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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

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

For the fiscal year ended December 31, 2002

Commission File Number: 0-11625

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

Delaware(State or other jurisdiction of
incorporation or organization)

04-2793022(I.R.S. Employer
Identification No.)30 Ossipee Road, P.0. Box 9101
Newton, Massachusetts(Address of principal executive offices)

02464-9101(Zip Code)


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

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

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

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

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

The
aggregate market value of Common Stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in determining such value
is an affiliate), based upon the closing sale price of the Common Stock on March 14, 2003 as reported on the NASDAQ Over-the-Counter Bulletin Board was $1,302,772.

The
number of shares outstanding of the registrant's Common Stock as of March 14, 2003 was 7,720,987 shares.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended
December 31, 2002. Portions of such proxy statement are incorporated by reference into Part III of this report.

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Item 1.    BUSINESS:

Company Overview:

MFIC Corporation (MFIC or the Company), through its wholly-owned subsidiaries, Microfluidics Corporation (Microfluidics Division) and MediControl Corporation
(MediControl), as well as its operating division, Morehouse-COWLES, specializes in producing and marketing a broad line of fluid materials processing systems used for a variety of grinding,
dispersing, milling, and blending applications across a variety of industries and for use in high shear fluid processing in numerous applications within those industries. Microfluidizer®
high shear fluid processor systems are produced at the Microfluidics Division, while high shear dispersers, dissolvers, colloid mills, horizontal media mills, vertical media mills, and grinding media
are produced and sold by the Morehouse-COWLES Division.

Microfluidizer®
fluid processing equipment, produced by the Company's Microfluidics Division, is used by industry to formulate stable emulsions, dispersions, and liposomes,
and is used in general for deagglomeration and for cell disruption in the biotech industry. Emulsions are found in a broad variety of common products, including processed foods, pharmaceuticals, and
specialty coatings such as photographic films. Dispersions are often employed in products such as pharmaceuticals, inks, pigments and coatings. The Company believes that the processing technique of
the Microfluidizer® equipment enhances the stability and consistency of emulsions and dispersions due to the equipment's unique ability to consistently produce uniform micron and
sub-micron scale particles in many applications. Liposomes, which are biodegradable cell-like structures, are used to encapsulate medications or nutrients, and are typically
used in cosmetic or pharmaceutical products. In addition, Microfluidizer® processor equipment is used in biotechnology applications to harvest, through cell disruption, the cultivated
product contents of plant and animal cells.

The
Company's product lines are used to create stable emulsions and dispersions through deagglomeration and particle size reduction. These formulations may be liquid/liquid or
liquid/solid formulations and are generally prepared in quantities ranging from less than one gallon to several thousand gallons in an industrial environment. In connection with the processing of
emulsions and dispersions, the various pieces of equipment in the product lines of the Morehouse-COWLES Division may be used in preparatory steps prior to introduction of the product into the
Microfluidizer® processor system for further processing.

The
Company's product lines are diversified and the Morehouse-COWLES equipment is used independent of the Microfluidizer® equipment in the preparation of many industrial
fluid formulations where the desired product characteristics do not require the sub-micron size of particles created by Microfluidizer® processing.

While
the Microfluidizer® equipment is generally used in the processing of high value-added end-products that require extremely small particle sizes, the
Morehouse-COWLES product lines are used in broader, high volume, lower value-added applications requiring less stringent particle size reduction.

The
combination of product lines result in one of the broadest offerings of fluid processing equipment in the materials processing market. The Company, in late 1998 and early 1999,
integrated its then existing three divisions such that its corporate marketing and sales group was responsible for the marketing and sales of products for all divisions. The acquisition of the Epworth
Mill and Morehouse-COWLES divisions in 1998 and the consolidation of marketing and sales personnel into one group enabled the Company to sell stand-alone pieces of equipment to smaller companies that
require only limited processing capability, as well as integrated systems or multiple pieces of equipment from more than one division to larger customers that have a variety of fluid processing
requirements.

The
Company was incorporated in Delaware in 1983. The Company, formerly named Biotechnology Development Corporation, changed its name effective June 8, 1993 to Microfluidics

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International Corporation, and again changed its name effective July 12, 1999 to MFIC Corporation. Its principal executive offices are located at 30 Ossipee Road, in Newton, Massachusetts,
02464-9101 and its telephone number is (617) 969-5452.

Microfluidizer®
and Zinger® are trademarks of the Company, which have been registered with the United States Patent and Trademark Office.
Morehouse-COWLES and Microfluidics are trademarks of the Company for which registration applications have been filed with the United States Patent and Trademark Office. All
other trademarks or trade names referred to herein are the property of their respective owners.

The Technology:

The Company's Microfluidizer® materials processor equipment is based on patents and related technology that were licensed by the Company from Arthur
D. Little & Co. in 1983 and subsequently purchased by the Company in 1985. The Company holds two United States patents related to the
apparatus and process used to intimately mix liquids and disperse particulate solids in microemulsions. See "Patents and Proprietary Rights Protection."

The
Company's Microfluidizer® processor technology is used in materials processing and product formulation to mix materials that are normally very difficult to mix. The
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. Additionally, the equipment is used for cell disruption to harvest the cultivated
contents of animal and/or plant cells and for liposomal encapsulation of materials for the cosmetics and biotech/ biopharma industry.

Prior
to October 1, 2000, the Company's Epworth Mill Division products consisted of ball mills and horizontal media mills. The division was also engaged in the sale and
distribution of grinding media. Ball mills are used in coarse grinding application of liquid slurries such as ore from mines or coarse slurries of material that will later be processed into finer
slurries. Ball mills use large media in a horizontal rotating cylindrical vessel to crush and grind the product being processed. The patented Zinger® horizontal media mill utilizes a
unique design for grinding and dispersing solid materials in a liquid carrying medium. The design is based upon established rotating, horizontal shaft technology but adds the unique capability of
enhanced mechanical activity between the grinding media and the product formulation. The enhanced mechanical activity is achieved through a unique combination of specially designed rotors and
containment vessels. In comparison to traditional horizontal media mills, the Zinger media mill technology has demonstrated significantly improved productivity in terms of greater volumes of product
processed at acceptable quality than the comparably sized and priced horizontal media mills. On July 24, 2000, the Company announced that it would transfer the manufacturing and sale of its
Zinger® horizontal media mills from its Michigan-based Epworth Mill Division to the Morehouse-COWLES Division plant in Fullerton, California. The transfer began on October 1, 2000,
and was completed in the fourth quarter of fiscal 2000.

On
September 30, 2000, the Company ceased operations of the Ball Mill repair business and decided to sell its Ball Mill operation conducted at the Epworth Mill Division through a
broker. On April 13, 2001 the Company concluded the sale of the assets of the division's operation for $200,000 in cash and a promissory note, which resulted in a loss on the sale of these
assets of approximately $53,000.

The
Company's Morehouse-COWLES Division manufactures grinding and dispersing equipment used in a broad number of industries including the coatings and ink industries. The products
include 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.

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Commercial Applications:

The Microfluidizer® 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®
equipment will exhibit improved stability and require reduced concentrations of costly emulsifying agents that are otherwise needed to enhance 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 pigments for medicines (including injectable drugs), paints and inks, iron oxide for magnetic tapes, phosphorescent coatings for TV screens and fluorescent lamps,
barium titanate for capacitors, toners and inks.

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

In
the biotechnology industry, Microfluidizer® equipment is currently used to harvest, by cell rupture, the contents of bacteria and mammalian plant or animal cells. The
precision with which the Microfluidizer® equipment can be used to break up materials allows the encapsulating cell wall to be ruptured without damage to or contamination of the cell
contents. The Microfluidizer® equipment minimizes the amount and presence of cell wall debris and eliminated grinding media contamination, thus minimizing downstream processing
requirements.

The
Microfluidizer® equipment is generally used in commercial applications where a scientist, formulator or chemist is trying to develop or improve a product formulation for
an expensive, high value-added end product. Microfluidizer® equipment is initially employed in a research laboratory, with the equipment subsequently being used in scaleup to pilot scale
production of new or improved products, and ultimately, for full production scale volumes as the improved product comes to market. From laboratory to production, it has been demonstrated that the
volume of product processed range from less than one quarter of a gallon per minute to 18 gallons per minute.

The
Company, through its Morehouse-COWLES Division, also 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 Products:

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



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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 advertising, direct mail, seminars, trade shows and telemarketing. In addition, the Company has an active program of field demonstrations, as well as
demonstrations to potential users in the Company's laboratories located in Newton, Massachusetts, Fullerton, California, and Lampertheim, Germany. Distributors and sales agents worldwide are supported
with trade advertising, collateral literature and trade show materials. The distributors also advertise directly on their own behalf and attend regional and international trade shows. 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 provide free processing and particle size
and distribution analysis of a prospective customer's sample formulation. Additionally, a prospective customer may pay for subsequent laboratory time and services on a fee for services basis, which
includes equipment rentals.

The
Company sells its divisions' equipment in the United States through a network of independent manufacturer's representative firms who are managed by the Company's regional sales
managers. In Canada, the Company has an exclusive distributor for the Microfluidics product line. In Europe, the Company sells its equipment through a network of independent regional sales agents and
distributors

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who are managed by the Company's European Sales organization. In Asia and the Pacific Rim, the Company sells through a network of distributors and independent manufacturer's representative firms.
Customers in other geographical regions are assisted directly by Company sales staff.

Customers:

The users of the Company's systems are in various industries, including the chemical, pharmaceuticals, food, cosmetic and biotechnology industries. Two customers
accounted for 11% and 10% of the revenues in 2002, respectively, and one customer accounted for 13% of the trade accounts receivable as of December 31, 2002. A reduction or delay in orders from
these or other significant customers could have a material adverse effect on the Company's results of operations. No customer accounted for more than 10% of the Company's revenues in 2001 or 2000.

Competition:

The patented Microfluidizer® 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 larger installed bases and competitive performance advantages over products of our
competitors. The Company believes that the Microfluidizer® processor equipment product line offers the highest shear forces available in the process equipment market today. In many
critical formulations Microfluidizer® processors produce 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® 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.

Grinding
media sales are in direct competition with a large number of suppliers, including the major supplier of the Company's media materials.

The
product lines of the Morehouse-COWLES Division have direct competition in its major market segments. The Morehouse-COWLES product line has strong brand name recognition, a large
installed base and a reputation for high quality, reliable, processing systems. The systems of this division have a very broad market use in a wide variety of mixing, blending, grinding, and
dispersing applications and therefore have potential for high volume unit shipments.

The
patented Zinger horizontal media mill competes against a well-established group of competitive mills. The unique design of the Zinger media mill, however, results in an
economic advantage for customers who employ the Zinger media mill because they are able to process larger volumes of product at lower energy cost while attaining the same or better quality as produced
by competitive mills, and can do so occupying less floor space. As customers replace older mills or expand their facilities, they will gain an economic advantage by lowering the processing costs of
their products by using a mill, such as the Zinger media mill, which more efficiently processes larger quantities of product than competitive mills.

The
Company faces, and will continue to face, intense competition from other companies who manufacture and sell fluid processing systems used in grinding, mixing, milling and dispersing
applications. 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 its maintaining its current technologically superior product line and competitive position in the fluid processing systems field. Rapid technological
development by

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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 fluid processing systems field as technical advances are made and become more widely known.

Research and Development:

The Company's research and development efforts are focused on developing new mixing techniques for the process industries and further enhancing the functionality,
reliability and performance of existing products. Research and development costs were $906,494, $857,491, and $835,136 in 2002, 2001, and 2000, respectively. The Company continues to pursue
development of the Multiple-Stream High Pressure Mixer/Reactor (See Patents and Proprietary Rights Protection) by working with customers who assist in the development of the system with both
application knowledge and financial support. Patent coverage for this new product has been obtained both in the United States and in Europe (with national entry in process) and 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 the Microfluidizer® equipment provided
for use. The Company has, in past years, subsidized research and development in the following fields at the following universities: The University of Massachusetts, Lowellbiotechnology;
Lehigh Universitypolymer chemistry; Université Laval (Quebec)food science; Worcester Polytechnic Institute (WPI)catalytic chemistry; and Purdue
Universitypharmaceuticals. In addition to their research activities, these universities provide the Company with contacts at industrial companies that may utilize the
Microfluidizer® processing technology. Additionally, on occasion, research reports, technical papers, and doctoral theses may be published, which document the use of
Microfluidizer® technology. Finally, the Company engages in many informal co-operative development efforts with its customers, particularly in the Microfluidics Division.

In
addition to providing subsidies, the Company has, in the past, entered into a research arrangement with Worcester Polytechnic Institute (WPI). The Company commenced support of
research and development at WPI in 1988 and continued such support until the mid 1990's. In 1992, the Company entered into a cooperative venture with WPI to develop, patent and license for WPI, for
its commercial applications, the Microfluidizer® process technology in the following fields: (i) the production of catalysts used in chemical and petroleum processing;
(ii) the manufacture of advanced ceramic materials; and (iii) the destruction of volatile organic compounds and other organic contaminants in process waste
water. The Company and WPI applied for United States and foreign patents in 1992 and 1993, respectively, which cite the Microfluidizer® processing technology as enabling the above process
technologies. The two applied-for United States patents were both granted and issued to WPI in the United States in 1995. In 1996 one applied for patent was granted to WPI in France for
European entry in the Patent Cooperation Treaty (PCT) countries. The program is inactive at this time.

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

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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 has not sought patent or trademark
protection for its Microfluidizer® equipment's interaction chamber in any country other than the United States and, 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. The Company's Microfluidizer® equipment process patent expires on March 13, 2007 and its device
patent expired on August 6, 2002. The Company does not believe that the expiration of its patent will result in any material detriment to the Company since the Company has made many
alterations, improvements and advances to its equipment over the years with such modification and innovations having been treated by the Company as trade secrets. In 1997 the Company completed
development of a novel adaptation of its Microfluidizer® equipmenta Multiple Stream High Pressure Mixer/ Reactor (MMR). In August 1997, the Company filed a patent
application for the device and its processes with the United States Patent and Trademark Office (USPTO), and filed a Patent Cooperation Treaty (PCT) application on May 5, 1998. In July and
November 2000, the USPTO issued to the Company notices of allowances of utility patent claims regarding the MMR and the use thereof. On September 18, 2002, the European Patent Office
advised the Company it would grant its MMR patent substantially as applied for, including its device and process claims. The Company is in the process of pursuing national entry in France, Germany,
Italy, The Netherlands, and the United Kingdom. The Company's Zinger horizontal media mill is protected by a United States patent granted June 5, 1997.

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.

Manufacturing:

At present, the Microfluidics Division subcontracts the manufacture of many of the components of its equipment to third parties, with the Company undertaking the
remaining fabrication, assembly and performance testing. The Microfluidics Division has selected certain primary suppliers based upon
pricing terms and the quality of their products. The Company believes that there are adequate available alternate manufacturing sources and suppliers for all of its components and raw materials
requirements.

In
the past, the Morehouse-COWLES Division performed a significant portion of machining and assembly operations. In the past year, a significant portion of this work has been outsourced
in an attempt to reduce labor and capital costs. The Company believes that there are adequate available alternate contractors to provide the division with all of its' components and raw material
requirements.

The
Company is keenly aware that 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 procured alternative suppliers for its most critical components of its equipment.

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 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.

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

At
present, the Company's customers include companies who are making FDA approved drugs, preparations, and products (example: x-ray film) for external use and companies who
utilize Microfluidizer® processor equipment for the formulation or production of FDA approved parenteral (injectable) drugs or compounds.

For
the Company's equipment entering Europe, CE compliance (Regulatory Compliance with European Safety Standards) is required. All products manufactured by the Microfluidics division are
CE compliant.

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

Backlog:

The Company's sales order backlog of accepted and unfilled orders at March 14, 2003, and March 15, 2002 was approximately $3,647,000 and $3,337,000,
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 69 full-time employees as of March 14, 2003. 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 2.    PROPERTIES

The Company's corporate headquarters are in Newton, Massachusetts. The Company also maintains other locations in South Haven, Michigan, Fullerton, California and
a sales office in Lampertheim, Germany. The Company rents approximately 127,000 square feet of offices, production and research and development facilities at these locations for administrative,
development and production activities. A portion of space is sublet to other non-affiliated companies for a total of $84,000 per annum. The lease terms expire at various times through
August 2006. The Company has the option to extend the leases for up to five additional years. The Company believes these facilities will be adequate for operations for the next several years.

Item 3.    LEGAL PROCEEDINGS

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

Item 4.    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders during the quarter ended December 31, 2002.

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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.

|Quarters Ended |  | 12/31
2002 |      | 9/30
2002 |   | 6/30
2002 |  | 3/31
2002 |      | 12/31
2001 |   | 9/30
2001 |  | 6/30
2001 |      | 3/31
2001
|-------------- |  | ---------- | ---- | --------- | - | --------- |  | --------- | ---- | ---------- | - | --------- |  | --------- | ---- | ---------
|Low            |  | $          | 0.25 |           | $ | 0.28      |  | $         | 0.35 |            | $ | 0.41      |  | $         | 0.40 |          
|High           |  | $          | 0.43 |           | $ | 0.42      |  | $         | 0.45 |            | $ | 0.55      |  | $         | 0.65 |          

Holders

As of March 14, 2003, there were approximately 389 holders of record of the Company's Common Stock.

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. In addition, pursuant to loan covenants contained in the Company's loan agreement with its
commercial lender, the Company may not pay dividends without the commercial lender's prior approval.

Equity Compensation Plan Information:

The information in the table below is as of December 31, 2002. See also the Consolidated Financial StatementsNote 9.

|Plan category                                              |  | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a) |  | Weighted-average exercise
price of outstanding options,
warrants and rights
(b) |      | Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected
in column (a))
(c)
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders     |  | 2,010,650                                                                                       |  | $                                                                               | 0.90 |                                                                                                                                                
|Equity compensation plans not approved by security holders |  |                                                                                                |  |                                                                                 |     |                                                                                                                                                
|Total                                                      |  | 2,010,650                                                                                       |  | $                                                                               | 0.90 |                                                                                                                                                

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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 year period
ended December 31, 2002. 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.

The
Company acquired the assets and assumed certain liabilities of two businesses, Morehouse-COWLES, Inc. and Epworth Manufacturing Company. These acquisitions were accounted for
as a purchase. Accordingly, in the following selected financial information, the results of operations and cash flows include Morehouse-COWLES and Epworth Mill subsequent to August 14, 1998.

Selected Statement of Operations Data

|                                                                                                                |         | Year Ended
December 31, 2002 |            | Year Ended
December 31, 2001 |   | Year Ended
December 31, 2000 |           | Year Ended
December 31, 1999 |            | Year Ended
December 31, 1998 |  
|--------------------------------------------------------------------------------------------------------------- | ------- | ---------------------------- | ---------- | ---------------------------- | - | ---------------------------- | --------- | ---------------------------- | ---------- | ---------------------------- | -
|Total revenues                                                                                                  |         | $                            | 14,573,382 |                              | $ | 15,511,014                   |           | $                            | 15,725,695 |                              | $
|Total costs and expenses                                                                                        |         |                              | 14,253,709 |                              |   | 15,728,336                   |           |                              | 15,793,065 |                              |  
|Income (loss) from operations                                                                                   |         |                              | 319,673    |                              |   | (217,322                     | )         |                              | (67,370    | )                            |  
|Interest expense                                                                                                |         |                              | (179,429   | )                            |   | (261,754                     | )         |                              | (350,486   | )                            |  
|Other expense                                                                                                   |         |                              |           |                              |   | (53,142                      | )         |                              | (250,000   | )                            |  
|Interest income                                                                                                 |         |                              | 7,191      |                              |   | 7,032                        |           |                              | 248        |                              |  
|Gain on sale of investments                                                                                     |         |                              |           |                              |   |                             |           |                              |           |                              |  
|Net income (loss) before taxes, cumulative effect of accounting change, and extraordinary item                  |         |                              | 147,435    |                              |   | (525,186                     | )         |                              | (667,608   | )                            |  
|Income tax (provision)                                                                                          |         |                              |           |                              |   |                             |           |                              |           |                              |  
|Net income (loss) before extraordinary item and cumulative effect of an accounting change                       |         |                              | 147,435    |                              |   | (525,186                     | )         |                              | (667,608   | )                            |  
|Gain on subordinated debt restructuring                                                                         |         |                              |           |                              |   |                             |           |                              | 194,500    |                              |  
|Net income (loss) before cumulative effect of an accounting change                                              |         |                              | 147,435    |                              |   | (525,186                     | )         |                              | (473,108   | )                            |  
|Cumulative effect of a change in accounting principle                                                           |         |                              | (2,661,409 | )                            |   |                             |           |                              |           |                              |  
|Net loss                                                                                                        |         | $                            | (2,513,974 | )                            | $ | (525,186                     | )         | $                            | (473,108   | )                            | $
|Weighted-average shares outstanding:                                                                            |         |                              |            |                              |   |                              |           |                              |            |                              |  
|                                                                                                                | Basic   |                              |            | 7,426,586                    |   |                              | 7,375,102 |                              |            | 7,086,058                    |  
|                                                                                                                | Diluted |                              |            | 7,470,090                    |   |                              | 7,375,102 |                              |            | 7,086,058                    |  
|Basic amounts per common share:                                                                                 |         |                              |            |                              |   |                              |           |                              |            |                              |  
|Net income (loss) per share before extraordinary gain and cumulative effect of a change in accounting principle |         | $                            | .02        |                              | $ | (.07                         | )         | $                            | (.09       | )                            | $
|Extraordinary gain per share:                                                                                   |         |                              |           |                              |   |                             |           | $                            | .03        |                              |  
|Net income (loss) per share before cumulative effect of a change in accounting principle                        |         | $                            | .02        |                              | $ | (.07                         | )         | $                            | (.06       | )                            | $
|Cumulative effect of a change in accounting principle per share                                                 |         | $                            | (.36       | )                            |   |                             |           |                              |           |                              |  
|Basic net loss per share                                                                                        |         | $                            | (.34       | )                            | $ | (.07                         | )         | $                            | (.06       | )                            | $
|Diluted amounts per common share:                                                                               |         |                              |            |                              |   |                              |           |                              |            |                              |  
|Net income (loss) per share before extraordinary gain and cumulative effect of a change in accounting principle |         | $                            | .02        |                              | $ | (.07                         | )         | $                            | (.09       | )                            | $
|Extraordinary gain per share:                                                                                   |         |                              |           |                              |   |                             |           | $                            | .03        |                              |  
|Net income (loss) per share before cumulative effect of a change in accounting principle                        |         | $                            | .02        |                              | $ | (.07                         | )         | $                            | (.06       | )                            | $
|Cumulative effect of a change in accounting principle per share                                                 |         | $                            | (.36       | )                            |   |                             |           |                              |           |                              |  
|Diluted net loss per share                                                                                      |         | $                            | (.34       | )                            | $ | (.07                         | )         | $                            | (.06       | )                            | $

Selected Balance Sheet Data

|                     |  | Year Ended
December 31, 2002 |           | Year Ended
December 31, 2001 |   | Year Ended
December 31, 2000 |  | Year Ended
December 31, 1999 |            | Year Ended
December 31, 1998
|-------------------- |  | ---------------------------- | --------- | ---------------------------- | - | ---------------------------- |  | ---------------------------- | ---------- | ----------------------------
|Working capital      |  | $                            | 1,571,712 |                              | $ | 1,404,675                    |  | $                            | 1,900,740  |                             
|Total assets         |  |                              | 9,486,780 |                              |   | 12,639,391                   |  |                              | 13,644,235 |                             
|Long term debt       |  |                              | 139,985   |                              |   | 316,239                      |  |                              | 896,243    |                             
|Stockholders' equity |  |                              | 4,102,368 |                              |   | 6,587,087                    |  |                              | 7,093,781  |                             

12

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

CERTAIN FACTORS AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Management believes that this report contains forward-looking statements that are subject to certain risks and uncertainties including statements relating to the
Company's plan to achieve full sales/marketing and operational integration of its divisions, to achieve revenue growth, to maintain and/or increase operating profitability, and to attain net income
profitability. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results achieved by the Company to differ
materially from those described in the forward-looking statements. The Company cautions investors that there can be no assurance that the actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking statements as a result of various factors, including but not limited to, the following risks and uncertainties: (i) the
ability to manage the integration of the Company's divisions into a cohesive operation and the attainment of successful operating results of such integrated operations, (ii) whether the
performance advantages of the Company's Microfluidizer® or Zinger® materials processing equipment will be realized commercially or that a commercial market for the equipment
will continue to develop, and (iii) whether the Company will have access to sufficient working capital through continued and improving cash flow from sales and ongoing borrowing availability,
the latter being subject to the Company's ability to comply with the covenants and terms of the Company's loan agreement with its senior lender.

Critical Accounting Policies

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

Revenue recognition:Revenue from the sale of machines and spare parts is generally recognized upon
shipment of the product or when the earnings process is complete. Rental income for the lease of equipment is recognized on a straight-line basis over the term of the lease agreement.

The
Company recognizes revenue for the sale of machines and spare parts in accordance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be met before revenue can
be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and
(4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged for services
rendered and products delivered and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected.

The
Company's products are generally covered by a warranty for a one-year period. The Company's estimate of costs to service its warranty obligations is based on historical
experience and expectation of future conditions. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, it will result in
decreased gross profit.

Inventories and Related Allowance for Obsolete and Excess Inventory:Inventories are valued at the
lower of cost or net realizable value on a first-in, first-out method. The Company regularly reviews inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on the estimated forecast of product demand over the next two years. A significant increase in the demand for the Company's products could result in a
short-term increase in the cost of inventory

13

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purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Additionally, estimates of future product demand may prove to be
inaccurate, in which case the Company may have understated or overstated the provision required for excess and obsolete inventory. In the future, if inventory were determined to be overvalued, the
Company would be required to recognize such costs in its cost of goods sold at the time of such determination. Likewise, if inventory is determined to be undervalued, the Company may have
over-reported costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although the Company makes every
effort to ensure the accuracy of forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of its
inventory and reported operating results.

Results of Operations



Total revenues for the year ended December 31, 2002 were $14,573,382 as compared to revenues of $15,511,014 for the year ended December 31, 2001,
representing a decrease of $937,632 or 6%.

North
American sales for the year ended December 31, 2002 were approximately $10,342,000, a 3% decrease as compared to North American sales of approximately $10,630,000 for the
year ended December 31, 2001. This decrease in North American sales was principally due to a decrease in the sale of machines. Foreign sales were approximately $4,231,000 for the year ended
December 31, 2002 compared to $4,881,000 for the year ended December 31, 2001, a decrease of approximately $650,000 or 13%. The decrease in foreign sales was principally due to a
decrease in the sale of machines compared to 2001.

Total
cost of goods sold for 2002 was $8,064,758 or 55% of revenue, as compared to $8,897,755 or 57% of revenue for 2001. The decrease in cost of goods sold in absolute dollars reflects
principally the decrease in sales generated by the Microfluidics division of the Company, offset by the increase in sales at the Morehouse-COWLES Division. It also reflects an increase in profit
margins at both divisions. 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 percent of revenue will differ between laboratory and
pilot plant units sold, due to the difference in costs between air driven and electric-hydraulic units.

Total
operating expenses for 2002 were $6,188,951, or 42% of revenue, as compared to $6,830,581, or 44% of revenue, for 2001, which is a decrease of $641,630, or 9%.

Research
and development expenses for 2002 were $906,494 compared to $857,491 for 2001, an increase of $49,003, or 6%. The increase in research and development expenses is principally
due to an increase in payroll costs, as a result of both an increase in headcount and pay increases.

Sales
and marketing expenses for 2002 increased approximately $44,000, or 1% from $3,049,418 to $3,093,293. The increase was due principally to an increase in media costs of
approximately $136,000, partially offset by a decrease in payroll costs of approximately $70,000, and other general cost reductions of approximately $20,000.

For
the year ended December 31, 2002, general and administrative expenses decreased by approximately $735,000, from $2,923,672 for the year ended December 31, 2001, to
$2,189,164, or 25%. The decrease in general and administrative expenses was principally due to a decrease in amortization of goodwill
costs of approximately $422,000 as a result of the adoption of SFAS No. 142, media costs of approximately $169,000, professional fees of approximately $86,000, and other cost decreases of

14

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approximately $105,000, partially offset by increases in payroll costs of approximately $47,000, due to pay increases.

Interest
expense for 2002 decreased to $179,429 from $261,754 for 2001, a decrease of $82,325, or 31%. The decrease was due primarily to a decrease in the interest rates charged the
Company.

Interest
income for 2002 increased to $7,191 from $7,032 for 2001, an increase of $159 or 2%.

In
October, 2000, the Company entered into a settlement agreement related to a warranty claim for the Epworth Mill Division, pursuant to which the Company paid $100,000 upon execution of
the agreement, and executed a promissory note for $350,000 payable two years from the execution date, with interest payable quarterly in arrears at 10% per annum. The Company paid off the balance of
this note in December, 2002.

On
January 1, 2002, the Company adopted SFAS No. 142,Goodwill and Other Intangible Assets, which requires companies to stop
amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, SFAS No. 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be
reviewed for impairment upon adoption of SFAS No. 142 and annually thereafter. The Company will perform its annual impairment review during the fourth quarter of each year, or when an event
occurs which may potentially impair goodwill.

Under
SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Upon adoption of SFAS No. 142 in the
first quarter of 2002, the Company recorded a one-time, noncash charge of $2,661,409 to reduce the carrying value of its goodwill. Such charge is nonoperational in nature and is reflected
as a cumulative effect of a change in the accounting principle in the accompanying consolidated statement of operations pursuant to the SFAS No. 142 transition rules. The SFAS No. 142
goodwill impairment is associated solely with goodwill resulting from the acquisition of Morehouse-COWLES, Inc. and the Epworth Manufacturing Company in 1998.



Total revenues for the year ended December 31, 2001 were $15,511,014 as compared to revenues of $15,725,695 for the year ended December 31, 2000,
representing a decrease of $214,681, or 1%. This
decrease in revenues was the result of a decrease in sales by the Morehouse-COWLES Division of the Company of approximately $1,390,000, a decrease in sales at the Epworth Mill Division of
approximately $1,442,000 (due to a cessation of operations of the Ball Mill repair business), offset by an increase of approximately $2,617,000 in additional revenue generated by the Company's
Microfluidics Division.

North
American sales for the year ended December 31, 2001 decreased to approximately $10,630,000, or 7%, as compared to North American sales of approximately $11,386,000 for the
year ended December 31, 2000. This decrease in North American sales was principally due to a decrease in the sale of machines. Foreign sales were approximately $4,881,000 for the year ended
December 31, 2001 compared to $4,340,000 for the year ended December 31, 2000, an increase of $541,000 or 12%. This increase in foreign sales was principally due to an increase in the
sale of machines.

Total
cost of goods sold for 2001 was $8,897,755 or 57% of revenue, as compared to $8,688,465 or 55% of revenue for 2000. The increase in cost of goods sold reflects primarily the
increase in sales generated by the Microfluidics operating division of the Company, offset by a decrease in cost of goods sold by the Morehouse-COWLES and Epworth Mill operating divisions. 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 percent of

15

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revenue will differ between laboratory and pilot plant units sold, due to the difference in costs between air driven and electric-hydraulic units.

Total
operating expenses for 2001 were $6,830,581 or 44% of revenue, as compared to $7,104,600 or 45% of revenue for 2000, which is a decrease of $274,019 or 4%.

Research
and development expenses for 2001 were $857,491 compared to $835,136 for 2000, an increase of $22,355 or 3%. The increase in research and development expenses is primarily due
to an increase in payroll and related costs of approximately $157,000, partially offset by a decrease in amortization costs of approximately $60,000, a decrease in outside contract services of
approximately $44,000, and a reduction of expenses at the Epworth Mill Division of approximately $49,000, due to the transfer of the division's operations in October of 2000.

Sales
and Marketing expenses for 2001 decreased approximately $433,000, from $3,482,866 in 2000 to $3,049,418 or 12%. The decrease was due principally to the reduction of selling
expenses at the Epworth Mills Division of approximately $287,000, a decrease in commission expense of approximately $138,000, and decreases in consultant expenses of approximately $48,000, partially
offset by increases of approximately $41,000 in demonstration cost expenses.

General
and administrative expenses for 2001 increased by approximately $137,000, from $2,786,598 for the year ended December 31, 2000, to $2,923,672, or 5%. The increase in
general and administrative expenses is primarily due to an increase in payroll costs of approximately $152,000, and an increase in grinding media sales costs of approximately $169,000, partially
offset by a reduction of general and administrative costs of approximately $167,000 at the Epworth Mill Division, due to the sale of the business, and a decrease in professional fees of approximately
$40,000.

Interest
expense for 2001 decreased from $350,486 in 2000 to $261,754, a decrease of $88,732, or 25%. The decrease was due primarily to a reduction in the interest rate paid, partially
offset by the increase in debt due to the transaction with J.M. Huber Corporation.

Interest
income for 2001 increased to $7,032 from $248 for 2000, an increase of $6,784. The increase is due to interest earned on the note receivable arising from the sale of the Ball
Mill operation.

On
July 24, 2000, the Company announced that it would transfer the sales and manufacturing of its line of Zinger ® horizontal media mills from its Michigan-based
Epworth Mill Division to the Morehouse-COWLES plant in Fullerton, California. The transfer began on October 1, 2000 and did not have a material impact on the profitability of the Company.
Simultaneously, the Company ceased operations of the Ball Mill repair business and decided to sell its Ball Mill product line. On March 19, 2001, the Company reached an agreement to sell the
Ball Mill operation for $200,000 in cash and notes.

QUARTERLY RESULTS OF OPERATIONS

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

16

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Summarized
unaudited quarterly financial data are as follows:

|                                                                       |  | Fiscal 2002 Quarters |           
|---------------------------------------------------------------------- |  | -------------------- | ----------
|
|Revenues                                                               |  | $                    | 3,581,320 
|Gross income                                                           |  |                      | 1,670,945 
|Net income (loss) before cumulative effect of accounting change        |  |                      | 100,247   
|Cumulative effect of accounting change                                 |  |                      | (2,661,409
|Net (loss) income                                                      |  | $                    | (2,561,162
|Net income (loss) per share:                                           |  |                      |           
|Basic income per share before cumulative effect of accounting change   |  | $                    | .01       
|Cumulative effect of accounting change                                 |  | $                    | (.36      
|Net (loss) income per share                                            |  | $                    | (.35      
|Diluted income per share before cumulative effect of accounting change |  | $                    | .01       
|Cumulative effect of accounting change                                 |  | $                    | (.36      
|Diluted (loss) income per share                                        |  | $                    | (.35      

|                                    |  | Fiscal 2001 Quarters |          
|----------------------------------- |  | -------------------- | ---------
|
|Revenues                            |  | $                    | 4,449,624
|Gross income                        |  |                      | 2,227,086
|Net income (loss)                   |  |                      | 497,055  
|Net income (loss) per share         |  | $                    | ..07     
|Diluted net income (loss) per share |  | $                    | .07      

LIQUIDITY AND CAPITAL RESOURCES

The Company generated cash from operations of $398,748 in 2002, $297,127 in 2001 and $80,718 in 2000. In 2002, the Company's principal operating cash requirements
were to fund its decrease in current liabilities, and increase in other current assets and prepaid expenses, offset by net income from operations, and a decrease in receivables and inventory. In 2001,
the Company's principal operating cash requirements were to fund its net loss from operations, increase in other assets, and decreases in current liabilities, offset by a decrease in trade and other
receivables, inventories, and prepaid expenses. In 2000, the Company's principal operating cash requirements were to fund its net loss from operations, increases in inventories, trade and other
receivables, other current assets and prepaid expenses, offset by a decrease in current liabilities.

The
Company used cash of $38,706 for investing activities in 2002. Net cash used in investing activities included the proceeds from the sale of assets, net of the purchase of capital
equipment. Net cash used by investing activities for 2001 resulted from the sale of assets from the Ball Mill operation offset by the issuance of a note receivable in connection with the sale of the
Ball Mill operation, and the purchase of fixed assets, partially offset by the sale of fixed assets. Net cash used by investing activities of $27,673 in 2000 consisted of the proceeds from the sale of
assets of $152,989, offset by the purchase of capital equipment of $180,662. The Company's sale of assets principally related to used equipment. As of December 31, 2002, the Company had no
material commitments for capital expenditures.

17

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For
financing activities, the Company used cash of $362,472 in 2002, $387,235 in 2001, and generated cash of $37,138 in 2000. In 2002 cash was used to pay the note payable due Huber, to
pay down the term note, and the subordinated debt, and was partially offset by proceeds from the line of credit, and the issuance of common stock. Cash used in 2001 reflected the payments on the line
of credit, line of credit term note, and subordinated debt, partially offset by the proceeds from the issuance of common stock. In 2000, cash was generated from the proceeds of stock issued, from the
proceeds of both a line of credit and a term note from a refinancing, and was used to pay down a previous line of credit, and pay fees in connection with obtaining the line of credit.

The
cash and cash equivalents balance at December 31, 2002 was $84,956, a decrease of $2,430 from the December 31, 2001 balance of $87,386. At December 31, 2002, the
Company maintained a line of credit and a term loan (collectively the Credit Facility) with PNC Bank, N.A. (the Lender). The line of credit facility provides for a maximum borrowing of $4,000,000. As
of December 31, 2002 and March 14, 2003, the Company had borrowings of $2,681,987 and $2,456,162, respectively.

Under
the terms of the line of credit with the Lender, the Company is subject to a number of restrictions that impact the Company's use of funds. The Company is limited to acquisition of
property of $250,000 per year or less, cannot pay dividends, and must maintain certain financial covenants as defined. In addition, the Company is required to maintain a lockbox arrangement with the
Lender, and all cash receipts are included in the lockbox and are applied against the outstanding line of credit. As discussed in Note 6 to the consolidated financial statements, the Company
was in violation of two covenants of the Credit Facility as of December 31, 2002. The Company had previously received a waiver from the Lender and the previous Lender as of both
December 31, 2001, and December 31, 2000, respectively, but was required to meet such covenants thereafter. As indicated in Note 6, the Company determined that violations of the
tangible net worth and liabilities to worth ratio covenant occurred for the quarter ended March 31, 2001. The Company obtained a waiver for these violations from the Lender. The Company's
ability to continue planned operations is dependent upon access to financing under its Credit Facility, which is potentially impacted by the Company's ability to achieve future compliance with the
financial covenants. On March 29, 2002, the Company and the Lender set new covenants for fiscal 2002. Borrowings outstanding under the Credit Facility are secured by a collateral pledge to the
lender of substantially all of the assets of the Company. Management of the Company is executing plans for a return to profitability, including the recent reorganization of its Morehouse-COWLES
Division and the concentration of manufacturing operations in an effort to improve costs
and marketing leverage; however, there can be no assurance that the Company will be successful in implementing these plans. On February 19, 2003, the Company and the Lender signed a third
amendment to the original agreement extending the credit facility for one year until February 28, 2004.

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

EFFECT OF RECENT AND NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, which was effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance
of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairment of
goodwill. Management made an assessment of the goodwill valuation, and upon adoption recognized a goodwill impairment charge

18

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of $2,661,409 in the first quarter of 2002. This Goodwill impairment charge was recognized as a change in accounting principle in the consolidated statements of operations.

In
April, 2002, the FASB issued SFAS No. 145,Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This statement eliminates extraordinary accounting treatment for a gain or loss reported on the extinguishment of debt and amends other existing
authoritative pronouncements to make technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this statement are effective at the beginning
of fiscal year 2003. The Company does not believe the adoption of this statement will have a material impact on the overall financial position or results of operations.

In
June, 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. This statement
requires that the fair value of a liability associated with an exit or disposal activity be recognized when the liability is incurred. Prior to the adoption of SFAS No. 146, certain exit costs
were recognized when we committed to a restructuring plan, which may have been before the liability was incurred. The Company adopted the provisions of this statement in December, 2002. The adoption
of SFAS No. 146 had no impact on the Company's financial position or results of operations.

In
December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement
No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method used on reported results. Management has determined that it will continue to account for stock-based compensation to
employees under the provisions of APB No. 25 and it will make all disclosures in its financial reports. The amendments to SFAS 123 provided for under SFAS No. 148 are effective
for financial statements for fiscal years ending after December 15, 2002. The disclosure requirements of SFAS No. 148 have been implemented in Note 1 Organization and Summary of
Significant Accounting Policies and the interim disclosure requirements will be adopted by the Company in the first quarter of 2003.

ITEM 7A    QUANTITATIVE AND QUALITIVE 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 approximately $2,836,000 of variable rate borrowings outstanding under its revolving credit agreement at December 31, 2002. A hypothetical 10% adverse change in
interest rates for this variable rate debt would have had an approximate $18,000 negative effect on the Company's earnings and cash flows on an annual basis.

For
additional information about the Company's financial instruments, see Note 6.

19

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Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following Consolidated Financial Statements of the Company and its Subsidiaries appear on the following pages of this Form 10-K.

|                                                                                                                |  | Page
|--------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Auditors                                                                                  |  | F-1 
|Report of Independent Auditors                                                                                  |  | F-2 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                                    |  | F-3 
|Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000                      |  | F-4 
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000                      |  | F-5 
|Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000 |  | F-6 
|Notes to Consolidated Financial Statements                                                                      |  | F-7 







20

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REPORT OF INDEPENDENT AUDITORS

To
the Board of Directors and Stockholders of MFIC Corporation:

We
have audited the accompanying consolidated balance sheets of MFIC Corporation (the "Company") and subsidiaries as of December 31, 2002 and December 31, 2001 and the
related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2002. These consolidated financial statements and
the schedule referred to below 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. The financial statements of MFIC Corporation and subsidiaries for the year ended December 31, 2000 were audited by other auditors whose report dated March 29, 2001 expressed an
unqualified opinion on those statements.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MFIC Corporation and subsidiaries
as of December 31, 2002 and December 31, 2001 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of America.

Our
audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The financial statement schedule listed in the index to
consolidated
financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be
set forth therein in relation to the basic consolidated financial statements taken as a whole.

As
discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and intangible assets in 2002 to conform to Statement of
Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets.

BROWN &
BROWN LLP
Boston, Massachusetts
February 21, 2003, except for Note 6, as to which the date is March 11, 2003

F-1

---

REPORT OF INDEPENDENT AUDITORS

To
the Board of Directors and Stockholders of MFIC Corporation:

We
have audited the accompanying consolidated statements of operations, changes in stockholders' equity, and cash flows of MFIC Corporation and Subsidiaries (the "Company") for the year
ended December 31, 2000. Our audit also included the financial statement schedule listed in the index at Item 15 (a)(2) for the year ended December 31, 2000. These consolidated financial
statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audit.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of MFIC
Corporation and Subsidiaries for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule referred to above for the year ended December 31, 2000, when considered in relation to the basic 2000 financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

Deloitte &
Touche LLP
Boston, Massachusetts
March 29, 2001, except for Note 6, as to which the date is April 13, 2001

F-2

---



MFIC CORPORATION        CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                        |  | December 31, |           
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------
|
|ASSETS                                                                                                                                                  | 
|Current Assets:                                                                                                                                         |  |              |           
|Cash and cash equivalents                                                                                                                               |  | $            | 84,956    
|Accounts receivable, less allowance of $45,233 and $38,248 in 2002 and 2001, respectively                                                               |  |              | 2,458,108 
|Note receivablecurrent                                                                                                                                 |  |              | 16,429    
|Inventories                                                                                                                                             |  |              | 3,898,098 
|Prepaid expenses                                                                                                                                        |  |              | 192,518   
|Other current assets                                                                                                                                    |  |              | 166,030   
|                                                                                                                                                        |  |              |           
|TOTAL CURRENT ASSETS                                                                                                                                    |  |              | 6,816,139 
|Property and Equipment, at cost:                                                                                                                        |  |              |           
|Furniture, fixtures and office equipment                                                                                                                |  |              | 288,472   
|Machinery and equipment                                                                                                                                 |  |              | 397,359   
|Leasehold improvements                                                                                                                                  |  |              | 133,522   
|                                                                                                                                                        |  |              |           
|                                                                                                                                                        |  |              | 819,353   
|Less: Accumulated depreciation and amortization                                                                                                         |  |              | (379,680  
|                                                                                                                                                        |  |              |           
|Net property and equipment                                                                                                                              |  |              | 439,673   
|Note receivablelong-term                                                                                                                               |  |              | 71,190    
|Goodwill (net of accumulated amortization and impairment charges of $4,064,459 in 2002 and $1,403,050 in 2001)                                          |  |              | 2,100,000 
|Patents, licenses and other assets (net of accumulated amortization of $299,985 in 2002 and $662,085 in 2001)                                           |  |              | 59,778    
|                                                                                                                                                        |  |              |           
|TOTAL ASSETS                                                                                                                                            |  | $            | 9,486,780 
|                                                                                                                                                        |  |              |           
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                    | 
|Current Liabilities:                                                                                                                                    |  |              |           
|Line of credit                                                                                                                                          |  | $            | 2,681,987 
|Accounts payable and accrued expenses                                                                                                                   |  |              | 1,899,113 
|Accrued interest-related party                                                                                                                          |  |              | 14,980    
|Accrued compensation and vacation pay                                                                                                                   |  |              | 158,119   
|Customer advances                                                                                                                                       |  |              | 320,224   
|Current portion of term note payable                                                                                                                    |  |              | 95,004    
|Current portion of long-term debt-related party                                                                                                         |  |              | 75,000    
|Note payableother                                                                                                                                      |  |              |          
|                                                                                                                                                        |  |              |           
|TOTAL CURRENT LIABILITIES                                                                                                                               |  |              | 5,244,427 
|Long-term debt, net of current portion-related party                                                                                                    |  |              | 81,250    
|Term note                                                                                                                                               |  |              | 58,735    
|Commitments (Note 10)                                                                                                                                   |  |              |           
|Stockholders' Equity:                                                                                                                                   |  |              |           
|Common Stock, par value $.01 per share, 20,000,000 shares authorized; 7,705,064 and 7,643,981 shares issued at December 31, 2002 and 2001, respectively |  |              | 77,051    
|Additional paid-in capital                                                                                                                              |  |              | 12,945,520
|Accumulated deficit                                                                                                                                     |  |              | (8,232,502
|Less: Treasury Stock, stated at cost, 260,446 shares at both December 31, 2002 and 2001, respectively                                                   |  |              | (687,701  
|                                                                                                                                                        |  |              |           
|TOTAL STOCKHOLDERS' EQUITY                                                                                                                              |  |              | 4,102,368 
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                              |  | $            | 9,486,780 
|                                                                                                                                                        |  |              |           

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

F-3

---

MFIC CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                      |                            | Years Ended December 31, |           
|----------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------ | ----------
|
|Revenues                                                                                              |                            | $                        | 14,573,382
|Cost of goods sold                                                                                    |                            |                          | 8,064,758 
|                                                                                                      |                            |                          |           
|Gross income                                                                                          |                            |                          | 6,508,624 
|Operating expenses:                                                                                   |                            |                          |           
|                                                                                                      | Research and development   |                          |           
|                                                                                                      | Selling                    |                          |           
|                                                                                                      | General and administrative |                          |           
|                                                                                                      |                            |                          |           
|Total operating expenses                                                                              |                            |                          | 6,188,951 
|Income (loss) from operations                                                                         |                            |                          | 319,673   
|Interest expense                                                                                      |                            |                          | (179,429  
|Interest income                                                                                       |                            |                          | 7,191     
|Other expense                                                                                         |                            |                          |          
|Net income (loss) before extraordinary item and cumulative effect of a change in accounting principle |                            |                          | 147,435   
|Gain on subordinated debt restructuring                                                               |                            |                          |          
|Net income (loss) before cumulative effect of a change in accounting principle                        |                            |                          | 147,435   
|Cumulative effect of change in accounting principle                                                   |                            |                          | (2,661,409
|Net loss                                                                                              |                            | $                        | (2,513,974
|                                                                                                      |                            |                          |           
|Weighted average number of common and common equivalent shares outstanding:                           |                            |                          |           
|                                                                                                      | Basic                      |                          |           
|                                                                                                      | Diluted                    |                          |           
|Basic amounts per common share:                                                                       |                            |                          |           
|Net income (loss) per share before extraordinary gain and cumulative effect of accounting change      |                            | $                        | .02       
|Extraordinary gain per share                                                                          |                            | $                        |          
|Net income (loss) per share before a change in accounting principle                                   |                            | $                        | .02       
|Cumulative effect of a change in accounting principle per share                                       |                            | $                        | (.36)     
|Basic net loss per share                                                                              |                            | $                        | (.34)     
|Diluted amounts per common share:                                                                     |                            |                          |           
|Net income (loss) per share before extraordinary gain and cumulative effect of accounting change      |                            | $                        | .02       
|Extraordinary gain per share                                                                          |                            | $                        |          
|Net income (loss) per share before a change in accounting principle                                   |                            | $                        | .02       
|Cumulative effect of a change in accounting principle per share                                       |                            | $                        | (.36)     
|Diluted net loss per share                                                                            |                            | $                        | (.34)     

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

F-4

---



MFIC CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                            |                        | Years Ended December 31, |           
|------------------------------------------------------------------------------------------- | ---------------------- | ------------------------ | ----------
|
|Cash flows from operating activities:                                                       |                        |                          |           
|Net loss                                                                                    |                        | $                        | (2,513,974
|Adjustments to reconcile net loss to net cash used in operating activities:                 |                        |                          |           
|Change in accounting principle:                                                             |                        |                          |           
|                                                                                            | Impairment of goodwill |                          |           
|Depreciation and amortization                                                               |                        |                          | 308,131   
|Bad debt expense (recovery)                                                                 |                        |                          | 6,985     
|Non cash provision for loss on legal settlement                                             |                        |                          |          
|Extraordinary gain on debt restructuring                                                    |                        |                          |          
|Gain on sale of assets                                                                      |                        |                          | (42,268   
|Issuance of restricted common stock to consultants                                          |                        |                          | 11,668    
|Loss on sale of Ball Mill repair business assets                                            |                        |                          |          
|Changes in assets and liabilities:                                                          |                        |                          |           
|                                                                                            | Receivables            |                          |           
|                                                                                            | Inventories            |                          |           
|                                                                                            | Prepaid expenses       |                          |           
|                                                                                            | Other current assets   |                          |           
|                                                                                            | Current liabilities    |                          |           
|                                                                                            |                        |                          |           
|Net cash provided by operating activities                                                   |                        |                          | 398,748   
|Cash flows from investing activities:                                                       |                        |                          |           
|Proceeds from sale of fixed assets                                                          |                        |                          | 105,991   
|Purchase of fixed assets                                                                    |                        |                          | (163,864  
|Issuance of note receivable in connection with sale of Ball Mill operation                  |                        |                          |          
|Proceeds from note receivable                                                               |                        |                          | 19,167    
|Proceeds from sale of Ball Mill repair business assets (net of selling expenses of $40,000) |                        |                          |          
|                                                                                            |                        |                          |           
|Net cash used in investing activities                                                       |                        |                          | (38,706   
|Cash flows from financing activities:                                                       |                        |                          |           
|Payments on bank line of credit                                                             |                        |                          |          
|Proceeds on bank line of credit                                                             |                        |                          | 146,195   
|Proceeds from term note                                                                     |                        |                          |          
|Principle payments on term note                                                             |                        |                          | (95,004   
|Principle payments on note payable                                                          |                        |                          | (350,000  
|Financing costs and termination payments for debt refinancing                               |                        |                          |          
|Issuance of restricted common stock                                                         |                        |                          |          
|Issuance of common stock under employee stock purchase plan                                 |                        |                          | 11,581    
|Issuance of common stock under employee stock option plan                                   |                        |                          | 6,006     
|Purchase of common stock                                                                    |                        |                          |          
|Principle payments on subordinated debt-related party                                       |                        |                          | (81,250   
|                                                                                            |                        |                          |           
|Net cash (used in) provided by financing activities                                         |                        |                          | (362,472  
|Net (decrease) increase in cash and cash equivalents                                        |                        |                          | (2,430    
|Cash and cash equivalents, beginning of year                                                |                        |                          | 87,386    
|                                                                                            |                        |                          |           
|Cash and cash equivalents, end of year                                                      |                        | $                        | 84,956    
|                                                                                            |                        |                          |           
|Supplemental disclosure of cash flow information:                                           |                        |                          |           
|Assets acquired in exchange for notes or common stock                                       |                        |                          |          
|                                                                                            |                        |                          |           
|Cash paid for interest                                                                      |                        | $                        | 204,977   
|                                                                                            |                        |                          |           

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 |  |   |        |  |   | Treasury Stock |  |   |           
|----------------------------------------------------------- |  | ------------ |  | - | ------ |  | - | -------------- |  | - | ----------
|
|Balance, December 31, 1999                                  |  | 6,061,307    |  | $ | 60,613 |  | $ | 12,494,839     |  | $ | (4,720,234
|Issuance of restricted common stock                         |  | 1,500,000    |  |   | 15,000 |  |   | 390,000        |  |   |          
|Issuance of common stock under employee stock purchase plan |  | 27,641       |  |   | 276    |  |   | 7,065          |  |   |          
|Purchase of treasury stock                                  |  |             |  |   |       |  |   |               |  |   |          
|Net loss                                                    |  |             |  |   |       |  |   |               |  |   | (473,108  
|Balance, December 31, 2000                                  |  | 7,588,948    |  |   | 75,889 |  |   | 12,891,904     |  |   | (5,193,342
|Stock options exercised                                     |  | 24,375       |  |   | 245    |  |   | 7,369          |  |   |          
|Issuance of common stock under employee stock purchase plan |  | 30,658       |  |   | 306    |  |   | 17,603         |  |   |          
|Purchase of treasury stock                                  |  |             |  |   |       |  |   |               |  |   |          
|Net loss                                                    |  |             |  |   |       |  |   |               |  |   | (525,186  
|Balance, December 31, 2001                                  |  | 7,643,981    |  |   | 76,440 |  |   | 12,916,876     |  |   | (5,718,528
|Stock options exercised                                     |  | 19,375       |  |   | 194    |  |   | 5,812          |  |   |          
|Issuance of common stock under employee stock purchase plan |  | 29,207       |  |   | 292    |  |   | 11,289         |  |   |          
|Issuance of common stock to consultants                     |  | 12,501       |  |   | 125    |  |   | 11,543         |  |   |          
|Net loss                                                    |  |             |  |   |       |  |   |               |  |   | (2,513,974
|                                                            |  |              |  |   |        |  |   |                |  |   |           
|Balance, December 31, 2002                                  |  | 7,705,064    |  | $ | 77,051 |  | $ | 12,945,520     |  | $ | (8,232,502
|                                                            |  |              |  |   |        |  |   |                |  |   |           

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

F-6

---



MFIC CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



MFIC Corporation (MFIC or the Company), through its wholly-owned subsidiaries, Microfluidics Corporation (Microfluidics) and MediControl Corporation
(MediControl), as well as its operating divisions, Morehouse-COWLES and Microfluidics, operates in one segment, specializing in producing and marketing a broad line of proprietary fluid materials
processing systems used for a variety of grinding, mixing, milling, and blending applications across a variety of industries and for use in numerous applications within those industries.
Microfluidizer® materials processor systems are produced at the Microfluidics Division, while dispersers, dissolvers, colloid mills, horizontal media and vertical media mills are produced
at the Morehouse-COWLES Division. The Morehouse-COWLES Division also sells and distributes grinding media.



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.



The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the 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 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. 101,Revenue Recognition in Financial
Statements. The Company recognizes revenues 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. Should an installation not be successfully completed, the contractual provisions
do not provide for forfeiture or refund. 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 considers all highly liquid securities with remaining maturities of 90 days or less, at the time of acquisition, to be cash equivalents.

F-7

---



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. The Company records a charge to cost of
goods sold, by any amounts required to reduce the carrying value to net realizable value.



The Company's property and equipment is recorded at cost. Depreciation is computed using the straight-line method, based upon 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.



In accordance with 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.

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.



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



Basic and diluted net loss per share is presented in conformity with Statement of Financial Accounting Standards (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 loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Options to purchase 2,010,650, 1,612,980 and 1,761,575 shares of
common stock were outstanding for the years ended 2002, 2001, and 2000, respectively. Basic and diluted net loss per share are the same for 2001 and 2000 because all outstanding common stock
equivalents have been excluded as they are antidilutive. Although there were dilutive shares of common stock for 2002, the basic and diluted net loss per share were the same.

F-8

---



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. The Company's subordinated debt bears interest at 10%,
which approximates fair market value.



The Company accounts for income taxes under SFAS No. 109,Accounting for Income Taxes. Under SFAS
No. 109, deferred tax assets and 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.



As allowed by SFAS No. 123,Accounting for Stock-Based Compensation, the Company has elected to account for
stock-based compensation at intrinsic value with disclosure of the effects of fair value accounting on net income and earnings per share on a pro forma basis. At December 31, 2002, the Company
had one stock incentive plan, which is described more fully in Note 9. The Company accounts for awards issued to employees under the plan under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and the related interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123:

2002

2001

2000Net loss, as reported

$
(2,513,974
)
$
(525,186
)
$
(473,108
)Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(340,178
)

(318,438
)

(389,275
)Pro forma net loss

$
(2,854,152
)
$
(843,264
)
$
(862,383
)Net loss per share:Basic and diluted-as reported

$
(0.34)

$
(0.07)

$
(0.06)Basic and diluted pro forma

$
(0.38)

$
(0.11)

$
(0.12)


Stock
options granted to non-employees are accounted for in accordance with SFAS No. 123 and the Emerging Issues Task Force (EITF) Abstract
No. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, and the related interpretations, which generally requires the value of options to be periodically remeasured and

F-9

---

charged to expense as they are earned over the performance period. Compensation related to stock appreciation rights and other variable stock option or award plans should be measured at the end of
each period. The Company did not grant any stock options to non-employees, excluding board members, during 2002, 2001 or 2000.



Certain fiscal 2000 and 2001 amounts have been reclassified to conform with fiscal 2002 presentations.



In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, which was effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance
of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairment of
goodwill. Management made an assessment of the goodwill valuation, and upon adoption recognized a goodwill impairment charge of $2,661,409 in the first quarter of 2002.

In
April, 2002, the FASB issued SFAS No. 145,Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This statement eliminates extraordinary accounting treatment for a gain or loss reported on the extinguishment of debt and amends other existing
authoritative pronouncements to make technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this statement are effective at the beginning
of fiscal year 2003. The Company does not believe the adoption of this statement will have a material impact on the overall financial position or results of operations.

In
June, 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. This statement
requires that the fair value of a liability associated with an exit or disposal activity be recognized when the liability is incurred. Prior to the adoption of SFAS No. 146, certain exit
costs were recognized when we committed to a restructuring plan, which may have been before the liability was incurred. The Company adopted the provisions of this statement in December, 2002. The
adoption of SFAS No. 146 had no impact on the Company's financial position or results of operations.

In
December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement
No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported results. Management has determined that it will continue to account for stock-based compensation to employees under the
provisions of APB No. 25 and it will make all disclosures in its financial reports. The amendments to SFAS 123 provided for under SFAS No. 148 are effective for financial
statements for fiscal years ending after December 15, 2002. The disclosure requirements of

F-10

---

SFAS No. 148 have been implemented in Note 1 Organization and Summary of Significant Accounting Policies and the interim disclosure requirements will be adopted by the Company in the
first quarter of 2003.

Note 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 conducts its business
primarily in the United States of America. The Company has less than 1% of total assets overseas. 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 outside North America are broken out, by major foreign markets, as follows:

|       |  | 2002 |           | 2001 |   | 2000     
|------ |  | ---- | --------- | ---- | - | ---------
|Asia   |  | $    | 2,940,000 |      | $ | 2,674,000
|Europe |  |      | 756,000   |      |   | 1,401,000
|Other  |  |      | 535,000   |      |   | 806,000  
|       |  |      |           |      |   |          
|       |  | $    | 4,231,000 |      | $ | 4,881,000
|       |  |      |           |      |   |          

Two
customers accounted for 11% and 10% of the revenues in 2002, respectively, and one customer accounted for 13% of the trade accounts receivable as of December 31, 2002. A
reduction or delay in orders from these or other significant customers could have a material adverse effect on the Company's results of operations. No customer accounted for more than 10% of the
Company's revenues in 2001 or 2000.

F-11

---



Note 3    INVENTORIES

The components of inventories are as follows at December 31:

2002

2001Raw materials

$
2,507,487

$
2,841,475Work in progress


417,434


195,644Finished goods


973,177


925,626TOTAL

$
3,898,098

$
3,962,745


Note 4    INTANGIBLES AND OTHER ASSETS

The Company purchased the rights and title of certain liposome and microemulsion technology devices from Arthur D. Little in 1985. The unamortized license fee and
patent are included in intangible assets and are being amortized using the straight-line method over the useful life of the patent, which is 17 years. In 1995, the Company
capitalized $96,680 of patent costs related to a cooperative research venture. Amortization of these assets charged to expense was $14,896 in 2002, $24,576 in 2001, and $42,269 in 2000. In 2001, the
Company capitalized $64,528 of costs related to the Multi-Stream Mixer Reactor patent, which is being amortized over a 17-year period, beginning in the last quarter of 2001. Amortization
of these costs was $3,800 in 2002 and $950 in 2001.

Costs
incurred in connection with the debt refinancing that occurred on February 28, 2000 are being amortized over three years, the initial term of the line of credit. The total
of such costs was approximately $207,000. Amortization of these costs amounted to $69,204 in both 2002 and 2001, and $57,663 in 2000, respectively.

Note 5    GOODWILL

In 1998, MFIC purchased substantially all of the assets and assumed certain liabilities of Epworth Manufacturing Company of South Haven, Michigan (Epworth) and
Morehouse-COWLES, Inc. of Fullerton, California (Morehouse) pursuant to an Asset Purchase Agreement (the "Agreement").

In
accordance with the Agreement, MFIC paid the following as consideration for the purchase price: (i) $5,508,480 in cash, (ii) two subordinated promissory notes in the
aggregate principal amount of $800,000 (the Promissory Notes) and (iii) 900,000 shares of MFIC's restricted common stock, $0.01 par value per share, subject to the restrictions as defined. MFIC
also incurred approximately $500,000 in expenses. In addition, MFIC assumed approximately $1,930,000 in accounts payable and accrued liabilities. The acquisition has been accounted for under the
purchase method of accounting.

On
January 1, 2002, the Company adopted SFAS No. 142,Goodwill and Other Intangible Assets, which requires companies to stop
amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, SFAS No. 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be
reviewed for impairment upon adoption of SFAS No. 142 and annually thereafter. The Company performed its annual impairment review during the fourth quarter of 2002, and determined that no
impairment of goodwill had occurred since it had recorded a one-time, noncash charge of $2,661,409 in the first quarter of 2002.

Under
SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Upon adoption of SFAS No. 142 in the
first quarter of 2002, the Company recorded a one-time, noncash charge of $2,661,409 to reduce the carrying value of its goodwill. Such charge is nonoperational in nature and is reflected
as a cumulative effect of a change in accounting principle in the accompanying consolidated statement of operations pursuant to the SFAS

F-12

---

No. 142 transition rules. The SFAS No. 142 goodwill impairment is associated solely with goodwill resulting from the acquisition of Morehouse-COWLES, Inc. and the Epworth
Manufacturing Company in 1998.

Note 6    DEBT

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

December 31,2002

2001Line of credit

$
2,681,987

$
2,535,79210% note payable





350,00010% subordinated note payable to related party


156,250


237,500Term note payable


153,739


248,743Less current portion


(2,851,991
)

(3,055,796
)TOTAL

$
139,985

$
316,239




The subordinated note is payable to Lake Shore Industries Inc. See Note 12 for further explanation of the note to Lake Shore Industries Inc.



In October, 2000, the Company entered into a settlement agreement related to a warranty claim dating back to 1998 for the Epworth Mill Division pursuant to which
the Company paid $100,000 upon execution of the agreement, and executed a promissory note for $350,000 payable two years from the execution date, with interest payable quarterly in arrears at 10% per
annum. The Company paid off the balance of this note in December, 2002.



On February 28, 2000, the Company entered into a revolving credit and term loan agreement with National Bank of Canada providing the Company with a
$4,475,000 three-year revolving credit and term loan facility. The Credit Facility was comprised of: (i) a $4 million three year revolving line of credit (Revolving Credit
Line) with advances thereunder bearing interest at an interest rate equal to the prime rate (the Prime Rate for United States borrowings from the National Bank of Canada as publicly announced from
time to time) plus one-half percent (0.50%). All borrowings under the Revolving Credit Line were evidenced by a $4 million promissory note having a maturity date of
February 28, 2003 (the Revolving Note), and (ii) a $475,000 term promissory note, amortized over a five-year period but having a maturity date of February 28, 2003 and
bearing interest at an interest rate equal to the Prime Rate (4.75% at December 31, 2001) plus three quarters of one percent (0.75%). Loans under the Credit Facility were 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. On January 16, 2002, the United States portion of National
Bank of Canada's operations and its loan portfolio was sold to PNC Bank. On February 19, 2003, the Company and PNC entered into an extension of the loan for an additional year, until
February 28, 2004.

F-13

---

As
one of the Lender's conditions precedent to the closing of the Finance Facility, the Company's Chairman, Irwin Gruverman, at the closing of the Credit Facility purchased, for
$250,000, 1,000,000 shares of restricted Common Stock of the Company. This purchase was approved by the Company's Board of Directors on December 30, 1999.

The
Credit Facility includes restrictive financial and non-financial covenants. The covenants include prohibition from paying dividends and limits capital expenditures to
$250,000 per year. In addition, the financial covenants include quarterly calculations of tangible net worth, maximum capital expenditures, and debt service coverage, and an annual covenant
requirement regarding net income. The Credit
Facility also contains a subjective acceleration clause and a lock-box arrangement, whereby remittances from the Company's customers reduce the outstanding amount of the Revolving Credit
Line.

After
review of the results as of and for the quarter ended March 31, 2001, the Company notified the National Bank of Canada that it was in violation of the tangible net worth and
liabilities to worth ratio covenants contained in the Credit Facility for the quarter ended March 31, 2001. On April 13, 2001, the Company received a waiver of these violations from the
National Bank of Canada, but is required to meet all covenant requirements thereafter. As a result of the waiver and management's expectations of future compliance, the non-current portion of the term
Promissory Note was classified as a non-current liability, as of December 31, 2000.

At
December 31, 2002, the Company was in violation of the net income and debt service coverage covenants. At December 31, 2001, the Company was not in compliance with the
tangible net worth, liabilities to worth ratio, net income covenants, and the debt service covenant. The Company has received a waiver of these violations from the Lender for both years, but is
required to meet all covenant requirements thereafter. On March 29, 2002, the Company and the Lender agreed on a revised set of covenants for fiscal 2002 under a second amendment to the
original agreement. On February 19, 2003, the Company and the Lender entered into a third amendment to the original agreement extending the credit facility for an additional year until
February 28, 2004, with no change to the revised covenants agreed upon under the agreement of March 29, 2002.

Due
to the subjective acceleration clause, and the lock-box arrangement, the revolving credit line is classified as a current liability in the consolidated balance sheet. At
December 31, 2002, the outstanding balance on the Revolving Credit Line was $2,681,987, having an interest rate of 5.5%. The balance outstanding on the term loan was $153,739, at an interest
rate of 5.75%.



The Company's ability to continue planned operations is dependent upon access to financing under the Credit Facility, which is potentially impacted by the
Company's ability to achieve future compliance with the financial covenants. It is expected by management that the Company will be in compliance with the revised covenants. Borrowings outstanding
under the Credit Facility are secured by a collateral pledge to the Lender of substantially all of the assets of the Company.

Management
of the Company is executing plans for a return to profitability; however, there can be no assurance that the Company will be successful in implementing these plans.

Note 7    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 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

F-14

---

as management deems advisable. The Company has made no matching contributions during 2002, 2001, and 2000. The Company also instituted a cafeteria plan in 1992, giving the employees certain
pre-tax advantages on specific payroll deductions.

Note 8    INCOME TAXES

At December 31, 2002, the Company had net operating loss and research tax credit carryforwards of approximately $5,086,000 and $171,000, respectively, for
financial reporting purposes, which may be used to offset future taxable income.

The
components of the net deferred tax asset with the approximate income tax effect of each type of carryforward, credit and temporary difference are as follows:

December 31,2002

2001Operating loss carryforwards

$
2,048,000

$
2,193,000Tax credit carryforwards


171,000


172,000Temporary differences


(22,000
)

(38,000
)2,197,000


2,327,000LessValuation allowance


(2,197,000
)

(2,327,000
)Net deferred tax asset

$


$



The
Company has recorded a full valuation allowance against its deferred tax assets because, based on the weight of available evidence, the Company believes it is more likely than not
that the deferred tax assets will not be realized in the near future. The carryforwards expire from 2003 through 2021 and are subject to review and possible adjustment by the Internal Revenue Service.
The Internal Revenue Code contains provisions that may limit the net operating loss and research tax credit carryforwards in the event of certain changes in the ownership interests of significant
stockholders.

Note 9    STOCKHOLDERS' EQUITY

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

F-15

---



Options granted under the Plans vest over a three-to-five-year period and expire 10 years from the grant date. At
December 31, 2002, 1,316,037 shares were available for future grant under the Plan. Information with respect to activity under the Plan is as follows:

Number of
Shares

Weighted Average
Exercise PriceOutstanding, December 31, 1999

1,303,731

$
1.13Granted

583,500


0.41Exercised




Canceled

(125,656
)

0.96Outstanding, December 31, 2000

1,761,575


0.94Granted

328,500


0.81Exercised

(24,375
)

0.31Canceled

(452,720
)

0.98Outstanding, December 31, 2001

1,612,980


0.88Granted

532,045


0.52Exercised

(19,375
)

0.31Canceled

(115,000
)

0.60Outstanding, December 31, 2002

2,010,650

$
0.90Exercisable, December 31, 2000

629,401

$
1.24Exercisable, December 31, 2001

878,803

$
1.06Exercisable, December 31, 2002

1,093,972

$
1.01


The
following table summarizes information relating to outstanding and exercisable stock options as of December 31, 2002:

|              |  |           |  |      |  |   |      | Exercisable
|------------- |  | --------- |  | ---- |  | - | ---- | -----------
|
|
|
|$0.31 to 1.31 |  | 1,997,850 |  | 6.5  |  | $ | 1.00 |            
|$1.69 to 5.88 |  | 12,800    |  | 3.0  |  |   | 2.30 |            
|              |  |           |  |      |  |   |      |            
|              |  | 2,010,650 |  | 6.50 |  | $ | 0.90 |            
|              |  |           |  |      |  |   |      |            



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

The
Company has computed the pro forma disclosures required under SFAS No. 123 for its stock compensation plan for employees during the years ended December 31, 2002, 2001
and 2000 using the

F-16

---

Black-Scholes option pricing model under the fair value method as prescribed by SFAS No. 123. The assumptions used for the years ended December 31, 2002, 2001 and 2000 are as follows:

December 31,2002

2001

2000Risk-free interest rates

4.36%

5.25%

5.25%Expected lives

5 years

5 years

5 yearsExpected volatility

75%

197%

146%Dividend yield

0%

0%

0%


Stock
or other equity-based compensation for nonemployees must be accounted for under the fair value method as required by SFAS No. 123 and Emerging Issues Task Force
No. 96-18,Accounting for
Equity Instruments That Are Issued To Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and the related interpretations. Under this method,
the equity-based instrument is valued at either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement
date is generally the vesting date for nonemployees. Compensation related to stock appreciation rights and other variable stock option or award plans should be measured at the end of each period. The
resulting noncash expense is recorded in the statements of operations over the vesting period of the stock. The Company did not grant any options to non-employees, excluding board members,
in 2002, 2001 or 2000.



On September 23, 1999, the Chief Executive Officer of the Company, Irwin J. Gruverman, was granted warrants to purchase up to 100,000 shares of the
Company's common stock at a price of $0.52 per share, having an expiration date of July 2, 2004. As of December 31, 2002, there were 100,000 warrants outstanding.



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 29,207, 30,658, and 27,641 in 2002, 2001 and 2000, respectively.

Note 10    COMMITMENTS

The Company leases its facilities under non-cancelable operating leases expiring through August 2006. Future minimum rental payments under the
operating leases at December 31, 2002 are approximately as follows:

2003


413,0002004


358,0002005


373,0002006


170,000Total Lease Payments

$
1,314,000


F-17

---

Rent
expense for 2002, 2001, and 2000 was approximately $402,000, $415,000, and $405,000, respectively. A portion of the space is sublet to non-affliliated companies for a
total of $84,000 per annum.

Note 11    RELATED PARTY TRANSACTIONS

During 2001 and 2000, the Company and G&G Corporation (G&G), an entity controlled by Mr. Gruverman, the Company's Chairman, entered into an arrangement
whereby G&G reimbursed the Company for certain administrative expenses incurred for services performed by the Company. The Company was reimbursed approximately $0, $30,407 and $75,780 by G&G during
2002, 2001 and 2000, respectively. At December 31, 2002, 2001, and 2000, G&G owed the Company $0, $0 and $18,525, respectively.

As
discussed in Notes 6 and 12, the Company owed the former Principals of Morehouse and Epworth $156,250, $237,500 and $300,000 at December 31, 2002, 2001, and 2000, respectively.
Interest capitalized on the $300,000 note in connection with the Settlement Agreement discussed in Note 12 amounted to $88,750 and is being amortized over 5 years. Total payments in 2002
and 2001 were $21,989 and $25,449, respectively.

Note 12    SETTLEMENT AGREEMENT, DEBT RESTRUCTURING AND REFINANCING

On December 20, 1999 the Company signed an agreement in principle (the Agreement In Principle) with J.B. Jennings and Bret A. Lewis, the former owners of
the Epworth Mill and Morehouse-COWLES businesses (the Sellers), Lake Shore Industries, Inc., and JLJ Properties, Inc., entities owned
and controlled by the Sellers. The Agreement In Principle sets forth understandings among the parties concerning restructuring of the Company's subordinated debt and resolution of various disputes. On
January 17, 2000 a definitive settlement agreement incorporating these subject matters was executed between the parties (the Settlement Agreement). In connection with the closing of the Credit
Facility, and pursuant to a Settlement Agreement dated January 17, 2000 with the Company's subordinated debt holders, the subordinated debt of the Company was restructured in the following
manner. The outstanding August 14, 1998 $500,000 subordinated promissory note, having a remaining $475,000 principal balance together with accrued interest at the Closing Date in the
approximate amount of $77,500, and accrued interest on the August 14, 1998 $300,000 subordinated note were converted to 500,000 shares of MFIC restricted common stock (the Conversion Shares).
The fair market value of the Company's Common Stock on the date of the Agreement In Principle was $0.31 per share. MFIC was granted the right for a three-year period to repurchase the
Conversion Shares at a purchase price of $1.75 per share. The August 14, 1998 $300,000 subordinated note was replaced with a new $300,000 subordinated promissory note dated February 28,
2000 (the 2000 Subordinated Note). The 2000 Subordinated Note has a maturity date of February 28, 2005 and bears interest at a rate of ten percent (10%) per annum. The note is payable interest
only in its first year and then is payable in equal quarterly installments of principal together with outstanding interest thereon until maturity.

A
disputed lease between the Company and one of the Seller's entities for property located in South Haven, Michigan, which was the subject of a suit to terminate filed by the Company,
was voluntarily dismissed in return for the payment by the Company of a total of $58,000. The initial payment in the amount of $30,000 was paid on January 19, 2000 upon execution of the
Settlement Agreement and the balance on February 28, 2000. The Company and the Sellers executed a mutual release of liability related to the August 14, 1998 Asset Purchase Agreement. As
a result of the debt

F-18

---

restructuring and refinancing, the Company recorded an extraordinary gain of approximately $195,000 in the first quarter of 2000.

Note 13    QUARTERLY RESULTS OF OPERATIONS2002

Summarized unaudited consolidated quarterly financial data are as follows:

|                                                                       |  | Fiscal 2002 Quarters |           
|---------------------------------------------------------------------- |  | -------------------- | ----------
|
|Revenues                                                               |  | $                    | 3,581,320 
|Gross income                                                           |  |                      | 1,670,945 
|Net income (loss) before cumulative effect of accounting change        |  |                      | 100,247   
|Cumulative effect of accounting change                                 |  |                      | (2,661,409
|Net (loss) income                                                      |  | $                    | (2,561,162
|Net income (loss) per share:                                           |  |                      |           
|Basic income per share before cumulative effect of accounting change   |  | $                    | .01       
|Cumulative effect of accounting change                                 |  | $                    | (.36      
|Net (loss) income per share                                            |  | $                    | (.35      
|Diluted income per share before cumulative effect of accounting change |  | $                    | .01       
|Cumulative effect of accounting change                                 |  | $                    | (.36      
|Diluted (loss) income per share                                        |  | $                    | (.35      

|                                    |  | Fiscal 2001 Quarters |          
|----------------------------------- |  | -------------------- | ---------
|
|Revenues                            |  | $                    | 4,449,624
|Gross income                        |  |                      | 2,227,086
|Net income (loss)                   |  |                      | 497,055  
|Net income (loss) per share         |  | $                    | ..07     
|Diluted net income (loss) per share |  | $                    | .07      

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

None.

F-19

---



PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning directors and executive officers of the Company required under this item is incorporated herein by reference to the Company's
definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31,
2002.

Item 11. EXECUTIVE COMPENSATION

The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 2002.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 2002.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 2002.

Item 14. Controls and Procedures

(a)Evaluation of disclosure controls and procedures.Based on his evaluation as of a date within 90 days prior to the
filing date of this Annual Report on Form 10-K, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure that 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 controls.    There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

F-20

---

PART IV

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

(a)(1.)    Consolidated Financial Statements.



(a)(2.)    Financial Statement Schedules.



(a)(3.)    List of Exhibits.

F-21

---



Exhibit Index

|Exhibit
Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(a)           |  | Certificate of Incorporation for the Company, as amended (filed as Exhibit 2A to Registration Statement No. 0-11625 on Form 8-A and as Exhibit 3.1(a) to the Company's Report on Form 10-Q for the quarterly period ended
September 30, 1999 and incorporated herein by reference).                                                                                                                                                            
|3(b)           |  | Amended and Restated By-Laws for the Company (filed as Exhibit 3.3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference).                                                                                                                                                                                                                                           
|10.1           |  | 1987 Stock Plan (filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference).                                                                                                                                                                                                                                                                         
|10.2           |  | 1988 Stock Plan (filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 and incorporated herein by reference).                                                                                                                                                                                                                                                                         
|10.3           |  | 1989 Non-Employee Directors Stock Option Plan (filed as Exhibit 10.1 to the Company's registration statement on Form S-8 filed October 22,1996 and incorporated herein by reference).                                                                                                                                                                                                                                                          
|10.4           |  | Lease for 30 Ossipee Road, Newton, Massachusetts dated May 23, 1997 between Microfluidics International Corporation and J. Frank Gerrity, Trustee of 1238 Chestnut Street Trust under Declaration of Trust dated May 23, 1969, recorded with Middlesex
South Registry of Deeds in Book 11682, Page 384 (filed as Exhibit 3.10(a) to the Company's form 10-Q for the quarterly period ended June 30, 1997 and incorporated herein by reference).
|10.5           |  | Letter of Understanding between Microfluidics International Corporation and Worcester Polytechnic Institute dated as of April 3, 1992 (filed as Exhibit 3.10(f) to the Company's Form 10-K for the fiscal year ended December 31, 1993 and incorporated
herein by reference).                                                                                                                                                                  
|10.6           |  | Agreement between Microfluidics International Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company's Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference) with
amendments dated September 1, 1994 and March 31, 1995.                                                                                                                                 
|10.7           |  | Amendment to agreement dated September 1, 1994 between Microfluidics International Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company's Form 10-K for the fiscal year ended December 31, 1993, and
incorporated herein by reference).                                                                                                                                                      
|10.8           |  | Amendment to agreement dated March 31, 1995 between Microfluidics International Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company's Form 10-K for the fiscal year ended December 31, 1993, and
incorporated herein by reference)                                                                                                                                                          
|10.9           |  | License Agreement among Microfluidics International Corporation, Worcester Polytechnic Institute and Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit 3.10(h) to the Company's Form 10-K for the fiscal year ended December 31, 1993 and
incorporated herein by reference).                                                                                                                                                     
|10.10          |  | Amendment to agreement dated September 1, 1994 between Microfluidics International Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company's Form 10-K for the fiscal year ended December 31, 1993, and
incorporated herein by reference).                                                                                                                                                      
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-22

---

|10.11 |  | Letter, dated August 15, 1995, from Microfluidics International Corporation to Michael T. Rumley. (filed as Exhibit 3.10(j) to the Company's Form 10-K for fiscal year ended December 31, 1995 and incorporated herein by reference).                                                                                       
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12 |  | Letter, dated December 31, 1995 from Microfluidics International Corporation to Irwin J. Gruverman. (filed as Exhibit 3.10(k) to the Company's Form 10-K for fiscal year ended December 31, 1996 and incorporated herein by reference).                                                                                     
|10.13 |  | Warrant for the Purchase of Shares of Common Stock, dated July 14, 1993, in favor of Ladenburg, Thalmann & Co. Inc. (filed as Exhibit 3.10(l) to the Company's Form 10-K or fiscal year ended December 31, 1996 and incorporated herein by
reference).                                                                      
|10.14 |  | Letter, dated December 31, 1996, from Microfluidics International Corporation to Irwin J. Gruverman. (filed as Exhibit 3.10(o) to the Company's Form 10-K for fiscal year ended December 31, 1996 and incorporated herein by reference).                                                                                    
|10.15 |  | Agreement between Microfluidics International Corporation and Catalytica, Inc. dated January 1, 1995 regarding participation in and management of the Advanced Technology Program (ATP). (filed as Exhibit 3.10(p) to the Company's Form 10-K for fiscal
year ended December 31, 1996 and incorporated herein by reference).
|10.16 |  | Consulting Agreement with James Little. (filed as Exhibit 3.10(q) to the Company's Form 10-K for fiscal year ended December 31, 1996 and incorporated herein by reference).                                                                                                                                                 
|10.17 |  | Supplemental Agreement between Catalytica Advanced Technologies, Inc. and Microfluidics International Corporation dated December 31, 1997.                                                                                                                                                                                  
|10.18 |  | Letter dated December 31, 1997, from Microfluidics International Corporation to Irwin J. Gruverman and G & G Diagnostics Corp.                                                                                                                                                                                              
|10.19 |  | 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.                                                                                                                                                           
|10.20 |  | 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).                                                                   
|10.21 |  | 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.                                                                                               
|10.22 |  | $500,000 Subordinated Promissory Note issued by the Company to Epworth Manufacturing Company (filed as exhibit 99.2 to the Company's Form 8-K on August 27, 1998, File No. 000-11625, and incorporated herein by reference).                                                                                                
|10.23 |  | $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).                                                                                                
|10.24 |  | Revolving credit loan between Comerica Bank and the Company dated August 12, 1998 (filed as Exhibit 10.1 to the Company's form 10-Q for the quarterly period ended September 30, 1998 and incorporated herein by reference).                                                                                                
|10.25 |  | Letter dated December 31, 1998 from Microfluidics International Corporation To Irwin J. Gruverman. (Filed as exhibit 3.10(2) to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1998 and incorporated herein by
reference.)                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                             

F-23

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|10.26 |  | Revolving Credit and Term Loan Agreement among MFIC Corporation and National Bank of Canada dated February 28, 2000. (Filed as exhibit 10.26 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein
by reference.)                                                                                                                                                                                                           
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.27 |  | Revolving Credit Note of the Company in favor of National Bank of Canada in the amount of $4,000,000.00 dated February 28, 2000. (Filed as exhibit 10.27 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and
incorporated herein by reference.)                                                                                                                                                                                               
|10.28 |  | Term Note of the Company in favor of National Bank of Canada in the amount of $475,000.00 dated February 28, 2000. (Filed as exhibit 10.28 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by
reference.)                                                                                                                                                                                                             
|10.29 |  | Security Agreement of the Company in favor of National Bank of Canada dated February 28, 2000. (Filed as exhibit 10.29 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by reference.)                                                                                                                                                                                                                                 
|10.30 |  | Trademark and Trademark Applications Security Agreement of the Company in favor of National Bank of Canada, dated February 28, 2000. (Filed as exhibit 10.30 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and
incorporated herein by reference.)                                                                                                                                                                                           
|10.31 |  | Patent and Patent Applications Security Agreement of the Company in favor of National Bank of Canada, dated February 28, 2000. (Filed as exhibit 10.31 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and
incorporated herein by reference.)                                                                                                                                                                                                 
|10.32 |  | Unlimited Guaranty of Microfluidics Corporation in favor of National Bank of Canada Dated February 28, 2000. (Filed as exhibit 10.32 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by
reference.)                                                                                                                                                                                                                   
|10.33 |  | Stock Pledge Agreement between the Company and National Bank of Canada dated February 28, 2000. (Filed as exhibit 10.33 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by reference.)                                                                                                                                                                                                                                
|10.34 |  | Subordination Agreement among the Company, Lake Shore Industries, Inc. and National Bank of Canada dated as of February 28, 2000. (Filed as exhibit 10.34 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and
incorporated herein by reference.)                                                                                                                                                                                              
|10.35 |  | 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 fiscal year ended December 31, 2000, and
incorporated herein by reference.)                                                                                                                                                                                      
|10.36 |  | Forbearance Agreements with Comerica. (Filed as exhibit 10.36 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by reference.)                                                                                                                                                                                                                                                                                          
|10.37 |  | 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 fiscal year ended December 31, 2000, and incorporated herein by reference.)
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-24

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|10.38 |  | Letter, dated December 31, 1999, from MFIC Corporation to Irwin J. Gruverman and G&G Diagnostics Corp. (Filed as exhibit 10.38 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by
reference.)                                                                                                                                                                                                            
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.39 |  | Letter, dated December 31, 1999, from MFIC Corporation to Irwin J. Gruverman. (Filed as exhibit 10.39 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by reference.)                                                                                                                                                                                                                                     
|10.40 |  | First Amendment to Revolving Credit and Term Loan Agreement between the Company and National Bank of Canada dated March 30, 2000. (Filed as exhibit 10.40 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and
incorporated herein by reference.)                                                                                                                                                                                 
|10.41 |  | Lease between ABB and Microfluidics dated April 14, 2000 for space at Lampertheim, Germany. (Filed as exhibit 10.41 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by reference.)                                                                                                                                                                                                                       
|10.42 |  | Security Agreement between MFIC Corporation and J.M. Huber Corporation dated October 18, 2000. (Filed as exhibit 10.42 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by reference.)                                                                                                                                                                                                                    
|10.43 |  | Settlement agreement between MFIC Corporation and J.M. Huber Corporation dated December 18, 2000. (Filed as exhibit 10.43 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by reference.)                                                                                                                                                                                                                 
|10.44 |  | Termination agreement between Michael A. Lento and MFIC Corporation dated December 14, 2000. (Filed as exhibit 10.44 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by reference.)                                                                                                                                                                                                                      
|10.45 |  | Letter, dated December 31, 2000, from MFIC Corporation to Irwin J. Gruverman and G&G Diagnostics Corporation. (Filed as exhibit 10.45 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by
reference.)                                                                                                                                                                                                     
|10.46 |  | Letter, dated December 31, 2000, from MFIC Corporation to Irwin J. Gruverman. (Filed as exhibit 10.46 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated herein by reference.)                                                                                                                                                                                                                                     
|10.47 |  | 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 fiscal year ended December 21, 2001, and incorporated herein by reference.)
|10.48 |  | Consulting agreement with Vincent Cortina dated January 2, 2002. (Filed as Exhibit 10.48 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and incorporated herein by reference.)                                                                                                                                                                                                                                                  
|10.49 |  | Letter dated December 31, 2001 from MFIC Corporation to Irwin J. Gruverman. (Filed as Exhibit 10.49 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and incorporated herein by reference.)                                                                                                                                                                                                                                       
|10.50 |  | 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 fiscal year ended December 31, 2001, and incorporated
herein by reference.)                                                                                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-25

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|10.51  |  | 1986 Employee Stock Purchase Plan as Amended. (Filed as Exhibit 10.51 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and incorporated herein by reference.)
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.52  |  | 1988 Stock Plan as Amended. (Filed as Exhibit 10.52 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and incorporated herein by reference.)                  
|*10.53 |  | Letter dated December 31, 2002 from MFIC Corporation to Irwin J. Gruverman.                                                                                                                      
|*10.54 |  | Third Amendment to Revolving Credit and Term Loan Agreement between the Company and PNC Bank N.A. dated February 19, 2003.                                                                       
|*23(a) |  | Consent of Brown & Brown LLP                                                                                                                                                                     
|*23(b) |  | Consent of Deloitte & Touche LLP                                                                                                                                                                 
|*99.1  |  | 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.                                               
|*99.2  |  | 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.                                               

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F-26

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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 24th day of March 2003.

| |  | By: |  | /s/IRWIN J. GRUVERMANIrwin 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. GRUVERMANIrwin J. Gruverman   |  | Chief Executive Officer (Principal Executive Officer), Chairman of the Board of Directors and Secretary |  | March 24 2003 
|/s/JAMES N. LITTLEJames N. Little         |  | Director                                                                                                |  | March 24, 2003
|/s/VINCENT CORTINAVincent Cortina         |  | Director                                                                                                |  | March 24, 2003
|/s/LEO PIERRE ROYLeo Pierre Roy           |  | Director                                                                                                |  | March 24,2003 
|/s/EDWARD T. PASLAWSKIEdward T. Paslawski |  | Director                                                                                                |  | March 24, 2003

F-27

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SCHEDULE II

MFIC CORPORATION

Valuation
and Qualifying Accounts and Reserves
For the years ended December 31, 2002, 2001, and 2000

|                                                                    |  | Balance at
Beginning of Period |           | Additions Charged to Costs and Expenses |   | Deductions and
Adjustments |  | Balance at End of Period
|------------------------------------------------------------------- |  | ------------------------------ | --------- | --------------------------------------- | - | -------------------------- |  | ------------------------
|ALLOWANCE FOR DOUBTFUL ACCOUNTS                                     |  |                                |           |                                         |   |                            |  |                         
|For the year ended December 31, 2002                                |  | $                              | 38,248    |                                         | $ | 6,985                      |  | $                       
|For the year ended December 31, 2001                                |  |                                | 55,570    |                                         |   |                           |  |                         
|For the year ended December 31, 2000                                |  |                                | 65,321    |                                         |   | 58,280                     |  |                         
|INVENTORY RESERVE                                                   |  |                                |           |                                         |   |                            |  |                         
|For the year ended December 31, 2002                                |  | $                              | 96,837    |                                         | $ | 12,431                     |  | $                       
|For the year ended December 31, 2001                                |  |                                | 194,044   |                                         |   | 34,727                     |  |                         
|For the year ended December 31, 2000                                |  |                                | 157,034   |                                         |   | 59,010                     |  |                         
|ACCUMULATED AMORTIZATION RELATED TO GOODWILL AND IMPAIRMENT CHARGES |  |                                |           |                                         |   |                            |  |                         
|For the year ended December 31, 2002                                |  | $                              | 1,403,050 |                                         | $ | 2,661,409                  |  | $                       
|For the year ended December 31, 2001                                |  |                                | 981,050   |                                         |   | 422,000                    |  |                         
|For the year ended December 31, 2000                                |  |                                | 554,329   |                                         |   | 426,721                    |  |                         
|ACCUMULATED AMORTIZATION RELATED TO OTHER INTANGIBLES               |  |                                |           |                                         |   |                            |  |                         
|For the year ended December 31, 2002                                |  | $                              | 662,085   |                                         | $ | 87,900                     |  | $                       
|For the year ended December 31, 2001                                |  |                                | 567,321   |                                         |   | 94,764                     |  |                         
|For the year ended December 31, 2000                                |  |                                | 467,389   |                                         |   | 99,932                     |  |                         

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CERTIFICATIONS

I,Irwin J. Gruverman, certify that:





Date:
March 21, 2003

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Chief
Executive Officer (Principal Executive Officer)

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I, Dennis P. Riordan, certify that:

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





Date:
March 21, 2003

---

Corporate
Controller (Principal Accounting Officer)

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