UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended ~~March~~June 3130, 2010

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

For the transition period from to

Commission File Number: 0-11625

MICROFLUIDICS INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(617) 969-5452

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

As of ~~May~~August 129, 2010, 10,~~412~~414,282 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.

Table of Contents

MICROFLUIDICS INTERNATIONAL CORPORATION

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets at March 31, 2010 and December 31, 2009	3
	Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009	4
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009	4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009	5
	Notes to Condensed Consolidated Financial Statements	6-10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-1516
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1516
Item 4.	Controls and Procedures	16
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	1617
Item 1A.	Risk Factors	1617-2223
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	(Removed and Reserved)	23
Item 5.	Other Information	23
Item 6.	Exhibits	23
	Signatures	2425
	Certifications

Table of Contents

PART I. FINANCIAL INFORMATION

PART I.	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS

~~ITEM~~MICROFLUIDICS 1.INTERNATIONAL ~~FINANCIAL STATEMENTS~~CORPORATION

~~MICROFLUIDICS~~Condensed ~~INTERNATIONAL~~Consolidated ~~CORPORATION~~Balance Sheets

~~Condensed~~(Unaudited ~~Consolidated~~- ~~Balance~~in ~~Sheets~~thousands, except share and per share amounts)

(Unaudited - in thousands, except share and per share amounts)

	June 30,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	1,949		$	2,185
Accounts receivable, net of allowance of $38 and $44 on June 30, 2010 and December 31, 2009, respectively	2,957			2,571
Inventories	2,683			2,916
Prepaid and other current assets	334			280
Total current assets	7,923			7,952

Property and equipment, net	757			891
Other non-current assets	442			535
Total assets	$	9,122		$	9,378

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	828		$	545
Accrued expenses	1,474			1,727
Customer advances	459			1,137
Total current liabilities	2,761			3,409

Long-term liabilities:
Convertible debt	4,707			4,679
Total liabilities	7,468			8,088

Stockholders’ equity:
Common stock; $.01 par value; 30,000,000 and 30,000,000 shares authorized; 10,649,728 and 10,630,228 shares issued; 10,414,282 and 10,394,782 shares outstanding as of June 30, 2010 and December 31, 2009, respectively.	106			106
Additional paid-in capital	18,369			18,254
Accumulated deficit	(16,152		)	(16,401		)
Treasury stock, 235,446 shares, at cost, as of June 30, 2010 and December 31, 2009	(669		)	(669		)
Total stockholders’ equity	1,654			1,290
Total liabilities and stockholders’ equity	$	9,122		$	9,378

	March 31,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	2,157		$	2,185
Accounts receivable, net of allowance of $44 as of March 31, 2010 and December 31, 2009	2,486			2,571
Inventories	2,714			2,916
Prepaid expenses and other current assets	359			280
Total current assets	7,716			7,952
Property and equipment, net	821			891
Other non-current assets	489			535
Total assets	$	9,026		$	9,378
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	822		$	545
Accrued expenses	1,513			1,727
Customer advances	531			1,137
Total current liabilities	2,866			3,409
Long-term liabilities
Convertible debt	4,693			4,679
Total liabilities	7,559			8,088
Stockholders’ equity:
Common stock; $.01 par value; 30,000,000 and 30,000,000 shares authorized; 10,647,728 and 10,630,228 shares issued; 10,412,282 and 10,394,782 shares outstanding as of March 31, 2010 and December 31, 2009, respectively	106			106
Additional paid-in capital	18,325			18,254
Accumulated deficit	(16,295		)	(16,401		)
Treasury stock, 235,446 shares, at cost, as of March 31, 2010 and December 31, 2009	(669		)	(669		)
Total stockholders’ equity	1,467			1,290
Total liabilities and stockholders’ equity	$	9,026		$	9,378

See notes to unaudited condensed consolidated financial statements.

~~See notes to unaudited condensed consolidated financial statements.~~3

3Table of Contents

~~Table~~MICROFLUIDICS ofINTERNATIONAL ~~Contents~~CORPORATION

~~MICROFLUIDICS~~Condensed ~~INTERNATIONAL~~Consolidated ~~CORPORATION~~Statements of Operations

~~Condensed~~(Unaudited ~~Consolidated~~- ~~Statements~~in ofthousands, ~~Operations~~except share and per share amounts)

(Unaudited - in thousands, except share and per share amounts)

	For The Three Months Ended						For The Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Revenues	$	4,512		$	3,469		$	8,827		$	7,028
Cost of sales	1,627			1,493			3,358			3,146
Gross profit	2,885			1,976			5,469			3,882

Operating expenses:
Research and development	509			410			976			868
Selling	1,076			926			2,131			2,147
General and administrative	979			676			1,749			1,455
Total operating expenses	2,564			2,012			4,856			4,470

Income (loss) from operations	321			(36		)	613			(588		)
Interest expense	(178		)	(142		)	(364		)	(282		)
Interest income	—			1			—			3
Net income (loss)	$	143		$	(177	)	$	249		$	(867	)

Net income (loss) per common share:
Basic	$	.01		$	(0.02	)	$	.02		$	(0.08	)
Diluted	$	.01		$	(0.02	)	$	.02		$	(0.08	)
Weighted average number of common and common equivalent shares outstanding:
Basic	10,413,615			10,371,782			10,407,115			10,371,205
Diluted	10,612,677			10,371,782			10,615,769			10,371,205

	For The Three Months Ended
	March 31,
	2010			2009
Revenues	$	4,315		$	3,559
Cost of sales	1,731			1,653
Gross profit	2,584			1,906
Operating expenses:
Research and development	467			458
Selling	1,055			1,221
General and administrative	770			779
Total operating expenses	2,292			2,458
Income (loss) from operations	292			(552		)
Interest expense	(186		)	(140		)
Interest income	—			2
Income (loss) before taxes	106			(690		)
Provision for income taxes	—			—
Net income (loss)	$	106		$	(690	)
Net income (loss) per common share:
Basic	$	0.01		$	(0.07	)
Diluted	$	0.01		$	(0.07	)
Weighted average number of common and common equivalent shares outstanding:
Basic	10,400,615			10,370,628
Diluted	10,618,255			10,370,628

See notes to unaudited condensed consolidated financial statements.

~~See notes to unaudited condensed consolidated financial statements.~~4

4Table of Contents

~~Table~~MICROFLUIDICS ~~of Contents~~INTERNATIONAL CORPORATION

~~MICROFLUIDICS~~Condensed ~~INTERNATIONAL~~Consolidated ~~CORPORATION~~Statements of Cash Flows

~~Condensed~~(Unaudited ~~Consolidated~~- ~~Statements~~in ~~of Cash Flows~~thousands)

(Unaudited - in thousands)

	For The Six Months Ended
	June 30,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	249		$	(867	)
Adjustments to reconcile net income (loss) to net cash flows:
Depreciation	61			80
Amortization of leasehold improvements	85			81
Amortization of intangibles	3			3
Amortization of deferred financing fees	90			31
Non-cash interest	28			27
Allowance for doubtful accounts	(6		)	—
Share-based compensation	108			88
Changes in assets and liabilities:
Accounts receivable	(380		)	(607		)
Inventories	233			(120		)
Prepaid expenses and other current assets	(54		)	16
Accounts payable	283			165
Accrued expenses	(253		)	(295		)
Customer advances	(678		)	(27		)
Net cash flows used in operating activities	(231		)	(1,425		)

Cash flows from investing activities:
Purchase of property, plant and equipment	(12		)	(72		)
Net cash flows used in investing activities	(12		)	(72		)

Cash flows from financing activities:
Net proceeds from issuance of common stock	7			4
Net cash flows provided by financing activities	7			4

Net change in cash and cash equivalents	(236		)	(1,493		)
Cash and cash equivalents at beginning of period	2,185			1,895
Cash and cash equivalents at end of period	$	1,949		$	402

	For The Three Months Ended
	March 31,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	106		$	(690	)
Adjustments to reconcile net income (loss) to net cash flows:
Depreciation	30			38
Amortization of leasehold improvements	43			41
Amortization of intangibles	1			1
Amortization of deferred financing fees	45			14
Non-cash interest	14			13
Share-based compensation	65			26
Changes in assets and liabilities:
Accounts receivable	85			(355		)
Inventories	202			(14		)
Prepaid expenses and other current assets	(79		)	95
Other non-current assets	—			(11		)
Accounts payable	277			98
Accrued expenses	(214		)	(82		)
Customer advances	(606		)	(156		)
Net cash flows used in operating activities	(31		)	(982		)
Cash flows used in investing activities:
Purchase of property, plant and equipment	(3		)	(67		)
Net cash flows used in investing activities	(3		)	(67		)
Cash flows from financing activities:
Net proceeds from issuance of common stock	6			4
Net cash flows provided by financing activities	6			4
Net change in cash and cash equivalents	(28		)	(1,045		)
Cash and cash equivalents at beginning of period	2,185			1,895
Cash and cash equivalents at end of period	$	2,157		$	850

See notes to unaudited condensed consolidated financial statements.

~~See notes to unaudited condensed consolidated financial statements.~~5

5Table of Contents

~~Table~~MICROFLUIDICS ~~of Contents~~INTERNATIONAL CORPORATION

~~MICROFLUIDICS~~NOTES ~~INTERNATIONAL~~TO CONDENSED ~~CORPORATION~~CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL~~1. Description ~~STATEMENTS~~of Business

~~(unaudited)~~Company Overview

~~1. Description~~References herein ofto ~~Business~~“we,” “us,” “our,” or “the Company” are to Microfluidics International Corporation.

The Company, ~~Overview~~along with its wholly-owned subsidiary, Microfluidics Corporation (“Microfluidics”), operates in one segment, producing and marketing a broad line of proprietary high-shear fluid processing systems used primarily in the pharmaceutical, biotechnology, chemical, nutraceutical/food, energy, academics and cosmetic industries.

~~References~~The condensed ~~herein~~consolidated tofinancial ~~“we”, “us”,~~statements ~~“our”,~~include orthe “accounts of the Company” and ~~are~~its towholly-owned subsidiary, Microfluidics. ~~International~~All ~~Corporation~~intercompany balances and transactions have been eliminated.

~~We, along with our~~The ~~wholly-owned~~Company’s ~~subsidiary,~~corporate ~~Microfluidics~~headquarters ~~Corporation (“Microfluidics”), operate in one segment, producing~~ and ~~marketing~~manufacturing aoperations ~~broad~~are ~~line~~located ~~of proprietary high-shear fluid processing systems used primarily~~ in ~~the pharmaceutical, biotechnology,~~ ~~chemical~~Newton, ~~nutraceutical/food, energy, academics and cosmetics industries~~Massachusetts.

~~The condensed~~Certain ~~consolidated~~accounts ~~financial~~in ~~statements include~~ the ~~accounts~~condensed ofconsolidated ~~our~~financial ~~Company~~statements and ~~our~~related notes ~~wholly-owned~~have ~~subsidiary,~~been ~~Microfluidics.~~reclassified ~~All~~to ~~intercompany~~conform ~~balances~~to ~~and transactions~~current ~~have~~period ~~been eliminated~~presentation.

~~Our corporate~~2. Interim ~~headquarters~~Financial ~~and manufacturing operations are located in Newton, Massachusetts.~~Statements

~~Certain~~The condensed ~~accounts~~consolidated infinancial information for the three and six months ended ~~condensed~~June 30, ~~consolidated~~2010 are unaudited but include all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial ~~statements~~position at such dates and ~~related~~of ~~notes~~the ~~have~~operating results ~~been~~and cash flows for the periods. The results of operations for the three ~~reclassified~~and tosix ~~conform~~months toended ~~current~~June 30, ~~period~~2010 ~~presentation~~and 2009 are not necessarily indicative of results that may be expected for the entire year. The information contained in this Form 10-Q should be read in conjunction with the Company’s audited financial statements, included in its Annual Report on Form 10-K as of and for the year ended December 31, 2009 filed with the Securities and Exchange Commission (“SEC”) on March 29, 2010.

~~2. Interim~~The balance ~~Financial~~sheet as of December 31, 2009 has been derived from the Company’s ~~Statements~~audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The condensed consolidated financial information for the three months ended March 31, 2010 are unaudited but include all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position at such date and of the operating results and cash flows for the period3. ~~The results of operations for the three~~ Significant ~~months~~Accounting ended March 31, 2010 and 2009 are not necessarily indicative of results that may be expected for the entire year. The information contained in this Form 10-Q should be read in conjunction with the Company’s audited financial statements, included in its Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (“SEC”) on March 29, 2010.Policies

The significant ~~balance~~accounting ~~sheet~~policies asfollowed ofby ~~December 31, 2009~~the ~~has~~Company ~~been~~and ~~derived~~its ~~from~~subsidiary ~~our~~in preparing ~~audited~~its unaudited condensed consolidated financial statements atare set ~~that~~forth ~~date~~in ~~but~~Note ~~does~~1 ~~not~~to ~~include all of~~ the ~~information~~consolidated ~~and~~financial ~~footnotes~~statements ~~required~~included byin the ~~generally~~Company’s ~~accepted~~Annual ~~accounting~~Report ~~principles~~on Form 10-K for ~~complete~~the ~~financial~~year ~~statements~~ended December 31, 2009.

34. ~~Significant Accounting~~ Revenue ~~Policies~~Recognition

~~The~~Revenue is ~~significant~~recognized when all of the following criteria are met: i) persuasive ~~accounting~~evidence ~~policies~~of ~~followed~~an byarrangement exists, ii) delivery has occurred, iii) the ~~Company~~price to the customer is fixed or determinable, and ~~its~~iv) ~~subsidiary~~collectability inis ~~preparing~~reasonably assured. ~~its~~In revenue transactions where support services are requested, revenue ~~unaudited~~is ~~condensed~~recognized ~~consolidated~~on ~~financial~~shipment ~~statements~~since this supportive service obligation is not essential to the functionality of the delivered products. Revenue transactions involving non-essential support services obligations are ~~set~~those which ~~forth~~(1) can generally be completed in ~~Note~~a 1short period of time at insignificant cost, (2) the skills required to complete these installations are not unique to the Company and in many cases can be provided by third parties or the customers and (3) the customer’s purchase obligations are not contingent upon performance of support services, if any, by the Company. Proceeds received in advance of product shipment are recorded as customer advances in the consolidated ~~financial~~balance ~~statements~~sheets. Returns and customer credits are infrequent and recorded as a reduction to sales. Right of returns are not included in ~~the~~sales arrangements. Discounts from list prices are recorded as a reduction of sales. On occasion, the Company’s ~~Annual~~provides machines available for rent by customers. Income ~~Report~~for the rental of equipment is recognized on ~~Form 10~~a straight-Kline ~~for~~basis over the rental ~~year~~term. Rental ~~ended~~income ~~December 31,~~and ~~2009~~product sales are classified in revenues in the consolidated statement of operations.

45. ~~Revenue~~ Recent Accounting ~~Recognition~~Pronouncements

~~Revenue is recognized~~In ~~when~~October 2009, ~~all of~~ the ~~following~~Financial ~~criteria~~Accounting ~~are~~Standards ~~met:~~Board i(“FASB”) ~~persuasive evidence of an~~issued ~~arrangement~~Accounting ~~exists,~~Standards ~~ii)~~Updated ~~delivery has occurred, iii~~(“ASU”) ~~the~~No. 2009-13 ~~price~~- to“Revenue ~~the~~Recognition ~~customer is~~(Topic ~~fixed and determinable, and iv~~605): ~~collectability is reasonably assured. In~~Multiple-Deliverable ~~revenue~~Revenue ~~transactions~~Arrangements” ~~where~~(formerly ~~support~~Emerging ~~services~~Issues ~~are~~Task ~~requested,~~Force ~~revenue is~~Issue ~~recognized on shipment since this supportive service obligation is not essential to the functionality of the delivered products~~No. ~~Revenue transactions involving non~~ 08-~~essential~~1). ~~support~~This ~~services~~ASU ~~obligations~~establishes ~~are those which can generally be completed in a short period of time at insignificant cost and~~ the ~~skills~~accounting ~~required to complete these installations are not unique to the Company~~ and inreporting ~~many~~guidance ~~cases can be provided by third parties or the~~for ~~customers.~~arrangements ~~The~~including ~~customer’s~~multiple ~~purchase~~revenue-generating ~~obligations are not contingent upon performance of support services, if any, by the Company~~activities. ~~Proceeds~~This ~~received in~~ASU ~~advance~~provides ofamendments ~~product~~to ~~shipment are recorded as customer advances in~~ the ~~consolidated~~ ~~balance~~criteria ~~sheets.~~for ~~Returns~~separating ~~and~~deliverables, ~~customer credits are infrequent~~ and ~~recorded~~ ~~as a reduction to sales. Right of returns are not included~~measuring inand ~~sales~~allocating ~~arrangements.~~arrangement ~~Discounts~~consideration ~~from list prices are recorded as a reduction~~ to ~~sales.~~one Onor ~~occasion,~~more ~~the~~units ~~Company provides machines available for rent by customers. Income for the rental~~ of ~~equipment is recognized on a straight-line basis over the rental term~~accounting. ~~Rental income and product~~ ~~sales~~The ~~are~~amendments ~~classified~~ in ~~revenues~~this inASU ~~the~~also ~~consolidated~~establish ~~statement~~a ofselling ~~operations.~~price

~~5. Recent Accounting Pronouncements~~6

InTable ~~October 2009,~~of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) No. 2009-13 - “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements” (formerly Emerging Issues Task Force Issue No. 08-1). This ASU establishes the accounting and reporting guidance for arrangements including multiple revenue-Contents

6hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. The Company believes the adoption of this guidance will not have a material impact on the Company’s consolidated results of operations or financial position.

~~Table~~In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of ~~Contents~~Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162. SFAS No. 168 was codified as Accounting Standards Codification (“ASC”) Topic 105-10 and establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. We adopted ASC Topic 105-10 effective for the quarter ended September 30, 2009 and the adoption did not result in a significant impact on the Company’s financial statements.

~~generating activities~~6. Stock ~~This ASU provides amendments to the criteria for separating~~Based deliverables, and measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. We believe adoption of this guidance will not have a material impact on our consolidated results of operations or financial position.Compensation

~~In June 2009,~~We ~~the~~account ~~Financial~~for ~~Accounting~~stock-based ~~Standards~~compensation ~~Board~~in ~~(“FASB”)~~accordance ~~issued~~with ~~Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and~~ the ~~Hierarchy~~provisions of ~~Generally~~ ~~Accepted Accounting Principles—a replacement of FASB Statement No. 162. SFAS No. 168 was codified as Accounting Standards Codification (“~~ASC”) ~~Topic 105-10 and replaces SFAS No. 162~~718, ~~The~~which ~~Hierarchy~~requires ofus ~~Generally Accepted Accounting Principles,~~ to ~~establish~~ ~~the~~recognize ~~FASB~~compensation ~~ASC~~expense asfor ~~the~~all ~~source of authoritative accounting principles~~stock-based ~~recognized~~payment byawards ~~the~~made ~~FASB~~ to beemployees applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. We adopted ASC Topic 105-10 effective for the quarter ended September 30, 2009 and ~~the adoption did not result in a significant impact on our financial statements~~directors.

6For the three month periods ended June 30, 2010 and 2009, the Company recognized stock based compensation expense of approximately $43,000 and $62,000, respectively. For the six month periods ended June 30, 2010 and 2009, the Company recognized stock based compensation expense of approximately $108,000 and $88,000, respectively. Stock-based ~~Based~~compensation ~~Compensation~~expense for the three and six month periods ended June 30, 2010 and 2009 is included in Research and Development, Selling, and General and Administrative expenses of the unaudited condensed consolidated statement of operations and allocated as follows:

We account for stock-based compensation in accordance with the provisions of ASC 718, which requires us to recognize compensation expense for all stock-based payment awards made to employees and directors. Stock-based compensation expense recognized under ASC 718 for the three months ended March 31, 2010 and 2009 was $65,000 and $26,000, respectively and allocated as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2010		2009		2010		2009
Research and development	$	11	$	17	$	27	$	23
Selling	9		13		23		18
General and administrative	23		32		58		47
Total	$	43	$	62	$	108	$	88

	Three Months Ended
	March 31,
(in thousands)	2010		2009
Research and development	$	16	$	6
Selling	14		5
General and administrative	35		15
Total	$	65	$	26

The Company did not capitalize any stock-based compensation. The Company has established a valuation allowance for net deferred tax assets. Accordingly, no significant tax benefit on the stock-based compensation was recorded during the three and six month periods ended June 30, 2010 and 2009.

The ~~Company did not~~ ~~capitalize~~fair ~~any~~value ~~stock-based~~of ~~compensation.~~each ~~The~~option ~~Company~~granted ~~has~~during ~~established~~the ~~a valuation~~three ~~allowance~~and ~~for~~six ~~net~~month ~~deferred~~periods ~~tax~~ended June 30, ~~assets.~~2010 ~~Accordingly,~~and no2009 ~~significant tax~~is ~~benefit~~estimated on the ~~stock-based~~date ~~compensation~~of ~~was~~grant ~~recorded~~using ~~during~~ the Black-Scholes ~~three~~option ~~month period~~pricing ~~ended~~model ~~March 31,~~with ~~2010~~the ~~and~~following ~~2009.~~weighted average assumptions:

The fair value of each option granted during the three month periods ended March 31, 2010 and 2009 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2010	2009	2010	2009
Dividend yield	None	None	None	None
Expected volatility	117%	111%	117%	111%
Risk-free interest rate	1.79%	2.00%	1.79%	2.00%
Expected life	5.0 years	5.0 years	5.0 years	5.0 years

	Three Months Ended
	March 31,
	2010		2009
Dividend yield	None		None
Expected volatility	117	%	111	%
Risk-free interest rate	2.55	%	2.00	%
Expected life	5 years		5 years

The weighted average fair value of stock options granted during the six months ended June 30, 2010 and 2009 was $0.82 and $0.54 per share, respectively. We estimate forfeitures related to option grants at an annual rate of 9% and 11% for 2010 and 2009, respectively.

~~The weighted average fair~~Total ~~value~~unrecognized of stock-based ~~options~~compensation ~~granted~~expense ~~during~~related ~~the~~to ~~three~~unvested ~~months~~stock ~~ended March 31,~~options ~~2010~~expected ~~and~~to ~~2009~~be ~~was~~recognized ~~$0.79~~over ~~and~~the ~~$0.51~~service ~~per share~~period, ~~respectively.~~generally We4 ~~estimate forfeitures~~years, ~~related~~ amounted to ~~option~~approximately ~~grants at an annual rate of 9%~~ $823,000 and ~~11%~~$770,00 ~~for~~at June 30, 2010 and 2009, respectively.

~~Total unrecognized~~The Company has three (3) shareholder approved stock~~-based~~ ~~compensation~~option ~~expense~~plans (collectively, ~~related~~the to“Stock ~~unvested~~Option ~~stock~~Plans”) ~~options~~as follows: (i) the 1988 Stock Plan, ~~expected~~which authorized the grant of stock rights for up to 3,500,000 shares of becommon ~~recognized~~stock ~~over~~(the “1988 Plan”); (ii) the ~~service~~1989 ~~period,~~Non-Employee ~~generally~~Director 4Stock Option ~~years~~Plan (the “1989 Plan”), ~~amounted~~which toauthorized the grant of nonqualified stock ~~approximately~~options ~~$867~~for up to 500,000 shares of common stock; and ~~$823~~(iii) the 2006 Stock Plan (the “2006 Plan”) which authorizes the grant of stock rights for up to 4,000,000 atshares ~~March 31~~of common stock, ~~2010~~decreased by the number of shares of common stock issued and ~~2009~~issuable pursuant to awards outstanding under either the 1988 Plan or the 1989 Plan (together, ~~respectively~~the “Prior Plans”). The 2006 Plan was

The Company has three (3) shareholder approved stock option plans (collectively, the “Stock Option Plans”) as follows: (i) the 1988 Stock Plan, which authorized the grant of stock rights for up to 3,500,000 shares of common stock (the “1988 Plan”); (ii) the 1989 Non-Employee Director Stock Option Plan (the “1989 Plan”), which authorized the grant of nonqualified stock 7

7Table of Contents

~~Table~~approved by the Company’s shareholders at the Annual Meeting of ~~Contents~~Shareholders held on June 20, 2006. Upon adoption of the 2006 Plan by the Company’s shareholders, we ceased granting new options under the Prior Plans. The Prior Plans permitted, and the 2006 Plan permits, the granting of stock awards to employees, officers, and non-employee members of the Board of Directors. Options granted under the Prior Plans and the 2006 Plan permit vesting over a 3-to-5 year period and expire 5-to-10 years from the date of grant. At June 30, 2010, 340,500 shares were available for future grants under the 2006 Plan and no shares were available for future grants under the Prior Plans.

~~options~~During the ~~for~~three upmonths toended ~~500~~June 30,~~000~~ ~~shares~~2010 ~~of common stock; and (iii)~~ the ~~2006~~ ~~Stock~~Company ~~Plan~~did ~~(the~~not ~~“2006~~issue ~~Plan”)~~any ~~which~~stock options. During ~~authorizes~~ the ~~grant~~three ofmonths ~~stock~~ended ~~rights~~June 30, ~~for up to 4~~2009,~~000,000~~ ~~shares~~the ofCompany ~~common~~issued ~~stock~~150,000 ~~decreased by the number of shares of common~~ stock ~~issued~~options ~~and issuable~~ pursuant to ~~options~~the ~~outstanding~~2006 ~~under~~Plan at ~~either~~exercise ~~the~~prices ~~1988~~equal ~~Plan~~to or ~~the~~greater ~~1989~~than ~~Plan (together,~~ the ~~“Prior~~fair ~~Plans”). The 2006~~market ~~Plan~~value ~~was~~of ~~approved by our shareholders at~~ the ~~Annual Meeting of~~Company’s ~~Shareholders~~common ~~held~~stock on ~~June 20,~~the ~~2006. Upon~~date ~~adoption~~ of the ~~2006 Plan~~grant. byDuring ~~our shareholders, we ceased granting new options under~~ the ~~Prior Plans. The~~six ~~Prior~~months ~~Plans permitted~~ended June 30, 2010 and ~~the 2006 Plan permits~~2009, the ~~granting~~ ofCompany ~~stock~~issued ~~awards to employees~~425,500 ~~officers,~~ and ~~non-employee~~535,000 ~~members of~~stock ~~the~~options, ~~Board~~pursuant ofto ~~Directors. Options granted under~~ the ~~Prior Plans and the~~ 2006 Plan, ~~permit~~respectively, ~~vesting~~at ~~over~~exercise aprices ~~3-to-5~~equal ~~year period and expire 5-~~to~~-10 years~~ ~~from~~or ~~the~~greater ~~date~~than ofthe ~~grant. At~~fair ~~March 31,~~market ~~2010,~~value ~~272,170 shares were~~of ~~available~~the ~~for~~Company’s ~~future~~common ~~grants~~stock ~~under~~on the ~~2006 Plan and no shares were~~date ~~available~~of ~~for future grants under~~ the ~~Prior Plans~~grant.

~~During~~Information regarding option activity for the ~~three~~six months ended ~~March~~June 3130, 2010 ~~and~~under ~~2009,~~ the ~~Company issued 425,500~~ ~~and 385,000 stock options pursuant to the~~ 2006 Plan, ~~respectively, at exercise prices equal to or greater than the fair market value of the Company’s common stock on the date of the grant. During the three months ended March 31, 2010~~ and ~~2009,~~Prior ~~approximately~~Plans ~~22,250~~is ~~shares~~summarized ~~and 200,000 shares, respectively, were forfeited and approximately 110,703 shares and 38,000 shares were vested, respectively under the 2006 Plan.~~below:

Information regarding option activity for the three months ended March 31, 2010 under the 2006 Plan is summarized below:

					Weighted
					Average
			Weighted		Remaining
	Options		Average Exercise		Contractual
	Outstanding		Price per Share		Term in Years
Options outstanding as of January 1, 2010	1,434,609		$	1.10	8.24
Granted	425,500		.90		6.12
Exercised	(9,500	)	.28		—
Cancelled	(90,580	)	1.26		—
Options outstanding as of June 30, 2010	1,760,029		1.05		8.02
Options exercisable as of June 30, 2010	750,193		1.18		6.70

					Weighted
			Weighted		Average
			Average Exercise		Remaining Contractual
	Options Outstanding		Price per Share		Term in Years
Options outstanding as of January 1, 2010	1,434,609		$	1.10	8.24
Granted	425,500		.90		6.12
Exercised	(7,500	)	.36		—
Cancelled	(22,250	)	2.60		—
Options outstanding as of March 31, 2010	1,830,359		$	1.04	8.08
Options exercisable as of March 31, 2010	713,375		$	1.20	6.50

7. Inventories

7. Inventories consist of the following:

Inventories consist of the following:

	June 30,			December 31,
(in thousands)	2010			2009
Raw materials	$	2,315		$	2,037
Work in progress	76			174
Finished goods	632			901
	3,023			3,112
Less: provision for excess inventory	(340		)	(196		)
Total inventories	$	2,683		$	2,916

	March 31,			December 31,
(in thousands)	2010			2009
Raw materials	$	1,917		$	2,037
Work in progress	346			174
Finished goods	647			901
	2,910			3,112
Less: provision for excess inventory	(196		)	(196		)
Total inventories	$	2,714		$	2,916

8. Property, Plant and Equipment

8. Property, plant ~~Plant~~ and ~~Equipment~~ equipment consist of the following:

Property, plant and equipment consist of the following:

	June 30,			December 31,
(in thousands)	2010			2009
Furniture, fixtures and office equipment	$	931		$	923
Machinery, equipment and tooling	530			530
Leasehold improvements	910			906
	2,371			2,359
Less: accumulated depreciation and amortization	(1,614		)	(1,468		)
	$	757		$	891

	March 31,			December 31,
(in thousands)	2010			2009
Furniture, fixtures and office equipment	$	923		$	923
Machinery, equipment and tooling	530			530
Leasehold improvements	909			906
	2,362			2,359
Less: accumulated depreciation and amortization	(1,541		)	(1,468		)
	$	821		$	891

9. Accrued Expenses

~~For the three months~~Accrued ~~ended~~expenses ~~March 31,~~consist ~~2010 and 2009, depreciation expense and amortization~~ of ~~leasehold~~ ~~improvements~~the ~~was approximately $73,000 and $79,000, respectively.~~following:

(in thousands)	June 30, 2010		December 31, 2009
Accrued expenses	$	263	$	319
Accrued wages, bonus and vacation pay	418		644
Accrued commissions	339		367
Accrued interest	414		338
Accrued warranty	40		59
	$	1,474	$	1,727

~~Table of Contents~~8

~~9. Accrued~~Table ~~Expenses~~of Contents

~~Accrued expenses consist~~10. Earnings ofPer ~~the following:~~Share

(in thousands)	March 31, 2010		December 31, 2009
Accrued expenses	$	281	$	319
Accrued wages, bonus and vacation pay	394		644
Accrued commissions	314		367
Accrued interest	465		338
Accrued warranty	59		59
	$	1,513	$	1,727

Basic net (loss) per common share was determined by dividing net (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock, unless the effects of dilution would be anti-dilutive.

10. Earnings Per Share

	Three Months Ended June 30,		Six Months Ended June 30,
(in thousands)	2010	2009	2010	2009
Shares for computation of basic net income (loss) per share	10,414	10,372	10,407	10,371
Shares for computation of diluted net income (loss) per share	10,613	10,372	10,616	10,371

~~Basic net income (loss) per common share was determined by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period~~11. ~~Diluted net income (loss) per share reflects the potential~~ Industry ~~dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock~~Segment, ~~unless~~Geographic ~~the~~and ~~effects of dilution would be anti~~Enterprise-~~dilutive.~~Wide Information

	Three Months Ended
	March 31,
(in thousands)	2010	2009
Shares for computation of basic net loss per share	10,401	10,371
Shares for computation of diluted net loss per share	10,618	10,371

The Company has determined that it conducts its operations in one business segment: producing and marketing a broad line of proprietary high shear fluid processing systems used primarily in the pharmaceutical, biotechnology, chemical, nutraceutical/food, academic and cosmetics industries. The Company has less than 3% of total assets in foreign countries. As a result, the financial information disclosed herein represents all of the material financial information related to the Company’s principal operating segment.

~~11. Industry~~Approximate sales ~~Segment~~to customers by geographic markets, ~~Geographic~~ and ~~Enterprise-Wide~~percentage ~~Information~~of total sales by geographic market, are as follows:

The Company has determined that it conducts its operations in one business segment: producing and marketing a broad line of proprietary high shear fluid processing systems used primarily in the pharmaceutical, biotechnology, chemical, nutraceutical/food, and cosmetics industries. The Company has less than 3% of total assets in foreign countries. As a result, the financial information disclosed herein represents all of the material financial information related to the Company’s principal operating segment.

	Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)	2010				2009				2010				2009
North America	$	2,440	54.1	%	$	1,545	44.5	%	$	5,113	57.9	%	$	3,984	56.7	%
Asia	879		19.5	%	846		24.4	%	1,357		15.4	%	1,242		17.7	%
Europe	1,193		26.4	%	1,078		31.1	%	2,357		26.7	%	1,802		25.6	%
	$	4,512	100	%	$	3,469	100.0	%	$	8,827	100	%	$	7,028	100.0	%

~~Approximate~~One customer ~~sales~~accounted ~~to customers~~for by10.7% ~~geographic~~of ~~markets~~the Company’s revenues for the three months ended June 30, ~~and~~2010. Two ~~percentage~~customers accounted for 28.8% of ~~total~~the ~~sales~~Company’s byrevenues ~~geographic~~for the three months ended June 30, ~~market~~2009. For the six month period ended June 30, ~~are~~2010 asand ~~follows:~~2009, no customer accounted for more than 10% of revenues.

	Three Months Ended March 31,
($ in thousands)	2010				2009
North America	$	2,673	61.9	%	$	2,439	68.5	%
Asia	478		11.1	%	396		11.1	%
Europe	1,164		27.0	%	724		20.4	%
	$	4,315	100.0	%	$	3,559	100.0	%

One customer accounted for 26.1% of the trade accounts receivable as of June 30, 2010 and two customers each accounted for 10% of the trade accounts receivable as of June 30, 2009. A reduction or delay in orders from any of the Company’s significant customers could have a material adverse effect on the Company’s results of operations.

~~One customer accounted for 18~~12.~~8% of the Company~~ Stockholders’~~s revenues for the three months ended March 31,~~ 2010. For the three months ended March 31, 2009, no customer accounted for greater than 10% of revenue. One customer accounted for 18.5% of the trade accounts receivable as of March 31, 2010. No customer accounted for greater than 10% of the trade accounts receivable as of March 31, 2009.Equity

12During the three months ended June 30, 2010, the Company issued 2,000 shares of common stock as a result of the exercise of options by an employee which generated cash proceeds of approximately $1,000. ~~Stockholders’~~ During ~~Equity~~the three months ended June 30, 2009, the Company issued no shares of commons stock as a result of the exercise of options by employees and directors. During the six months ended June 30, 2010, the Company issued 9,500 shares of common stock as a result of the exercise of options by a former director and an employee which generated cash of approximately $4,000. During the six months ended June 30, 2009, the Company issued no shares of common stock as a result of the exercise of options by employees and directors.

During the three months ended ~~March~~June 3130, 2010, ~~the~~and ~~Company issued 7,500 shares of common stock as a result of the exercise of options by a former director. During the three months ended March 31,~~ 2009, the Company issued no shares of common stock as a result of the ~~exercise~~purchase of ~~options~~shares byunder ~~employees~~the ~~and~~Company’s Employee ~~directors~~Stock ~~under~~Purchase ~~its stock plans~~Plan. During the six ~~three~~ months ended ~~March~~June 3130, 2010 and 2009, the Company issued 10,000 and 15,000 shares, respectively, of common stock, ~~respectively,~~as ~~under~~a ~~the~~result ~~Employee~~of ~~Stock~~the ~~Purchase Plan. Issuance~~purchase of shares ofunder ~~common stock during~~ the ~~three~~Employee ~~months~~Stock ~~ended~~Purchase ~~March 31~~Plan, ~~2010~~generating ~~and 2009 generated~~ cash proceeds of approximately $63,~~100~~000 and $4,000, respectively.

913. Credit Facility

~~Table~~On October 23, 2009, the Company and its subsidiary entered into a senior secured $1 million revolving line of ~~Contents~~credit

~~13. Credit Facility~~9

~~On October 23,~~Table ~~2009, the Company and its subsidiary entered into a senior secured $1 million revolving line~~ of credit pursuant to a loan agreement (the “Revolving Line of Credit”) with Webster Bank, National Association, as lender (“Webster Bank”). The Revolving Line of Credit matures on October 22, 2010. We may extend the Revolving Line of Credit for one year without the consent of Global Strategic Partners LLC (“GSP”). The actual amount of credit that is available from time to time under the Revolving Line of Credit is limited to a borrowing base amount that is determined according to, among other things, a percentage of the value of eligible accounts receivables. The Revolving Line of Credit contains customary representations and warranties and restrictive covenants relating to matters, such as indebtedness, liens, investments, acquisitions, mergers, dispositions and dividends. The Revolving Line of Credit also has two financial covenants that require the Company to maintain a senior debt to twelve month trailing EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortization) of 2:1, and requires the Company to maintain $500,000 of available cash or excess availability under the Revolving Line of Credit. The proceeds of any borrowings under the Revolving Line of Credit are available for working capital and other general corporate purposes.Contents

~~The~~pursuant ~~Company’s~~to ~~borrowings~~a ~~under~~loan agreement (the “Revolving Line of Credit”) with Webster Bank, National Association, as lender (“Webster Bank”). The Revolving Line of Credit ~~will~~matures ~~generally~~on ~~accrue~~October 22, 2010. ~~interest~~The atCompany amay ~~margin~~extend the Revolving Line of ~~5.50% over~~Credit for one year without the ~~London~~consent ~~Interbank~~of ~~Offered~~Global ~~Rate~~Strategic Partners LLC (“~~LIBOR~~GSP”). ~~(LIBOR~~See atNote ~~March 31~~14, ~~2010~~Long Term ~~was~~Debt, 0below.~~29150%)~~ The ~~and~~actual ~~are~~amount ~~secured~~of bycredit that ais ~~lien~~available onfrom ~~substantially~~time ~~all~~to time under the Revolving Line of ~~its~~Credit ~~personal~~is ~~property.~~limited to a borrowing base amount that is determined according to, among other things, a percentage of the value of eligible accounts receivables. The Revolving Line of Credit ~~generally~~ contains customary ~~events~~representations ofand warranties and restrictive covenants relating to ~~default~~matters, ~~for~~such ~~credit~~as ~~facilities~~indebtedness, ofliens, ~~this~~investments, ~~type.~~acquisitions, ~~Upon~~mergers, dispositions anand ~~event~~dividends. The Revolving Line of ~~default~~Credit also has two financial covenants that isrequire the Company to ~~not~~maintain ~~cured~~a orsenior ~~waived~~debt ~~within~~to ~~any~~twelve ~~applicable~~month ~~cure~~trailing ~~periods~~EBITDA (Earnings Before Interest, inTaxation, ~~addition~~Depreciation toand ~~other remedies~~Amortization) ~~that~~of ~~may~~2:1, beand ~~available~~requires the Company to ~~Webster~~maintain ~~Bank~~$500,000 ~~the~~of ~~obligations~~available cash or excess availability under the Revolving Line of Credit. The ~~may~~proceeds of beany ~~accelerated~~borrowings ~~and~~under ~~remedies~~the ~~may~~Revolving beLine ~~exercised~~of Credit are available for working ~~against~~capital ~~the~~and ~~collateral~~other general corporate purposes.

InThe ~~connection~~Company’s ~~with~~borrowings ~~the~~under ~~closing of~~ the Revolving Line of Credit, ~~the~~will ~~Company~~generally ~~also~~accrue ~~amended~~interest at a margin of 5.50% over the ~~Convertible~~London ~~Debenture~~Interbank ~~and~~Offered ~~Agreement~~Rate ~~with~~(“LIBOR”) ~~GSP~~ (~~each~~LIBOR asat ~~defined~~June 30, ~~below~~2010 was 0.53394%) toand are ~~permit~~secured ~~the~~by a lien on substantially all of its personal property. The Revolving Line of Credit asgenerally ~~senior~~contains ~~indebtedness~~customary ~~and~~events ~~provide~~of default for credit ~~certain~~facilities ~~other covenants,~~of ~~including~~this atype. ~~cross~~Upon ~~default~~an ~~provision~~event ~~with~~of ~~the~~default ~~Revolving~~that ~~Line~~is ~~of Credit,~~not ~~and~~cured ~~GSP~~or ~~agreed~~waived towithin ~~subordinate~~any ~~the~~applicable ~~indebtedness~~cure ~~under~~periods, ~~the~~in ~~Convertible~~addition ~~Debenture~~to ~~and Agreement~~other toremedies ~~our~~that may ~~indebtedness~~be available to Webster Bank~~. As~~, ofthe ~~March 31,~~obligations ~~2010,~~under wethe ~~had~~Revolving ~~not~~Line ~~drawn~~of Credit ~~down~~may onbe ~~the~~accelerated ~~Revolving~~and ~~Line of~~remedies ~~Credit~~may be exercised against the collateral.

14In connection with the closing of the Revolving Line of Credit, the Company also amended the Convertible Debenture and Warrant Purchase Agreement with GSP and related agreements to permit the Revolving Line of Credit as senior indebtedness and provide for certain other covenants, including a cross default provision with the Revolving Line of Credit, and GSP agreed to subordinate the indebtedness under the Convertible Debenture to the Company’s indebtedness to Webster Bank. ~~Long-Term~~ As ~~Debt~~of June 30, 2010, the Company had not drawn down on the Revolving Line of Credit.

14. Long-~~term debt as of the~~Term ~~following dates consisted of:~~Debt

	March 31,		December 31,
(in thousands)	2010		2009
Convertible debt, (net of discount of $307 in 2010 and $321 in 2009)	$	4,693	$	4,679
Less: current portion	—		—
Long-term debt, net of current portion	$	4,693	$	4,679

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

On November 14, 2008 we entered into the Convertible Debenture and Warrant Purchase Agreement (the “Agreement”) with GSP. The total amount of the Convertible Debenture is $5,000,000 and bears interest at nine percent (9.0%) per annum payable quarterly in arrears. The Convertible Debenture is due and payable on the earlier to occur of (i) November 14, 2015 or (ii) the acceleration of the maturity of the Convertible Debenture upon the occurrence of an event of default. GSP may, at its option, on any of the maturity date, the date that any interest payment is due, or the date on which a change of control occurs, convert all or any portion of the outstanding principal amount of the Convertible Debenture into shares of our common stock at a $1.25 per share. In May 2009, after an initial quarterly interest payment of approximately $113,000, GSP agreed to defer the interest payments due and payable under the Convertible Debenture on each of July 1, 2009, October 1, 2009 and January 4, 2010. The deferred payments will accrue interest at nine percent per annum and will be payable in eight equal quarterly installments on the first day of such quarter beginning on April 1, 2010. The Convertible Debenture is secured by all assets, property rights and interests of the Company, and is subordinate to our Revolving Line of Credit with Webster Bank. As of March 31, 2010, a total of approximately $465,000 of accrued interest expense is included as part of accrued expenses. The Convertible Debenture is presented net of the discount of approximately $307,000 and $321,000 as of March 31, 2010 and December 31, 2009, respectively. The discount represents the value of the warrants granted as part of the financing which was approximately $382,000, at the date of grant, which is being accreted over the seven year life of the loan as interest expense.

	June 30,		December 31,
(in thousands)	2010		2009
Convertible debt, (net of discount of $293 in 2010 and $321 in 2009)	$	4,707	$	4,679
Less: current portion	—		—
Long-term debt, net of current portion	$	4,707	$	4,679

10On November 14, 2008, we entered into the Convertible Debenture and Warrant Purchase Agreement (the “Agreement”) with GSP. The total amount of the Convertible Debenture is $5,000,000 and bears interest at nine percent (9.0%) per annum payable quarterly in arrears. The Convertible Debenture is due and payable on the earlier to occur of: (i) November 14, 2015 or (ii) the acceleration of the maturity of the Convertible Debenture upon the occurrence of an event of default. We may, at our option and upon 30 days notice to GSP, on an interest payment date prepay all of the principal balance of the Convertible Debenture, without penalty, together with any accrued and unpaid interest through the date of prepayment. Our right to prepay is subject to GSP’s right to convert the Convertible Debenture as contemplated in the Convertible Debenture. GSP may, at its option, on any of the maturity date, the date that any interest payment is due, or the date on which a change of control occurs, convert all or any portion of the outstanding principal amount of the Convertible Debenture into shares of the Company’s common stock at a $1.25 per share. In May 2009, after an initial quarterly interest payment of approximately $113,000, GSP agreed to defer the interest payments due and payable under the Convertible Debenture on each of July 1, 2009, October 1, 2009 and January 4, 2010. The deferred payments accrue interest at nine percent per annum and are payable in eight equal quarterly installments on the first day of such quarter beginning on April 1, 2010. The Convertible Debenture is secured by all assets, property rights and interests of the Company, and is subordinate to the Company’s Revolving Line of Credit with Webster Bank. As of June 30, 2010, a total of approximately $414,000 of accrued interest expense is included as part of accrued expenses. The Convertible Debenture is presented net of the discount of approximately $293,000 and $321,000 as of June 30, 2010 and December 31, 2009, respectively. The discount represents the value of the warrants granted as part of the financing which was approximately $382,000, at the date of grant, which is being accreted over the seven year life of the loan as interest expense.

~~Table of Contents~~10

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Future Operating Results

This report may contain forward-looking statements that are subject to certain risks and uncertainties including statements relating to ~~our~~the Company’s plan to achieve, maintain, and/or increase revenue growth, and/or operating profitability, and to achieve, maintain, and/or increase net operating profitability. Such statements are based on ~~our~~ the Company’s current expectations and are subject to a number of factors and uncertainties that could cause actual results achieved by us to differ materially from those described in the forward-looking statements. We caution investors that there can be no assurance that the actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including but not limited to, the following risks and uncertainties: (i) whether the performance advantages of ~~our~~the Company’s Microfluidizer® materials processing equipment will be realized commercially or that a commercial market for the equipment will continue to develop, (ii) whether the timing of orders will significantly affect quarter to quarter revenues and resulting net income results for a particular quarter, which may cause increased volatility in ~~our~~the Company’s stock price, (iii) whether we will have access to sufficient working capital through continued and improving cash flow from sales and ongoing borrowing availability, the latter being subject to ~~our~~the Company’s ability to maintain compliance with the covenants and terms of ~~our~~ the Company’s financing agreements, (iv) whether ~~our~~the Company’s technology will be adopted by customers as a means of producing Microfluidics Reaction Technology ™ or MRT innovative materials in large quantities, (v) whether we will be able to deploy further prototype ~~Microfluidics~~MRT ~~Reaction Technology~~ systems for nanoparticle production and then manufacture and introduce commercial production ~~Microfluidics~~MRT ~~Reaction Technology~~ equipment, (vi) whether we will achieve a greater proportion of ~~our~~the Company’s sales in the future through the sale of advanced processor production systems, and (vii) those risks set forth in Part II, Item 1A, “Risk Factors” of this quarterly report on Form 10-Q and ~~our~~the Company’s other periodic reports filed with the SEC. We assume no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise.

Overview

WeFor ~~have, for~~ over 25 years, we have specialized in manufacturing and marketing a broad line of materials ~~processing~~ processing systems, more specifically known as high shear fluid processors, which are used in numerous applications in the pharmaceutical, biotechnology, chemical, nutraceutical/food, energy, academics and cosmetics industries.

~~Our~~The Company’s line of lab ~~and~~ and production equipment, marketed under ~~our~~the Company’s Microfluidizer® trademark and trade name, process premixed formulations to produce small, uniform structures, usually of the submicron and nanoscale size (commonly defined as particles having dimensions less than 100 nanometers) including nanoemulsions and nanosuspensions.

Additionally, ~~our~~the Company’s equipment is used for cell disruption to harvest the cultivated contents of cells such as e.coli, bacterial yeast, mammalian and /or plant cells and for liposomal encapsulation of materials primarily for the pharmaceutical, biotechnology, nutraceutical/ and cosmetic industries.

The technology embodied within ~~our~~the Company’s Microfluidizer high shear fluid processors is used in formulating products that are normally very difficult to mix and stabilize. We believe that ~~our Microfluidizer~~the Company’s Microfluidizer processors, through process intensification, allow manufacturers to produce higher quality products with better characteristics, on a more ~~consistent~~ consistent basis, than with other blending, mixing or homogenizing techniques. Further, ~~our~~the Company’s processor equipment is able to scale up formulations and results from flow rates as low as 100 to 200 milliliters per minute on ~~our~~the Company’s laboratory and bench top models to ~~more~~ more than 15 gallons per minute on ~~our~~the Company’s production models, which is a competitive advantage for ~~our~~the Company’s customers.

We have begun to sell beta versions and associated process technology consulting services to ~~our~~the Company’s commercial customers, incorporating ~~related~~the toCompany’s ~~our~~MRT ~~proprietary~~technology ~~equipment~~in ~~for~~ the ~~continuous~~proprietary ~~production of precipitated submicron or nanoscale particles by interaction of discrete streams of reacting materials (“Microfluidics Reaction Technology ™” or “MRT”)~~equipment. In 2009 we launched the MRT processor, the CR5. The combination of the process development and processor was used successfully to produce drug suspensions of the desired particle size via crystallization. ~~Our~~The Company’s management believes that once commercialized, the manufacturing capability of the ~~our~~Company’s processing equipment and ~~our~~ ~~Microfluidics~~the ~~Reaction~~Company’s ~~Technology~~MRT technology may enable the ~~our~~Company’s pharmaceutical and other customers to implement further their nanotechnology based products.

In August 1997, we filed a patent application for the MRT processor device and its processes with the United States Patent and Trademark Office (USPTO), and filed a Patent Cooperation Treaty (PCT) application on May 5, 1998 and we intend to file for protection in selected countries in 2010. In ~~July and November 2000, we were issued by the USPTO notices of allowances of utility patent claims regarding the MMR and the use thereof. In~~ April 2010, the Company applied for a Japanese patent on MRT entitled “Apparatus and Methods for Nanoparticle Generation and Process Intensification of Transport and Reaction Systems”.

In July and November 2000, we were issued by the USPTO notices of allowances of utility patent claims regarding the Microfluidizer Mixer/Reactor (“MMR”) and the use thereof. On September 18, 2002, the European Patent Office advised us it would grant its MMR patent substantially as applied for, including its device and process claims. We have gained national entry of the patent in France, Germany, Italy, The Netherlands, and the United Kingdom.

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We were incorporated in Delaware in 1983 under the name Biotechnology Development Corporation. ~~Our~~The Company’s principal executive offices are located at 30 Ossipee Road, in Newton, Massachusetts 02464 and ~~our~~the Company’s telephone number is (617) 969-5452.

Critical Accounting Policies

~~Our~~The Company’s significant accounting policies are summarized in Note 1 to ~~our~~the ~~consolidated~~Company’s ~~financial~~consolidated financial statements included in Item 8 of ~~our~~the Company’s Annual Report on Form 10-K for the period ended December 31, 2009 as filed with the SEC on March 29, 2010. Certain of ~~our~~the ~~accounting~~Company’s accounting policies require the application of significant judgment by ~~our~~the Company’s management, and such judgments are reflected in the amounts reported in ~~our~~the Company’s consolidated financial statements. In applying these policies, ~~our~~the Company management uses their judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on ~~our~~the ~~historical~~Company’s historical experience, terms of existing contracts, ~~our~~the Company’s observance of market trends, information provided by ~~our~~the Company’s strategic partners and information available from other outside sources, as appropriate. Actual results may differ significantly from the estimates contained in ~~our~~the Company’s consolidated financial statements. ~~Our~~The Company’s critical accounting policies are as follows:

· Revenue Recognition. Revenue is recognized when all of the following criteria are met: i) persuasive evidence of an arrangement exists, ii) delivery has occurred, iii) the price to the customer is fixed ~~and~~or determinable, and iv) collectability is reasonably assured. In revenue transactions where support services are requested, revenue is recognized on shipment since this supportive service obligation is not essential to the functionality of the delivered products. Revenue transactions involving non-essential support services obligations are those which can generally be completed in a short period of time at insignificant cost and the skills required to complete these installations are not unique to the Company and in many cases can be provided by third parties or the customer~~. The~~ and the customer’s purchase obligations are not contingent upon performance of support services, if any, by the Company. Proceeds received in advance of product shipment are recorded as customer advances in the consolidated balance sheets. Returns and customer credits are infrequent and recorded as a reduction to sales. Rights of returns are not included in sales arrangements. Discounts from list prices are recorded as a reduction to sales. On occasion, the Company provides machines for rent by customers. Income for the rental of equipment is recognized on a straight-line basis over the rental term. Rental income and product sales are classified in revenues in the consolidated statement of operations.

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

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

· Product Warranties. ~~Our~~ The Company’s products are generally sold with a twelve month warranty provision that requires us to remedy deficiencies in quality or performance of ~~our~~the Company’s products at no cost to our customers only after it has been determined that the cause of ~~the~~ the deficiency is not due to the actions of the machine operator or product used in the machine. WeThe ~~have~~Company has established a policy for replacing parts that wear out or break prematurely. The policy called for ~~replacing~~ replacing the parts or repairing a machine within one year of the sale.

Results of Operations

Three Months Ended ~~March~~June 3130, 2010 vs. ~~March~~June 3130, 2009

Revenues

Total revenues for the three months ended ~~March~~June 3130, 2010 were approximately $4,~~315~~512,000, as compared to revenues of approximately $3,~~559~~469,000 for the comparable prior year period, an increase of approximately $~~756~~1,043,000, or 21 30.21%. Sales of lab machines increased to 51 for the three months ended June 30, 2010, as compared to sales of 41 machines in the three months ended June 30, 2009, a 24% increase.

North American sales for the three months ended ~~March~~June 3130, 2010 increased to ~~approximately~~ approximately $2,~~673~~440,000, or 9by 57.69%, as compared to sales of approximately $21,~~439~~545,000 for the three months ended ~~March~~June 3130, 2009. The increase in North American sales was principally due to an increase in the ~~sale~~sales of lab machines and spare parts of approximately $~~712~~1,300,000, offset by a ~~reduction~~decrease in ~~new~~the ~~lab machine sales~~ sale of ~~approximately $311,000, and a decrease in~~ production ~~machine~~machines ~~sales~~ of approximately $~~167~~500,000.

Foreign sales were approximately $1,642,000 for the three months ended March 31, 2010, compared to $1,120,000 for the three months ended March 31, 2009, an increase of $522,000, or 46.6% primarily resulting from an increase in the number of production and lab machines sold during the first quarter of 2010 and slightly higher sales of spare parts.

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Foreign sales for the three months ended June 30, 2010 increased to approximately $2,072,000 or by 7.7% as compared to approximately $1,924,000 for the three months ended June 30, 2009. The increase in foreign sales was principally due to an increase in the sale of production and lab machines in Europe of approximately $300,000, offset by a decrease in parts sales of approximately $223,000.

Due to the nature of the sale of capital equipment, one specific quarter can be impacted by the timing of the sale of one or more production machines. In addition, the percentage of North American sales and foreign sales to total sales can vary from quarter to quarter depending on the nature of the capital equipment sold in that geographical region.

Our sales order backlog on June 30, 2010 was approximately $2, 5000,000 as compared to approximately $4,300, 000 on June 30, 2009. Backlog represents orders in hand that typically take between one and six months to deliver.

Cost of Sales

Cost of sales for the three months ended ~~March~~June 3130, 2010 was approximately $1,~~731~~627,000, or 4036.1% of revenue, compared to approximately $1,~~653~~493,000, or 4643.40% of revenue, for the comparable prior year period.

The increase in cost of sales in absolute dollars for the three months ended June 30, 2010, reflects an overall sales increase for the second quarter 2010, as compared to the second quarter of 2009. The decrease in cost of sales as a percentage of ~~revenue~~revenues is primarily attributable to a ~~higher~~sales ~~percentage~~price ofincrease ~~sales~~taking ~~coming~~effect during ~~from~~ the ~~sale~~quarter ofended ~~spare~~June 30, ~~parts~~2010 ~~which generally~~and ~~have~~better ~~higher profit~~ margins ~~than~~from ~~the~~more efficient ~~sale~~manufacturing of production ormachines and second generation lab machines. ~~The~~Included ~~Company’s major~~in ~~product~~cost ~~lines~~of ~~have~~sales ~~different~~is an ~~profit~~increase ~~margins,~~in asinventory ~~well~~reserve asof ~~multiple~~approximately ~~profit margins~~$144,000 ~~within~~related ~~each~~to ~~product~~the cancellation ~~line~~of ~~and~~a ~~the~~customer’s ~~makeup~~contract offor which the ~~sales~~Company ~~for~~received a ~~quarter can~~ ~~cause~~cancellation ~~swings~~fee infrom ~~our~~the ~~gross margins~~customer.

Research and Development Expenses

Research and development expenses for the three months ended ~~March~~June 3130, 2010 were ~~approximately~~ approximately $~~467~~509,000, compared to approximately $~~458~~410,000 for the comparable prior year period, an increase of approximately $999,000, or 224.01%. ~~The~~ This increase in research and development expenses was primarily due to ~~stock~~higher payroll ~~based~~and ~~compensation~~other payroll related costs of approximately $1069,000, ~~partially offset~~as bywell as an ~~reductions~~increase in ~~payroll~~MRT ~~and~~ related travel costs of approximately $1519,000.

Selling Expenses

Selling expenses for the three months ended ~~March~~June 3130, 2010 were approximately $1,~~055~~076,000, compared to approximately $1926,~~221,~~000 for the comparable prior year period, aan ~~decrease~~increase of approximately $~~166~~150,000, or 13 16.62%. The ~~decrease~~increase is was primarily ~~related~~due to ahigher ~~decrease~~commission inexpenses ~~payroll and related costs~~ of ~~approximately~~ $7684,000, abased ~~decrease~~on ~~in commissions of~~increased ~~approximately~~revenue ~~$76,000,~~as acompared ~~decrease~~to inlast ~~travel~~year ~~related expenses of approximately $45,000, a decrease in advertising expenses of approximately $31,000,~~ and ~~a decrease~~increased intravel ~~direct mail~~ expenses of ~~approximately~~ $2148,000~~, partially offset by an increase in sales meeting expenses of approximately $78,000, and stock based compensation of approximately $9,000~~.

General and Administrative Expenses

General ~~and~~ and administrative expenses for the three months ended ~~March~~June 3130, 2010, were approximately $~~770~~979,000, compared to approximately $~~779~~676,000 for the comparable prior ~~year~~ year period, aan ~~decrease~~increase of approximately $9303,000, or 144.28%. The ~~decrease~~increase is was primarily attributable to (a) an increase ~~decrease~~ in ~~payroll~~legal ~~related~~fees ~~costs~~ of approximately $44133,000, arelated ~~decrease~~to inour ~~corporate~~proxy ~~expenses~~and annual ~~of approximately $70~~meeting,~~000~~ ~~and~~patent ~~a decrease~~expenses infor ~~travel~~MRT ~~related~~and ~~changes~~other ofcorporate ~~$32~~matters,~~000,~~ ~~partially offset~~(b) byan ~~investor~~increase ~~relations~~in ~~and~~consulting ~~professional~~expenses ~~fees~~ of approximately $6766,000 ~~and~~primarily ~~stock~~related ~~based~~to ~~compensation~~human ~~expense~~resources ofand ~~approximately~~IT ~~$20~~services,~~000.~~ ~~Additionally,~~and ~~for the three months ended March~~(c) ~~31,~~an ~~2010,~~adverse ~~the~~impact ~~Company~~from ~~recorded a foreign currency~~the ~~loss of approximately $33,000 as compared to a foreign~~ currency ~~gain~~exchange rates of $1340,000 ~~for the comparable period in 2009~~.

Interest Expense

Interest expense for the three months ended ~~March~~June 3130, 2010 was approximately $~~186~~178,000 as compared to approximately $~~140~~142,000 for the comparable prior year period, an increase of ~~approximately~~ approximately $4636,000, or 3225.94%. The increase is due to the amortization of financing costs related to the Revolving Line of Credit with Webster Bank.

Income Tax Provision

As described in Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 29, 2010, we have recorded a full valuation allowance for the amount of the deferred tax assets.

AsSix ofMonths ~~December~~Ended June 3130, 2010, the Company has available federal net operating loss carry forwards for income tax purposes of approximately $12,757,000 and state net operating loss carry forwards of approximately $2,784,000, which expire at various dates through 2029, and federal research and development credit carry forwards of approximately $356,000 expiring in varying amounts during the period through 2024vs. ~~Ownership changes~~June 30, as defined in the Internal Revenue Code, may limit the amount of operating loss carry forwards that can be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years.2009

~~As of March 31, 2010, the Company has approximately $135,000 of prepaid German taxes which the Company expects to collect in 2010.~~Revenues

Total revenues for the six months ended June 30, 2010 were approximately $8,827,000, as compared to revenues of $7,028,000 for the comparable prior year period, an increase of approximately $1,799,000, or 25.6%.

North American sales for the six months ended June 30, 2010 increased to approximately $5,113,000, or by 28.3%, as compared to sales of approximately $3,984,000 for the six months ended June 30, 2009. The increase in North American sales

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was principally due to an increase in the sale of parts and services of approximately $1,420,000 and lab machine sales of $370,000, partially offset by a reduction in the sales of production machines of $646,000.

Foreign sales for the six months ended June 30, 2010 increased to approximately $3,714,000, or by 22.0%, as compared to approximately $3,044,000 for the six months ended June 30, 2009. The increase in foreign sales was primarily due to an increase in sales of production machines of $636,000.

Due to the nature of the sale of capital equipment, one specific quarter can be impacted by the timing of the sale of one or more production machines as well as the mix between North American and foreign sales.

Unit sales increased to 95 units as compared to 91 units for the six months ended June 30, 2010 and June 30, 2009, respectively.

Cost of Sales

Cost of sales for the six months ended June 30, 2010 was approximately $3,358,000, or 38.0% of revenue, compared to approximately $3,146,000, or 44.8% of revenue, for the comparable prior year period.

The Company’s major product lines have different profit margins, as well as multiple profit margins within each product line. The decrease in cost of sales as a percentage of revenues is attributable to a sales price increase taking effect during the second quarter ended June 30, 2010 and better margins on the sale of production machines and second generation lab machines.

Research and Development Expenses

Research and development expenses for the six months ended June 30, 2010 were approximately $976,000, compared to $868,000 for the comparable prior year period, an increase of approximately $108,000, or 12.4%. This increase was primarily due to higher expenses related to payroll and related costs of approximately $69,000 and MRT related travel costs of approximately $21,000.

Selling Expenses

Selling expenses for the six months ended June 30, 2010 were approximately $2,131,000 compared to approximately $2,147,000 for the comparable prior year period, a decrease of approximately $16,000 or .7%.

General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2010 were approximately $1,749,000, as compared to $1,455,000 for the comparable prior year period, an increase of $294,000, or 20.2%. The increase was primarily attributable to (a) an increase in legal fees of approximately $168,000 related to our proxy and annual meeting, patent expenses for MRT and other corporate matters, (b) an increase in consulting fees of approximately $105,000 primarily related to human resources and IT matters and (c) an adverse impact from currency exchange rates of $87,000; (d) partially offset by a decrease in payroll and related costs of approximately $60,000.

Interest Income and Expense

Interest expense for the six months ended June 30, 2010 was approximately $364,000, as compared to $282,000 for the comparable prior year period, an increase of approximately $82,000, or 29.1%. The increase is due to the amortization of financing costs related to the Revolving Line of Credit with Webster Bank.

There was no interest income for the six months ended June 30, 2010, as compared to approximately $3,000 for the comparable prior year period. The decrease is due to a decrease in cash available for investment.

Income Tax Provision

As of December 31, 2009, the Company has available federal net operating loss carry forwards for income tax purposes of approximately $12,757,000 and state net operating loss carry forwards of approximately $2,784,000, which expire at various dates through 2029, and federal research and development credit carry forwards of approximately $356,000 expiring in varying amounts during the period through 2024. Ownership changes, as defined in the Internal Revenue Code, may limit the amount of operating loss carry forwards that can be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years.

In addition, as of June 30, 2010, the Company had approximately $135,000 of prepaid German taxes which the Company expects to collect in 2010.

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Liquidity and Capital Resources

Liquidity

We have ~~fund~~funded our working capital requirements primarily through the proceeds from our ~~term~~Convertible ~~loan~~Debenture, funds generated from operations and customer ~~deposits~~ advances. We also have unused borrowing availability under our Revolving Line of Credit with Webster Bank. We expect to fund our liquidity requirements, including interest on our ~~convertible~~Convertible ~~debt~~Debenture and capital expenditures, primarily through revenue and bookings for which we receive ~~deposits~~ customer advances in advance of shipment and as needed, our ~~new~~ working capital line with Webster Bank. Our line with Webster Bank expires on October 22, 2010 and we have had preliminary discussions about renewing the line for an additional one year period. We anticipate that with our expected revenues and customer ~~deposits~~advances, together with our existing cash balance at ~~March~~June 3130, 2010 and our working capital line, we will have sufficient capital to meet our working capital requirements for the next twelve months. However, if we do not achieve ~~the~~ the revenues and customer ~~deposits~~advances as and when planned, and/or if we are unable to access ~~our~~or ~~secured~~renew our working capital line before it expires on October 22, 2010, we may face substantial liquidity pressures that we may not be able to sustain if we are unable to access additional sources of liquidity.

Long Term Debt

On November 14, 2008, we entered into the Convertible Debenture and Warrant Purchase Agreement (the “Agreement”) with GSP. The Convertible Debenture issued pursuant to the terms of the Agreement (the “Convertible Debenture”) bears interest at nine percent (9.0%) per annum payable quarterly in arrears. The Convertible Debenture is due and payable on the earlier to occur of (i) November 14, 2015 or (ii) the acceleration of the maturity of the Convertible Debenture upon the occurrence of an Event of Default (as defined in the ~~Agreement~~Convertible Debenture). We may, at our option and upon 30 days notice to GSP, prepay on an interest payment date all of the principal balance of the Convertible Debenture, without penalty, together with any accrued and unpaid interest through the date of prepayment. Our right to prepay is subject to GSP’s right to convert the Convertible Debenture as contemplated in the Convertible Debenture. GSP may, at its option, on any of the maturity dates, the date that any interest payment is due, or the date on which a change of control occurs, convert all or any portion of the outstanding principal amount of the Convertible Debenture into shares of our common stock at a $1.25 per share. In May 2009, GSP agreed to defer the interest payments due and payable under the Convertible Debenture on each of July 1, 2009, October 1, 2009 and January 4, 2010. The deferred payments ~~will~~ accrue interest at nine percent (9.0%) per annum and ~~will~~are be payable in eight equal quarterly installments on the first day of ~~such~~each quarter beginning on April 1, 2010. The Convertible Debenture is secured by all assets, property rights and interests of the Company, and is subordinate to the working capital line with Webster Bank.

On November 14, 2008, we also issued ~~the~~a Warrant to GSP pursuant to the terms of the Agreement, giving it the right to purchase up to fifty percent (50%) of our outstanding common stock, on a fully diluted basis, less the number of shares of common stock into which the Convertible Debenture is convertible. The Warrant can be exercised by GSP in two (2) tranches at any time prior to the earlier to occur of: (i) the seventh anniversary of the date of the Agreement, (ii) the third anniversary of the date of the Agreement in the event that we retire the Convertible Debenture on or before such date (the “Third Anniversary”) or (iii) such time as GSP has acquired fifty percent (50%) of the total number of shares of our common stock then outstanding on a fully diluted basis. The first tranche is exercisable at $2.00 per share up to forty percent (40%) of our common stock then outstanding on a fully diluted basis and the second tranche is exercisable at $3.00 per share up to fifty percent (50%) of our common stock then outstanding on a fully diluted basis.

The aggregate number of shares of Common Stock (the “Tranche One Maximum”) that may be purchased pursuant to one or more tranche one exercises of the Warrant (the “Tranche One Exercises”) is forty percent (40%) of the Common Stock then outstanding on a fully diluted basis, minus that number of shares of Common Stock that GSP is or was entitled to acquire (or has theretofore acquired) upon exercise of the conversion feature of the Convertible Debenture. Notwithstanding the preceding sentence, if all or any portion of the principal amount of the Convertible Debenture has been prepaid by us prior to the Third Anniversary, then the Tranche One Maximum will also include a number of shares of common stock equal to the quotient of: (i) the amount of the Convertible Debenture’s principal amount that was so repaid by the Third Anniversary, divided by (ii) $1.25 (the “Prepayment Shares”).

The aggregate number of shares of Common Stock that may be purchased pursuant to one or more tranche two exercises of the Warrant (the “Tranche Two Exercises”) is equal to (a) fifty percent (50%) of the common stock then outstanding on a fully diluted basis, minus (b) that number of shares of common stock that GSP is or was entitled to acquire (or has theretofore acquired) upon (i) exercise of the conversion feature of the Convertible Debenture, and (ii) the Tranche One Exercise, plus (c) the Prepayment Shares. A Tranche Two Exercise may only be made after the full number of shares exercisable pursuant to Tranche One Exercises ~~have~~has been purchased.

Revolving Line of Credit

On October 23, 2009, we entered into a senior secured $1 million Revolving Line of Credit with Webster Bank described above in Footnote 13 to ~~our~~the Company’s unaudited consolidated financial statements for the three and six months ended ~~March~~June 3130, 2010. The Revolving Line of Credit matures on October 22, 2010. WeThe ~~may extend the~~ Revolving ~~Credit for one year without the consent of GSP. As noted above, the actual amount of credit that is available from time to time under the Revolving~~ Line of Credit is ~~limited to a borrowing base~~ ~~amount~~senior ~~that is determined according~~ to, ~~among~~our ~~other~~Convertible ~~things,~~Debenture aand ~~percentage~~we ofmay extend the ~~value~~ ~~of eligible accounts receivables. The~~ Revolving ~~Line of~~ Credit ~~contains customary representations and~~for ~~warranties~~one ~~and~~year ~~restrictive~~without ~~covenants~~the ~~relating~~consent toof ~~matters~~GSP, ~~such~~the asholder ~~indebtedness, liens,~~of ~~investments,~~the ~~acquisitions, mergers, dispositions and dividends~~Convertible Debenture. ~~The~~As ~~Revolving~~noted ~~Line of Credit also has two financial covenants that require us to maintain a senior debt to twelve month trailing EBITDA of 2:1~~above, ~~with~~ the ~~initial twelve month trailing EBITDA, and~~actual ~~requires~~amount usof tocredit ~~maintain~~that ~~$500,000~~is of available ~~cash~~from ortime ~~excess~~to ~~availability~~time under the Revolving Line ~~of Credit. The~~ ~~proceeds~~ of ~~any borrowings under the Revolving Line of~~ Credit ~~are available for working capital and other general corporate purposes.~~is

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~~Our~~limited ~~borrowings~~to ~~under~~a ~~the~~borrowing ~~Revolving Line~~base ofamount ~~Credit~~that ~~will~~is determined ~~generally~~according ~~accrue~~to, ~~interest~~among atother things, a ~~margin~~percentage of ~~5.50%~~the ~~over~~value ~~LIBOR~~of ~~and~~eligible ~~are~~accounts ~~secured~~receivables. The Revolving byLine aof ~~lien~~Credit oncontains ~~substantially~~customary ~~all~~representations ofand ~~its~~warranties ~~personal~~and restrictive ~~property~~covenants relating to matters, ~~which is~~such ~~senior~~as inindebtedness, ~~rights~~liens, investments, toacquisitions, ~~our~~mergers, ~~Debenture~~dispositions and dividends. The Revolving Line of Credit ~~generally~~also ~~contains~~has ~~customary events of~~two ~~default~~financial ~~for~~covenants ~~credit~~that ~~facilities~~require ofus ~~this~~to ~~type.~~maintain ~~Upon~~a ansenior ~~event~~debt ofto ~~default~~twelve ~~that~~month trailing isEBITDA ~~not cured~~of or2:1, ~~waived~~and ~~within~~requires ~~any~~us ~~applicable~~to ~~cure~~maintain ~~periods~~$500,000 inof ~~addition~~available ~~to other~~cash ~~remedies~~or ~~that~~excess ~~may~~availability beunder ~~available~~the toRevolving ~~Webster~~Line ~~Bank,~~of ~~the~~Credit. The ~~obligations~~proceeds of any borrowings under the ~~Loan~~ ~~Agreement~~Revolving ~~may~~Line beof ~~accelerated~~Credit ~~and~~are ~~remedies~~available ~~may~~for beworking ~~exercised~~capital ~~against~~and ~~the~~other general ~~collateral~~corporate purposes.

The Company’s borrowings under the Revolving Line of Credit will generally accrue interest at a margin of 5.50% over LIBOR and are secured by a lien on substantially all of its personal property, which is senior in rights to its Convertible Debenture. The Revolving Line of Credit generally contains customary events of default for credit facilities of this type. Upon an event of default that is not cured or waived within any applicable cure periods, in addition to other remedies that may be available to Webster Bank, the obligations under the Loan Agreement may be accelerated and remedies may be exercised against the collateral.

In connection with the closing of the Revolving Line of Credit, we also amended the Agreement and Debenture with GSP to permit the Revolving Line of Credit as senior indebtedness and provide for certain other covenants, including a cross default provision with the Revolving Line of Credit.

As of ~~March~~June 3130, 2010, we had not drawn upon the Revolving Line of Credit.

Operating, Investing and Financing Activities

As of ~~March~~June 3130, 2010, we had approximately $21,~~157~~949,000 in cash and cash equivalents, as compared to approximately $2,185,000 ason of December 31, 2009. In the ~~three~~six months ended ~~March~~June 3130, 2010, the decrease of ~~approximately~~ $28236,000 in cash resulted primarily from changes in working capital, particularly ~~due to~~ lower customer advances.

~~Our~~The ~~operating~~Company’s ~~activities~~operating activities used cash of approximately $31231,000 for the ~~three~~six months ended ~~March~~June 3130, 2010 compared to approximately $~~982~~1,425,000 for the ~~three~~six months ended ~~March~~June 3130, 2009. The decrease in cash flows from operations was primarily due to changes in working capital year to year and improved profitability.

The Company used cash of $312,000 and $6772,000 for investing activities for the ~~three~~six months ended ~~March~~June 3130, 2010 and 2009, respectively, for the purchase of capital equipment~~, and renovations to the Company’s facilities in 2009~~.

Contractual Obligations

~~Our~~The Company’s contractual obligations as of ~~March~~June 3130, 2010 are as follows:

			Payment due by period
(in thousands)	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Convertible debt (1)	$	8,~~192~~021	$	~~651~~639	$1,032	~~1,078~~	$	900	$	5,~~563~~450
Operating leases	~~679~~1,032		~~411~~412		~~268~~620		—		—
Purchase obligations (2)	40		40		—		—		—
	$	89,~~911~~093	$	1,~~102~~091	$	1,~~346~~652	$	900	$	5,~~563~~450

(1) Includes principal and interest payments, principal is due only at maturity unless called upon following an event of default under the convertible debenture agreement. (See discussion above on interest in Long Term Debt.)

(1)	Includes principal and interest payments, principal is due only at maturity unless called upon following an event of default under the convertible debenture agreement. (See discussion above on interest in Long Term Debt.)

(2)	Purchase obligations consist of commitments for production materials and supplies.

(2) Purchase obligations consist of commitments for production materials and supplies.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

~~Our~~During ~~financial~~the ~~instruments~~six ~~are~~months ~~generally~~ended ~~not~~June 30, ~~subject~~2010, tothere ~~changes~~were inno ~~market~~material ~~value as a result of~~ changes ~~in interest rates due~~ to the ~~short maturities of the~~ ~~instruments. Our~~Company’s ~~fixed~~market ~~rate~~risk ~~debt~~policies isor ~~not~~market ~~exposed~~risk tosensitive ~~cash~~instruments ~~flow or~~and ~~interest~~positions ~~rate~~as ~~changes~~described ~~but~~in isthe ~~exposed~~Company’s toannual ~~fair~~report ~~market~~on ~~value~~Form 10-K ~~changes~~for in the ~~event~~ ofyear ~~refinancing~~ended ~~this fixed rate debt. The Revolving Line of Credit accrues interest at a margin of 5.50% over LIBOR. As of March~~December 31, ~~2010, we had not drawn upon the Revolving Line of Credit~~2009.

~~Although~~Item ~~we have a significant percentage of sales from foreign counties, our sales are predominately denominated in U~~4.S. ~~dollars.~~Controls However, sales to foreign government sponsored organizations or universities are often required to be denominated in their local currency. Additionally, we maintain a cash balance in a German bank to facilitate our European operations. As a result, sales in foreign currency and ~~our~~ German bank account may result in exposure to fluctuations in foreign currency exchange rates. A significant increase in foreign sales that require denomination in local currency may expose the Company to additional risk.Procedures

15The certificates of the Company’s principal executive officer and principal financial officer attached as Exhibits 31.1 and 31.2

~~Table of Contents~~16

~~For~~Table ~~additional~~of information about our financial instruments, see Note 7 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 29, 2010.Contents

~~Item~~to ~~4T.~~this ~~Controls~~Quarterly Report on Form 10-Q include, in paragraph 4 of such certifications, information concerning the Company’s disclosure controls and ~~Procedures~~procedures, and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4 for a more complete understanding of the matters covered by such certifications.

~~The certificates of the~~Disclosure ~~Company’s~~Controls ~~principal executive officer~~ and ~~principal~~ financial officer attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q include, in paragraph 4 of such certifications, information concerning the Company’s disclosure controls and procedures, and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4 for a more complete understanding of the matters covered by such certifications.Procedures

The Company’s management, with the participation of the Company’s chief executive officer and principal financial and accounting officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2010. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and ~~Controls~~procedures include, without limitation, controls and ~~Procedures~~procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its chief executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions to be made regarding required disclosure. It should be noted that any system of controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met and that management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of June 30, 2010, the Company’s chief executive officer and principal financial and accounting officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

~~The~~Changes Company’s management, with the participation of the Company’s chief executive officer and principal financial and accounting officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2010. The term “disclosure controls and procedures”, as defined in ~~Rules 13a-15(e) and~~ ~~15d-15(e) under~~Internal ~~the~~Control ~~Securities~~Over ~~Exchange~~Financial Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its chief executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions to be made regarding required disclosure. It should be noted that any system of controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met and that management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of March 31, 2010, the Company’s chief executive officer and principal financial and accounting officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.Reporting

~~Changes~~There were no changes to the inCompany’s ~~Internal~~internal ~~Control~~control ~~Over~~over ~~Financial~~financial ~~Reporting~~reporting during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There were no changes to the Company’s internal control over financial reporting during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings.

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

Item 1A.	Risk Factors.

~~PART II~~You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. ~~OTHER~~ If ~~INFORMATION~~any of these risks or uncertainties occurs, our business, financial condition or operating results could be materially harmed. In that case the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we may face. We believe that this filing contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to regulatory risks and clinical uncertainties. Such statements are based on management’s current expectations and are subject to facts that could cause results to differ materially from the forward-looking statements. For further information you are encouraged to review our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the period ended December 31, 2009.

~~Item~~We 1.have ~~Legal~~experienced ~~Proceedings~~net losses in four of our last five fiscal years, including the fiscal year ended December 31, 2009, and we may not be able to achieve consistent profitability in the future.

~~The~~For ~~Company~~four isof ~~not~~the past five fiscal years, including for fiscal 2009, we have experienced net losses. For the year ended December 31, 2009 and the year ended December 31, 2008, we had a net loss of $362,000 and $4,011,000, ~~party~~respectively. Although we have significantly improved our operating results during fiscal 2009 and the first six months of 2010, including recording positive net income in the third and fourth quarters of 2009 and the first and second quarters of 2010, in the future the Company may not be able to achieve ~~any~~consistent ~~material~~profitability ~~legal~~on ~~proceedings~~a quarter by quarter and year over year basis.

~~Item~~The ~~1A.~~Company ~~Risk~~must ~~Factors~~remain cash-flow positive.

~~You~~We believe ~~should~~that ~~carefully consider~~our ~~the~~expected ~~risks~~revenues and customer ~~uncertainties~~advances, ~~described~~together ~~below~~with ~~and~~our existing ~~the~~cash ~~other~~balance ~~information in~~at ~~this~~June 30, ~~filing~~2010 ~~before~~and ~~deciding~~the availability tounder ~~purchase~~ our ~~common~~working ~~stock. If~~capital ~~any of~~line ~~these~~should ~~risks~~be orsufficient ~~uncertainties~~to ~~occurs,~~meet our ~~business, financial condition or~~working ~~operating~~capital ~~results~~requirements ~~could~~for bethe ~~materially~~next ~~harmed~~twelve months. In ~~that case the~~ ~~trading~~the ~~price~~first quarter of ~~our~~2009, ~~common~~we ~~stock~~initiated ~~could~~an ~~decline~~aggressive ~~and~~cost ~~you~~reduction ~~could~~program that ~~lose~~includes ~~all or part~~headcount ofreductions ~~your~~as ~~investment. The~~well ~~risks~~as ~~and~~the ~~uncertainties~~elimination ~~described~~of ~~below~~all ~~are~~non-essential discretionary ~~not~~spending ~~the~~such ~~only~~as ~~ones~~travel, weconsulting ~~may~~and ~~face~~marketing programs. We ~~believe~~As ~~that~~a ~~this~~result ~~filing~~of ~~contains forward-looking~~these ~~statements~~initiatives asand ~~that~~the ~~term~~cost reduction isprogram, ~~defined in~~ the ~~Private~~Company ~~Securities Litigation~~was ~~Reform~~cash-flow ~~Act~~positive offor ~~1995. Such~~the ~~forward-looking~~year ~~statements~~ended ~~are~~December 31, ~~subject~~2009, toas awell ~~number~~as offor ~~risks~~the ~~and~~six ~~uncertainties,~~months ~~including~~ending ~~the~~June 30, ~~ones described below~~2010. ~~Such~~However, ~~statements~~if we ~~are~~sustain ~~based~~a onrevenue ~~management’s~~shortfall ~~current~~that ~~expectations~~we ~~and are~~can’t compensate ~~subject~~with toadditional ~~facts~~cost ~~that~~cuts, ~~could~~or ~~cause~~our ~~results~~current tocredit ~~differ~~facility ~~materially~~is ~~from~~withdrawn ~~the~~or ~~forward-looking~~not ~~statements. For~~renewed ~~further~~before ~~information~~it ~~you~~expires ~~are encouraged~~on toOctober 22, ~~review~~2010; ~~our~~it ~~filings~~is ~~with~~possible ~~the~~that ~~Securities~~we could ~~and~~face ~~Exchange~~unsustainable ~~Commission, including~~liquidity ~~our~~pressures. This ~~Annual~~concern ~~Report~~is onaccentuated ~~Form 10K~~by ~~for~~ the ~~period~~fact ~~ended~~that current ~~December 31~~credit markets, ~~2009.~~

We have experienced operating losses in four of our last five fiscal years, including the fiscal year ended December 31, 2009, and we may not be able to achieve consistent profitability in the future.17

~~For~~Table ~~four~~ of ~~the~~ past five fiscal years, including for fiscal 2009, we have experienced losses from continuing operations. For the year ended December 31, 2009 and the year ended December 31, 2008, we had a net loss of $362,000 and $4,011,000, respectively. Although we have significantly improved our operating results during fiscal 2009 and the first three months of 2010, including recording positive net income in the third and fourth quarters of 2009 and the first quarter of 2010, in the future the Company may not be able to achieve consistent profitability on a quarter by quarter and year over year basis.Contents

16coupled with our history of losses, have made it possible that we would not be able to obtain alternative or additional financing. Under these circumstances, it is possible that we could default under our financing agreements, which default could force us to seek protection under the bankruptcy laws and cause our investors to sustain a loss of their investment in our shares.

~~Table~~Increased ofconcerns ~~Contents~~about the financial markets, economic conditions, and corporate profits may exacerbate certain risks affecting our business.

We cannot predict the extent of the impact of the economic environment specific to our industry. Continued or increased concerns about credit markets, consumer confidence, economic conditions, volatile corporate profits and reduced capital spending could negatively impact demand for our products. In the future, we may experience reduced demand for our products because of the uncertainties in the general economic environment in which our customers and we operate. The on-going ~~Company~~tightening ~~must~~of credit in financial markets may adversely affect the ability of our customers and suppliers to obtain financing, which could result in a decrease in, or deferrals or cancellations of, the sale of our products. Although there have been signs of an improving economy, if global economic and market conditions, or economic conditions in the United States, remain ~~cash-flow~~uncertain, ~~positive~~deteriorate or enter into a period with no or flat growth, we may experience a material adverse effect on our business, operating results and financial condition. Unstable economic, political and social conditions make it difficult for our customers, our suppliers and us to accurately forecast and plan future business activities. If such conditions persist, our business, financial condition and results of operations could suffer.

WeThe ~~believe~~failure ~~that~~of ~~our~~any ~~expected revenues~~banking ~~and~~institution ~~customer~~in ~~advances,~~which ~~together~~we ~~with~~deposit our ~~existing~~funds ~~cash balance at March 31,~~or ~~2010 and~~ the ~~availability~~failure ~~under our working capital line should be sufficient to meet our working capital requirements for the next twelve months. In the first quarter~~ of ~~2009, we initiated an aggressive cost reduction program that includes headcount reductions as well as the elimination of all non-essential discretionary spending~~ such asbanking ~~travel, consulting~~institution ~~and~~to ~~marketing~~provide ~~programs.~~services Asin ~~a result of these initiatives and~~ the ~~cost~~ reduction program, the Company was cash-flow positive for the year ended December 31, 2009, as well as for the three months ending March 31, 2010. However, if we sustain a revenue shortfall that we can’t compensate with additional cost cuts, or our current ~~credit facility is withdrawn or not renewed, it is~~ ~~possible~~economic ~~that~~environment we could ~~face~~have ~~unsustainable~~a ~~liquidity~~material ~~pressures. This~~adverse ~~concern~~effect ison ~~accentuated by the fact that current credit markets, coupled with~~ our ~~history~~results of ~~losses~~ operations, ~~has~~financial ~~made~~condition ~~it possible that we would not be able to obtain alternative~~ or ~~additional financing.~~access ~~Under these circumstances, it is possible that we could default under our financing agreements, which default could force us~~ to ~~seek protection under the bankruptcy laws and cause our investors to sustain a loss of their investment in our shares~~borrowings.

~~Increased~~The ~~concerns~~capital and credit ~~about~~markets have been experiencing extreme volatility and disruption. In some cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers, as well as pressured the solvency of some financial ~~markets~~institutions. Some of these financial institutions, ~~economic~~including ~~conditions~~banks, have had difficulty performing regular services and ~~corporate~~in ~~profits~~some ~~may~~cases have failed or otherwise been largely taken over by ~~exacerbate~~governments. ~~certain~~If ~~risks~~we ~~affecting~~are unable to access some or all of our ~~business~~cash on deposit, either temporarily or permanently, or are unable to access our Revolving Line of Credit with Webster Bank, it could have a negative impact on our operations, including our reported net income, or our financial position, or both.

WeThe ~~cannot~~occurrence ~~predict the extent~~ of ~~the~~an ~~impact~~event of ~~the~~default ~~economic~~under ~~environment specific to~~ our ~~industry. Continued~~financing ~~or increased concerns about credit markets, consumer confidence,~~arrangements ~~economic conditions, volatile corporate profits and reduced capital spending~~ could negatively impact demand for our products. In the future, we may experience reduced demand for our products because of the uncertainties in the general economic environment in which our customers and we operate. The on-going tightening of credit in financial markets may adversely affect the ability of our customers and suppliers to obtain financing, which could result in asubstantial ~~decrease~~losses in, or deferrals or cancellations of, the sale of our products. Although there have been signs of an improving economy, if global economic and market conditions, or economic conditions in the United States, remain uncertain, deteriorate or enter into a period with no or flat growth, we may experience a material adverse effect on our business, operating results and financial condition. Unstable economic, political and social conditions make it difficult for our customers, our suppliers and us to ~~accurately forecast and plan future business activities. If such conditions persist,~~ our ~~business, financial condition and results of operations could suffer~~stockholders. ~~We cannot project the extent of the impact of the economic environment specific to our industry.~~

~~The~~Both ~~failure~~our Revolving Line of ~~any~~Credit and our ~~banking~~Convertible ~~institution~~Debenture contain events of defaults, which are more fully described in our Form 8-Ks filed by the Company with the Securities and Exchange Commission on October 26, 2009 with respect to the Revolving Line of Credit and November 20, 2008 with respect to the Convertible Debenture. In addition, the Revolving Line of Credit and Convertible Debenture contain cross default provisions, which weprovides ~~deposit~~that an event of default under our ~~funds~~Revolving Line of Credit or ~~the~~Convertible ~~failure~~Debenture may also trigger an event of ~~such~~default under the ~~banking~~other ~~institution~~financing agreement. If we were to experience ~~provide~~an ~~services~~event of default under our Revolving Line of Credit or our Convertible Debenture, that is not cured or waived within any applicable cure periods, in addition to other remedies that may be available to Webster Bank and GSP, the ~~current~~holder ~~economic~~of ~~environment~~the Convertible Debenture, the parties may accelerate ~~could~~the ~~have~~obligations aunder ~~material~~these ~~adverse~~financing ~~effect~~arrangements onand they may exercise their remedies against the secured collateral, which is substantially all of our assets. If ~~results~~an event of ~~operations~~default occurs, ~~financial~~there can be no assurance that we would be able to ~~condition~~repay the obligations under these financing arrangements or be ~~access~~able to ~~borrowings~~raise additional funds to make such payments. Failure to repay these financing arrangements could force us to reorganize our debts, possibly in bankruptcy, in which event our common stock could likely become worthless.

~~The~~Our ~~capital~~ownership ~~and~~structure ~~credit markets~~includes ~~have been experiencing extreme volatility and~~several ~~disruption. In~~investors ~~some~~who ~~cases,~~own ~~the~~large ~~markets~~blocks ~~have~~of ~~exerted~~common ~~downward pressure on~~ stock ~~prices~~or ~~and~~convertible ~~credit~~securities ~~capacity for certain issuers, as well as~~whose ~~pressured~~interests ~~the solvency of some financial institutions. Some of these financial institutions, including banks, have had difficulty performing regular services~~ and rights in ~~some cases have failed or otherwise been largely taken over by governments. If we are unable to access some or all of~~ our ~~cash~~Company onmay ~~deposit, either~~differ ~~temporarily~~in orimportant ~~permanently,~~respects orfrom ~~are unable to access our Revolving Line~~those of ~~Credit with Webster Bank, it could have a negative impact on~~ our ~~operations, including~~other ~~our~~common ~~reported~~stock ~~net income, or our financial position, or both~~investors.

Several investors in the Company own large concentrations of our common stock or securities convertible into our common stock, making our shares more illiquid than if our ownership structure were more widely distributed. The ~~occurrence~~concentration in the ownership of our common stock anand ~~event~~the rights of ~~default~~the ~~under~~holder of our ~~financing~~Convertible ~~arrangements~~Debenture ~~could~~and ~~result~~Warrants impact the trading liquidity of our common shares, our corporate governance, and the relative economic stake that our common stock and Convertible Debenture and Warrants have in the enterprise value of our business. Although a more active ~~substantial~~trading ~~losses~~market may develop in the future, the limited market liquidity for our common stock may affect your ability to sell at a price that is satisfactory to you. The market price of our ~~stockholders~~common stock may be adversely affected should the one large investor convert the Convertible Debenture and Warrants into common stock or several large investors sell at the same time. Additionally, if the holder of our Convertible Debenture and Warrant were to convert and sell such shares or a large stockholder were to sell their shares our stock price may be adversely affected.

~~Both~~We ~~our~~face ~~Revolving~~intense ~~Line~~competition ~~of Credit and our Convertible Debenture contain events of defaults, which are more fully described~~ in ~~our~~many ~~Form 8-Ks filed by the Company with the Securities and Exchange Commission on October 26, 2009 with respect to the Revolving Line~~ of Credit and November 20, 2008 with respect to the Convertible Debenture. In addition, the Revolving Line of Credit and Convertible Debenture contain cross default provisions, which provides that an event of default under our ~~Revolving Line of Credit or Convertible Debenture may also trigger an event of default under the other financing agreement~~markets. If we were to experience an event of default under our Revolving Line of Credit or our Convertible Debenture, that is not cured or waived within any applicable cure periods, in addition to other remedies that may be available to Webster Bank and GSP, the parties may accelerate the obligations under these financing arrangements and they may exercise their remedies against the secured collateral, which is substantially all of our assets. If an event of default occurs, there can be no assurance that we would be able to repay the obligations under these financing arrangements or be able to raise additional funds to make such payments. Failure to repay these financing arrangements could force us to reorganize our debts, possibly in bankruptcy, in which event our common stock could likely become worthless.

Our ~~ownership~~Microfluidizer ~~structure~~product ~~includes~~line ~~several~~of ~~investors~~high-shear ~~who~~fluid ~~own~~processors ~~large~~has ~~blocks~~direct ofcompetition ~~common~~in ~~stock~~its ~~or convertible~~major ~~securities~~markets, ~~whose~~including ~~interests~~its ~~and~~most ~~rights~~important markets in ~~our~~the ~~Company~~pharmaceutical, biotechnology ~~may~~and ~~differ~~coatings/chemical industries. The severity of the competition that we confront requires that we continuously invest in ~~important~~research and ~~respects~~development ~~from~~in ~~those~~order ofto keep our ~~other~~product ~~common~~line ~~stock investors~~competitive. Despite

17Table of Contents

~~Table~~such expenditures, however, there can be no assurance that we will be able to meet the enhancement challenges posed by our competitors, or that we will be able to create or exploit the kinds of ~~Contents~~innovations, such as our MRT technology, needed to drive future sales.

~~Convertible~~In ~~Debenture~~addition, ~~and Warrants~~we ~~have in the enterprise value of our business. Although a more active trading market may develop in the future~~face, ~~the limited market liquidity for our~~and ~~common~~will ~~stock~~continue ~~may affect your ability~~ to ~~sell~~face, atintense acompetition ~~price~~from ~~that~~other iscompanies ~~satisfactory~~who tomanufacture ~~you.~~and ~~The~~sell ~~market~~fluid ~~price~~processing ofsystems ~~our~~used ~~common~~in ~~stock~~particle ~~may~~size bereduction, ~~adversely effected should the~~mixing, ~~one~~milling, ~~large~~dispersing, ~~investor~~homogenizing, ~~convert~~cell ~~the~~disruption ~~Convertible Debenture~~ and ~~Warrants~~liposomal ~~into common~~encapsulation ~~stock~~applications. orWe ~~several~~expect ~~large~~competition ~~investors~~to ~~sell~~intensify atin the ~~same~~fluid ~~time.~~processing systems ~~Additionally,~~field ifas ~~the holder~~technical ofadvances ~~our~~are ~~Convertible~~made ~~Debenture~~ and ~~Warrant~~become ~~were~~more towidely ~~convert~~known, and ~~sell such~~ ~~shares~~such orincreased acompetition ~~large~~may ~~stockholder~~have ~~were~~a tomaterial ~~sell~~adverse ~~their~~effect ~~shares~~upon our ~~stock price may be~~ ~~adversely effected~~business.

WeOur future ~~face~~success ~~intense~~will depend in large part on our ability to maintain a ~~competition~~technologically superior product line. Rapid technological development by us or others may result in ~~many~~our products or technologies becoming obsolete before we recover the expenses we incur in connection with their development. Products offered by us could be made obsolete by less expensive or more effective technologies, or may never achieve market acceptance. There can be no assurance that we will be able to make the enhancements to our technology successful in the enhancement, introduction, manufacturing and marketing of any new technologies, products or product innovations, or develop and introduce, in a timely manner, innovations to our ~~markets~~existing technologies or products that satisfy our customers’ needs or achieve market acceptance to compete successfully with newly emerging technologies and products of our competitors.

~~Our~~If ~~Microfluidizer product~~we ~~line~~fail ofto ~~high-shear~~retain ~~fluid~~key ~~processors~~personnel ~~has direct competition in its major~~and ~~markets~~hire, ~~including~~train ~~its~~and ~~most~~retain ~~important~~qualified ~~markets in the pharmaceutical~~employees, ~~biotechnology~~ ~~and coatings/chemical industries. The severity of the competition that~~ we ~~confront~~may ~~requires~~not ~~that we continuously invest in research and development in order to keep our product line competitive. Despite such expenditures, however, there can~~ be ~~no assurance that we will be~~ able to ~~meet~~compete ~~the enhancement challenges posed by our competitors~~effectively, orwhich ~~that~~could weresult ~~will~~in bereduced ~~able~~revenue ~~to create~~ or ~~exploit~~increased ~~the kinds of innovations, such as our Microfluidics Reaction Technology, needed to drive future sales~~costs.

InOur ~~addition,~~success weis ~~face~~highly dependent on the continued services of key management, technical and scientific personnel. Our management ~~will~~and ~~continue~~other toemployees ~~face~~may voluntarily terminate their employment at any time upon short notice. The loss of the services of any member of the senior management team, ~~intense~~including ~~competition~~the ~~from~~Chief ~~other~~Executive ~~companies~~Officer, ~~who~~Michael ~~manufacture~~Ferrara, Peter Byczko, the ~~and~~Chief ~~sell~~Accounting ~~fluid~~Officer, ~~processing~~William ~~systems~~Conroy, ~~used~~the inSenior ~~particle~~Vice ~~size~~President ~~reduction~~of Operations and Engineering, ~~mixing~~Thomai Panagiotou, Chief Technology Officer, ~~milling~~William Kober, ~~dispersing~~Vice President of Sales—The Americas and Western Asia, ~~homogenizing~~Xavier Leroy, ~~cell~~Vice ~~disruption~~President of Sales—EMEA and ~~liposomal~~South ~~encapsulation~~East Asia or any of the ~~applications~~managerial, technical or scientific staff may significantly delay or prevent the achievement of product development and other business objectives. WeOur future ~~expect~~success ~~competition~~will also depend on our ability to ~~intensify~~identify, recruit and retain additional qualified scientific, technical and managerial personnel. Competition for qualified personnel in the ~~fluid~~technology ~~processing systems~~area ~~field~~is asintense ~~technical~~where labor ~~advances~~markets are ~~made~~particularly competitive, including Boston, Massachusetts and where ~~become~~demand ~~more~~for ~~widely~~personnel ~~known,~~with these skills is extremely high and is likely to ~~such~~remain ~~increased~~high. As a result, competition for qualified personnel is intense, particularly in the areas of general management, finance, information technology, engineering and science, and the process of hiring suitably qualified personnel is often lengthy and expensive, and may ~~have~~become more expensive in the future. If we are unable to hire and retain a ~~material~~sufficient ~~adverse~~number ~~effect~~of ~~upon~~qualified ~~our~~employees, our ability to conduct and expand our business could be seriously reduced.

~~Our~~We ~~future success will depend in large part on our ability to maintain a technologically superior product line. Rapid technological development by us or others~~ may ~~result in our products or technologies becoming obsolete before we recover the expenses we incur in connection with their development. Products offered by us could~~ be ~~made~~unsuccessful obsolete by less expensive or more effective technologies, or may never achieve market acceptance. There can be no assurance that we will be able to make the enhancements to our technology successful in ~~the~~developing ~~enhancement, introduction, manufacturing and marketing of any~~ new ~~technologies,~~ products ~~or product~~for ~~innovations, or develop and introduce, in a timely manner, innovations to our~~ existing ~~technologies or products that satisfy our customers’ needs or achieve market acceptance to compete successfully with newly emerging technologies and products of our competitors~~markets.

IfOur westrategy ~~fail~~includes developing new products to drive ~~retain~~organic ~~key~~growth ~~personnel~~in ~~and~~our ~~hire,~~businesses. ~~train~~We ~~and~~may ~~retain~~be ~~qualified~~unsuccessful developing new ~~employees,~~products that will be well received in existing markets. The products we develop may ~~not~~have less market demand than we anticipate or the demand may be ~~able~~at substantially tolower ~~compete~~prices ~~effectively~~than we anticipate. Our competitors may develop new products or technologies that diminish demand for our new products. Our customers may receive decreased funding levels, which ~~could~~may ~~result~~cause their demand for our products to decrease. Our efforts to develop new intellectual property and new products may be costly. Substantial failure in our new product ~~reduced~~development ~~revenue~~program orcould ~~increased~~have ~~costs~~a material impact on our results of operations and our financial condition.

~~Our~~We ~~success is highly dependent on the continued services of key management, technical and scientific personnel. Our management and other employees~~ may ~~voluntarily~~be ~~terminate~~unsuccessful ~~their~~in ~~employment at~~launching ~~any time upon short notice. The loss of the services of any member of the~~new ~~senior~~products management team, including the Chief Executive Officer, Michael Ferrara, Peter Byczko, the Chief Accounting Officer, William Conroy, the Senior Vice President of Operations and Engineering, Thomai Panagiotou, Chief Technology Officer, William Kober, Vice President of Sales—The Americas and Western Asia, Xavier Leroy, Vice President of Sales—EMEA and South East Asia or ~~any~~expanding ~~of the managerial, technical or scientific staff may significantly delay or prevent the achievement of~~ product ~~development and other business objectives~~offerings. Our future success will also depend on our ability to identify, recruit and retain additional qualified scientific, technical and managerial personnel. Competition for qualified personnel in the technology area is intense where labor markets are particularly competitive, including Boston, Massachusetts and where demand for personnel with these skills is extremely high and is likely to remain high. As a result, competition for qualified personnel is intense, particularly in the areas of general management, finance, information technology, engineering and science, and the process of hiring suitably qualified personnel is often lengthy and expensive, and may become more expensive in the future. If we are unable to hire and retain a sufficient number of qualified employees, our ability to conduct and expand our business could be seriously reduced.

We recently announced the launch of our new LV1 Microfluidizer High Shear Fluid Processor on March 17, 2010. We also announced that we intend to develop a series of service offerings to address what we believe is a long-term growth opportunity within our customer base. Although we believe the new product and service offerings will present long-term opportunities for the Company, we may be unsuccessful in ~~developing~~identifying and pursuing such opportunities. We may be unsuccessful in introducing the new product ~~products~~and service offerings, expanding current product offerings and commercializing new technologies. In addition, there may be a lack of demand in the present or in the future for ~~existing~~the ~~markets~~products that we introduce.

Our ~~strategy~~future ~~includes developing new products to drive organic~~ growth inis ~~our~~dependent ~~businesses.~~upon ~~We may be unsuccessful developing new products that will be well received in existing markets. The products we develop may have less market demand than we anticipate or~~ the ~~demand~~development ~~may~~of ~~be at substantially lower prices than we anticipate. Our competitors may develop~~ new products ~~or technologies that diminish demand for our new products. Our customers may receive decreased funding levels~~, which ~~may~~require ~~cause their~~significant ~~demand~~research ~~for our products to decrease. Our efforts to develop new intellectual property~~ and ~~new products may be costly. Substantial failure in our new product~~ development, ~~program~~and ~~could~~customer ~~have~~testing, aall ~~material~~of ~~impact~~which onare ~~our~~very ~~results~~expensive ~~of operations~~ and ~~our financial condition~~time consuming.

WeIn ~~may~~order beto ~~unsuccessful~~develop ~~in launching~~ new products orand ~~expanding~~improve current product offerings, we focus our research and development programs largely on the development of next generation and novel technology offerings. The research, development, testing and commercialization of our MRT Processor and other novel technology are expensive and time consuming. We are in the early stages of commercialization of our MRT Processor, with certain potential customers testing beta products and receiving

18Table of Contents

~~Table~~consulting services. We may experience significant delays in the testing process. Additionally, there are no assurances that our MRT Processor or any of ~~Contents~~our other next generation or novel technology offerings will gain market acceptance. The failure to gain or a prolonged delay in market acceptance or an extended testing period may have a material adverse effect on our results of operations and financial conditions.

~~within~~We ~~our~~are ~~customer~~dependent ~~base.~~on ~~Although~~a werelatively ~~believe the new~~small ~~product~~number ~~and~~of ~~service~~customers ~~offerings will present long-term opportunities~~ for the Company, we may be unsuccessful in identifying and pursuing such opportunities. We may be unsuccessful in introducing the new product and service offerings, expanding current product offerings and commercializing new technologies. In addition, there may be a ~~lack~~significant portion of ~~demand~~our innet ~~the present or in the future for the products that we introduce~~sales.

~~Our~~A ~~future~~significant ~~growth~~portion of our net sales is ~~dependent~~derived from ~~upon~~a relatively small number of customers with sales to a group of three customers accounting for 26.1% of our revenues for the ~~development~~three months ended June 30, 2010 and sales to a different group of ~~new~~customers ~~products~~accounting for 26.6% of our revenues for the three months ended June 30, 2009. We expect to continue ~~which~~to ~~require~~depend upon our principal customers for a significant ~~research~~portion ~~and~~of ~~development~~our sales, although our principal customers may not continue to purchase products and services ~~customer~~from ~~testing~~us at current levels, if at all . The loss of ~~which~~one ~~are~~or ~~very~~more ~~expensive~~major customers or a change in their buying patterns could have a material adverse effect on our business, financial condition, and ~~time~~results ~~consuming~~of operations.

InWe ~~order~~rely ~~to develop new products and improve current product offerings, we focus our research and development programs largely~~ on ~~the development of next generation and novel technology offerings. The research~~suppliers, ~~development,~~vendors ~~testing~~ and ~~commercialization of our MRT Processor and other novel technology is expensive and time consuming~~subcontractors. We are in the early stages of commercialization of our MRT Processor, with certain potential customers testing beta products and receiving consulting services. We may experience significant delays in the testing process. Additionally, there are no assurances that our MRT Processor or any of our other next generation or novel technology offerings will gain market acceptance. The failure to gain or a prolonged delay in market acceptance or an extended testing period may have a material adverse effect on our results of operations and financial conditions.

We ~~are~~do ~~dependent~~not manufacture most of the components contained in our Microfluidizer materials processor equipment, but rather subcontract the manufacture of most components. Based on quality, price, and performance, we have selected certain suppliers, vendors, and subcontractors that provide parts, subassemblies, machining and finishing of components that are assembled by our production staff. It is possible that, as a ~~relatively~~result ~~small~~of ~~number~~the recent economic slowdown or other reasons, one or more of ~~customers~~our suppliers, vendors or subcontractors could go out of business, or not ship on open account, or otherwise be unable to supply our needs. Although we have identified alternate sources for parts, components, machining and finishing integral to the manufacture of our products, there can be no assurance that a transition to ~~significant~~an ~~portion~~alternative source would not entail quality assurance or quality control difficulties, on-time delivery problems, or other transition problems, any or all of which could have an impact on our ~~net~~production ~~sales~~of equipment and could have a material adverse effect on our business, financial condition, or results of operations.

AMany ~~significant portion~~ of our ~~net sales~~current isand ~~derived~~potential ~~from a relatively small number of~~ customers ~~with~~are ~~sales~~from ~~to three customers accounting for 33% and 25% of our revenues for~~ the ~~three months~~pharmaceutical ~~ended~~and ~~March 31,~~biotechnology ~~2010~~industries and ~~2009,~~are ~~respectively.~~subject ~~We expect~~ to ~~continue~~risks ~~to depend~~faced ~~upon~~by ~~our~~those ~~principal customers for a significant portion of our sales, although our principal customers may not continue to purchase products and services from us at current levels, if at all~~industries. ~~The loss of one or more major customers or a change in their buying patterns could have a material adverse effect on our business, financial condition, and results of operations.~~

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

WeIn doparticular, ~~not manufacture most of~~ the ~~components contained in our Microfluidizer materials processor~~ ~~equipment,~~biotechnology ~~but~~industry ~~rather~~is ~~subcontract~~dependent ~~the~~on ~~manufacture~~raising ofcapital ~~most~~to ~~components~~fund operations. If ~~Based~~biotechnology oncompanies ~~quality,~~are ~~price,~~unable ~~and~~to ~~performance,~~obtain wethe ~~have~~financing ~~selected~~necessary ~~certain suppliers,~~to ~~vendors,~~purchase ~~and~~our ~~subcontractors that provide parts~~products, ~~subassemblies,~~our ~~machining~~business and ~~finishing~~ results of ~~components~~operations ~~that~~could ~~are~~be materially ~~assembled~~adversely ~~by our production staff~~affected. ItAs ~~is possible~~it ~~that,~~relates asto aboth ~~result of~~ the ~~recent economic slowdown or other reasons,~~biotechnology ~~one~~and orpharmaceutical ~~more of our suppliers~~industries, ~~vendors~~many orcompanies ~~subcontractors~~have ~~could~~significant gopatents ~~out~~that have ofexpired ~~business,~~ or ~~not~~are ~~ship~~about onto ~~open account~~expire, orwhich ~~otherwise~~could beresult ~~unable~~in toreduced ~~supply~~revenues ~~our~~for those ~~needs~~companies. ~~Although~~If wepharmaceutical ~~have~~or ~~identified~~biotechnology ~~alternate~~companies ~~sources~~suffer ~~for~~reduced ~~parts,~~revenues ~~components,~~as ~~machining~~a ~~and~~result ~~finishing~~of ~~integral~~these topatent ~~the manufacture of our products~~expirations, ~~there~~they ~~can~~may be nounable ~~assurance that a transition~~ to ~~an alternative~~ ~~source~~purchase ~~would~~our ~~not entail quality assurance or quality control difficulties~~products, ~~on-time~~ ~~delivery~~and ~~problems,~~our orbusiness ~~other~~and ~~transition~~results ~~problems, any or all~~ of ~~which could~~operations ~~have an impact on our production of equipment and~~ could ~~have a material~~be ~~adverse~~materially ~~effect~~adversely ~~on our business, financial condition, or results of operations~~affected.

~~Many~~Mergers ~~of our current~~ and ~~potential~~acquisitions ~~customers~~ are prevalent ~~from~~in the pharmaceutical and biotechnology industries as there has been a recent trend toward increased consolidation in these industries. If ~~and~~one ~~are~~or ~~subject~~more of our major customers is acquired, there is no guarantee that the acquirer will continue to ~~risks~~purchase ~~faced~~our products byor ~~those~~continue ~~industries~~to develop the drugs that use our products. If one or more of our customers is acquired our business could be harmed.

WeIn ~~derive~~addition, awe ~~substantial~~are ~~portion~~dependent, ofboth ~~our~~directly ~~revenues~~and ~~from~~indirectly, ~~pharmaceutical~~upon ~~and~~general ~~biotechnology~~health ~~companies.~~ care spending Wepatterns, ~~expect~~particularly ~~that~~in the research and development budgets of the pharmaceutical and biotechnology ~~companies~~industries, ~~will~~as ~~continue~~well toas beupon the financial ~~our~~condition ~~major~~and ~~sources~~purchasing patterns of ~~revenues~~various ~~for~~governments ~~the~~and ~~foreseeable future~~government agencies. Many Asof aour ~~result~~customers, weincluding ~~are~~universities, government ~~subject~~research tolaboratories, ~~risks~~private foundations and ~~uncertainties~~other ~~that~~institutions, ~~affect~~obtain funding for the ~~pharmaceutical~~purchase ~~and biotechnology~~of ~~industries,~~products ~~such~~from asgrants ~~pricing~~by ~~pressures~~governments asor ~~third-party payers~~government ~~continue~~agencies. There ~~challenging~~exists the ~~pricing~~risk of ~~medical~~potential ~~products~~decrease ~~and~~in ~~services,~~the ~~government~~level of ~~regulation,~~governmental ~~ongoing~~spending ~~consolidation~~allocated ~~and~~to ~~uncertainty~~scientific ofand ~~technological~~medical ~~change~~research, ~~and~~which could substantially reduce or even eliminate these grants. If government funding necessary to ~~reductions~~purchase ~~and~~our ~~delays~~products inwere ~~research~~to decrease, our business and ~~development~~results ~~expenditures~~of operations could be materially adversely affected. Spending patterns may also be affected by ~~companies~~federal regulation, including the recent inhealth ~~these~~care ~~industries~~bills before congress, which may affect research budgets.

~~In particular~~Lastly, ~~the~~because our ~~biotechnology~~Convertible ~~industry~~Debenture iswas ~~dependent~~provided onby ~~raising~~an ~~capital~~affiliate toof ~~fund~~a ~~operations.~~pharmaceutical Ifcompany ~~biotechnology~~that ~~companies~~competes ~~are~~with ~~unable~~other topharmaceutical ~~obtain the financing necessary to purchase our products~~companies, ~~our business and results of operations could be materially adversely affected. As~~ it ~~relates~~is topossible ~~both~~that the ~~biotechnology~~ ~~and~~other ~~pharmaceutical industries, many~~ companies ~~have~~might ~~significant~~decide ~~patents~~against ~~that have~~doing ~~expired~~business orwith ~~are~~us ~~about to expire, which could result~~ in ~~reduced~~the ~~revenues~~future for ~~those~~competitive ~~companies~~reasons. If ~~pharmaceutical~~a ~~companies~~significant ~~suffer~~number ~~reduced~~of ~~revenues~~pharmaceutical companies aswere ~~a result~~to ofreduce ~~these~~their ~~patent~~purchases ~~expirations,~~of ~~they~~our ~~may~~products befor ~~unable~~this toor ~~purchase~~any ~~our~~other ~~products~~reason, ~~and~~ our business and results of operations could be materially ~~adversely~~ adversely affected.

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

19We have a single manufacturing facility located in Newton, Massachusetts. Our success depends on the efficient and uninterrupted operation of that facility. Whether as a result of a fire, natural disaster, or other cause, any disruption to our manufacturing operations would significantly impair our ability to operate our business on a day-to-day basis. Although we

~~Table of Contents~~20

~~Lastly,~~Table ~~because our Financing was provided by an affiliate~~ of a pharmaceutical company that competes with other pharmaceutical companies, it is possible that the other companies might decide against doing business with us in the future for competitive reasons. If a significant number of pharmaceutical companies were to reduce their purchases of our products for this or any other reason, our business and results of operations could be materially adversely affected. General health care spending patterns may also be affected by federal regulation, including the recent health care bills before congress, which may effect research budgets.Contents

Wemaintain ~~have~~business interruption ~~only~~insurance, ~~one~~our business would be injured by any extended interruption of the operations of our manufacturing facility. Further our insurance coverage may not be adequate to compensate us for all losses that may occur, or may not continue to be available to us. Finally, if we seek to replicate our manufacturing operations at another location, we will face a number of technical as well as financial challenges, which we may not be able to address successfully.

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

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

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

ToWe ~~protect~~have ~~our proprietary~~recently ~~rights,~~filed wepatent ~~rely on a combination of trademark laws, trade secrets,~~applications ~~confidentiality~~for ~~agreements,~~our ~~contractual~~MRT ~~provisions and technical means~~Technology. In ~~the~~If ~~event~~we ofare aunable ~~breach~~to ofobtain ~~these~~or ~~protections,~~maintain ~~there can be no assurance that~~patent ~~these~~protection ~~measures~~or ~~will~~if ~~prove~~our topatents ~~have~~do ~~been~~not ~~adequate~~provide toprotection ~~protect~~against ~~our interests, or~~competitive ~~that~~products weof ~~will~~our ~~have~~MRT ~~sufficient~~Technology, ~~resources~~our toresults ~~prosecute~~of oroperations ~~prevail~~may inbe ~~an action~~adversely ~~against a third party~~affected.

WeOur ~~have~~future ~~recently~~success ~~filed~~is dependent in part on our ability to obtain and maintain patent ~~applications~~protection for our MRT Technology. IfIn 1997 we ~~are~~completed ~~unable~~development toof ~~obtain~~a ornovel ~~maintain~~adaptation of our Microfluidizer processor equipment - a “Multiple Stream High Pressure Mixer/Reactor”, commercially designated as the Microfluidizer Mixer/Reactor (MMR). In August 1997, we filed a patent ~~protection~~application orfor ifthe ~~our~~device ~~patents~~and doits ~~not~~processes with the United ~~provide~~States ~~protection~~Patent ~~against~~and ~~competitive~~Trademark ~~products~~Office (USPTO), and filed a Patent Cooperation Treaty (PCT) application on May 5, 1998. In July and November, 2000, the USPTO issued us notices of ~~our~~allowances ~~MRT~~of ~~Technology~~utility patent claims regarding the MMR and the use thereof. On September 18, 2002, the European Patent Office advised us it would grant our MMR patent substantially as applied for, ~~results~~including our device and process claims. We are in the process of ~~operations~~pursuing national ~~may~~entry bein ~~adversely~~France, ~~affected~~Germany, Italy, The Netherlands, and the United Kingdom.

~~Our~~We ~~future~~are ~~success~~pursuing ~~is dependent in part on our ability to obtain and maintain~~ patent protection ~~for~~in ~~our~~the ~~MRT Technology.~~United InStates ~~1997~~and weselect ~~completed~~foreign ~~development~~jurisdictions ofwith arespect ~~novel~~to ~~adaptation~~proprietary ofaspects of our ~~Microfluidizer processor~~MRT ~~equipment - a “Multiple Stream High Pressure Mixer/Reactor”, commercially designated as the Microfluidizer Mixer/Reactor (MMR)~~Processor. InWe ~~August 1997, we~~ filed a ~~patent~~U.S Patent application for ~~the~~this ~~device~~technology ~~and~~in ~~its processes with the United~~March 2008 ~~States Patent~~ and ~~Trademark Office (USPTO), and filed~~ a Patent ~~Cooperation~~ Convention Treaty (PCT) ~~application~~in ~~on May~~March 5,2009 ~~1998. In July~~ and ~~November,~~plan ~~2000, the~~to ~~USPTO issued us notices of allowances of utility patent claims regarding~~file ~~the~~selected ~~MMR~~national ~~and~~patents ~~the~~in ~~use thereof~~2010. OnIn ~~September~~April 182010, ~~2002,~~ the ~~European~~Company ~~Patent Office advised us it would grant our MMR patent substantially as~~ applied for, ~~including~~a ~~our~~Japanese ~~device~~patent ~~and~~on ~~process~~MRT ~~claims.~~entitled We“Apparatus ~~are~~and inMethods ~~the~~for ~~process of pursuing national~~Nanoparticle ~~entry~~Generation inand ~~France,~~Process ~~Germany,~~Intensification ~~Italy,~~of ~~The~~Transport ~~Netherlands,~~ and ~~the~~Reaction ~~United Kingdom~~Systems”. We are ~~currently~~awaiting ~~pursuing~~responses ~~our~~to ~~MMR~~these ~~patent application in Canada~~filings.

WeThere ~~are~~can ~~pursuing~~be ~~patent~~no ~~protection in~~assurance ~~the~~that ~~United~~(i) any ~~States~~patents issued ~~and~~to ~~select~~us ~~foreign~~will ~~jurisdictions~~provide us with ~~respect~~any tocompetitive ~~proprietary~~advantages or adequate ~~aspects~~protection offor our ~~MRT~~inventions; ~~Processor.~~(ii) any Wepatents ~~filed~~issued ato ~~U.S~~us ~~Patent~~will ~~application~~not ~~for this~~be ~~technology~~challenged, ininvalidated ~~March 2008~~or ~~and~~circumvented aby ~~Patent~~others; ~~Convention~~or ~~Treaty~~ (~~PCT~~iii) issued patents, inor ~~March 2009~~patents that may be issued, will provide protection against ~~and~~competitive ~~plan~~products or otherwise be commercially valuable. Furthermore, patent law relating to ~~file~~the ~~selected~~scope ~~national~~of ~~patents~~claims in ~~2010.~~the Infields ~~April 2010,~~of ~~the~~healthcare and biosciences ~~Company~~is ~~applied~~still ~~for~~evolving, aand ~~Japanese~~our patent onrights ~~MRT~~are ~~entitled~~subject ~~“Apparatus~~to ~~and~~this ~~Methods~~uncertainty. ~~for~~European ~~Nanoparticle~~and ~~Generation~~United ~~and~~States ~~Process~~patent ~~Intensification~~authorities have not adopted a consistent policy regarding the breadth of ~~Transport~~claims allowed for health and ~~Reaction~~ ~~Systems”~~bioscience patents. WeOur ~~are~~patent ~~awaiting~~rights ~~responses~~on toour ~~these~~products ~~filings~~therefore might conflict with the patent rights of others, whether existing now or in the future.

~~There~~In ~~can~~order ~~be no assurance that (i) any patents issued~~ to usprotect ~~will~~or ~~provide~~enforce usour ~~with~~patent ~~any~~rights, ~~competitive advantages or~~we ~~adequate~~may ~~protection~~initiate ~~for~~patent ~~our~~litigation ~~inventions;~~against ~~(ii) any~~third ~~patents~~parties. ~~issued~~We tomay usalso ~~will~~become ~~not~~subject beto ~~challenged,~~interference ~~invalidated~~proceedings orconducted ~~circumvented~~in bythe ~~others;~~patent orand ~~(iii) issued~~trademark ~~patents,~~offices orof ~~patents~~various ~~that~~countries ~~may~~to bedetermine ~~issued,~~the ~~will~~priority ~~provide~~of ~~protection~~inventions. ~~against~~The ~~competitive~~defense ~~products~~and orprosecution, ~~otherwise~~if benecessary, ~~commercially~~of ~~valuable.~~intellectual ~~Furthermore,~~property ~~patent~~suits, ~~law~~interference ~~relating~~proceedings toand ~~the~~related ~~scope~~legal ofand ~~claims~~administrative inproceedings ~~the~~would be ~~fields~~costly ~~of healthcare~~ and ~~biosciences is~~divert ~~still~~our ~~evolving,~~technical and ~~our~~management ~~patent~~personnel ~~rights~~from ~~are~~their ~~subject to this uncertainty.~~normal ~~European~~responsibilities. ~~and~~We ~~United~~may ~~States patent authorities have~~ not ~~adopted~~prevail ain ~~consistent policy~~any ~~regarding the breadth~~ of ~~claims~~these ~~allowed~~suits ~~for~~should ~~health~~they ~~and bioscience patents~~occur. An ~~Our~~adverse ~~patent~~determination ~~rights~~of onany ~~our~~litigation ~~products~~or ~~therefore~~defense ~~might~~proceedings ~~conflict~~could ~~with~~put ~~the~~our patent ~~rights~~applications ofat ~~others,~~risk ~~whether~~of ~~existing~~not ~~now or in the future~~issuing.

~~In order to protect or enforce our patent rights, we may initiate patent litigation against third parties.~~ We may ~~also~~ ~~become~~be ~~subject~~subjected to ~~interference~~increased ~~proceedings~~government ~~conducted~~regulation inthat ~~the patent and~~could ~~trademark~~affect ~~offices~~our ofability ~~various countries~~ to ~~determine~~sell ~~the~~our ~~priority~~products ofoutside ~~inventions. The defense and prosecution, if necessary,~~ of ~~intellectual~~the ~~property~~United ~~suits, interference proceedings and related legal and administrative proceedings would be costly and divert our technical and management personnel from their normal responsibilities~~States.

20Although United States governmental restrictions on technology transfer, import, export and customs regulations and other similar local, state or federal regulations, have not had a significant effect on us historically, any future legislation or administrative action restricting our ability to sell our products to certain countries outside the United States could significantly affect our ability to make certain foreign sales. The extent of adverse governmental regulation, which might result from future legislation or administrative action, cannot be accurately predicted. In particular, the USA Patriot Act and other governmental regulations may impose export restrictions on sale of equipment or transfer of technology to certain countries or groups. There

~~Table of Contents~~21

WeTable ~~may not prevail in any~~ of ~~these suits should they occur. An adverse determination of any litigation or defense proceedings could put our patent applications at risk of not issuing.~~Contents

Wecan ~~may~~be no assurance that sale of our equipment will not be ~~subjected~~impacted by any such legislation or todesignation. Depending ~~increased~~upon ~~government~~which ~~regulation~~countries ~~that~~and sales may be designated for trade restriction; such actions could ~~affect~~have a material adverse effect on our ~~ability~~business, financial condition, or results of operations. Also, certain agreements that may be entered into by us involving exclusive license rights may also be subject to ~~sell~~national ~~our~~or supranational antitrust ~~products~~regulatory ~~outside~~control, the effect of ~~the~~which ~~United~~cannot ~~States~~be predicted.

~~Although~~Our ~~United~~stock ~~States governmental~~is ~~restrictions~~listed on ~~technology~~the ~~transfer,~~OTC ~~import, export and customs~~Bulletin ~~regulations~~Board and may ~~other~~experience ~~similar local, state or federal regulations, have not had~~ a ~~significant~~high ~~effect~~level onof usvolatility ~~historically,~~due ~~any future legislation or administrative action restricting our ability~~ to ~~sell our products to certain countries outside~~ the ~~United States could significantly affect our ability to~~ ~~make~~market ~~certain~~in ~~foreign~~general ~~sales. The extent of adverse governmental regulation, which might result from future legislation or administrative action, cannot be accurately predicted. In particular, the USA Patriot Act~~ and ~~other governmental regulations may impose export restrictions on sale of equipment or transfer of technology to~~ certain ~~countries~~other ~~or groups. There~~factors ~~can~~including bethe noliquidity ~~assurance~~in ~~that sale of our equipment will~~the ~~not~~trading bein ~~impacted by any such legislation or designation. Depending upon which countries and sales may be designated for trade restriction, such actions could have a material adverse effect on~~ our ~~business, financial condition, or results of operations~~shares. Also, certain agreements that may be entered into by us involving exclusive license rights may also be subject to national or supranational antitrust regulatory control, the effect of which cannot be predicted.

Our common stock is ~~listed~~quoted on the OTC Bulletin Board, ~~and~~which ~~may~~provides ~~experience~~significantly less liquidity than a ~~high~~securities ~~level~~exchange (such ofas ~~volatility~~the ~~due~~NYSE toAmex, New York Stock Exchanges or The NASDAQ Stock Market). In general, over the past two years, fewer than 20,000 shares of our common ~~market~~stock inhave ~~general~~traded ~~and~~on ~~certain~~a ~~other~~daily ~~factors~~basis. ~~including~~Although a more active trading market may develop in the future, the limited market liquidity for our stock may affect your ability to sell at a price that is satisfactory to you. The market price of our common stock may have increased volatile and could decline in the ~~trading~~ future in ~~our~~response ~~shares.~~to various factors including:

~~Our common~~· volatility stock is quoted on the OTC Bulletin Board, which provides significantly less liquidity than a securities exchange (such as the NYSE Amex, New York Stock Exchanges or The NASDAQ Stock Market). In general, over the past two years, fewer than 20,000 shares of ~~our common stock have traded on a daily basis. Although a more active trading market may develop in~~ the ~~future,~~financial the limited market liquidity for our stock may affect your ability to sell at a price that is satisfactory to you. The market price of our common stock may have increased volatile and could decline in the future in response to various factors including:markets

· ~~volatility~~uncertainty ofregarding ~~the~~domestic ~~financial~~and ~~markets~~foreign economies

· ~~uncertainty~~technological ~~regarding~~innovations ~~the~~by ~~domestic~~competitors ~~and~~or ~~foreign~~competing ~~economies~~technologies

· ~~technological~~quarterly ~~innovations~~revenues byand ~~competitors~~operating results fluctuating or ~~competing~~failing ~~technologies~~to meet the expectations of management

· ~~quarterly~~conditions ~~revenues and operating results fluctuating~~ or ~~failing~~trends toin ~~meet~~ the ~~expectations of~~pharmaceutical ~~management~~and biotechnology industries

· ~~conditions~~announcement orof ~~trends~~significant changes in ~~the~~financing ~~pharmaceutical~~or ~~and~~strategic ~~biotechnology industries~~partnerships

~~· announcement~~ Because we may experience a high level of ~~significant~~volatility in ~~changes~~our common stock, you should not invest in ~~financing~~our orstock ~~strategic~~unless ~~partnerships~~you are prepared to absorb a significant loss of your capital. At any given time, you may not be able to sell your shares at a price that you think is acceptable.

~~Because~~Our wequarterly ~~may~~revenues ~~experience~~and ~~a high level of volatility in our common~~ stock, ~~you~~performance ~~should not invest in our stock unless you~~ are ~~prepared to absorb a significant loss of your capital~~variable. ~~At any given time, you may not be able to sell your shares at a price that you think is acceptable.~~

~~Our~~The ~~quarterly~~timing of orders including completion of our factory acceptance testing can impact the actual shipment date, which will significantly affect quarterly revenues and ~~stock~~net income ~~performance~~results ~~are~~for ~~variable~~particular quarters which may cause increased volatility in both our revenues and stock price.

~~The~~We ~~timing~~allow ~~of orders including completion of~~ our ~~factory~~customers ~~acceptance~~to ~~testing~~lease ~~can~~some ~~impact~~of ~~the~~our ~~actual shipment~~products ~~date, which will significantly affect quarterly revenues~~ and ~~net income~~those ~~results for particular quarters which~~ leases may ~~cause~~not ~~increased~~turn ~~volatility~~into ~~in both our revenues and stock price~~sales.

We ~~allow~~sometimes rent our products to our customers prior to ~~lease~~or ~~some~~instead of ~~our~~selling a product to a customer. Our products are expensive, and ~~those~~customers ~~leases~~frequently ~~may~~want ~~not~~to test ~~turn~~out a product’s capabilities prior to purchase. We have had reasonable success in converting rentals into subsequent sales of the same or a newer product; however, there is no guarantee that we will continue to be able to convert any of our leases into sales.

We ~~sometimes~~may ~~rent~~be ~~our products~~subject to ~~our customers prior to or instead of selling a~~ product toliability ~~a customer. Our~~claims ~~products~~from ~~are~~our ~~expensive, and~~ customers ~~frequently want to test out a product’s capabilities prior to purchase. We have had reasonable success in converting rentals into subsequent sales of the same~~ or aby ~~newer~~persons ~~product;~~harmed ~~however,~~by ~~there is no guarantee that we will continue to be able to convert any of~~ our ~~leases~~customers’ ~~into sales~~products.

We ~~may~~maintain bewhat ~~subject~~ we deem to be reasonable levels of product liability ~~claims~~coverage ~~from~~through insurance policies with a reasonably small deductible. Nonetheless, inasmuch as we sell our equipment to a number of customers who make pharmaceutical preparations and consumer cosmetics, there can be no assurance that if a consumer of end products is injured or bydies ~~persons~~from ~~harmed~~such product that a suit by an injured party (or a class of similar situated plaintiffs) will not include us as well as the maker of the drug or cosmetic. Although we may have no control over the manufacture of end-products made on our equipment, we may not be able to ~~customers~~bar a plaintiff’s claims against all parties whose products and equipment were involved in the manufacturing process under a variety of legal theories of liability. We may be required to present a vigorous and costly defense if we cannot be dismissed from such an action. The cost of such legal defense may significantly impact our cash flow.

WeOur ~~maintain~~international ~~what~~business weoperations ~~deem to~~expose be reasonable levels of product liability coverage through insurance policies with a reasonably small deductible. Nonetheless, inasmuch as we sell our equipment to a number of customers who make pharmaceutical preparations and consumer cosmetics, there can be no assurance that if a consumer of end products is injured or dies from such product that a suit by an injured party (or a class of similar situated plaintiffs) will not include us as ~~well as the maker of the drug or cosmetic. Although we may have no control over the manufacture of end-products made on our equipment, we may not be able~~ to ~~bar~~ a ~~plaintiff’s claims against all parties whose products and equipment were involved in the manufacturing process under a~~ variety of ~~legal theories of liability~~risks. ~~We may be required to present a vigorous and costly defense if we cannot be dismissed from such an action. The cost of such legal defense may significantly impact our cash flow.~~

21For the three months ending June 30, 2010 and 2009, shipments outside of North America accounted for approximately 45.9% and 55.5%, respectively, of our net revenues in those periods. In particular, approximately 6.1% and 2.7% of our net revenues in the three months ended June 30, 2010 and 2009, respectively, resulted from sales to Japan and approximately 8.4% and 3.0% of our net revenues in the three months ended June 30, 2010 and 2009, respectively resulted from sales to China. Approximately 26.4% and 31.1% of our net revenues resulted from sales to Europe in the three months ended June 30, 2010 and 2009, respectively. We expect that shipments outside of North America will continue to account for a significant portion of our total net product revenues.

~~Table~~We attempt to reduce some of our ~~Contents~~risk related to sales and shipments outside of the United States by requiring that our contracts generally be paid in United States Dollars. Nevertheless, a downturn in the economies of Japan, China or Europe might

~~Our international business operations expose us to a variety of risks.~~22

~~For~~Table ~~the three months ending March 31, 2010 and 2009, shipments outside~~ of North America accounted for approximately 38.1% and 31.5%, respectively, of our net revenues in those periods. In particular, approximately 3.7% and 1.0% of our net revenues in the three months ended March 31, 2010 and 2009, respectively, resulted from sales to Japan and approximately 7.3% and 3.1% of our net revenues in the three months ended March 31, 2010 and 2009, respectively resulted from sales to China. Approximately 20.3% and 20.3% of our net revenues resulted from sales to Europe in the three months ended March 31, 2010 and 2009, respectively. We expect that shipments outside of North America will continue to account for a significant portion of our total net product revenues.Contents

~~We attempt to~~ reduce some of our risk related to sales and shipments outside of the United States by requiring that our contracts generally be paid in United States Dollars. Nevertheless, a downturn in the economies of Japan, Korea or Europe might reduce investment in new technology or products while a weakening of foreign currency against the United States Dollar would make our products more expensive, each of which could have a substantial impact on our operating results. Additionally, the Company may have exposure to fluctuations in foreign currency exchange rates as it maintains a cash balance in a German bank and has certain sales contracts in local currency.

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

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

We are required to ~~evaluate~~ evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of of 2002. We were also required to furnish a report by our management on ~~our~~ our internal controls over financial reporting beginning with our annual report on on Form 10-K for the fiscal year ended December 31, 2008. Such report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. While we have completed our self-assessment as to the effectiveness of internal control over financial reporting for the year ended December 31, 2009, which did not identify material weaknesses in our internal control systems, there can be no assurance that future material weaknesses in our internal control systems will not be identified as a result of changing financial or operating conditions. In If ~~addition,~~we ~~although~~fail weto maintain ~~are~~proper ~~currently~~and ~~not~~effective ~~required~~internal tocontrols ~~subject~~in future periods, it could adversely affect our ~~internal~~operating ~~controls~~results, tofinancial ~~audit~~condition byand our ability to run our ~~independent~~business ~~registered~~effectively ~~public~~and ~~accounting~~could ~~firm~~cause ~~until~~investors atto ~~least~~lose ~~our~~confidence ~~fiscal~~in ~~year~~our ~~ending~~financial ~~December~~reporting. ~~31,~~As ~~2010,~~a ~~there~~smaller ~~can~~reporting becompany, nowe ~~assurance~~are ~~that~~currently annot required ~~audit~~to ofsubject our internal controls ~~will~~to ~~not~~audit ~~result~~by inour ~~the~~independent registered ~~identification~~public ofaccounting ~~a material weakness~~firm. If we were ~~fail~~ to ~~maintain~~become ~~proper~~subject ~~and~~to ~~effective~~an ~~internal controls in future periods~~audit, itthere ~~could~~can ~~adversely~~be ~~affect~~no ~~our~~assurance ~~operating~~that ~~results,~~such ~~financial~~an ~~condition~~audit ~~and~~of our ~~ability~~internal tocontrols ~~run~~will ~~our~~not ~~business~~result ~~effectively~~in ~~and~~the ~~could~~identification ~~cause~~of a ~~investors~~material ~~to lose confidence in our financial reporting~~weakness. In the event that it is determined that our internal control over financial reporting is not effective, as defined under Section 404, investor confidence in us may be adversely affected and could cause a decline in the market price of our stock.

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

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

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

Management judgment and estimates are necessarily required in the application of our Critical Accounting Policies. We discuss these estimates in the subsection entitled Critical Accounting Policies, ~~beginning~~which onis ~~page 12~~ included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this report Ifif our estimates are incorrect, our future financial operating results and financial condition could be adversely affected.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

	None.

Item 3.	Defaults Upon Senior Securities.

	None.

Item 4.	(Removed and Reserved).

Item 5.	Other Information.

	None.

Item 6.	Exhibits.

Table of Contents

Exhibits

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.

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.~~23

~~None.~~Table of Contents

Item 3. Defaults Upon Senior Securities.

32.1		Certification of Principal 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 Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~None.~~24

~~Item~~Table 4.of ~~(Removed and Reserved).~~Contents

~~Item 5. Other Information.~~SIGNATURES

~~None~~Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

~~Item~~MICROFLUIDICS 6INTERNATIONAL CORPORATION By: /s/ Michael C. ~~Exhibits~~Ferrara Michael C. Ferrara President and Chief Executive Officer (Principal Executive Officer) By: /s/ Peter F. Byczko Peter F. Byczko Vice President of Finance & Chief Accounting Officer (Principal Financial and Accounting Officer)

Exhibits
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 Principal 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 Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Dated: August 10, 2010

2325

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MICROFLUIDICS INTERNATIONAL CORPORATION By: /s/ Michael C. Ferrara Michael C. Ferrara President and Chief Executive Officer (Principal Executive Officer) By: /s/ Peter F. Byczko Peter F. Byczko Vice President of Finance & Chief Accounting Officer (Principal Financial and Accounting Officer)

Dated: May 17, 2010

Filing Compare · MICROFLUIDICS INTERNATIONAL CORP