**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

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**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended December 31, 2006**

**OR**

**o**                                 TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe transition period from                                           to                                           **

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**CommissionFile Number: 0-11625**

**MFIC CORPORATION**

(Exact name of registrant asspecified in its charter)

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

 

**(617) 969-5452**

(Registrant’s telephonenumber, including area code)

**Securitiesregistered pursuant to Section 12(b) of the Act:    None**

**Securitiesregistered pursuant to Section 12(g) of the Act:  CommonStock, $.01 par value**

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

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of theAct.  o

Indicate by check mark whether the registrant (1) filedall reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  þ  No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  þ

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

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

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

As of March 23, 2007and June 30, 2006, 10,124,769 and 9,984,845 shares, respectively, of theregistrant’s Common Stock were outstanding, and the aggregate market value ofthe registrant’s Common Stock held by non-affiliates of the registrant (withoutadmitting that such person whose shares are not included in such calculation isan affiliate) was approximately $19,048,000 and $10,868,000, respectively,based on the last sale price as reported by the Over-the-Counter Bulletin Boardon each such date.

 

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**MFIC CORPORATIONTable of Contents**

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

 

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**PART I**

**Item1.****                        BUSINESS**

*Company Overview*

MFIC Corporation (MFIC or the Company) has, for over20 years, specialized in manufacturing and marketing a broad line of high shearfluid processing systems used in numerous applications in the chemical,pharmaceutical, biotech, food and cosmetics industries.

MFIC’s line of high shear fluid processor equipment,marketed under the Company’s Microfluidizer® trademark and trade name, process premixedformulations to produce small, uniform structures, usually of the submicron andnanoscale size (commonly defined as particles having dimensions less than 100nanometers) including nanostructures, microemulsions and nanosuspensions. Theequipment produces commercial quantities of such materials important toproducers of pharmaceuticals, coatings and other products.

Additionally, the Company commercializes itsproprietary equipment, processes and technology for the continuous productionof precipitated submicron or nanoscale particles by interaction of discretestreams of reacting materials. The Company has undertaken commercializationefforts for its patented MicrofluidizerMixer/Reactor (MMR), which is a highpressure multiple stream mixer/reactor.

The Company’s technology embodied within itsMicrofluidizer® high shear fluid processor is used forformulation of products that are normally very difficult to mix and stabilize. Microfluidizerprocessors through process intensification allow manufacturers in the chemical,pharmaceutical, cosmetic, and food processing industries to produce higherquality products with better characteristics on a more consistent basis thanwith other blending, mixing or homogenizing techniques. Additionally, theequipment is used for cell disruption to harvest the cultivated contents ofbacterial, yeast, mammalian and/or plant cells and for liposomal encapsulationof materials for the cosmetics and biotech/biopharma industries.

The Company’s management believes that futurecommercialization and growth of nanotechnology may be, in large part, enabledby the manufacturing capability of the Company’s materials processor and MMRequipment. Further, the Company guarantees scaleup of formulations and resultson its processor equipment from 10 milliliters per minute on its laboratory andbench top models to more than 15 gallons per minute on its pilot and productionmodels.

The Company wasincorporated in Delaware in 1983. The Company, formerly named BiotechnologyDevelopment Corporation, changed its name effective June 8, 1993 toMicrofluidics International Corporation, and again changed its name effective July 12,1999 to MFIC Corporation. From August, 1998 until its sale on February 9,2004, the Company also operated another division, known as the Morehouse-COWLESDivision, which manufactured and sold a broad line of mechanical fluidmaterials processing systems used for a variety of dispersing, milling, andmixing applications across a variety of industries. The Company’s principalexecutive offices are located at 30 Ossipee Road, in Newton, Massachusetts 02464-9101and its telephone number is (617) 969-5452.

*Technologies*

*FluidProcessing Equipment.**  *TheCompany’s Microfluidizer high shear fluid processing equipment is based onpatents and related technology that were licensed by the Company from Arthur D.Little & Co. in 1983 and subsequently purchased by the Company in1985.

Microfluidizer high shear fluid processors differ fromconventional mechanical mixing and processing technologies in that theCompany’s equipment utilizes highly pressurized product streams that travel athigh velocities in precisely defined microchannels producing high shear forcesand then collide at ultra-high velocities in a small, confined spaceproducing high forces of impact. There are no moving parts 

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in this mixing andcollision zone (“fixed geometry”). Combined forces of shear and impact in thefixed geometry design act upon products to cause deagglomeration and particlesize reduction. These forces result in what the Company believes are smaller,more uniform, highly stable, and reproducible dispersions and emulsions thancan be produced by any other means. Microfluidizer processors also differ fromconventional mixing and homogenization equipment in that Microfluidizerprocessors permit a linear scaleup from milliliters per minute to gallons perminute with no basic change in product formulation or equipment design andengineering. The formulations processed may be liquid/liquid or liquid/solidcombinations.

*MMR.*   TheCompany has introduced its patented Microfluidizer Mixer-Reactor (MMR) systemas a continuous chemical reactor, which the Company believes may become astandard device for conducting chemical reactions, many of which can beconfigured to produce nanoparticles. This system produces uniform nanoparticleswith phase purity previously unachievable with conventional batch reactiontechnology. This degree of reaction chemistry control can lead tocost-effective product improvements and the development and manufacture of newnanomaterials in scalable quantities. Recent advances have enabled simpler MMRvariants, utilizing modified Microfluidizer processors , which the Companyplans to market.

*CommercialApplications*

Microfluidizer processor technology allowsmanufacturers in the chemical, pharmaceutical, biotechnology, cosmetic, andfood processing industries to produce higher quality products with bettercharacteristics on a more consistent basis than with other blending, mixing orhomogenizing techniques. Further, the proprietary equipment enables manufactureof unique products which cannot otherwise be produced. Microfluidizer processorequipment is generally used in the processing of high value-added end-productsthat require extremely small and uniform particle sizes. Newer applicationsinclude deagglomeration of carbon nanotubes for subsequent formatting oralignment for specific uses.

Microfluidizer processor equipment can be used to mixand formulate stable emulsions, dispersions and liposomes, and for celldisruption.

Emulsions are homogenous mixtures of oil and watercomponents (or other normally immiscible components), which, if mixed properly,do not readily separate. Emulsions comprise many products, such as foodadditives, medicines (including injectable drugs), photographic films, andpolymers. The Company believes that, generally, an emulsion processed withMicrofluidizer processor equipment will exhibit improved stability and requirereduced concentrations of costly emulsifying agents that are otherwise neededto create and/or maintain product stability.

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

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

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

Microfluidizer processor equipment is generally usedin commercial applications where a scientist, formulator or chemist is tryingto develop or improve a product formulation for a high value-added end product.The Company believes that its laboratory equipment uniquely facilitates modernformulation development and production capability. Microfluidizer processorequipment is initially employed in a research laboratory, with the equipmentsubsequently being used in scale-up to pilot scale production of new orimproved products, and ultimately, for production scale volumes as the improvedproduct comes to market. From laboratory to production, the Company guaranteesscale-up of formulations and results on its equipment from 10 milliliters perminute on its laboratory and bench top models up to more than 15 gallonsper minute on its pilot and production models.

The Company currently manufactures and markets thefollowing lines of equipment:

*TheHC Series.*   The HC Series, also known as “Homogenizers,”is a laboratory-scale series of equipment that is intended to impart moderatelevels of energy into a customer’s product with greater flow rates than themore energy intensive Microfluidizer processor devices. Operating pressures ofproducts in the Company’s HC Series can range from 250 psi to as high as8,000 psi, and will process as much as two liters of fluid per minute.

*The M-110Series.*   The M-110 Series is alaboratory product line that is designed primarily for research and developmentapplications. Standard pneumatic (air-driven) models can generate pressures ashigh as 23,000 psi and have a product flow rate on the order of one-half literper minute. The M-110EH includes an on-board hydraulic pump system forhigh performance “lab scale” micro-mixing at processing pressures up to 30,000psi and flow rates up to 320 ml/min. It has numerous standard featuresincluding ceramic plungers, diamond interaction chambers, and options includingexplosion-proof motors, and steam sterilization.

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

*The M-210Series.*   The M-210 Series is a pilotproduction unit and is primarily marketed to pharmaceutical, cosmetic and foodproduct manufacturers who have successfully created a new or improvedformulation on the M-110 Series unit and would like to increasetheir production capacity. The M-210 Series unit is typically usedfor testing formulations at greater volume levels before initiating full-scaleproduction. For some customers (such as biotechnology and pharmaceuticalproduct manufacturers), the M-210 Series may have the capacity tofunction as a production unit.

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

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

The M-700 Series equipment is available ina variety of configurations and flow rates depending upon motor size and thenumber of intensifier pumps. The M-700 series equipment can achieveoperating pressures up to 40,000 psi. On the low end of the spectrum is the 15HP, single intensifier pump M-7115 machine with flow rates ranging from0.9 gpm at 10,000 psi to 0.4 gpm at 30,000 psi. The next size up is the 25 HP,single intensifier pump, M-7125 machine with flow rates ranging from 2.3gallons per minute (“gpm”) at 10,000 psi to 0.6 gpm at 30,000 psi. The largestoffering of the M-700 series product line is the 50 HP, dual intensifierpump M-7250 machine with flow rates ranging from 4.0 gpm at 10,000 psi to1.2 gpm at 30,000 psi. The M-7250 machine is available with a recentlyintroduced “constant pressure” option in which operating pressure is maintainedto within 5% of peak operating pressure resulting in lengthened component life,reduced operating costs, and quieter operation.

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

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

(i.)   The M-700Microfluidizer Containment System, which provides a hermetically sealedstainless steel containment isolator that fully encloses the Microfluidizerprocessor’s high-pressure processing area and is utilized for the safetyprotection of personnel engaged in the processing of highly toxic cancertherapeutic drugs and other hazardous and potent materials.

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

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

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

(v.)   ConstantPressure control option is now an available feature that eliminates virtuallyall process pressure variations which dramatically improves the overallreliability of all M-7250 machines.

*The M-610Series.*   The M-610 Series are legacysystems that consist of custom-built models used for large-scale production. Theseunits have flow rates of up to 18 gallons per minute and generate operatingpressures up to 40,000 psi. Generally, these models are available in 100 HP and200 HP.

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*MicrofluidizerMixer/Reactor (MMR).*   The Company has introducedits patented Microfluidizer Mixer/Reactor (MMR) system as a continuous chemicalreactor, which the Company believes may become a standard device for conductingchemical reactions, many of which can be configured to produce nanoparticles. Thissystem produces uniform nanoparticles on a continuous (versus batch) basis withphase purity previously unachievable with conventional batch reactiontechnology. This degree of reaction chemistry control can lead tocost-effective product improvements and the development and manufacture of newnanomaterials in scalable quantities. Applications for the new technologyinclude improving the performance of catalysts, planarization polishing media,superconductors, abrasive silica, recording media, photographic media andpigments. It also may be used in the development and production of uniquepharmaceutical products as well as the conversion of existing insoluble drugsto nanosuspension forms which are then deliverable by conventional means andwith high bioavailability. The Company is proceeding with projects involvingother companies seeking to optimize or enable drug delivery, catalysts andcoatings products, as well as an internal program on nanopolymer creation fordrug delivery and other applications. The Company believes that it cannotaccurately assess or anticipate either the timing of receipt of an order or thedelivery of its first MMR laboratory development systems. However, managementbelieves that such event will occur in the foreseeable future. The Companybelieves that the MMR systems and technology will make it a leader in theprovision of systems for continuous production of uniform, reproducible,microparticles, nanoparticles and nanodroplets involving fast chemicalreactions. A recent breakthrough has allowed design of a modifiedMicrofluidizer with capabilities to handle most continuous reactionapplications. This simpler equipment design is expected to result in a lowercost system which should accelerate interest in MMR systems.

*Former CompanyBusiness Division*

*Morehouse-COWLESDivision.*   On February 9, 2004, pursuant toan Asset Purchase Agreement (the Asset Purchase Agreement) dated February 5,2004 between MFIC and a wholly owned subsidiary of NuSil Corporation, aCalifornia corporation (NuSil), MFIC sold substantially all of the assets andselected liabilities of its Morehouse-COWLES Division (the Division), to NuSil.Other than NuSil’s prior purchases of products from the Division, there were nopreexisting relationships between MFIC and NuSil.

Prior to February 9,2004, the Company-operated Morehouse-COWLES Division manufactured grinding anddispersing equipment used in a broad number of industries including thecoatings and ink industries. The products included high-speed single andmulti-shaft dissolvers and dispersers, stone mills, and vertical and horizontalmedia mills. As one of the early inventors of dispersers, dissolvers, stonemills, and media mills, the one hundred-year-old COWLES name is anindustry-accepted symbol of quality, reliable products. Morehouse-COWLESmanufactures 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 conventionalwhereby the formulations are less expensive to produce and the volumes ofproduct produced are large. The Morehouse-COWLES product lines are used inbroader, high volume, lower value-added applications requiring less stringentparticle size reduction.

*Marketing and Sales*

The Company’s marketing and sales activities areconducted through a corporate marketing and sales group that is responsible forthe worldwide marketing and sales of all products.

Marketing programs include media advertising, awebsite, direct mail, seminars, trade shows and telemarketing. In addition, theCompany has an active program of field demonstrations. As an aid to themarketing and sales activity for the equipment, the Company providesprospective customers with access to its applications laboratories. Theselaboratories, located in Newton, Massachusetts, Irvine, California, andLampertheim, Germany, provide free processing and particle size anddistribution analysis of a prospective 

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customer’s sampleformulation. Additionally, a prospective customer may pay for subsequentlaboratory time and services on a fee for services basis. Typically, about onethird of such laboratory trials result in equipment orders within twelve months.Finally, the Company has an active domestic and foreign equipment rentalprogram designed to allow customers to use Microfluidizer processor equipmentat their own locations to experiment with and develop product formulations andprocesses. A rental period may last from weeks to several months. The Companyhas a rental pool of equipment to service the needs of customers, includinglaboratory and pilot production machines. A significant percentage of customerswho rent the Company’s equipment elect to purchase the rental equipment or topurchase new equipment. For the Company’s policy on product warranties, see “CriticalAccounting Policies—Product Warranties under Item 7.

Distributors and sales agents worldwide are supportedwith trade advertising, collateral literature and trade show materials. Thedistributors and sales agents also advertise directly on their own behalf andattend regional and international trade shows.

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

*Customers*

The users of the Company’s systems are in variousindustries, including the chemical, pharmaceuticals, food, cosmetic andbiotechnology industries. One company accounted for 10% of 2006 revenues. Twocompanies each accounted for more than 10% of 2005 revenues and 2004 revenues. MizuhoIndustrial Co. Ltd. (Mizuho), a distributor for the Company, and one customer,Teva Pharmaceuticals Industries Ltd. (Teva) and its’ wholly owned subsidiary,accounted for 9.2% and 15.23%, respectively, of the Company’s revenues in 2006;19.5% and 18.9%, respectively, in 2005; and 20.5% and 12.8%, respectively, in2004. Mizuho, the Company’s Japanese distributor of Microfluidizer processorequipment and spare parts, resells the Company’s equipment to numerousend-users in Japan, none of which individually represents 10% or more of theCompany’s revenues.

As of December 31, 2006, two customers accountedfor 14.4% and 13.6% of the trade accounts receivable, respectively. As of December 31,2005, two customers accounted for 10.8% and 10.7% of the trade accounts receivable,respectively. As of December 31, 2004, three customers accounted for15.1%, 14.7%, and 13.4% of the trade accounts receivable, respectively. Areduction or delay in orders from any of the Company’s significant customerscould have a material adverse effect on the Company’s results of operations.

The Company sells itsproducts in various countries. The Company’s sales in North America, includingthe United States, Canada, and Mexico, accounted for approximately 55.2% of theCompany’s revenues in 2006; 51.8% of the Company’s revenues in 2005; andapproximately 51.1% of the Company’s revenues in 2004, with almost all of thosesales coming from United States and Canada. Sales to the rest of the worldaccounted for approximately 44.8% of the Company’s revenues in 2006; 48.2% ofthe Company’s revenues in 2005; and approximately 48.9% of the revenues in 2004.Sales through the Company’s exclusive distributors in Japan accounted forapproximately 9.2% of the Company revenues in 2006; 19.5% of the Companyrevenues in 2005; and 20.5% of the Company’s revenues in 2004. Sales throughthe Company’s 

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representativein Korea accounted for approximately 9.5% of the Company’s revenues in 2006;12.1% of the Company’s revenues in 2005; and 4.8% of the Company’s revenues in2004.

*Competition*

The Microfluidizerprocessor equipment product line of high shear fluid processors has directcompetition in its major markets, including pharmaceutical andcoatings/chemical applications, but management believes that the Company’sproducts have a larger installed base and performance advantages over productsof our competitors. The Company also believes that its “fixed-geometry” systemswhich permit a linear scale up for drops per minute to gallons per minute offera unique equipment advantage. The Company further believes that theMicrofluidizer processor equipment product line offers the highest shear forcesavailable in the process equipment market today. It has been proven in manyinstances that for critical formulations, Microfluidizer processors haveproduced better quality products for our customers.

The M-700 Series offluid processors, together with the M-210 and M-610 product lines,provide high shear fluid processing capabilities for sanitary, sterile, andindustrial applications. The Company believes that the Microfluidizer processorproduct line provides a distinct advantage over the product lines of ourcompetitors with respect to the processing of abrasive slurries or solidsdispersed in liquids in large part because of the Company’s unique,wear-resistant, diamond interaction chamber and the special design of theintensifier pumping system. Further, recent incorporation of Company developedcomponents in the M-700 series equipment has reduced the cost of theseunits, and they are priced competitively with lesser capability processingequipment.

The MMR systems mayencounter significant competition and there are other companies that possesspatents and claims to equipment or processes that claim to make productionquantities of nanoparticles. Although the Company believes that its MMR systemis superior in design and function, there can be no assurance that othercompanies will not pose a competitive impediment to sales of the Company’s MMRsystem.

The Company faces, andwill continue to face, intense competition from other companies who manufactureand sell materials processing systems. The Company is subject to significantcompetition from organizations that are pursuing technologies and products thatare similar to the Company’s technology and products. The Company’s futuresuccess will depend in large part on maintaining its current technologicallysuperior product line and competitive position in the fluid processing systemsfield. Rapid technological development by the Company or others may result inthe Company’s products or technologies becoming obsolete before the Companyrecovers the expenses it incurs in connection with their development. Productsoffered by the Company could be made obsolete by less expensive or moreeffective technologies. There can be no assurance that the Company will be ableto make the enhancements to its technology necessary to compete successfullywith newly emerging technologies. The Company expects competition to intensifyin the materials processing systems field as technical advances are made andbecome more widely known.

*Research and Development*

It is the Company’sposition that a greater proportion of its sales in the future will be for moreadvanced processor production systems that will incorporate features notcurrently included in many of the current production machines. In order to meetsuch a challenge going forward, it became necessary to hire additional researchand development personnel. It also became necessary, as a result of thisdecision, to increase spending in research and development. Additionalresources in both personnel and spending may be required in the future.

The Company’s research anddevelopment efforts are focused on: (i) developing new processingapplications for the process industries; (ii) further enhancements to thefunctionality, reliability and 

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performanceof existing products, and (iii) development of the MicrofluidizerMixer/Reactor (MMR) by: (a) working with customers who assist in thedevelopment of the system with both application knowledge and financialsupport, and (b) an internal development program relating to reactionchamber design and creation of a variety of nanomaterials. There can be noassurance that the Company will be able to meet the enhancement challengesposed by applications of its core Microfluidizer processor business. Likewise,there can be no assurance that the Company will be able to design andmanufacture systems for its MMR applications that will deliver the desiredresult for specific applications. For the years ended December 31, 2006,2005 and 2004, research and development costs for continuing operations were$1,763,000, $1,702,000, and $1,034,000, respectively. Patent coverage for theMMR has been obtained both in the United States and in Europe (with nationalentry in process) and the Company is prosecuting the patent application inCanada.

*Cooperative ResearchArrangements*

The Company subsidizesresearch and development activities centered around Microfluidizer processortechnology at a number of research centers and universities. The Company’ssubsidy of these activities takes the form of substantial reduction orelimination of the customary rental charges for Microfluidizer processorequipment provided for use. The Company has, in past years, subsidized researchand development in the following fields at the following universities:

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

 

In addition to their research activities, theseuniversities provide the Company with contacts at industrial companies that mayutilize Microfluidizer processor technology. Most recently, the Company enteredinto a Research Collaboration Agreement with the University of Massachusetts,Lowell (UML) in September 2005 to develop new applications, processes andproducts in the area of nanomaterials utilizing MFIC’s leading-edge materialsprocessing and MMR equipment. Additionally, on occasion, research reports,technical papers, and doctoral theses may be published, which document the useof Microfluidizer processor technology. Finally, the Company engages in manyinformal co-operative development efforts with its customers.

*Patentsand Proprietary Rights Protection*

To protect its proprietary rights, the Company relies ona combination of U.S. patent and trademark laws, trade secrets, confidentialityagreements, contractual provisions and technical means. In the event of patent infringementor breach of confidentiality, there can be no assurance that these measureswill be adequate or that the Company will have sufficient resources toprosecute or prevail in an action against a third party. In addition, theCompany neither applied for nor obtained patent or trademark protection for itsMicrofluidizer processor equipment’s interaction chamber in any country otherthan the United States and, as a result, its proprietary rights are not subjectto the protection of patent or trademark laws of foreign countries where theCompany’s equipment is sold. The Company’s Microfluidizer processor equipmentmethod patent expired on March 13, 2007 and its device patent expired onAugust 6, 2002. The Company does not believe that the expiration of itsdevice or method patents resulted in any material detriment to the Companysince the Company has made many alterations, improvements and advances to itsequipment over the years with such modification and innovations having beentreated by the Company as trade secrets.

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In 1997 the Company completed development of a noveladaptation of its Microfluidizer processor equipment—a “Multiple Stream HighPressure****Mixer/Reactor”, commerciallydesignated as the Microfluidizer Mixer/Reactor (MMR). In August 1997, theCompany filed a patent application for the device and its processes with theUnited States Patent and Trademark Office (USPTO), and filed a PatentCooperation Treaty (PCT) application on May 5, 1998. In July andNovember, 2000, the USPTO issued to the Company notices of allowances ofutility patent claims regarding the MMR and the use thereof. On September 18,2002, the European Patent Office advised the Company it would grant its MMRpatent substantially as applied for, including its device and process claims. TheCompany is in the process of pursuing national entry in France, Germany, Italy,The Netherlands, and the United Kingdom. The Company is currently prosecutingits MMR patent in Canada.

In order to afford additional protection to itsintellectual property, in November 2006 the Company adopted a provision aspart of its standard terms and conditions of purchase. Such provision is anacknowledgement and agreement by a purchaser of the Company’s merchandise andequipment (the “Equipment”) that certain proprietary intellectual property ofthe Company, including the design, operation and use of the Equipment’sinteraction chamber or reaction chamber constitutes the Company’s trade secretinformation (the “Trade Secret Information”). Such purchaser agrees that itwill not (and will not aid, assist or permit any other person to): (i) tamperwith the Equipment, (ii) utilize imaging equipment or other means toreveal the inner structures and/or designs of the Equipment, (iii) attemptto disassemble or reverse engineer the Equipment, including specifically theinteraction or reaction chamber, or (iv) otherwise attempt to discoverand/or utilize any of the Trade Secret Information. A purchaser is furtherprohibited from disclosing (or aiding, assisting or permitting third parties todisclose) any information which the purchaser may learn or discover about thematerials and methods of construction, design, assembly, functioning,geometries, measurements and tolerances of the internal components of theEquipment. In the event of a violation of any of the above prohibitions, thepurchaser has stipulated that it is liable to the Company and/or itssubsidiary, Microfluidics Corporation, for any and all actual and potential,direct and indirect, incidental and consequential damages, including, withoutlimitation, resulting lost profits, and all available equitable relief. TheCompany has made such provision applicable to purchasers, renters andsubsidized users of the Equipment (“Users”). Despite the protection afforded bysuch provision, there can be no assurance that the Company will be able tomonitor compliance by all Users or that if the Company becomes aware of aviolation that it will be able to enforce its rights regarding such violation.

The Company maintainsconfidentiality agreements with its employees and also maintainsconfidentiality agreements and non-competition agreements with those thirdparties to whom it discloses non-public technical information relating to itsequipment. The Company believes that enforcement of the provisions of suchagreements should adequately protect the Company’s proprietary information. However,in the event of a material breach of such agreements certain of the Company’svaluable intellectual property may be disclosed to third parties (includingcompetitors). In such event, despite provisions for equitable relief anddamages, the Company may suffer competitively and be materially and negativelyimpacted as a result of any unauthorized disclosure.

*Manufacturing*

At present, the Company subcontracts the manufactureand/or machining and finishing of many of the components of its equipment tothird parties, with the Company undertaking the remaining fabrication, assemblyand performance testing. The Company has selected certain primary suppliersbased upon pricing terms, quality of their products, and the vendor’sperformance record.

The loss of any primarysupplier could have a material, adverse effect on the Company’s business,financial condition, or results of operations. Therefore, the Company has identifiedalternative suppliers for its most critical components (“Alternative Sources”).There can be no assurance that a transition to 

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suchAlternative Sources will not entail transitional delays, quality assurance andquality control difficulties, or delivery problems, any or all of which wouldlikely have an impact on the Company’s production of equipment and could have amaterial adverse effect on the Company’s business, financial condition, orresults of operations.

*KeyManagement/Personnel*

The Company’s continuedoperation, innovation and growth are to some significant degree reliant on thecontinued services of its key executive officers and leading technicalpersonnel. The Company does not maintain employment contracts with its keymanagement or leading technical personnel. Though the Company believes that itcan identify and recruit replacement key management and technical personnel,there can be no assurance as to such availability, the length of time requiredto obtain such replacement management and technical personnel, the salary levelthat may have to be paid to obtain their respective services, or the impact onoperations that may be experienced through the interim absence of such keymanagement and technical personnel. The loss of key management or leadingtechnical personnel could, therefore, have a material adverse effect on theCompany’s business, financial condition, or results of operations.

*GovernmentRegulation*

Certain of the Company’s customers utilize the Company’sproducts in processes and production that are subject to governmentalregulation. For example, the manufacturing and marketing of pharmaceuticalproducts may require the approval of the U.S. Food and Drug Administration(FDA) within the United States and of comparable agencies in foreign countries.The FDA has established mandatory procedures, safety standards and protocolsthat apply to the manufacture, clinical testing and marketing of newpharmaceutical products in the United States. The process of seeking andobtaining FDA approval of a new product often takes a number of years and ofteninvolves the expenditure of substantial resources by the Company’s customers. TheFDA approval process can result in long lead times that are attendant tomanufacturing equipment orders for these applications.

Further, in addition to product approvals, the FDAimposes requirements as to manufacturing practices, record keeping andreporting (“current Good Manufacturing Practices” or “cGMP”). cGMP-regulatedcompanies are subject to inspections by the FDA (inclusive of Microfluidizerprocessor equipment) and product approvals may be withdrawn if cGMP are notmet.

At present, the Company’s customers include companieswho are making FDA approved drugs, preparations, and products, including sunscreensand cosmetic lotions for external use and companies who utilize Microfluidizerprocessor equipment for the formulation or production of FDA approvedparenteral (injectable) drugs or compounds including vaccines, and anesthesia.

For the Company’s equipment entering Europe, CEcompliance (Regulatory Compliance with European Safety Standards) is required. Allproducts manufactured for European customers (and for any others who mayrequest it) by the Company are CE compliant.

Various laws, regulations and recommendations relatingto safe working conditions, laboratory practices and the purchase, storage,movement, import and export, use and disposal of harmful or potentially harmfulsubstances 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, theUnited States Atomic Energy Act, the Clean Air Act, the Clean Water Act, theOccupational Safety and Health Act, the National Environmental Policy Act, theToxic Substances Control Act, the Resource Conservation and Recovery Act,national restrictions on technology transfer, import, export and customsregulations and other present and possible future local, state or Federalregulation. The extent of adverse governmental regulation, which might resultfrom future legislation or administrative action, cannot be accuratelypredicted. Certain 

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agreements that may beentered into by the Company involving exclusive license rights may also besubject to antitrust regulatory control, the effect of which cannot bepredicted.

To date the Company hasnot been affected by any United States governmental restrictions on technologytransfer, import, export and customs regulations and other present local, stateor Federal regulation. The extent of adverse governmental regulation, whichmight result from future legislation or administrative action, cannot beaccurately predicted. In particular, the USA Patriot Act of 2001 and othergovernmental regulations may impose export restrictions on sale of equipment ortransfer of technology to certain countries or groups. There can be noassurance that sale of the Company’s equipment will not be impacted by suchlegislation or designation. Depending upon which countries and sales may bedesignated for trade restriction such action could have a material adverseeffect on the Company’s business, financial condition, or results ofoperations.

*Backlog*

The Company’s sales orderbacklog related to continuing operations of accepted and unfilled orders at March 23,2007 and March 28, 2006, was approximately $3,567,000 and $3,646,000,respectively. Backlog as of any particular date should not be relied upon asindicative of the Company’s net revenues for any future period.

*Employees*

The Company has approximately53 full-time employees as of March 23, 2007. None of the Company’semployees are covered by a collective bargaining agreement, and the Companyconsiders its relations with its employees to be satisfactory. The Companybelieves that its future success will depend in large part on its ability toattract and retain highly skilled employees.

**Item 1A.**                Risk Factors

You should carefullyconsider the risks and uncertainties described below and the other informationin this filing before deciding to purchase our common stock. If any of theserisks or uncertainties occurs, our business, financial condition or operatingresults could be materially harmed. In that case the trading price of ourcommon stock could decline and you could lose all or part of your investment. Therisks and uncertainties described below are not the only ones we may face. Webelieve that this filing contains forward-looking statements as that term isdefined in the Private Securities Litigation Reform Act of 1995. Suchforward-looking statements are subject to regulatory risks and clinicaluncertainties. Such statements are based on management’s current expectationsand are subject to facts that could cause results to differ materially from theforward-looking statements. For further information you are encouraged toreview MFIC Corporation’s filings with the Securities and Exchange Commission,including its Quarterly Reports on Form 10-Q for the periods ended March 31,2006, June 30, 2006 and September 30, 2006. The Company assumes nocontinuing obligation to update the information contained in this filing.

**We face intensecompetition in many of our markets.**

Our Microfluidizer product line of high-shear fluidprocessors has direct competition in its major markets, including its mostimportant markets in the pharmaceutical, biotechnology and coatings/chemicalindustries.

In addition, the Companyfaces, and will continue to face, intense competition from other companies whomanufacture and sell fluid processing systems used in particle size reduction,mixing, milling, dispersing, homogenizing, cell disruption and liposomalencapsulation applications. The Company expects competition to intensify in thefluid processing systems field as technical advances are made and become morewidely known, and such increased competition may have a material adverse effectupon our business.

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**Weare subject to significant competition from companies that are pursuingtechnologies and products that are similar to our technology and products.**

Our future success willdepend in large part on the Company’s ability to maintain a technologicallysuperior product line. Rapid technological development by the Company or othersmay result in our products or technologies becoming obsolete before the Companyrecovers the expenses the Company incurs in connection with their development. Productsoffered by the Company could be made obsolete by less expensive or moreeffective technologies. There can be no assurance that the Company will be ableto make the enhancements to our technology necessary to compete successfullywith newly emerging technologies.

**We rely on suppliers, vendors and subcontractors.**

The Company does notmanufacture most of the components contained in its Microfluidizer materialsprocessor equipment but rather subcontracts the manufacture of most components.Based on quality, price, and performance, the Company has selected certainsuppliers, vendors, and subcontractors that provide parts, subassemblies,machining and finishing of components that are assembled by the Company’sproduction staff. Although the Company has identified alternate sources forsuch parts, components, machining and finishing, there can be no assurance thata transition to such alternative sources would not entail quality assurance andquality control difficulties, on-time delivery problems, or other transitionalproblems, any or all of which could have an impact on the Company’s productionof equipment and could have a material adverse effect on the Company’sbusiness, financial condition, or results of operations.

**Ourcustomer base is concentrated, and a substantial portion of our sales areprovided by just three customers.**

Three customers accountedfor an aggregate of 32.2% of the Company’s revenues for the year ended December 31,2006. Historically, our largest single customer has been the Japanesedistributor of our Microfluidizer processor equipment and spare parts, whichaccounted for 9.2% of our revenues for the year ended December 31, 2006, 19.5% of our revenues for the yearended December 31, 2005 and 20.5% of our revenues for the year ended December 31,2004. Our next historically largest customer accounted for 15.23% of ourrevenues for the year ended December 31, 2006, 18.9% of our revenues for the year ended December 31, 2005and 12.8% of our revenues for the year ended December 31, 2004. A thirdcustomer is a distributor in Canada who accounted for 7.8% of ourrevenues for the year ended December 31, 2006, 3.2% of our revenues for the year ended December 31,2005 and 3.11% of ourrevenues for the year ended December 31, 2004. Although we areunaware of any plans by any of these customers to reduce their business withus, the loss of any one or more of these customers would be highly problematicfor us, and would likely cause a material change in our near-term, and possiblylong-term, financial prospects. In addition, a reduction or delay in ordersfrom any of these customers could have a material adverse effect on the Company’sresults of operations.

As of December 31,2006, 14.4% and 13.6% of the Company’s trade accounts receivable were due fromtwo customers, both of which are long-established customers of the Company andneither of which have presented credit issues in the past. Nevertheless, ifeither or both of these customers were to default on their obligations to ussuch default would likely cause a material change in our near-term, andpossibly long-term, financial prospects.

**Manyof our current and potential customers are from the pharmaceutical andbiotechnology industries and are subject to risks faced by those industries.**

We derive a substantialportion of our revenues from pharmaceutical and biotechnology companies. Weexpect that pharmaceutical and biotechnology companies will continue to be oneof our major sources of revenues for the foreseeable future. As a result, weare subject to risks and uncertainties that affect the 

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pharmaceuticaland biotechnology industries, such as pricing pressures as third-party payerscontinue challenging the pricing of medical products and services, governmentregulation, ongoing consolidation and uncertainty of technological change, andto reductions and delays in research and development expenditures by companiesin these industries.

In particular, the biotechnology industry has beenfaced with declining market capitalization and a difficult capital-raising andfinancing environment. If biotechnology companies are unable to obtain thefinancing necessary to purchase our products, our business and results ofoperations could be materially adversely affected. As it relates to both thebiotechnology and pharmaceutical industries, many companies have significantpatents that have expired or are about to expire, which could result in reducedrevenues for those companies. If pharmaceutical companies suffer reducedrevenues as a result of these patent expirations, they may be unable topurchase our products, and our business and results of operations could bematerially adversely affected.

In addition, we aredependent, both directly and indirectly, upon general health care spendingpatterns, particularly in the research and development budgets of thepharmaceutical and biotechnology industries, as well as upon the financialcondition and purchasing patterns of various governments and governmentagencies. Many of our customers, including universities, government researchlaboratories, private foundations and other institutions, obtain funding forthe purchase of products from grants by governments or government agencies. Thereexists the risk of potential decrease in the level of governmental spendingallocated to scientific and medical research, which could substantially reduceor even eliminate these grants. If government funding necessary to purchase ourproducts were to decrease, our business and results of operations could bematerially adversely affected.

**We have only onemanufacturing facility.**

The Company has only onemanufacturing facility located in Newton, Massachusetts. Our success depends onthe efficient and uninterrupted operation of that facility. Whether as a resultof a fire, natural disaster, or other cause, any disruption to ourmanufacturing operations would significantly impair our ability to operate ourbusiness on a day-to-day basis. Although the Company maintains businessinterruption insurance, our business would be injured by any extendedinterruption of the operations of our manufacturing facility. Further, althoughthe Company carries property and business interruption insurance, our coveragemay not be adequate to compensate us for all losses that may occur. Thisinsurance may not continue to be available to the Company. Finally, if theCompany seeks to replicate our manufacturing operations at another location, theCompany will face a number of technical as well as financial challenges, whichthe Company may not be able to address successfully.

**We rely on ourtrade secrets to protect our technology.**

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

In order to afford additional protection to itsintellectual property, in November 2006 the Company adopted a provision aspart of its standard terms and conditions of purchase. Such provision is anacknowledgement and agreement by a purchaser of the Company’s merchandise andequipment (the 

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“Equipment”) that certainproprietary intellectual property of the Company, including the design,operation and use of the Equipment’s interaction chamber or reaction chamberconstitutes the Company’s trade secret information (the “Trade SecretInformation”). Such purchaser agrees that it will not (and will not aid, assistor permit any other person to): (i) tamper with the Equipment, (ii) utilizeimaging equipment or other means to reveal the inner structures and/or designsof the Equipment, (iii) attempt to disassemble or reverse engineer theEquipment, including specifically the interaction or reaction chamber, or (iv) otherwiseattempt to discover and/or utilize any of the Trade Secret Information. Apurchaser is further prohibited from disclosing (or aiding, assisting orpermitting third parties to disclose) any information which the purchaser maylearn or discover about the materials and methods of construction, design,assembly, functioning, geometries, measurements and tolerances of the internalcomponents of the Equipment. In the event of a violation of any of the aboveprohibitions, the purchaser has stipulated that it is liable to the Companyand/or its subsidiary, Microfluidics Corporation, for any and all actual andpotential, direct and indirect, incidental and consequential damages,including, without limitation, resulting lost profits, and all availableequitable relief. The Company has made such provision applicable to purchasers,renters and subsidized users of the Equipment (“Users”). Despite the protectionafforded by such provision, there can be no assurance that the Company will beable to monitor compliance by all Users or that if the Company becomes aware ofa violation that it will be able to enforce its rights regarding suchviolation.

To protect its otherproprietary rights, the Company relies on a combination of trademark laws,trade secrets, confidentiality agreements, contractual provisions and technicalmeans. In the event of a breach of these protections, there can be no assurancethat these measures will prove to have been adequate to protect the Company’sinterests, or that the Company will have sufficient resources to prosecute orprevail in an action against a third party. The Company maintainsconfidentiality and non-competition agreements with those parties to whom itdiscloses non-public technical information relating to its equipment. TheCompany believes that enforcement of the provisions of such agreements shouldadequately protect the Company’s proprietary information. However, in the eventof a material breach of such agreements, certain of the Company’s valuableintellectual property may be disclosed to third parties (including competitors).In such event, despite provisions for equitable relief and damages in the eventof such breaches, the Company may suffer competitively and be materially andnegatively impacted as a result of such unauthorized disclosure.

**We must continueour research and development efforts to maintain our competitiveness.**

The Company’s research anddevelopment efforts are focused on: (i) developing new processingapplications for the process industries and further enhancing the functionality,reliability and performance of existing products, and development of newequipment models, and (ii) development of the Multiple-Stream HighPressure Mixer/Reactor (MMR) by: (a) working with customers who assist inthe development of the system with both application knowledge and financialsupport, and (b) internal development program relating to interactionchamber design and creation of a variety nanomaterials. There can be noassurance that the Company will be able to meet the enhancement challenges posedby applications of its core Microfluidizer processor business. Likewise therecan be no assurance that the Company will be able to design and manufacturesystems for its MMR applications that will deliver the desired result forspecific applications. The inability to meet the enhancement challenges ordesign and manufacture systems for its MMR applications may have a materialadverse effect on the Company.

**Our ability to continue planned operations isdependent upon access to financing under a credit facility with our commerciallender.**

The Company’s credit facility is comprised of arevolving line of credit in the maximum principal amount of $1,000,000 and aterm loan note in a face amount of $1,000,000 under which the Company 

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currently owed approximately$312,000 at December 31, 2006. Under the terms of the credit facility, theCompany is subject to a number of restrictions that impact the Company’s use offunds. The Company is limited in ability to acquire property and pay dividends,and it must maintain certain financial covenants as defined. The Company’sability to operate is potentially impacted by the Company’s ability to achievefuture compliance with the financial covenants of the credit facility. Theobligations due the lender are essentially demand obligations and under certaincircumstances, including the lender’s determination that the Company’s prospectof payment of all or any part of the obligations due the lender are impaired,the lender may declare a default and accelerate payment of the obligations. Loansunder the credit facility are secured by a collateral pledge to the lender ofsubstantially all the assets of the Company and its subsidiary. In the event ofa breach of the covenants or events of default under the credit facility therecan be no assurance that the Company can obtain a waiver of such breach ordefault from its lender. Likewise, in the event of that the Company cannoteffect a cure or obtain a waiver of a breach or default under the creditfacility there can be no assurance either that the lender will not terminatethe credit facility or that the Company will be able to obtain alternatefinancing, or that it can obtain alternate financing on terms that arefavorable to the Company. Either event could have a material adverse effect onthe Company’s business, financial condition, or results of operations.

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

There can be no assurancethat the Company will have access to sufficient working capital throughcontinued and improving cash flow from sales and ongoing borrowingavailability, the latter being subject to the Company’s ability to comply withthe covenants and terms of the Company’s loan agreement with its lender.

**We may be subjected to increased government regulationwhich could affect our ability to sell our products outside of the UnitedStates.**

Although the Company hasnot historically been significantly affected by any United States governmentalrestrictions on technology transfer, import, export and customs regulations andother present local, state or federal regulation, any future legislation oradministrative action restricting our ability to sell our products to certaincountries outside the United States could significantly affect our ability tomake certain foreign sales. The extent of adverse governmental regulation,which might result from future legislation or administrative action, cannot beaccurately predicted. In particular, the USA Patriot Act and other governmentalregulations may impose export restrictions on sale of equipment or transfer oftechnology to certain countries or groups. There can be no assurance that saleof the Company’s equipment will not be impacted by any such legislation ordesignation. Depending upon which countries and sales may be designated fortrade restriction such action could have a material adverse effect on theCompany’s business, financial condition, or results of operations. Also,certain agreements that may be entered into by the Company involving exclusivelicense rights may also be subject to national or supranational antitrustregulatory control, the effect of which cannot be predicted.

**We rely on our keymanagement and technical personnel.**

The Company’s continuedoperation, innovation and growth are to some significant degree reliant on thecontinued services of its key executive officers and leading technicalpersonnel. The Company does not maintain employment contracts with its keymanagement or leading technical personnel. There can be no assurance that theCompany will be able to retain such key management and technical personnel ifemployment is offered by other companies better able to pay highercompensation, provide more and better benefits, or willing to offer longer termjob security by entering into employment contracts with the Company’s employees.Further, there can be no assurance that key executive officers and leadingtechnical personnel will not leave the Company’s employment, or either die orbecome disabled to an extent that 

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theycannot render their services to the Company. Though the Company believes thatit can identify and recruit replacement key management and technical personnel,there can be no assurance as to such availability, the length of time requiredto obtain such replacement management and technical personnel, the salary levelthat may have to be paid to obtain their respective services, or the impact onoperations that may be experienced through the interim absence of such keymanagement and technical personnel. The loss of key management or leadingtechnical personnel could, therefore, have a material adverse effect on theCompany’s business, financial condition, or results of operations.

**Our stock is listedon the OTC Bulletin Board and our stockholders may have limited liquidity.**

The Company’s common stock is quoted on the OTC Bulletin Board,which provides significantly less liquidity than a securities exchange (such asthe American or New York Stock Exchanges or The Nasdaq Stock Market LLC). Ingeneral, over the past two years, fewer than 100,000 shares of our common stockhave traded on a daily basis. Management expects, when and if the Companyqualifies, to seek a listing on a national securities exchange, which mayincrease stockholders liquidity. There is uncertainty that the Company willever be accepted for a listing on a securities exchange.

**Our quarterly revenues and stock performance are variable.**

The timing of orders and subsequent shipment will significantlyaffect quarterly revenues and resulting net income results for particularquarters which may cause increased volatility in both the Company’s revenuesand stock price.

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

We sometimes lease our products to our customers prior to orinstead of selling a product to a customer. The Company’s products areexpensive, and customers frequently want to test out a product’s capabilitiesprior to purchase. We have had reasonable success in converting leases intosubsequent sales of the same or a newer product, however there is no guaranteethat we will continue to be able to convert any of our leases into sales.

**We may be subjectto product liability claims from our customers or by persons harmed by ourcustomers’ products.**

The Company maintains what it deems to be reasonable levels ofproduct liability coverage through insurance policies with a reasonably smalldeductible. Nonetheless, inasmuch as the Company sells its equipment to anumber of customers who make pharmaceutical preparations and consumercosmetics, there can be no assurance that if a consumer of end products isinjured or dies from such product that a suit by an injured party (or a classof similar situated plaintiffs) will not include the Company as well as themaker of the drug or cosmetic. Although the Company may have no control overthe manufacture of end-products made on its equipments, it may not be able tobar a plaintiff’s claims against all parties whose products and equipment werein involved in the manufacturing process under a variety of legal theories ofliability. The Company may be required to present a vigorous and costly defenseif it cannot be dismissed from such an action. The cost of such legal defensemay significantly impact the cash flow of the Company.

**Our internationalbusiness operations expose us to a variety of risks.**

For the years ended December 31, 2006, 2005 and2004, shipments outside of North America accounted for approximately 44.8%,48.2% and 48.9%, respectively, of our net revenues in those periods. Inparticular, approximately 9.2%, 19.5% and 20.5% of our net revenues in 2006,2005 and 2004, respectively, resulted from sales to Japan and approximately9.5%, 12.1% and 4.8% of those net revenues resulted from sales to Korea in2006, 2005 and 2004, respectively. In addition, approximately 22.3%, 13.0% 

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and 17.9% of our netrevenues resulted from sales to Europe in 2006, 2005 and 2004, respectively. Weexpect that shipments outside of North America will continue to account for asignificant portion of our total net product revenues.

We attempt to reduce some of our risk related to salesand shipments outside of the United States by requiring that our contractsgenerally be paid in United States Dollars. Nevertheless, a downturn in theeconomies of Japan, Korea or Europe might reduce investment in new technologyor products while a weakening of foreign currency against the United StatesDollar would make our products more expensive, each of which could have asubstantial impact on our operating results.

In addition, a significantportion of our total net revenue is subject to the risks associated withshipping to foreign markets in general, including unexpected changes in legaland regulatory requirements; changes in tariffs; political and economicinstability; risk of terrorism; difficulties in managing distributors andrepresentatives; difficulties in protecting our intellectual property overseas;and natural disasters, any of which could have a negative impact on ouroperating results.

**Compliance withinternal controls reporting requirements will increase our costs.**

As directed by Section 404of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commissionadopted rules requiring public companies to include a report of managementon a company’s internal control over financial reporting in their annualreports on Form 10-K. This report is required to contain anassessment by management of the effectiveness of such company’s internalcontrols over financial reporting. In addition, the public accounting firmauditing a public company’s financial statements must attest to and report onmanagement’s assessment of the effectiveness of a company’s internal controlsover financial reporting. We intend to expend resources in developing thenecessary documentation and testing procedures required by Section 404. Goingforward, there is a risk that we will not comply with all of the requirementsimposed by Section 404. If the Company fails to implement required new orimproved controls, we may be unable to comply with the requirements of Section 404in a timely manner. This could result in an adverse reaction in the financialmarkets due to a loss of confidence in the reliability of the Company’sfinancial statements, which could cause the market price of the Company’scommon stock to decline and make it more difficult for the Company to financeits operations. Under current rules, the Company is required to comply with certainrequirements of Section 404 by its first fiscal year ending on or after December 15,2007.

**Future changes infinancial accounting standards may adversely affect our reported results ofoperations.**

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

**If our accountingestimates are not correct, our financial results could be adversely affected.**

Management judgment andestimates are necessarily required in the application of our CriticalAccounting Policies. We discuss these estimates in the subsection entitledCritical Accounting Policies beginning on page 30. If our estimates areincorrect, our future financial operating results and financial condition couldbe adversely affected.

**Item 1B.**               Unresolved Staff Comments

None.

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**Item 2.**                        Properties

The Company’s corporateheadquarters are in Newton, Massachusetts. The Company also maintains a salesoffice and laboratory facility in Lampertheim, Germany and a sales andlaboratory office in Irvine, California. The Company rents approximately 35,000square feet of offices, production and research and development facilities atthese locations for administrative, development and production activities. Thelease terms expire at various times through October, 2011 (with options underwhich the Company can extend the lease at the Newton facility throughOctober 31, 2015). A portion of the space at the Newton, Massachusettsfacility is sublet to a non-affiliated company (the “Sub-Lessee”) under atenant-at-will arrangement. Through April 30, 2006, the Sub-Lessee’s leaseobligation to the Company was $21,600 per annum, which was increased to $30,000per annum on May 1, 2006. The Company believes these facilities will beadequate for operations for the next five years.

**Item 3.**                        Legal Proceedings

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

**Item 4.**                        Submission of Matters to a Vote of SecurityHolders

No matters were submittedto a vote of the Company’s security holders during the quarter endedDecember 31, 2006.

**PART II**

**Item 5.**                        Market for Registrant’s Common Equity andRelated Stockholder Matters

*Market*

TheCompany’s Common Stock is traded on the Over-the-Counter Bulletin Board underthe symbol MFIC. The following table sets forth the range of quarterly high andlow bid quotations for the last two fiscal years, as furnished by the NationalAssociation of Securities Dealers Automated Quotation System. The quotationsrepresent interdealer quotations without adjustment for retail markups,markdowns, or commissions, and may not necessarily represent actualtransactions.

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

 

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

 

*Holders*

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

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*Sales ofUnregistered Securities*

On March 30, 2004,the Company completed a private placement of investment units (each unitconsisting of one share of common stock and a 3-year warrant to purchasean additional 1⁄2 share of common stock). A total of 1,426,616 units were sold, yieldinggross proceeds of approximately $3,567,000. The units were priced at $2.50 eachand the associated warrants to purchase 713,308 shares of common stock areexercisable at $3.05. Additionally, the placement agent for the offeringreceived five-year warrants to purchase 213,992 shares of common stock at anexercise price of $3.20 per share. The value of the warrants granted to theplacement agent  was approximately $351,000. Theinvestment units and warrants were issued pursuant to the exemption to theregistration requirements of the Securities Act of 1933, as amended, availableunder Section 4(2) of that Act. The placement agent and thepurchasers of the units (the “Purchasers”) were “accredited investors” pursuantto the rules of the Securities and Exchange Commission. The Company fileda registration statement on Form SB-2, which was declared effectiveon May 13, 2004, for purposes of registering the shares of common stockunderlying the units and warrants. The warrants associated with the units areexercisable in whole or in part at any time on or prior to their terminationdate in March, 2007. In addition, these warrants provide for certainadjustments to the exercise price upon the issuance by the Company of certainsecurities at a price below $3.05. The warrants issued to the placement agentmay be exercised in whole or in part at any time prior to their terminationdate in March 2009. In addition, the warrants issued to the placement agentprovide for certain adjustments to the exercise price upon the issuance by theCompany of certain securities at a price below $3.20.

*Issuance ofWarrants*

On November 17, 2004,the Company entered into a general financial and advisory services agreementwith Maxim Group LLC pursuant to which Maxim Group LLC was granted, on April,1, 2005, a three-year warrant to purchase 100,000 shares of the Company’scommon stock at an exercise price of $3.20 per share. These warrants wereissued pursuant to the exemption to the registration requirements of theSecurities Act of 1933, as amended, available under Section 4(2) ofthat Act. Maxim Group LLC was an “accredited investor” pursuant to the rules ofthe Securities and Exchange Commission. The Company filed a registrationstatement on Form SB-2, which was declared effective on June 5,2006, for purposes of registering the shares of common stock underlying thewarrants. Maxim Group LLC has waived its rights to receive, based upon the datethat the registration statement on Form SB-2 was declared effective,an additional warrant to purchase shares of the Company’s common stock. Thewarrants may be exercised in whole or in part at any time on or prior to April 1,2008. In addition, the warrants provide for certain adjustments to the exerciseprice upon the issuance by the Company of certain securities at a price below$3.20.

*Dividends*

The Company has never paidany cash dividends on its Common Stock and presently anticipates that nodividends on its Common Stock will be declared in the foreseeable future. TheCompany’s current policy is to retain all of its earnings to finance futuregrowth.

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*SecuritiesAuthorized for Issuance Under Equity Compensation Plans*

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

| ** **                                              | ** ** | **Number of securities  to be issued  upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price  of outstanding  options, warrants  and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected  in column (a))** | ** **  |
|---------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|
| **Plan Category**                                  | ** ** | ** **                                                                                                                                       | ** ** | **(a)**                                                                                                 | ** ** | **(b)**                                                                                                                                                                                                      | ** **  | **(c)** | ** ** |
| Equity  compensation plans approved by stockholders     |       |                                                                                                                                             | 1,561,086  |                                                                                                    |       |                                                                                                                                                                                                         | $ 1.45 |   |   |   | 754,000 |   |   |
| Equity  compensation plans not approved by stockholders |       |                                                                                                                                             | 1,027,300  |                                                                                                    |       |                                                                                                                                                                                                         | $ 3.10 |   |   |   | — |   |   |
| Total                                                   |       |                                                                                                                                             | 2,588,386  |                                                                                                    |       |                                                                                                                                                                                                         | $ 2.10 |   |   |   | 754,000 |   |   |
|                                                         |            |                                                                                                                                                  |            |                                                                                                         |            |                                                                                                                                                                                                              |             |  |  |  |  |  |  |  |  |

 

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*Performance Graph*

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN***AmongMFIC Corporation, The AMEX Composite IndexAnd A Peer Group

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

Fiscal year endingDecember 31.

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

 

The Company’scompetitors are either larger integrated companies or privately-held companies.The Company has chosen a peer group consisting of companies with a marketcapitalization from $7 million to $27 million in the information technologysector of the American Stock Exchange. The peer group consists of the followingissuers:
| ·  Apogee Technology Inc.                 |   | ·  Intelligent Systems LP                                       |
|-----------------------------------------------------|--------|---------------------------------------------------------------------------|
| ·  AXS-One Inc.                           |   | ·  MPC Corporation                                              |
| ·  Blonder Tongue Laboratories Inc.       |   | ·  Pinnacle Data Systems Inc.                                   |
| ·  Cash Technology Inc.                   |   | ·  Thinkengine Network Inc.

·  Trans-Lux Corporation |
| ·  Conversion Services International Inc. |   |
| ·  CVD Equipment Corporation              |   | ·  US Dataworks Inc.                                            |
| ·  Elecsys Corporation                    |   | ·  Winland Electronics Inc.                                     |
| ·  Ilinc Communications Inc.              |   | ·  Wireless Xcessories Group Inc.                               |

 

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**Item 6.**                        Selected Financial Data

The selected financialinformation presented below is derived from the audited consolidated financialstatements of the Company for each of the five years in the period ended December 31,2006. The information set forth below should be read in conjunction withManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and the Consolidated Financial Statements and related Notes includedelsewhere in this Form 10-K. All fiscal years noted below have beenrestated to reflect discontinued operations.

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

 

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

 

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

**Future OperatingResults**

This report may containforward-looking statements that are subject to certain risks and uncertaintiesincluding statements relating to the Company’s plan to achieve, maintain,and/or increase revenue growth, and/or operating profitability, andto achieve, maintain, and/or increase net operating profitability. Suchstatements are based on the Company’s current expectations and are subject to anumber of factors and uncertainties that could cause actual results achieved bythe Company to differ materially from those described in the forward-lookingstatements. The Company cautions investors that there can be no assurance thatthe actual results or business conditions will not differ materially from thoseprojected or suggested in such forward-looking statements as a result ofvarious factors, including but not limited to, the following risks anduncertainties: (i) whether the performance advantages of the Company’sMicrofluidizer® materials processing equipment will berealized commercially or that a commercial market for the equipment willcontinue to develop, (ii) whether the timing of orders will significantlyaffect quarter to quarter revenues and resulting net income results for aparticular quarter, which may cause increased volatility in the Company’s stockprice, (iii) whether the Company will have access to sufficient workingcapital through continued and improving cash flow from sales and ongoingborrowing availability, the latter being subject to the Company’s ability tomaintain compliance with the covenants and terms of the Company’s loanagreement with its senior lender, (iv) whether the Company’s technologywill be adopted by customers as a means of producing MMR (defined below)innovative materials in large quantities, (v) whether the Company is ableto deploy prototype MMR placements and then manufacture and introducecommercial production MMR equipment, (vi) whether the Company will achievea greater proportion of its sales in the future through the sale of advancedprocessor production systems, and (vii) as well as those risks set forthin Item 1a, “Risk Factors.”  The Companyassumes no responsibility to update any forward-looking statements as a resultof new information, future events, or otherwise.

**Overview**

MFIC Corporation (“MFIC” or the “Company”) has, forover 20 years, specialized in manufacturing and marketing a broad line of highshear fluid processing systems used in numerous applications in the chemical,pharmaceutical, biotech, food and cosmetics industries.

MFIC’s line of high shear fluid processor equipment,marketed under the Company’s Microfluidizer trademark and trade name, processpremixed formulations to produce small uniform structures, usually of thesubmicron and nanoscale size (commonly defined as particles having dimensionsless than 100 nanometers) including nanostructures, microemulsions andnanosuspensions. The equipment produces commercial quantities of such materialsimportant to producers of pharmaceuticals, coatings and other products. Further,the Company guarantees scaleup of formulations and results on its processorequipment from 10 milliliters per minute on its laboratory and bench top modelsto more than 15 gallons per minute on its pilot and production models.

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

The Company has begun totake steps toward commercializing its proprietary equipment, processes andtechnology for the continuous production of precipitated submicron or nanoscaleparticles by 

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interactionof discrete streams of reacting materials,through a novel adaptation of its Microfluidizer processor equipmentthat permits the mixing of, and reactions between, streams of differentsolutions at high pressures. The Company refers to this technology as aMultiple Stream High Pressure Mixer/Reactor (MMR). In August 1997, theCompany filed a patent application for the device and its processes with theUnited States Patent and Trademark Office (USPTO), and filed a PatentCooperation Treaty (PCT) application on May 5, 1998. In July and November 2000,the USPTO issued to the Company notices of allowances of utility patent claimsregarding the MMR and the use thereof. On September 18, 2002, the EuropeanPatent Office advised the Company it would grant its MMR patent substantiallyas applied for, including its device and process claims. The Company has gainednational entry of the patent in France, Germany, Italy, The Netherlands, andthe United Kingdom. The Company is still prosecuting the allowance of thepatent in Canada. The Company’s management believes that futurecommercialization and growth of nanotechnology may be, in large part, enabledby the manufacturing capability of the Company’s materials processor and MMRequipment.

**Results of Operations**

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

*Revenues*

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

North American sales forthe year ended December 31, 2006 increased to approximately $8,636,000, a43.3% increase, as compared to sales of approximately $6,028,000 for the yearended December 31, 2005. The increase in North American sales wasprincipally due to an increase in the sale of machines of approximately$2,922,000, partially offset by a decrease in the sale of spare parts ofapproximately $314,000. Foreign sales were approximately $7,018,000 for theyear ended December 31, 2006, compared to $5,617,000 for the year ended December 31,2005, an increase of $1,401,000, or 24.9%. The increase in foreign sales wasprincipally due to an increase in the sale of machines of approximately$1,466,000, partially offset by a decrease in the sale of spare parts ofapproximately $65,000. The overall increase in sales was due to two factors: (i) thenumber of machines sold increased over 2005, and (ii) the Companyinstituted an overall price increase of 10% for standard machines effective inthe first quarter of fiscal 2006.

*Cost of Goods Sold*

Cost of goods sold for theyear ended December 31, 2006 was approximately $7,001,000, or 44.7% ofrevenue, compared to $5,918,000, or 50.8% of revenue, for the comparable prioryear. The increase in cost of goods sold in absolute dollars for the year endedDecember 31, 2006, reflects the overall increase in sales. The Company’smajor product lines have different profit margins, as well as multiple profitmargins within each product line. The decrease in cost of goods sold as apercentage of sales is attributable to (i) an average price increase of10% for standard machines effective in the first quarter of fiscal 2006, (ii) ahigher volume of machines sold, and (iii) a product mix having morefavorable overall gross margins. In addition, the Company also sold anon-standard  piece of equipment (the “Non-StandardEquipment”) in the year ended December 31, 2005 at a selling price whichapproximated the cost of the equipment resulting in a higher cost of goods as apercentage of revenues for that period. This Non-Standard Equipment was builtand supplied to demonstrate certain advanced features and capabilities that arenow offered as optional features on the M700 line of equipment. Cost of goodssold for products other than the Non-Standard Equipment was 49.6% in 2005.

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*Research andDevelopment Expenses*

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

*Selling Expenses*

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

*General andAdministrative Expenses*

General and administrativeexpenses for the year ended December 31, 2006, were approximately $2,701,000,compared to $2,384,000 for the comparable prior year, an increase of $317,000,or 13.3%. The increase in general and administrative expenses is principallydue to a planned increase in payroll of approximately $157,000, an increase incorporate expenses of approximately $141,000, and an increase in professionalfees of approximately $121,000, partially offset by a decrease in consultantcosts of approximately $86,000 and a decrease in occupancy costs of $29,000. Theincrease in corporate expenses was principally due to the Company adopting SFAS123R as of January 1, 2006, and recognizing compensation expense inconjunction with share based payments to employees and directors in the amountof $130,000. The increase in professional fees is partially due to utilizationof outside professionals to improve the Company’s financial reporting,corporate governance and internal controls. The decrease in consulting costs isthe result of the expiration of a one-year consulting agreement which expiredon December 31, 2005.

*Interest Income andExpense*

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

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

*Income TaxProvision*

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

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

**Results ofContinuing Operations**

*Revenues*

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

North American sales forthe year ended December 31, 2005 decreased to approximately $6,028,000, ora 3.0% decrease, as compared to North American sales of approximately$6,212,000 for the year ended December 31, 2004. This decrease in NorthAmerican sales was principally due to a decrease in the sale of machines ofapproximately $1,478,000, offsetting an increase in the sale of spare parts ofapproximately $1,294,000. Foreign sales were approximately $5,617,000 for the yearended December 31, 2005, compared to $5,947,000 for the year ended December 31,2004, a decrease of approximately $330,000, or 5.5%. The decrease in foreignsales was principally due to a decrease in the sale of spare parts ofapproximately $1,374,000, partially offset by an increase in the sale ofmachines of approximately $1,044,000. The decline in the sale of machines is aresult, in part, of longer lead times associated with the increased complexityof manufactured automated operating controls, data acquisition systems, andsterilization features of systems orders received from biopharma customers. Thedecline is also the result of increased competition from several companies thatsell laboratory units. The Company believes its laboratory machines aresuperior in terms of technology, and that, with relatively minor modificationsto these units that are currently in development, the Company hopes to regainmarket share.

*Cost of Goods Sold*

Total cost of goods sold for the year ended December 31,2005 was approximately $5,918,000, or 50.8% of revenue, as compared to$5,608,000, or 46.1% of revenue for the comparable prior year. The increase incost of goods sold is primarily a result of the increased costs from themanufacture and sales of production units, as opposed to manufacturinglaboratory machines. Production units have a higher cost to manufacture and alower corresponding gross profit margin than laboratory machines. A substantialcontributor to the increased cost of goods sold in 2005 was the Company’sproduction of a highly customized production system for the Korean Institute ofIndustrial Technology (KITECH). This customized production machine accountedfor approximately 2.8% of the total revenues for 2005 or approximately$324,000, and approximately 5.2% of the total costs of goods sold for the yearended December 31, 2005 or approximately $308,000.

The Company believes that the construction and designof this customized production system  forKITECH enhanced the Company’s knowledge and skills in producing advancedsystems, and will allow the Company to quote other significant equipment ordersat higher profit margins in the future. The Company also believes that, becauseKITECH provides high visibility for its equipment to companies that work withKITECH, it may lead those companies to consider purchasing our equipment toscale up the production of products developed on this system.

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

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*Research andDevelopment Expenses*

Research and development expenses for the year ended December 31,2005 were approximately $1,702,000 compared to $1,034,000 for the comparableprior year, an increase of approximately $668,000 or 64.6%. The increase inresearch and development expenses is primarily due to a planned increase inpayroll and related costs of approximately $419,000, an increase in consultingcosts of approximately $134,000, and an increase in development costs ofapproximately $101,000. The development costs were primarily for outsidecontractors and supplies.

It is the Company’sposition that a greater proportion of its sales in the future will be for moreadvanced processor production systems that will incorporate features notcurrently included in many of the current production machines. In order to meetthat challenge going forward, it became necessary to hire additional researchand development personnel, and also to increase spending in research anddevelopment.

*Selling Expenses*

Selling expenses for theyear ended December 31, 2005 were approximately $2,412,000 compared to$2,588,000 for the comparable prior year, a decrease of approximately $176,000or 6.8%. The decreases were due principally to a decrease in commission expenseof approximately $136,000, a decrease of approximately $35,000 in deliverycosts, a decrease of approximately $33,000 in payroll and related costs, adecrease in advertising expenses of approximately $19,000, partially offset byan increase in facility operating costs of approximately $40,000, and anincrease in printing costs of approximately $20,000. The decrease in commissioncosts was caused by a decrease in direct sales. Sales made in Asia, where theCompany’s products are sold primarily through distributors, were approximately35.2% of sales for the year ended December 31, 2005, compared to 31.0% ofsales for the year ended December 31, 2004. Sales made to distributors aresold net of a discount, but without a commission. Accordingly, these salesgenerally reflect a lower gross margin offset by lower selling costs. Thedecrease in payroll was due to a reduction in personnel. The decrease indelivery costs was principally due to a change in vendors. The increase inprinting costs was due to increased purchases of general brochures and costdata sheets compared to the previous year.

*General andAdministrative Expenses*

General and administrativeexpenses for the year ended December 31, 2005 were approximately$2,384,000 compared to $2,232,000 for the comparable prior year, an increase ofapproximately $152,000 or 6.8%. The increase in general and administrativeexpenses is primarily due to an increase in consultants costs of approximately$166,000, an increase in facility operating costs of approximately $74,000, anincrease in corporate expenses of approximately $53,000, and an increase inprofessional fees of approximately $17,000, offset in part by a decrease in payrollcosts of approximately $114,000. The increase in consultant costs was caused bythe use of outside consultants that included a non-cash charge for warrantsissued in the approximate amount of $119,000, and a recruiting placement fee ofapproximately $41,000. The increases in facility operating costs were primarilyrent and energy related. The increase in corporate costs is due to the expenseincurred in accelerating employees’ stock options of approximately $65,000. Thedecrease in payroll is a result of a planned decrease in payroll costs,including both a reduction in personnel and no bonuses paid employees for 2005,due to the loss from operations.

*Interest Income andExpense*

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

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Interest income for theyear ended December 31, 2005 was approximately $26,000 as compared to$27,000 for the comparable prior year, a decrease of approximately $1,000 or3.7%. The decrease is due to less cash available for investing.

**Results ofDiscontinued Operations**

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

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

It was expected that the sale would positively impactthe Company’s cash flow, and would allow the Company to focus on the corebusiness, and expand its sales and marketing resources for the Company’sMicrofluidizer processor systems line, and promote its new MMR nanoparticleproduction systems.

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

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

The assets of the Division that were sold includedaccounts receivable, furniture, fixtures and equipment, inventory and supplies,books and records, bids, contracts, prepaid expenses, leases, intellectualproperty, goodwill, domain names and claims, all as described in the AssetPurchase Agreement (collectively, the Assets). In addition, certain rights andobligations arising after February 9, 2004 under the Division’s PacifiCareGroup Health Insurance Policy were assigned. The Division’s cash or cashequivalents on hand on February 9, 2004 were excluded from the assetsbeing sold. Under the Asset Purchase Agreement, the Division’s executoryobligations under certain contracts and bids, and the Division’s accountspayable as of February 9, 2004 in the amount of $623,240, were assumed byNuSil.

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

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

28

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The aforementioned Purchase Note bore interest at fivepercent (5%) per annum, was secured by the Assets pursuant to a SecurityAgreement dated February 5, 2004 (the Security Agreement) between theparties and was subject to certain offsets as provided in the Asset PurchaseAgreement. Principal and interest on the Purchase Note were payable on February 9,2005. NuSil forwarded a payment to the Company on that date which, inconjunction with an allowable offset of approximately $8,000 paid by NuSil forthe benefit of the Company, satisfied the claim.

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

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

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

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

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

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

**LIQUIDITY AND CAPITAL RESOURCES**

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

For the year ended December 31, 2006, the Companyused cash from investing activities of approximately $57,000 for the purchaseof capital equipment. For the year ended December 31, 2005, the Companyused cash from investing activities of approximately $96,000 for the purchaseof capital equipment. For the year ended December 31, 2004, the Companygenerated cash from investing activities of $513,000 primarily through the saleof the Morehouse-COWLES Division, partially offset by the purchase of capitalequipment.

29

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For the year ended December 31, 2006, theCompany  used cash from financingactivities of approximately $184,000, primarily as a result of repayments ofits term loan, offset by the issuance of common stock for options exercised andfrom proceeds from stock issued from the employee stock purchase plan. For theyear ended December 31, 2005, the Company used cash from financingactivities of approximately $84,000 primarily as a result of repayments on itsterm loan; and offset by the issuance of common stock for options exercised,from proceeds from stock issued from the employee stock purchase plan, and thecollection of a note receivable. For the year ended December 31, 2004, theCompany generated cash from financing activities of approximately $1,607,000primarily through the net proceeds from the private placement offering, theissuance of common stock for options exercised, proceeds from stock issued fromthe employee stock purchase plan, and net proceeds from a new term loan andline of credit.

As of December 31, 2006, the Company maintains arevolving credit and term loan agreement with Banknorth, N.A., providing theCompany with a $1,000,000, four-year revolving credit line and a $1,000,000four-year term loan facility. As of December 31, 2006, there was nobalance due under its revolving credit line and a balance of $312,000 under itsterm loan facility, having a due date of March 1, 2008.

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

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

 

Assuming that there is nosignificant change in the Company’s business, the Company believes that cashflows from operations, together with the credit facility, and the existing cashbalances, will be sufficient to meet its working capital requirements for atleast the next twelve months.

*Off-Balance SheetArrangements*

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

**Critical AccountingPolicies**

Our significantaccounting policies are summarized in Note 1 to our consolidated financialstatements. However, certain of our accounting policies require the applicationof significant judgment by our management, and such judgments are reflected inthe amounts reported in our consolidated financial statements. In applyingthese policies, our management uses its judgment to determine the appropriateassumptions to be used in the determination of estimates. Those estimates arebased on our historical experience, terms of existing contracts, our observanceof market trends, information provided by our strategic partners andinformation available from other outside sources, as appropriate. Actualresults may differ significantly from the estimates contained in ourconsolidated financial statements. Our critical accounting policies are asfollows:

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

30

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price is fixed ordeterminable and collection is deemed probable. If uncertainties regardingcustomer acceptance exist, the Company recognizes revenue when thoseuncertainties are resolved and title has been transferred to the customer. Amountscollected or billed prior to satisfying the above revenue recognition criteriaare recorded as deferred revenue.

·       *Accounts Receivable Valuation.*   We perform variousanalyses to evaluate accounts receivable balances and record an allowance forbad debts based on the estimated collectibility of the accounts such that theamounts reflect estimated net realizable value. If actual uncollectible amountssignificantly exceed the estimated allowance, the Company’s operating resultswould be significantly and adversely affected.

·       *Inventory Valuation.*   We value ourinventory at the lower of our actual cost or the current estimated market value.We regularly review inventory quantities on hand and inventory commitments withsuppliers and record a provision for excess and obsolete inventory basedprimarily on our historical usage for the prior twenty-four month period. Althoughwe make every effort to ensure the accuracy of our forecasts of future productdemand, any significant unanticipated change in demand or technologicaldevelopments could have a significant impact on the value of our inventory andour reported operating results.

·       *ProductWarranties.*   Our products are generally sold with atwelve month warranty provision that requires us to remedy deficiencies inquality or performance of our products at no cost to our customers only afterit has been determined that the cause of the deficiency is not due to theactions of the machine operator or product used in the machine. The Company hasestablished a policy for replacing parts that wear out or break prematurely. Thepolicy called for replacing the parts or repairing a machine within one year ofthe sale. Commencing in May of 2006, the Company altered its warranty bylimiting to a period of 90 days its warranty coverage on certain critical wearitems. The Company is now selling more advanced processor production systemsthan past years that may require more costly parts. A reserve balance wasestablished during the year ended December 31, 2005. We believe thereserve balance in the amount of $74,000 to be adequate as of December 31,2006.

**Recent AccountingPronouncements**

The Company has adopted SFAS No. 151, *“Inventory Costs—an amendment of ARB No. 43,”* which isthe result of the FASB’s efforts to converge U.S. accounting standards forinventories with international Accounting Standards. SFAS No. 151 requiresidle facility expenses, freight, handling costs, and wasted material (spoilage)costs to be recognized as current-period charges. It also requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. SFAS No. 151 iseffective for inventory costs incurred during fiscal years beginning after September 15,2005. The Company adopted SFAS No. 151 on January 1, 2006 and it didnot have a material impact on our consolidated financial statements.

The Company has adopted SFAS No. 154, *“Accounting Changes and Corrections.”*  SFAS No. 154 addresses the accountingand reporting for changes in accounting principles. It replaces APB 20 and FIN20, and is effective for all fiscal years beginning after December 15,2005. It requires that the cumulative effect of a change in accountingprinciple be recorded directly in the opening retained earnings balance. TheCompany has evaluated this standard, and has determined there is no materialimpact on our consolidated financial statements.

In June 2006, the FIN48, *“Accounting for Uncertainty in Income Taxes,”*an interpretation of SFAS No. 109. FIN 48 clarifies the accounting foruncertainties in income taxes recognized in an enterprise’s financialstatements. The Interpretation requires that we determine whether it is morelikely than not that a tax position will be sustained upon examination by theappropriate taxing authority. If a tax position 

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

**Item 7A.**                Quantitative and Qualitative Disclosures AboutMarket Risk

The Company’s financial instruments are generally notsubjected to changes in market value as a result of changes in interest ratesdue to the short maturities of the instruments. The Company’s fixed rate debtis not exposed to cash flow or interest rate changes but is exposed to fairmarket value changes in the event of refinancing this fixed rate debt. TheCompany does not have significant exposure to fluctuations in foreign exchangerates.

The Company had no variable rate borrowingsoutstanding under its revolving credit agreement at December 31, 2006. Therefore,until the Company decides to borrow under its revolving credit agreement, anadverse change in interest rates for this variable rate debt would have nomaterial effect on the Company’s earnings and cash flows on an annual basis.

For additional information about the Company’sfinancial instruments, see Note 8 to the Consolidated Financial Statements.

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**Item 8.**                        FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA

**Reportof Independent Registered Public Accounting Firm**

The Board of Directors andStockholders of MFIC Corporation:

We have audited the accompanying consolidated balancesheet of MFIC Corporation and subsidiaries as of December 31, 2006 and therelated consolidated statements of operations, stockholders’ equity, and cashflows for the one year period ended December 31, 2006. These financialstatements and schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits. The financial statements of MFIC Corporationand subsidiaries for the two years ended December 31, 2005 and 2004 wereaudited by other auditors whose reports dated March 1, 2006, except forNote 6, as to which the date is March 23, 2006, and March 2, 2005,respectively, expressed unqualified opinions on those financial statements.

We conducted our audits in accordance with theauditing standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. An auditincludes consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstance, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’ internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of MFIC Corporation andsubsidiaries at December 31, 2006 and the consolidated results of theiroperations and their cash flows for the year ended December 31, 2006, inconformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

/s/ UHY LLP

Boston, Massachusetts

March 12, 2007

F-1

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**Reportof Independent Registered Public Accounting Firm**

The Board ofDirectors and Stockholders of MFIC Corporation:

We have audited theaccompanying consolidated balance sheets of MFIC Corporation and subsidiariesas of December 31, 2005 and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of the two years inthe period ended December 31, 2005. Our audits also included the financialstatement schedule listed in the Index at Item 15(c). These financialstatements and schedule  are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements and schedule based on ouraudits.

We conducted our audits inaccordance with the auditing standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required tohave, nor were we engaged to perform an audit of its internal control overfinancial reporting. An audit includes consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstance, but not for the purpose of expressing anopinion on the effectiveness of the Company’ internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of MFIC Corporation and subsidiaries at December 31,2005 and the consolidated results of their operations and their cash flows forthe two years in the period ended December 31, 2005, in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

/s/ Brown & Brown, LLP

Boston,Massachusetts

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

F-2

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**MFIC CORPORATION** CONSOLIDATEDBALANCE SHEETS(in thousands, except share and per share amounts)

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

 

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

F-3

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

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

 

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

F-4

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**MFIC CORPORATIONConsolidated Statements of Cash Flows (in thousands)**

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

 

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

F-5

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**MFIC CorporationConsolidated Statements of Changes in Stockholders’ Equity**

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

 

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

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**MFIC CORPORATIONNOTES TO CONSOLIDATED FINANCIAl STATEMENTS**

**1.**                 ORGANIZATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

**Organization**

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

**Principles ofConsolidation**

The consolidated financialstatements of the Company include the accounts of the Company and its whollyowned subsidiaries. All significant intercompany transactions and balances havebeen eliminated in consolidation.

**Reclassifications**

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

**Use of Estimates**

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America (“Generally AcceptedAccounting Principles”) requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

**Revenue Recognition**

Revenue from the sale of machines and spare parts isgenerally recognized upon shipment of the product or when the earnings processis complete. Rental income for the lease of equipment is recognized on astraight-line basis over the term of the lease agreement. Rental income andequipment sales are classified in revenues in the consolidated statement ofoperations.

The Company has adopted Securities and ExchangeCommission (SEC) Staff Accounting Bulletin (SAB) No. 104, *“Revenue Recognition in Financial Statements*.*”*  The Companyrecognizes sales at the time of shipment of the system to the customer. Managementbelieves the customer’s post-delivery acceptance provisions and installationare routine. The Company has never failed to successfully complete a systeminstallation. With few exceptions, the Company limits its liability to thereturn of the equipment sold. 

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Installation costs arepredictable and insignificant to the total purchase price. The Company hasdemonstrated a history of customer acceptance subsequent to shipment andinstallation of these systems.

The Company has adoptedFinancial Accounting Statements Board (“FASB”) Interpretation No. (“FIN”)46R, *“Consolidation of Variable Interest Entities*.*”*  The Company hasevaluated this interpretation, and has determined that it has no VariableInterest Entities that would require consolidation within the Company’s December 31,2006 Consolidated Financial Statements.

**Cash and CashEquivalents**

The Company considers allhighly liquid securities with initial maturities of 90 days or less, at thetime of acquisition, to be cash equivalents.

**Allowance forDoubtful Accounts**

The Company maintains anallowance for estimated losses resulting from the inability of its customers tomake required payments. An estimate of uncollectible amounts is made bymanagement based upon historical bad debts, current customer receivablebalances, age of customer receivable balances, customer’s financial conditionand current economic trends. If the actual uncollected amounts significantlyexceed the estimated allowance, the Company’s operating results would besignificantly adversely affected.

**Inventories**

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

The Company periodicallyreviews quantities of inventory on hand and compares these amounts to expectedusage of each particular product line. Reserves are established to recordprovisions for slow moving inventories in the period in which it becomesreasonably evident that the item is not useable, salable or the market value isless than cost.

**Property andEquipment**

The Company’s property andequipment is recorded at cost. Depreciation is computed using the straight-linemethod, based upon estimated useful lives of 3 to 7 years. Leaseholdimprovements are amortized using the straight-line method based upon theshorter of the estimated useful lives or remaining life of the lease. Expendituresfor maintenance and repairs are expensed as incurred. Upon retirement or saleof property and equipment, the cost of the disposed asset and the relatedaccumulated depreciation are removed from the accounts and any resulting gain,or loss is credited or charged to operations.

**Long-Lived Assets**

In accordance withStatements of Financial Accounting Standards (“SFAS”) No.144, *“Accounting for the Impairment or Disposal of Long-Lived Assets*,*”* the Company reviews long-lived assets and all amortizingintangible assets for impairment whenever events or changes in circumstancesindicate the carrying amount of such assets may not be recoverable. Recoverabilityof these assets is determined by comparing the forecasted undiscounted net cashflows of the operation to which the assets relate, to the carrying amount. Ifthe operation is determined to be unable to recover the carrying amount of itsassets, then intangible assets are written down first, followed by the otherlong-lived assets of the operation, to fair value. Fair value is determinedbased on discounted cash flows or appraised values, depending upon the natureof the assets.

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**Patents, Licensesand Other Intangible Assets**

Patents, patentapplications and rights are stated at acquisition cost. Amortization isrecorded using the straight-line method over the shorter of the legal lives oruseful life of the patents. Patents, licenses and other intangible assets arebeing amortized over a period of 3 to 17 years.

**Reserve forWarranty Expenses**

Our products are generallysold with a twelve month warranty provision that requires us to remedydeficiencies in quality or performance of our products at no cost to our customersonly after it has been determined that the cause of the deficiency is not dueto the actions of the machine operator or product used in the machine. TheCompany has established a policy for replacing parts that wear out or breakprematurely. The policy called for replacing the parts or repairing a machinewithin one year of the sale. Commencing in May of 2006, the Companyaltered its warranty by limiting to a period of 90 days its warranty coverageon certain critical wear items. The Company is now selling more advancedprocessor production systems than past years that may require more costly parts.A reserve balance was established during the year ended December 31, 2005.We believe the reserve balance in the amount of $74,000 to be adequate as of December 31,2006.

**Research andDevelopment Expenses**

The Company chargesresearch and development expenses to operations as incurred.

**Earnings (Loss) perShare**

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

**Fair Value ofFinancial Instruments**

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

**Income Taxes**

The Company accounts forincome taxes under SFAS No. 109, *“Accounting for IncomeTaxes.” *Under SFAS No. 109,deferred tax assets or liabilities are computed based on the differences betweenthe financial statement and income tax bases of assets and liabilities usingthe effective tax rates. Deferred income tax expense or credits are based onchanges in the asset or liability from period to period. The Company records avaluation allowance against any net deferred tax assets if it is more likelythan not that they will not be realized.

**Stock-BasedCompensation**

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

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share-based payments,including employee stock options, at fair value. Generally, the approach inSFAS No. 123R is similar to the approach described in SFAS No. 123, *“Accounting forStock-Based Compensation.”* However, SFAS No. 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair value over the requisite serviceperiod. Pro forma disclosure is no longer an alternative. In March 2005,the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, which expressedthe views of the SEC regarding the interaction between SFAS No. 123R andcertain rules and regulations of the SEC. SAB No. 107 providesguidance related to the valuation of share-based payment arrangements forpublic companies, including assumptions such as expected volatility andexpected term.

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

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

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

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

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

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

 

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

On December 31, 2005, upon recommendation of itsCompensation Committee, the Company approved the accelerated vesting of all ofthe then outstanding unvested stock options (“Options”), pursuant to theCompany’s 1988 Employee Stock Option Plan, to purchase shares of common stockof the Company. Of the Options approved for acceleration, Options to purchase480,915 shares of the Company’s common stock became immediately exercisable on December 31,2005. In connection with the acceleration of vesting, the Company recognizedapproximately $65,000 of compensation expense for “in-the-money” Options in thefourth quarter of fiscal 2005 as a one-time charge in accordance with APB No. 25.The remaining terms for each of the Options granted remain the same. Withrespect of the remaining Options to purchase 284,971 shares of the Company’scommon stock approved for acceleration, the option holders exercised their “opt-out”rights to forego acceleration. Accordingly, the Company has recognized anon-cash compensation charge of approximately $87,000 in the year ended December 31,2006 with regard to those Options. The decision to accelerate the vesting ofthese Options was made primarily to reduce non-cash compensation expense thatwould have been recorded in its income statement in the future periods upon theadoption of SFAS No. 123R on January 1, 2006.

The Black-Scholes option valuation model was developedfor use in estimating the fair value of traded options, which have no vestingrestrictions and are fully transferable. In addition, option valuation modelsrequire the input of highly subjective assumptions including the expected stockprice volatility. Because the Company’s employee stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of its employeestock options.

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

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

 

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

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

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

*Expectedlife*—The expected life of options granted representsthe period of time for which the options are expected to be outstanding and isderived from the Company’s historical stock option exercise experience andoption expiration data.

Other reasonable assumptions about these factors couldprovide different estimates of fair value. Future changes in stock pricevolatility, life of options, interest rates, forfeitures and dividendpractices, if any, may require changes in our assumptions, which couldmaterially affect the calculation of fair value.

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

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

**Recent AccountingPronouncements**

The Company has adopted SFAS No. 151, *“Inventory Costs—an amendment of ARB No. 43,”* which isthe result of the FASB’s efforts to converge U.S. accounting standards forinventories with international Accounting Standards. SFAS No. 151 requiresidle facility expenses, freight, handling costs, and wasted material (spoilage)costs to be recognized as current-period charges. It also requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. SFAS No. 151 iseffective for inventory costs incurred during fiscal years beginning after September 15,2005. The Company adopted SFAS No. 151 on January 1, 2006 and it didnot have a material impact on our consolidated financial statements.

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

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FIN 20, and iseffective for all fiscal years beginning after December 15, 2005. Itrequires that the cumulative effect of a change in accounting principle berecorded directly in the opening retained earnings balance. The Company hasevaluated this standard, and has determined there is no material impact on ourconsolidated financial statements.

In June 2006, the FIN48, *“Accounting for Uncertainty in Income Taxes,”*an interpretation of SFAS No. 109. FIN 48 clarifies the accounting foruncertainties in income taxes recognized in an enterprise’s financialstatements. The Interpretation requires that we determine whether it is morelikely than not that a tax position will be sustained upon examination by theappropriate taxing authority. If a tax position meets the more likely than notrecognition criteria, FIN 48 requires the tax position be measured at thelargest amount of benefit greater than fifty percent (50%) likely of beingrealized upon ultimate settlement. This accounting standard is effective forfiscal years beginning after December 15, 2006. The effect, if any, ofadopting FIN 48 on our financial position and results of operations has notbeen determined.

**2.**                 INDUSTRYSEGMENT, GEOGRAPHIC AND ENTERPRISE-WIDE REPORTING

SFAS No. 131, “*Disclosuresabout Segments of an Enterprise and Related Information,”* requirescompanies to report selected information about operating segments, as well asenterprise-wide disclosures about products, services, geographic areas andmajor customers. Operating segments are determined based on the way managementorganizes its business for making operating decisions and assessing performance.The Company’s chief decision-maker, as defined under SFAS No. 131, is thechairman and chief executive officer. The Company has determined that itconducts its operations in one business segment: the development, manufacture,marketing and sale of process and formulation equipment. The Company’s salesare primarily to companies with processing needs in the chemical,pharmaceutical, food, cosmetic, and biotechnology industries. The Company hasless than 1% of total assets in foreign countries. As a result, the financialinformation disclosed herein represents all of the material financialinformation related to the Company’s principal operating segment.

Approximatesales to customers by geographic markets, are as follows:

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

 

The users of the Company’s systems are in variousindustries, including the chemical, pharmaceuticals, food, cosmetic andbiotechnology industries. Mizuho Industrial Co. Ltd. (Mizuho), and TevaPharmaceuticals Industries Ltd. (Teva) and its’ wholly owned subsidiary accountedfor 9.2% and 15.2% of the Company’s revenues in 2006, respectively; 19.5% and18.9%, respectively, in 2005; and 20.5% and 12.8%, respectively, in 2004. Mizuho,the Company’s Japanese distributor of Microfluidizer processor equipment andspare parts, resells the Company’s equipment to numerous end-users in Japan,none of which individually represents 10% or more of the Company’s revenues. Twocustomers accounted for 14.4% and 13.6% of the trade accounts receivable as of December 31,2006, respectively. Two customers accounted for 10.8% and 10.7% of the tradeaccounts receivable as of December 31, 2005, respectively. Three customersaccounted for 15.1%, 14.7%, and 13.4% of the trade accounts receivable as of December 31,2004, respectively. A reduction or delay in orders from any of the Company’ssignificant customers could have a material adverse effect on the Company’sresults of operations.

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The Company sells itsproducts in various countries. The Company’s sales in North America, includingthe United States, Canada, and Mexico, accounted for approximately 55.2% of theCompany’s revenues in 2006; approximately 51.8% of the Company’s revenues in2005; and approximately 51.1% of the Company’s revenues in 2004; with almostall of those sales coming from United States and Canada. Sales to the rest ofthe world accounted for approximately 44.8% of the Company’s revenues in 2006;48.2% of the Company’s revenues in 2005; and approximately 48.9% of therevenues in 2004. Sales through the Company’s exclusive distributors in Japanaccounted for approximately 9.2% of the Company’s revenues in 2006; 19.5% ofthe Company’s revenues in 2005; and 20.5% of the Company’s revenues in 2004. Salesthrough the Company’s representative in Korea accounted for approximately 9.5%of the Company’s revenues in 2006; 12.1% of the Company’s revenues in 2005; and4.8% of the Company’s revenues in 2004.

**3.**                 INVENTORIES

Thecomponents of inventories are as follows:

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

 

**4.**                 ASSETSAVAILABLE FOR SALE

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

SummaryOperating Results of the Discontinued Operations of the Division for the yearended December 31, 2004 is as follows:

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

 

On February 9, 2004, pursuant to an AssetPurchase Agreement (the “Asset Purchase Agreement”) dated February 5, 2004between MFIC and a wholly owned subsidiary of NuSil Corporation (“NuSil”), MFICsold substantially all of the assets and selected liabilities of the Division,to NuSil. Other than 

F-14

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NuSil’s prior purchases ofproducts from the Division, there were no preexisting relationships betweenMFIC and NuSil.

The assets of the Division that were sold includedaccounts receivable, furniture, fixtures and equipment, inventory and supplies,books and records, bids, contracts, prepaid expenses, leases, intellectualproperty, goodwill, domain names and claims, all as described in the AssetPurchase Agreement (collectively, the “Assets”). In addition, certain rightsand obligations arising after February 9, 2004 under the Division’sPacifiCare Group Health Insurance Policy were assigned. The Division’s cash onhand on February 9, 2004 were excluded from the assets being sold. Underthe Asset Purchase Agreement, the Division’s executory obligations undercertain contracts and bids, and the Division’s accounts payable as of February 9,2004 in the approximate amount of $623,000, were assumed by NuSil.

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

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

The aforementioned Purchase Note bore interest at fivepercent (5%) per annum, and was secured by the Assets pursuant to a SecurityAgreement dated February 5, 2004 (the “Security Agreement”) between theparties and was subject to certain offsets as provided in the Asset PurchaseAgreement. Principal and interest on the Purchase Note were payable on February 9,2005. NuSil forwarded a payment to the Company on that date which, inconjunction with allowable offset of approximately $8,000 paid by NuSil for thebenefit of the Company, satisfied the claim.

Pursuant to the AssetPurchase Agreement, MFIC entered into a Noncompetition and NonsolicitationAgreement, dated February 5, 2004, which limits MFIC’s ability to competewith the business of the Division for a period of five years.

**5.**                 PROPERTYAND EQUIPMENT

Propertyand equipment consist of the following:

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

 

Depreciation expense forproperty and equipment for the years ended December 31, 2006, 2005 and2004 was approximately $160,000, $173,000 and $93,000, respectively.

F-15

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**6.**                 INTANGIBLESAND OTHER ASSETS

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

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

**7.**                 ACCRUEDEXPENSES

Accruedexpenses consist of the following:

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

 

**8.**                 LONG-TERMDEBT AND OBLIGATIONS UNDER CAPITAL LEASE

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

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

 

On March 1, 2004, the Company and itsMicrofluidics Corporation subsidiary, as co-borrowers, entered into a revolvingcredit and term loan agreement with Banknorth, N.A. (the “Lender”) providingthe Company with a $2,000,000 demand revolving credit and four year term loanfacility (the “Credit Facility”). The Credit Facility was comprised of (i) a$1,000,000 demand revolving line of credit (the “Revolving Credit Line”), and (ii) a$1,000,000 four year term promissory note (the “Term Loan”). The RevolvingCredit Line obtains advances thereunder bearing interest at a rate equal to theprime rate (8.07% at December 31, 2006). All borrowings under theRevolving Credit Line were evidenced by a $1,000,000 demand promissory note(the “Revolving Note”), and (ii) a $1,000,000 term promissory note,amortized over a four year period but having a maturity date of March 3,2008 and bearing interest at a rate equal to 5.67%. Loans under the CreditFacility are secured by a collateral pledge to the Lender of substantially allthe assets of the Company and its subsidiaries. The Company’s MicrofluidicsCorporation subsidiary guaranteed the Company’s obligations to the Lender underthe Credit Facility. The Company also pledged to the Lender all shares ofMicrofluidics Corporation owned by the Company. The Company is required to meettwo covenants on an annual (calendar) basis as of December 31 of a givenyear as 

F-16

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

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

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

Futureminimum capital lease payments required under the capital leases are asfollows:

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

 

**9.**                 EMPLOYEEBENEFIT PLANS

The Company offers a 401(k) profit-sharingplan (the 401K Plan) to its employees. All Company and related entity employeeswho are eighteen (18) years of age and have completed one hour of service areeligible to participate in the 401K Plan. Employees may contribute from 1% to20% of their compensation. The Company’s contribution is discretionary, withcontributions made from time to time as management deems advisable. The Companymade no matching contributions during the years ended December 31, 2006,2005 or 2004. The Company also instituted a cafeteria plan in 1992, giving theemployees certain pre-tax advantages on specific payroll deductions.

**10.**          INCOMETAXES

Theprovision (benefit) for income taxes consists of the following:

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

 

F-17

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

Thetotal income tax provision (benefit) differs from the income tax at thestatutory federal income tax rate due to the following:

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

 

Thefollowing is a summary of the significant components of the Company’s deferredtax assets and liabilities:

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

 

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

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

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**11.**          STOCKHOLDERS’EQUITY

*Private Placement*

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

*Warrants*

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

*Employee StockPurchase Plan*

The Company has anemployee stock purchase plan (the “Purchase Plan”). Under the Purchase Plan,participants are granted options to purchase the Company’s common stock twice ayear 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 theseshares, 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 amaximum amount of 1,000 shares for each six-month period. The number of sharesissued pursuant to this plan totaled 29,183, 23,289, and 26,678 , in 2006,2005, and 2004, respectively.

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**12.**          SUPPLEMENTALDISCLOSURES FOR STOCK-BASED COMPENSATION

*Stock Options*

The Company has three (3) shareholder approvedstock option plans as follows:  (i) the1988 Stock Plan, which authorized the grant of stock rights for up to 3,500,000shares of common stock (the “1988 Plan”); (ii) the 1989 Non-EmployeeDirector Stock Option Plan (the “1989 Plan”), which authorizes the grant ofnonqualified stock options for up to 500,000 shares of common stock; and (iii) the2006 Stock Plan (the “2006 Plan”) which authorizes the grant of stock rightsfor up to 4,000,000 shares of common stock, increased by the number of sharesof common stock underlying unexercised options issued under either the 1988Plan or the 1989 Plan (together, the “Prior Plans”) that expired after June 20,2006, and decreased by the number of shares of common stock issued and issuablepursuant to options outstanding under the Prior Plans. The 2006 Plan was approvedby our shareholders at the Annual Meeting of Shareholders held on June 20,2006. Upon adoption of the 2006 Plan by our shareholders, we ceased grantingnew options under the Prior Plans. The Prior Plans permitted, and the 2006 Planpermits, the granting of stock awards to employees, officers, and non-employeemembers of the Board of Directors. Options granted under the Prior Plans andthe 2006 Plan permit vesting over a 3-to-5 year period and expire 5-to-10years from the date of grant. At December 31, 2006, approximately 754,000shares were available for future grants under the 2006 Plan and no shares wereavailable for future grants under the Prior Plans.

During the year ended December 31, 2006, theCompany issued 51,000 stock options at exercise prices equal to or greater thanthe fair market value of the Company’s stock on the date of grant under the1988 Stock Plan, and the 1989 Non-Employee Director Stock Option Plan, and7,412 shares under the 2006 Stock Plan. Approximately 62,000 shares were forfeitedand approximately 176,000 shares were vested during the year ended December 31,2006.

Activityunder the Plans is as follows:

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

 

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

F-20

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Summarizedinformation about stock options outstanding as of December 31, 2006 are asfollows:

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

 

On April 7, 2004, anofficer of the Company exercised 80,000 options that had been granted in 1998at an exercised price of $1.2375 per share, for a total expenditure of $99,000.Upon a review of the 1988 Plan, it was discovered that the officer, due to hisdegree of ownership in the Company, could not exercise these options after fiveyears, or 2003. Instead of having the money returned, the officer exercisedother options held and exercisable. The effect of this transaction was an equalincrease to Common Stock and decrease to Additional Paid-In Capital, with noresultant affect to equity as a whole.

**13.**          COMMITMENTS

TheCompany leases its facilities under non-cancelable operating leases expiringthrough October, 2011. Future minimum rental payments under the operatingleases at December 31, 2006 are as follows:

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

 

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

**14.**          RELATEDPARTY TRANSACTIONS

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

F-21

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**15.**          CONDENSED CONSOLIDATEDQUARTERLY FINANCIAL DATA (UNAUDITED)

Thefollowing consolidated interim financial information is unaudited. Suchinformation reflects all adjustments, consisting solely of normal recurringadjustments, which are in the opinion of management necessary for a fairpresentation of the quarterly financial data.

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

 

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

 

**16.**          VALUATION AND QUALIFYINGACCOUNTS

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

 

F-22

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

On May 26, 2006, thepartners of Brown & Brown, LLP (“B&B”) announced that they werejoining UHY LLP (“UHY”), a New York limited liability partnership. UHY is an independentregistered public accounting firm. On August 8, 2006, B&B notifiedMFIC Corporation (the “Company”) that, as a result of the merger, B&B wouldno longer provide audit and attestation services and that those services wouldnow be handled by UHY, as B&B’s successor in interest. B&B requestedthat the Company accept and appoint UHY as the independent public auditors ofthe Company effective as of August 8, 2006.

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

During the three mostrecent fiscal years of the Company and any subsequent interim periods, therewere no disagreements between the Company and B&B on any matter ofaccounting principles or practices, financial statement disclosure, or auditingscope or procedure, which disagreements, if not resolved to the satisfaction ofB&B, would have caused it to make reference to the subject matter of thedisagreements in connection with its report.

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

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

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

**Item9A.**                CONTROLS AND PROCEDURES

a)     Evaluation of disclosure controls and procedures. Based on theirevaluation as of the end of the fiscal quarter ended December 31, 2006,each of our principal executive officer and principal financial officer haveconcluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) areeffective to ensure that material information required to be disclosed by us inreports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

b)     Changes in internal control over financial reporting. There wereno significant changes in our internal control over financial reporting duringthe fiscal quarter ended December 31, 2006 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

**Item 9B.**               OTHER INFORMATION

None.

33

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**PART III**

**Item 10.**                 DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE

The information requiredby this Item 10 will be incorporated by reference from the Company’s definitiveproxy statement or will be filed as an amendment to the Company’s Form 10-Kwithin 120 days of the Company’s fiscal year end

**Item 11.**                 EXECUTIVE COMPENSATION

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

**Item 12.**                 SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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

**Item 13.**                 CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information requiredby this Item 13 will be incorporated by reference from the Company’s definitiveproxy statement or will be filed as an amendment to the Company’s Form 10-Kwithin 120 days of the Company’s fiscal year end.

**Item 14.**                 PRINCIPAL ACCOUNTANT FEESAND SERVICES

*Audit Fees*

During the years ended December 31,2006 and 2005, UHY LLP (“UHY”), formerly Brown & Brown, LLP, was paidapproximately $91,000, and $87,000 respectively for services rendered for theaudit of the Company’s financial statements and review of financial statementsincluded in the Company’s reports on Form 10-Q or services that arenormally provided by UHY in connection with statutory and regulatory filings orengagements for those fiscal years. All services were approved by the AuditCommittee.

*Audit Related Fees*

During the years ended December 31,2006 and 2005, UHY received no payments for assurance and related servicesreasonably related to the performance of audit or review of the Company’sfinancial statements and are not reported under Item 9(e) of the Company’sdefinitive proxy statement. All services were approved by the Audit Committee.

*Tax Fees*

During the years ended December 31,2006 and 2005, UHY was paid approximately $22,000 and $16,000, respectively,for tax compliance, tax advice and tax planning services. All tax services wereapproved by the Audit Committee.

34

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*All Other Fees*

During the years ended December 31, 2006 and2005, UHY was paid approximately $46,000 and $27,000, respectively, fornon-audit services. All of these services were approved by the Audit Committee.

The Audit Committee pre-approves audit and non-auditservices provided to the Company by the independent auditors (or subsequentlyapproves non-audit services in those circumstances where a subsequent approvalis necessary and permissible).

The Audit Committee has considered whether theprovision of non-core audit services to the Company by the Company’s principalauditor is compatible with maintaining independence, and have affirmed, in eachinstance, that the provision of such service was compatible with the principalauditor’s independent role.

35

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**PART IV**

**Item 15.**                 EXHIBITS AND FINANCIALSTATEMENT SCHEDULES

(a)   FinancialStatements

The following ConsolidatedFinancial Statements are included in Item 8:
|                                                                                                                    | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent  Registered Public Accounting Firm                                                           |       | F-1      |
| Report of Independent Registered Public Accounting  Firm                                                           |       | F-2      |
| Consolidated Balance Sheets as of  December 31, 2006 and 2005                                                 |       | F-3      |
| Consolidated Statements of  Operations for the Three Years Ended December 31, 2006                            |       | F-4      |
| Consolidated Statements of  Cash Flows for the Three Years Ended December 31, 2006                            |       | F-5      |
| Consolidated Statements of  Changes in Stockholders’ Equity for the Three Years Ended December 31,  2006 |       | F-6      |
| Notes  to Consolidated Financial Statements                                                                        |       | F-7      |

 

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

36

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

37

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

38

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

----

*                    Filedherewith.

39

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized, in the city of Newton,Commonwealth of Massachusetts, on the 28th dayof March, 2007.

| ** ** | **MFIC CORPORATION** | ** **                 |
|------------|----------------------|----------------------------|
| ** ** | ** **           | ** **                 |
|       | By:                  | /s/ IRWIN J. GRUVERMAN     |   |
|       |                 | Irwin J.  Gruverman        |   |
| * *   | * *             | *Chief  Executive Officer* | * * |

 

Pursuantto the requirements of the Securities and Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.
|                         | **Signature** | ** **                                    | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-------------------------|---------------|-----------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ IRWIN  J. GRUVERMAN |          | Chief Executive  Officer                      |       | March 28, 2007 |
| Irwin  J. Gruverman     |          | (Principal Executive Officer),  Chairman of   |       |                |
|                    |          | the Board of Directors  and Secretary         |       |                |
| /s/ DENNIS  P. RIORDAN  |          | Controller                                    |       | March 28, 2007 |
| Dennis  P. Riordan      |          | (Principal Financial and  Accounting Officer) |       |                |
| /s/ JAMES  N. LITTLE    |          | Director                                      |       | March 28, 2007 |
| James  N. Little        |          |                                          |       |                |
| /s/ LEO  PIERRE ROY     |          | Director                                      |       | March 28, 2007 |
| Leo  Pierre Roy         |          |                                          |       |                |
| /s/ GEORGE  UVEGES      |          | Director                                      |       | March 28, 2007 |
| George  Uveges          |          |                                          |       |                |
| /s/ ERIC  G. WALTERS    |          | Director                                      |       | March 28, 2007 |
| Eric G. Walters         |          |                                          |       |                |

 

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