or prior to the expiration of the then-current portion of the Term) specified in Landlord’s termination notice; or

b.     To enter upon and take possession of the Premises (or any part thereof in the name of the whole) without demand or notice, and repossess the same as of the Landlord’s former estate, expelling Tenant and those claiming under Tenant, forcibly if necessary, without being deemed guilty of any manner of trespass and without prejudice to any other remedy for any default hereunder.

Landlord’s repossession of the Premises under this Article shall not be construed to effect a termination of the Lease, unless Landlord sends Tenant a written notice of termination as required hereunder.

20.2. Re-letting. Landlord shall have the right (as its sole election and whether or not this Lease shall be terminated under Section 20.1) to re-let the Premises or any part thereof for such period or periods (which may extend beyond the Term and at such rent or rents and upon such other terms and conditions as Landlord may deem advisable, and in connection with any such re-letting,

20.3. Removal of Goods. If Landlord shall terminate this Lease or take possession of the Premises by reason of a default, Tenant, and those claiming under Tenant, shall forthwith remove their goods and effects from the Premises within thirty (30) business days of receipt of a notice of termination or Landlord’s taking possession. If Tenant or any such claimant shall fail so to remove forthwith, Landlord, without liability to

Tenant or to those claiming under Tenant, may remove such goods and effects and may store the same for the account of Tenant or of the owner thereof in any place selected by Landlord or, at Landlord’s sole election, Landlord may sell the same at public auction or at private sale on such terms and conditions as to price, payment and otherwise as Landlord, in its sole judgment, may deem advisable. Tenant shall have the right to reimburse itself from the proceeds of any such sale for all such costs paid or incurred by Landlord. If any surplus sale proceeds shall remain after such reimbursement, Landlord may deduct from such surplus any other sum due to Landlord hereunder and shall pay over to Tenant the remaining balance of such surplus sale proceeds, if any.

20.4. Current Damages. No termination or repossession provided for in Section 20.1 shall relieve Tenant (or any guarantor of Tenant’s obligations hereunder) of its liabilities and obligations hereunder or under its instrument of guarantee, all of which shall survive such termination or repossession. In the event of any such termination or repossession, Tenant shall pay Landlord, in advance, on the first day of each month (and pro rata for the fraction of any month) for what would have been the entire balance of the original Term or of the then current extension period, one-twelfth of the Annual Rental for the Premises, as defined in Section 20.5 hereof, less the proceeds (if any) of any re-letting of the Premises which remain after deducting Landlord’s expenses in connection with such re-letting. Such expense shall include, without limitation, removal, storage and the cost of painting and refurbishing the Premises and attorneys’ and brokers’ fees.

20.5. Annual Rental. The Annual Rental for the Premises shall be the total of (a) the Fixed Rent including Tenant’s Share of Real Estate Taxes and Operating Expenses, and all other charges payable by Tenant (whether or not to Landlord) for the lease year ending next prior to such termination or repossession; (b) the cost of heating the Premises to prevent the freezing of pipes while the Premises remains vacant; (c) any increase in the premiums payable by Landlord for any insurance coverage maintained with respect to the Premises while the Premises remains vacant, if the increases are attributable to the vacancy of the Premises; (d) the cost of any repairs to the Premises which become necessary during the vacancy of the Premises and which would have been required of Tenant under the Lease if the Lease had not been terminated; and (e) the cost of any repairs to the Premises which, notwithstanding that they became necessary because of the acts of some other person(s), would probably not have become necessary if the Premises had not been vacant.

20.6. Liquidated Damages. In lieu of any other damages or indemnity and in lieu of full recovery by Landlord of all sums payable under all the foregoing provisions of this Article, Landlord may by written notice to Tenant, at any time after termination of this Lease or repossession of the Premises elect to recover, and Tenant shall thereupon pay, liquidated damages. The liquidated damages shall be equal to (a) the aggregate of the Fixed Rent and additional rent accrued in the twelve months ended next prior to such termination or repossession; plus (b) the amount of rent of any kind accrued and unpaid at the time of termination or repossession; and less (c) the amount of any recovery by Landlord under the foregoing provision of this Article up to the time of payment of such liquidated damages. Notwithstanding the foregoing, the liquidate damages shall never be more than the Fixed Rent and additional rent due for the remainder of the Term. Nothing contained in this Lease shall, however, limit or prejudice the right of Landlord to prove for and obtain in proceedings for bankruptcy or insolvency by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal tom, or less than the amount of the loss or damages referred to above.

20.7. Remedies Cumulative.   Any and all rights and remedies which Landlord may have under this Lease and at law and equity shall be cumulative and shall not be deemed inconsistent with each other, and any two or more of all such rights and remedies may be exercised at the same time insofar as permitted by law.

20.8. Landlord’s Right to Cure Defaults. Landlord shall have the right but not the obligation, to cure at any time and without notice, any default by Tenant under the Lease. Whenever Landlord so elects, all costs and expenses incurred by Landlord, including reasonable attorney’s fees from curing a default, shall be paid by Tenant to Landlord on demand, as additional rent hereunder, together with lawful interest thereon from the date of payment by Landlord to the date of payment Tenant.

20.9. Costs of Enforcement. Tenant shall pay, within seven (7) business days after receipt of Landlord’s bill therefore, reasonable costs and expenses (including without limitation reasonable attorneys’ fees) incurred by Landlord, in enforcing Tenant’s obligations or Landlord’s rights under this Lease.

21.NO WAIVER: NO ACCORD AND SATISFACTION

21.1. No Waiver.  Any consent or permission by Landlord or Tenant to any act or omission which otherwise would be a default hereunder or any waiver by Landlord or Tenant of the terms, covenants or conditions herein, shall not in any way be held or construed to operate so as to impair the continuing obligation of any term, covenant or condition herein, or to permit any similar acts or omissions. The failure of Landlord to seek redress for a violation of, or to insist upon the strict performance of, any covenant, condition or obligation of this Lease shall not be deemed a waiver of such violation nor prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of any rent with knowledge of any default hereunder shall not be deemed to have been a waiver of such default, unless such waiver is in writing signed by the Landlord.

21.2. No Accord and Satisfaction.   No acceptance by Landlord of a lesser sum than any sum due under any provision of this Lease shall be deemed to be other than on account of the earliest installment of such sum due, nor shall any endorsement or statement on any check or letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to any rights to recover the balance of such installment or pursue any other remedy in this Lease provided.

22.RECORDING

The Landlord and Tenant agree not to record this Lease, but each party agrees, on request of the other, to execute, acknowledge and deliver a notice of lease in recordable form, which may be recorded with Middlesex South District Registry of Deeds. Such notice shall expressly state that it is executed pursuant to the terms of this Lease and is not intended to vary the terms and conditions of this Lease, and in no event shall such notice set forth the rent or other charges payable by Tenant under this Lease.

23.LANDLORD’S LIABILITY

Landlord shall not be liable for any breach of covenant during the Term unless the same shall occur during and within the period of time that it is the owner of and in possession of Landlord’s Property. In no event and under no circumstances shall Landlord be liable to Tenant for any consequential damages in connection with any act of Landlord, its agents or servants. The placement by Tenant of any goods, wares and merchandise in the Premises or any areas within Landlord’s Property shall be at the sole risk and hazard of Tenant. Notwithstanding anything to the contrary contained in this Lease, it is specifically understood and agreed that the monetary liability of Landlord hereunder shall be limited to its equity in the Premises in the event of a default under this Lease by Landlord. In furtherance of the foregoing, Tenant hereby agrees that any judgment it may obtain against Landlord as a result of a breach of any of the terms, covenants or conditions hereof shall be enforceable solely against Landlord’s fee interest in the Premises.

24.FORCE MAJEURE

In any case where either party is required to do any act, the time for the performance thereof shall be extended by a period equal to any delay caused by or resulting from Acts of God, war, civil commotion, fire or other casualty, labor difficulties, shortage of labor, materials or equipment, governmental regulations, or other causes beyond such party’s reasonable control, whether such times are designated by a fixed time or a “reasonable time” This clause shall not be applicable to any payment of rent or other charges due from Tenant to Landlord.

25.MECHANICS LIENS

The Tenant shall not permit any mechanics’ or material men’s or other liens to stand against the Premises, the Building or Landlord’s Property for any labor or materials furnished Tenant in connection with work of any character performed on the Premise by, for, or at the direction of Tenant. Any such lien shall be discharged by payment in full within then (10) business days thereafter or by filing of the bond required by law. If Tenant

fails to discharge any such lien, Landlord may do so at Tenant’s expense and Tenant shall reimburse Landlord for any expense or cost incurred by Landlord in connection therewith, within fifteen (15) business days of receipt of Landlord’s bill therefore.

26.ESTOPPEL CERTIFICATE(S)

Tenant shall, at any time during the Term, within ten (10) days after Landlord’s request therefore, delivery a duly executed and acknowledge written instrument to Landlord to a person or entity specified by Landlord in a form reasonably satisfactory to Landlord certifying  to the extent accurate:

a.     That the Lease is unmodified and in full force and effect, or, if there has been any modification, that the same is in full force and effect, as modified and stating any such modification;

b.     Whether or not there are any existing setoffs or defenses against the enforcement of any of the terms, agreements, covenants and conditions of the Lease and any modifications thereof on the part of Tenant to be performed or complied with, and if so, specifying the same; and

c.     The date to which Fixed Rent and all additional rent and other charges have been paid.

It is intended that any estoppel certificates delivered by Tenant pursuant to this Article may be relied upon by any other party with whom Landlord may be dealing.

The failure by Tenant to deliver timely the estoppel certificates shall constitute as to any person entitle to rely upon such statements an acknowledgment that the Lease is unmodified and in full force and effect and a waiver of any defaults which may exist prior to the date of such notice. In the event of such failure, Tenant also authorizes Landlord to act as Tenant’s attorney-in-fact to prepare and deliver such certificate on Tenant’s behalf, and Tenant shall be deemed bound thereby to the party to whom such certificate is sent, upon Landlord’s furnishing a copy of the certificate to Tenant.

27.DEFINITIONS

The words “Landlord” and “Tenant” as used herein shall include their respective heirs, executors, administrators, successors, representatives, assigns, invitees, agents, and servants. The words “it”, “he” and “him” where applicable apply to the Landlord or Tenant regardless of gender, number, corporate entity, trust or other body. If more than one party signs this Lease as Tenant, the covenants, conditions and agreements of Tenant shall be joint and several obligations of each party.

28.SEPARABILITY CLAUSE

If any provision in this Lease (or portion of such provision) or the application thereof to any person or circumstance is held invalid, the remainder of the Lease (or the remainder of such provision) and the application thereof to other persons or circumstances shall not be affected thereby.

This Lease may be executed in any number of counterparts and each fully executed counterpart shall be deemed an original.

29.NOTICES

Any notices required under this lease shall be in writing and delivered by hand or mailed by registered or certified mail to Tenant at the Premises or to Landlord care of its Management Agent, Creative Development Co., 77 Franklin Street, Boston, Massachusetts 02110. Landlord or Tenant may, by proper notice to the other as provided herein, change its notice address.

30.HOLDING OVER

If for any reason Tenant retains possession of the Premises or any part thereof after the termination of the Term or any extension thereof, such holding over shall constitute a tenancy from month to month, terminable by either party upon thirty (30) days prior written notice to the other party, and Tenant shall pay Landlord monthly rental during the month to month tenancy computed as the rent (including Fixed Rent and all additional rent) payable hereunder for the final month

of the last year of the Term prior to such holding over plus one hundred (1 00%) percent of said rent. The month-to-month tenancy shall otherwise be on the same terms and conditions as set forth in the Lease, as far as applicable.

31.HAZARDOUS WASTE

Tenant shall not generate, store or spill upon, dispose of or transfer to or from the Premises or Landlord’s Property, any hazardous waste materials in violation of applicable City, State or Federal laws. Any such actions shall be a default hereunder.

Tenant agrees that if it or anyone claiming under it shall generate, store or spill upon, dispose of our transfer to and from the Premises or Landlord’s Property any hazardous waste materials, it shall remove the same in the manner provided by applicable laws (federal, state and local) and the rules and regulations promulgated there under (hereinafter such laws, rules and regulations shall be referred to as ‘‘Laws’’). Furthermore, Tenant shall repair and restore any portion of the Premises and Landlord’s Property, which it shall disturb in removing said hazardous waste materials to the condition, which existed prior to Tenant’s disturbance thereof.

For purposes of this Article, “hazardous waste materials” shall be deemed to be any materials defined as such by any Law applicable to Landlord’s Property. Tenant shall dispose of any hazardous waste hereunder within the earlier of:

a.within the time periods specified by Law; or

b.within the time period ordered by any governmental agency or official.

If Tenant fails to perform any such obligation, Landlord shall have the right, but not the obligation, to enter upon the Premises and to perform Tenant’s obligations hereunder, including the payment of money and the performance of any other act. All sum s so paid by landlord and all necessary incidental costs and expenses in connection therewith shall be paid by Tenant to Landlord on demand as additional rent hereunder, and Landlord shall have the same rights and remedies for the non-payment thereof as for the non-payment of rent. Notwithstanding any such re-entry by Landlord, Tenant shall remain primarily liable for any violation of any applicable Laws, and Tenant shall indemnify and hold Landlord harmless from and against all injury, loss claim or damage in connection therewith.

Landlord and Tenant mutually agree to promptly deliver to the other any notices, orders or similar documents received from any governmental agency or official concerning hazardous waste materials affecting Landlord’s Property.

The obligations of Tenant contained herein shall survive the expiration or termination of the Lease.

32.GOVERNING LAW

This Lease shall be governed exclusively by the provisions hereof and by the laws of the Commonwealth of Massachusetts, as the same may from time to time exist.

33.LEASE AMENDMENTS

Tenant acknowledges that amendments to this Lease may be required in connection with the financing of Landlord’s Property and Tenant hereby agrees that it will enter into any reasonable modifications requested by a mortgage in connection with such financing, provided the same do not (a) increase the Fixed Rent or additional rents payable to Tenant or increase Tenant’s financial obligations hereunder; (b) reduce or extend the Term hereof except as otherwise provided in this Lease; (c) change the Permitted Use; or (d) materially effect the rights and obligations of Tenant hereunder.

34.BROKERAGE

Tenant warrants and represents that it has dealt with NO broker in connection with the consummation of this Lease and in the event a brokerage claim is made against Landlord predicated upon other prior dealings with Tenant, Tenant shall defend the claim against Landlord and save harmless and indemnify Landlord on account of loss, cost or damage which may arise by reason of such claim.  Landlord warrants and represents that it has not entered into any exclusive listing so-called or other brokerage agreement that would require the payment of a brokerage fee.

35.WAIVER OF COUNTERCLAIMS

In the event Landlord commences any proceedings for nonpayment of rent (Fixed Rent or additional rent) or for recovering possession of the Premises, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding except for compulsory counterclaims. This shall not, however, be construed as a waiver of the Tenant’s right to assert such claims in any separate action or actions brought by Tenant.

36.OPTION TO EXTEND

Tenant shall have the option to extend this lease for two additional terms each consisting of a period of two (2) years provided that there has been no approved assignment of this Lease on the same terms and conditions provided herein except that:

a.             The annual Fixed Rent for the term of the 1st extension period shall be Four Hundred Twenty Two Thousand Two Hundred Eighty Seven ($422,287.00) Dollars payable in equal monthly installments of $35,190.59 ($13/SQFT for 31,712 SQFT on 1st and 2nd floors of 30 Ossipee Road, $4.50/SQFT for the Basement Space, and $13/SQFT for 192 SQFT for the Chestnut Street Space.

b.        The annual Fixed Rent for the term of the 2nd extension period shall be Four Hundred Fifty Five Thousand Seventy Eight ($456,626.00) Dollars payable in equal monthly installments of $37,923.17 ($14/SQFT for 31,712 SQFT on 1st and 2nd floors of 30 Ossipee Road and $5/SQFT for the Basement Space, and $14/SQFT for 192 SQFT for the Chestnut Street Space.

Tenant’s right to exercise the extension option is conditioned upon Tenant’s performance of all of the duties and obligations on its part to be performed under this Lease so that, at the time of the exercise of said option, Tenant shall not be in default hereunder.

Tenant shall exercise its option to extend by giving written notice thereof to Landlord by certified mail, return receipt requested, no earlier than fifteen (15) months before and no later than sixty (60) days before the expiration of the existing Term or any extension thereof.

37.LANDLORD’S TITLE

Landlord represents that it has good and clear, record and marketable title to Landlord’s Property, subject to encumbrances of record.

38.PRIOR LEASE. 

This Lease shall supersede and replace the prior Lease between Landlord and Tenant dated May 23, 1997, as amended by Lease Amendment and Modification Agreement dated October 19, 2001.  Landlord acknowledges that Tenant has fulfilled all of its obligations under said Lease as amended.

Signatures on following page

IN WITNESS WHEREOF, the parties hereunto set their hands and seals as of November    , 2006.

TENANT:		LANDLORD:
MFIC Corporation		King Real Estate Corp as
		Trustee of
		1238 Chestnut Street Trust
By:	/s/ Irwin Gruverman	By:	/s/ John H. Finley, III
Irwin Gruverman,		John H. Finley, III,
CEO & Chairman,		Vice President and Treasurer,
MFIC Corporation		King Real Estate Corp.

EX-10.70

Exhibit 10.70

TD Banknorth, N.A.

17 New England Executive Park

2nd Floor

Burlington, MA 01803

TDBanknorth.com

November 20, 2006

Microfluidics Corporation as Agent

30 Ossipee Road

Newton, MA 02464-9101

Attn: Dennis P. Riordan, Controller

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

Gentlemen:

Reference is made to the Loan Agreement between the Borrower and the Lender and the Transaction Documents. The Agreement is hereby amended, effective immediately as follows:

Section 1.01 the term for “Debt Service Coverage Ratio” is hereby deleted in its entirety and the following new terms substituted therefore, as follows:

“Debt Service Coverage Ratio” shall mean, during the applicable period, that quotient equal to (a) EBITDA of the Borrower plus Share Based Compensation minus distributions minus Cash Taxes of the Borrower, divided by fixed charges of the Borrower, that is,

EBITDA + Share Based Compensation - distributions - Cash Taxes

Fixed Charges

“EBITDA” shall mean, for the applicable period, income from continuing operations before the payment of interest and taxes, plus depreciation and amortization, determined in accordance with generally accepted accounting principles.

“Share Based Compensation” shall mean, during the applicable period, the non cash expense relating to options granted to employees and others as detailed in the Borrower’s condensed consolidated statements of cash flows from operating activities, determined in accordance with generally accepted accounting principles.

“Cash Taxes” shall mean, during the applicable period, those taxes actually paid by the Borrower.

Nothing contained herein, nor shall any correspondence between the Borrower and the Bank alter or impair the demand nature of the Borrower’s Obligations to the Bank under the Loan Agreement.

Except as specifically amended hereby, the Loan Agreement remains in full force and effect and the Borrower reaffirms all representations and warranties contained therein, as of the date hereof.

Please acknowledge your assent and agreement to the foregoing by signing this letter in the space provided and returning it to the undersigned, whereupon it shall take effect as an instrument under seal.

	Very truly yours,
	TD BANKNORTH, N.A.
By:	/s/ Brant A. McDougall
	Brant A. McDougall, Senior Vice President

ACKNOWLEDGED AND AGREED TO:
MFIC Corporation
By:	/s/ Irwin J. Gruverman
	Irwin J. Gruverman, Chairman and CEO
Date:		12/07/06
Microfluidics Corporation
By:	/s/ Irwin J. Gruverman
Date:		12/07/06

2

EX-10.71

Exhibit 10.71

March 20, 2007

Clifford A. Teller
Managing Director
Director of Investment Banking
Maxim Group LLC
405 Lexington Avenue
New York, NY 10174

Re: General Financial Advisory and Investment Banking Services Agreement between Maxim Group LLC (“Maxim”) and MFIC Corporation (the “Company” or “MFIC”) dated November 17, 2004 (the “Agreement”)

Dear Cliff,

Pursuant to Maxim’s warrant to purchase 100,000 shares of the Company’s common stock that was part of the non-cash consideration paid to Maxim under the above Agreement, if a registration statement covering the sale of the shares issuable upon exercise of Maxim’s Common Stock Warrant was not declared effective on or before March 31, 2006, the Company would have been required to issue to the holder upon exercise of the Common Stock Warrant an additional warrant to purchase shares of common stock of the Company.  The Company on February 24, 2006 requested that Maxim extend the date by when the registration statement must become effective by either 30 days (until April 30, 2006) or 60 days (until May 30, 2006) depending upon whether the Securities and Exchange Commission (the “SEC”) elected to conduct a full review of the registration statement. Maxim granted such requested extension.

The SEC did not declare the SB-2 Registration effective by Notice of Effectiveness until June 5, 2006.

We have assumed that the imposition of a penalty if the Company does not meet the extended requirement for the effectiveness of the registration statement was prompted by a need to ensure that: (a) the Company would diligently take action to make the shares underlying the Maxim warrant salable, and (b) Maxim would want be able to exercise the Warrant and sell the shares if it so desired. We believe that we have exercised reasonable due diligence but find ourselves in a position where regulatory authorities did not act to issue a Notice of Effectiveness to the Company upon the filed registration statement within the period of extension granted by Maxim. We also note that the trading price of the Company’s stock during the five day period where the Company did not benefit from Maxim’s extension was well below the exercise “strike” price of the Warrant.  Given the above circumstances, we believe that Maxim would not want to penalize MFIC for the five day gap in time to get the registration statement effective, especially as it was beyond our control and did not prejudice Maxim.

If you are amenable to granting to us a waiver of Maxim’s right to receive additional warrants because of the delay in declaration of effectiveness of the SB-2 Registration until June 5, 2006, please so indicate by signing below and returning this letter.

We ask that you respond promptly as we will have to revise our Form 10-K disclosure regarding the Maxim Warrant.

Thank you for your assistance and cooperation.

Yours truly,		Maxim Group LLC
/s/ IRWIN GRUVERMAN
Irwin Gruverman	By:	/s/ CLIFFORD A. TELLER
CEO and Chairman	Title:	Director of IB
MFIC Corporation	Date:	3/28/07

EX-23.(A)

Exhibit 23(a)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement Nos. 333-115006 and 333-132895 on Form SB-2 and Registration Statement Nos. 33-6300, 33-19372, 33-38928, 33-38925, 33-86726, 333-14607, 333-29949, 333-85988, and 333-99233 of MFIC Corporation (the “Company”) on Form S-8 of our report dated March 12, 2007, pertaining to the consolidated financial statements and schedules of MFIC Corporation which appears in the Annual Report on Form 10-K for the year end December 31, 2006.

/s/ UHY LLP

Boston, Massachusetts
March 28, 2007

EX-23.(B)

Exhibit 23(b)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement Nos. 333-115006 and 333-132895 on Form SB-2 and Registration Statement Nos. 33-6300, 33-19372, 33-38928, 33-38925, 33-86726, 333-14607, 333-29949, 333-85988, and 333-99233 of MFIC Corporation (the “Company”) on Form S-8 of our report dated March 12, 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 year end December 31, 2005.

/s/ Brown & Brown, LLP

Boston, Massachusetts
March 28, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Irwin J. Gruverman, hereby certify that:

1.I have reviewed this Annual Report on Form 10-K of MFIC Corporation (the “Company”);

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

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

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

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

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

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

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

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

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

Date: March 28, 2007

/s/ IRWIN J. GRUVERMAN

Irwin J. Gruverman

Chief Executive Officer (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Dennis P. Riordan, hereby certify that:

1.I have reviewed this Annual Report on Form 10-K of MFIC Corporation (the “Company”);

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

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

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

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

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

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

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

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

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

Date: March 28, 2007

/s/ DENNIS P. RIORDAN

Dennis P. Riordan

Controller (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

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

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

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

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

	/s/ IRWIN J. GRUVERMAN
	Irwin J. Gruverman
	Chief Executive Officer
Date: March 28, 2007

EX-32.2

Exhibit 32.2

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

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

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

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

	/s/ DENNIS P. RIORDAN
	Dennis P. Riordan
	Controller
Date: March 28, 2007