10QSB

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2003

¨ Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from                      to                     

Commission file number 0-29024

BENTHOS, INC.

(Exact Name of Small Business Issuer as Specified in Its Charter)

Massachusetts	04-2381876
(State or Other Jurisdiction of Incorporation or Organization)	(I. R. S. Employer Identification No.)

49 Edgerton Drive, North Falmouth, Massachusetts	02556
(Address of Principal Executive Offices)

(508) 563-1000

Issuer’s Telephone Number Including Area Code

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

Yes  x    No  ¨

State the number of shares outstanding of each of the issuer’s classes of Common equity as of the latest practicable date:

Common Stock par value $.06 2/3	1,383,102
(Class)	(Outstanding stock at May 2, 2003)

Transitional Small Business Disclosure Format (check one):

Yes  ¨    No  x

BENTHOS, INC. AND SUBSIDIARIES

FORM 10-QSB

FOR THE SECOND QUARTER AND SIX MONTHS ENDED

MARCH 31, 2003

INDEX

			Page No.
Face Sheet			1
Index			2
PART I    FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets (unaudited) March 31, 2003 and September 30, 2002	3
		Condensed Consolidated Statements of Operations (unaudited) Quarter and Six Months Ended March 31, 2003 and March 31, 2002	4
		Condensed Consolidated Statements of Cash Flows (unaudited) Six Months Ended March 31, 2003 and March 31, 2002	5
		Notes to Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3.	Controls and Procedures	18
PART II    OTHER INFORMATION
	Item 6.	Exhibits and Reports on Form 8-K	18
	Signature		19
	Certifications		20

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Benthos, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

(unaudited)

	March 31, 2003			September 30, 2002
Assets
Current Assets:
Cash and Cash Equivalents	$	25		$	76
Accounts Receivable, Net		2,848			2,871
Inventories		2,918			3,210
Refundable Income Taxes		3			393
Prepaid Expenses and Other Current Assets		127			148
Deferred Tax Asset		1,500			1,500
Assets Held for Sale		187			—
Total Current Assets		7,608			8,198
Property, Plant and Equipment, Net		1,217			1,599
Goodwill		576			576
Acquired Intangible Assets, Net		576			695
Other Assets, Net		512			521
	$	10,489		$	11,589
Liabilities and Stockholders’ Investment
Current Liabilities:
Current Portion of Long-Term Debt	$	786		$	786
Line of Credit		350			400
Accounts Payable		1,929			1,866
Accrued Expenses		1,360			1,503
Customer Deposits and Deferred Revenue		238			540
Total Current Liabilities		4,663			5,095
Long-Term Debt, Net of Current Portion		1,899			2,292
Stockholders’ Investment:
Common stock, $.06 2/3 Par Value — Authorized—7,500 Shares Issued—1,653 Shares at March 31, 2003 and September 30, 2002		110			110
Capital in Excess of Par Value		1,569			1,569
Retained Earnings		2,879			3,154
Treasury Stock, at Cost—270 shares at March 31, 2003 and September 30, 2002		(631	)		(631	)
Total Stockholders’ Investment		3,927			4,202
	$	10,489		$	11,589

See accompanying notes to Condensed Consolidated Financial Statements.

3

Benthos, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

	Quarter Ended March 31,						Six Months Ended March 31,
	2003			2002			2003			2002
Net Sales	$	4,419		$	3,670		$	8,771		$	8,313
Cost of Sales		2,635			2,610			5,451			5,663
Gross Profit		1,784			1,060			3,320			2,650
Selling, General & Administrative Expenses		1,283			1,245			2,540			2,523
Research and Development Expenses		426			465			823			693
Amortization of Acquired Intangibles		59			59			119			119
Income (Loss) from Operations		16			(709	)		(162	)		(685	)
Interest Expense		(56	)		(65	)		(113	)		(130	)
Loss before Benefit for Income Taxes		(40	)		(774	)		(275	)		(815	)
Benefit for Income Taxes		—			(232	)		—			(245	)
Net Loss	$	(40	)	$	(542	)	$	(275	)	$	(570	)
Basic and Diluted Loss Per Share	$	(0.03	)	$	(0.39	)	$	(0.20	)	$	(0.41	)
Weighted Average Number of Shares Outstanding		1,383			1,383			1,383			1,383

See accompanying notes to Condensed Consolidated Financial Statements.

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Benthos, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended
	March 31, 2003			March 31, 2002
Cash Flows from Operating Activities:
Net Loss	$	(275	)	$	(570	)
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities:
Depreciation and Amortization		346			415
Changes in Assets and Liabilities:
Accounts Receivable		23			(177	)
Inventories		292			(113	)
Refundable Income Taxes		390			627
Prepaid Expenses and Other Current Assets		21			(67	)
Accounts Payable and Accrued Expenses		(80	)		535
Customer Deposits and Deferred Revenue		(302	)		223
Net Cash Provided by Operating Activities		415			873
Cash Flows from Investing Activities:
Purchases of Property, Plant and Equipment		(24	)		(44	)
Decrease (Increase) in Other Assets		1			(86	)
Net Cash Used in Investing Activities		(23	)		(130	)
Cash Flows from Financing Activities:
Payments on Line of Credit		(50	)		(375	)
Payments on Long-Term Debt		(393	)		(392	)
Net Cash Used in Financing Activities		(443	)		(767	)
Net Decrease in Cash and Cash Equivalents		(51	)		(24	)
Cash and Cash Equivalents, Beginning of Period		76			46
Cash and Cash Equivalents, End of Period	$	25		$	22
Supplemental Disclosure of Cash Flow Information:
Interest Paid	$	114		$	129
Income Taxes Paid, Net	$	(387	)	$	(680	)

Supplemental disclosure of non-cash investing and financing activities:

During the six months ended March 31, 2003, the Company reclassified $187 of Property, Plant and Equipment to Assets Held for Sale.

See accompanying notes to Condensed Consolidated Financial Statements.

5

Benthos, Inc. and Subsidiaries

Notes to Financial Statements

(in thousands, except per share amounts)

1. Fiscal Periods

The fiscal year of Benthos, Inc. (the Company) ends on September 30 each year. Interim quarters are comprised of 13 weeks unless otherwise noted and end on the Sunday closest to December 31, March 31, and June 30. All references in the unaudited condensed consolidated financial statements to fiscal periods ended on December 31, March 31, or June 30 mean the interim quarters referred to above.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended September 30, 2002, included in the Company’s previously filed Form 10-KSB. The accompanying condensed consolidated financial statements reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full fiscal year. Certain reclassifications have been made to the 2002 financial statements to conform with the 2003 presentation.

3. Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:

	March 31, 2003		September 30, 2002
Raw Materials	$	334	$	317
Work-in-Process		2,555		2,869
Finished Goods		29		24
	$	2,918	$	3,210

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4. Accounts Receivable and Allowance for Doubtful Accounts

The Company records an allowance for doubtful accounts based on specifically identified amounts that it believes to be uncollectible. The Company also records additional allowances based on certain percentages of its aged receivables, which are determined based on historical experience and the Company’s assessment of the general financial conditions affecting its customer base. If the actual collections experience changes, revisions to the Company’s allowance may be required. The Company has a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in the creditworthiness of any one of the customers, or any other matters affecting the collectibility of amounts due from such customers, could have a material effect on the Company’s results of operations in the period in which such changes or events occur. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

5. Assets Held for Sale

On November 1, 2002, the Company’s Board of Directors approved management’s plan to sell certain excess real estate owned by the Company. The Company has entered into an agreement to sell a portion of the excess real estate for a gross sales price of $2.5 million. There are several contingencies related to the transaction and all of the contingency periods have not yet expired. The Company expects that the sale of such real estate, if completed, could generate a significant gain during fiscal 2003. A portion of the sale proceeds will be used to pay down the Company’s term loan. The net book value of this property, $187, has been recorded as Assets Held for Sale in the accompanying condensed consolidated balance sheet as of March 31, 2003.

6. Earnings (Loss) Per Share

A reconciliation of basic and diluted shares outstanding is as follows:

	Quarter Ended March 31,		Six Months Ended March 31
	2003	2002	2003	2002
Basic weighted average common shares outstanding	1,383	1,383	1,383	1,383
Weighted average common share equivalents	—	—	—	—
Diluted weighted average shares outstanding	1,383	1,383	1,383	1,383

The following securities were not included in computing earnings per share because their effects would be anti-dilutive:

	Quarter Ended March 31,		Six Months Ended March 31,
	2003	2002	2003	2002
Options to purchase common stock	415	383	401	360

7. Stock Options

At March 31, 2003, the Company had two stock-based compensation plans (one employee and one non-employee director’s plan). The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net loss, as the options granted under those plans had an exercise price equal to, or greater than, the market value of the underlying common stock on the date of the grant. In accordance with FASB Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” beginning in the quarter ending March 31, 2003, the Company adopted the disclosure requirements of FASB No. 148.

7

The Company provides pro forma disclosures of compensation expense under the fair value method of SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.”

The weighted average assumptions used were as follows:

	2003	2002
Risk-free interest rate	3.52% - 3.58%	4.66% - 4.86%
Expected dividend yield	—	—
Expected life (in years)	7	7
Expected volatility	40%	40%

Had compensation cost for the Company’s option plans been determined using the fair value method at the grant dates, the effect on the Company’s net loss and loss per share for the periods shown below would have been as follows:

	Quarter Ended March 31,						Six Months Ended March 31,
	2003			2002			2003			2002
Net loss as reported:	$	(40	)	$	(542	)	$	(275	)	$	(570	)
Add:
Stock-based employee compensation expense Included in net loss, net of related tax effects		—			—			—			—
Deduct:
Total stock-based employee compensation determined under fair value method for all awards, net of related tax effects		(60	)		(70	)		(118	)		(132	)
Pro forma net loss	$	(100	)	$	(612	)	$	(393	)	$	(702	)
Basic and diluted loss per share
As reported	$	(0.03	)	$	(0.39	)	$	(0.20	)	$	(0.41	)
Pro forma	$	(0.07	)	$	(0.44	)	$	(0.28	)	$	(0.51	)

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8. Segment Reporting

The Company views its operations and manages its business as two segments, Undersea Systems and Package Inspection Systems, as being strategic business units that offer different products. The Company evaluates performance of its operating segments based on revenues from external customers, income from operations and identifiable assets.

	Quarter Ended March 31,						Six Months Ended March 31,
	2003			2002			2003			2002
Sales to Unaffiliated Customers:
Undersea Systems	$	2,399		$	1,975		$	4,809		$	4,991
Package Inspection Systems		2,020			1,695			3,962			3,322
Total	$	4,419		$	3,670		$	8,771		$	8,313
Income (Loss) from Operations:
Undersea Systems	$	(65	)	$	(790	)	$	(314	)	$	(901	)
Package Inspection Systems		81			81			152			216
Total	$	16		$	(709	)	$	(162	)	$	(685	)
Identifiable Assets:
Undersea Systems							$	6,481		$	9,990
Package Inspection Systems								1,840			2,928
Corporate Assets								2,168			2,922
Total							$	10,489		$	15,840
Depreciation:
Undersea Systems	$	81		$	77		$	160		$	160
Package Inspection Systems		46			39			95			98
Corporate Assets		11			13			22			26
Total	$	138		$	129		$	277		$	284
Tax Benefit (Provision):
Undersea Systems	$	—		$	237		$	—		$	271
Package Inspection Systems		—			(24	)		—			(64	)
Corporate Assets		—			19			—			38
Total	$	—		$	232		$	—		$	245
Purchases of Fixed Assets:
Undersea Systems	$	2		$	17		$	26		$	37
Package Inspection Systems		1			3			9			5
Corporate Assets		—			2			4			4
Total	$	3		$	22		$	39		$	46

9

Revenues by geographic area for the quarters ended March 31, 2003 and 2002 were as follows:

	Quarter Ended March 31,				Six Months Ended March 31,
	2003		2002		2003		2002
Geographic Area:
United States	$	2,927	$	2,224	$	6,201	$	6,057
Other		1,492		1,446		2,570		2,256
Total	$	4,419	$	3,670	$	8,771	$	8,313

Revenues by product line within the Undersea Systems segment were as follows:

	Quarter Ended March 31,				Six Months Ended March 31,
	2003		2002		2003		2002
Product Line:
Underwater Acoustics	$	1,102	$	686	$	2,267	$	1,576
Geophysical Exploration Equipment		1,019		889		2,020		2,413
Other Undersea Products		278		400		522		1,002
Total	$	2,399	$	1,975	$	4,809	$	4,991

The Package Inspection Systems segment has only one product line.

9. Credit Facility

The Company has a credit facility with a bank. This facility provides for loans under two notes: a $5,500 variable rate term note and a $600 variable rate line of credit. The term note is payable in 84 consecutive equal monthly installments of principal with interest at prime (4.25% at March 31, 2003) plus 2%, or 7%, whichever is higher. The term note matures in August 2006. Principal payments under the term note will be $393 for the second half of fiscal year 2003, $786 in each of the fiscal years 2004 and 2005, and $720 in fiscal 2006. The line of credit expires on January 31, 2004. Borrowings under the line of credit are payable as follows: monthly payments of interest only and unpaid principal and accrued and unpaid interest at maturity. The interest rate under the line of credit is either prime (4.25% at March 31, 2003) plus 2%, or 7%, whichever is higher. Advances are limited to 45% of eligible accounts receivable. The availability under the line of credit was $600 as of March 31, 2003. There were $350 in advances outstanding under the line of credit as of March 31, 2003. The credit facility is secured by substantially all of the assets of the Company and requires the Company to meet certain covenants, including debt service coverage. As of March 31, 2003, the Company was in compliance with these covenants.

10. New Accounting Standards

In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” This statement superseded EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” Under this statement, a liability or a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity’s commitment to an exit plan as required under EITF 94-3. The provision of this statement is effective for exit or disposal activities that are initiated after March 31, 2003, with early adoption permitted. The Company is currently evaluating the effect that the adoption of SFAS No. 146 will have on its consolidated financial position and results of operations.

10

In November 2002, the Emerging Issues Task Force (EITF) reached consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Revenue arrangements with multiple deliverables include arrangements which provide for the delivery or performance of multiple products, services and/or rights to use assets where performance may occur at different points in time or over different periods of time. The Company generally enters into arrangements for multiple deliverables that occur at different points in time when it contracts to provide installation services. EITF Issue No. 00-21 is effective for the Company beginning October 1, 2003. The Company has not completed the evaluation of the impact of this EITF.

11. Comprehensive Loss

SFAS No. 130, “Reporting Comprehensive Income,” requires disclosure of all components of comprehensive loss. Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The Company does not have any items of comprehensive loss other than net loss.

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

Critical Accounting Policies

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, management evaluates the Company’s estimates and assumptions, including but not limited to those related to revenue recognition, inventory valuation, warranty reserves and the impairment of long-lived assets, goodwill and other intangible assets. Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

1. Revenue Recognition

The Company recognizes revenue from product sales upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed probable. If uncertainties regarding customer acceptance exist, the Company recognizes revenue when those uncertainties are resolved. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. The Company generally enters into arrangements for multiple deliverables when it contracts to provide installation services. Multiple deliverable arrangements include arrangements which provide for the delivery of multiple products and/or the performance of multiple services and/or rights to use assets, where performance may occur at several different points in time or over different periods of time. The Company generally recognizes revenue from each of these elements separately.

2. Inventory Valuation

The Company values its inventory at the lower of actual cost or the current estimated market value. It regularly reviews inventory quantities on hand and inventory commitments with suppliers and records a provision for excess and obsolete inventory based primarily on historical usage for the prior twelve to twenty-four month period. Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of its inventory and its reported operating results. In the second quarter of fiscal year 2003, the Company reviewed its inventories and reserve position and reduced inventory reserves by $125.

3. Warranty Reserves

The Company’s warranties require it to repair or replace defective products returned to it during such warranty period at no cost to the customer. It records an estimate for warranty-related costs based on actual historical return rates, anticipated return rates, and repair costs at the time of sale. A significant increase in product return rates, or a significant increase in the costs to repair products, could have a material adverse impact on future operating results for the period or periods in which such returns or additional costs materialize and thereafter. During the first quarter of fiscal 2003, the Company reversed approximately $50 of a warranty reserve related to a specific warranty issue on an older model hydrophone. The reduction in warranty reserve was the result of a lower return rate and lower repair and replacement costs for this older model hydrophone.

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4. Goodwill

The goodwill associated with the Datasonics acquisition is subject to an annual assessment for impairment by applying a fair-value based test. In the fourth quarter of fiscal 2002, the Company completed a valuation of its goodwill by comparing the fair value of its reporting units, as determined by an independent appraiser, to the reporting units’ book value. The valuation indicated that goodwill for the Undersea Systems business segment was impaired. Accordingly, the Company recorded a non-cash goodwill impairment charge of $2.1 million for the year ended September 30, 2002. The valuation was based upon estimates of future income from the reporting units and estimates of the market value of the units, based on comparable recent transactions. These estimates of future income are based upon historical results, adjusted to reflect management’s best estimate of future market and operating conditions, and are continuously reviewed based on actual operating trends. Actual results may differ from these estimates. In addition, the relevancy of recent transactions used to establish market value for the Company’s reporting units is based upon management’s judgment.

Results of Operations—Second quarter of fiscal year 2003 compared with second quarter of fiscal year 2002.

The following table presents, for the periods indicated, the percentage relationship of Condensed Consolidated Statements of Earnings items to total sales:

	Quarter Ended
	March 31, 2003		March 31, 2002
	(unaudited)
Net Sales	100.0	%	100.0	%
Cost of Sales	59.6	%	71.1	%
Gross Profit	40.4	%	28.9	%
Selling, General and Administrative Expenses	29.0	%	33.9	%
Research and Development Expenses	9.6	%	12.7	%
Amortization of Acquired Intangibles	1.4	%	1.6	%
Income (Loss) from Operations	.4	%	(19.3	)%
Interest Expense	(1.3	)%	(1.8	)%
Loss Before Benefit for Income Taxes	(.9	)%	(21.1	)%
Benefit for Income Taxes	—	%	(6.3	)%
Net Loss	(.9	)%	(14.8	)%

Revenues by product line within the Undersea Systems segment were as follows:

	Quarter Ended March 31,
	2003		2002
Product Line:
Underwater Acoustics	$	1,102	$	686
Geophysical Exploration Equipment		1,019		889
Other Undersea Products		278		400
Total	$	2,399	$	1,975

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The Package Inspection Systems segment has only one product line.

Sales. Net sales increased by 20.4% in the second quarter of fiscal year 2003 to $4,419 as compared to $3,670 in the second quarter of fiscal year 2002. Sales of the Package Inspection Systems Division increased by 19.2% to $2,020 in the second quarter of fiscal year 2003 as compared to $1,695 in the second quarter of fiscal year 2002. The increase resulted largely from the timing of orders, increased market penetration, and new products. Sales of the Undersea Systems Division increased by 21.5% to $2,399 in the second quarter of fiscal year 2003 as compared to $1,975 in the second quarter of fiscal year 2002. The increase in sales was concentrated in the Underwater Acoustics product line resulting from increased industry demand for acoustic releases and underwater locator products, and in the Geophysical Exploration Equipment product line, resulting from increased demand for side scan sonar systems and geophysical hydrophones for use in exploration by the oil and gas industries. These sales gains were offset by a decrease in the Other Undersea Products product line related to the sale by the Company of its Imaging products line in the second quarter of fiscal year 2002. During the fiscal quarter ended March 31, 2003, approximately 10% of the Company’s sales were to a single customer.

Gross Profit. Gross Profit increased by 68.3% to $1,784 for the second quarter of fiscal year 2003 as compared to $1,060 for the second quarter of fiscal year 2002. As a percentage of sales, gross profit was 40.4% in the second quarter of fiscal year 2003 as compared to 28.9% in the second quarter of fiscal year 2002. The increase in gross profit percentage is attributed primarily to the higher sales volume, improved gross margins in the products of the Undersea Systems Division, and a reduction of $125 in inventory reserves in the second quarter of fiscal year 2003 as a result of decreased inventories.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by 3.1% to $1,283 for the second quarter of fiscal year 2003 as compared to $1,245 in the second quarter of fiscal year 2002. As a percentage of sales, selling, general and administrative expenses decreased to 29.0% in the second quarter of fiscal year 2003 as compared to 33.9% for the second quarter of fiscal year 2002. The decrease in selling, general and administrative expenses as a percentage of sales is a result of increased sales volume partially offset by increased spending on selling, general and administrative expenses as compared to the second quarter of fiscal year 2002.

Research and Development Expenses. Research and development expenses decreased 8.4% to $426 for the second quarter of fiscal year 2003 as compared to $465 in the second quarter of fiscal year 2002. As a percentage of sales, research and development expenses decreased to 9.6% of sales in the second quarter of fiscal year 2003 from 12.7% in the second quarter of fiscal year 2002. The decrease in the overall level of expenditures in the second quarter of fiscal year 2003 is a result of spending on fewer development projects than were active in the second quarter of fiscal year 2002 and is consistent with the Company’s operational plans.

Amortization of Acquired Intangibles. Amortization of acquired intangibles was $59 in the second quarters of fiscal years 2003 and 2002. The amortization of acquired intangibles related to the purchased technology in the Datasonics acquisition during fiscal year 1999.

Interest Expense. Interest Expense decreased to $56 in the second quarter of fiscal year 2003 as compared to $65 in the second quarter of fiscal year 2002. The decrease in interest expense dollars was a result of reduced principal on the variable rate term loan used to finance the Datasonics acquisition.

Benefit for Income Taxes. The benefit for income taxes decreased to $0 in the second quarter of fiscal year 2003 as compared to a benefit of $232 in the second quarter of fiscal year 2002. The effective tax rate used in the second quarter of fiscal year 2002 was 30.0%. The rate used in fiscal year 2002 is lower than the statutory rate due primarily to the benefit from the Company’s Foreign Sales Corporation. In 2003, the Company has provided a valuation reserve against deferred tax assets generated. Accordingly, no benefit was recorded.

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Results of Operations—Six months of fiscal year 2003 compared with six months of fiscal year 2002.

The following table presents, for the periods indicated, the percentage relationship of Condensed Consolidated Statements of Earnings items to total sales:

	Six Months Ended
	March 31, 2003		March 31, 2002
	(unaudited)
Net Sales	100.0	%	100.0	%
Cost of Sales	62.1	%	68.1	%
Gross Profit	37.9	%	31.9	%
Selling, General and Administrative Expenses	29.0	%	30.4	%
Research and Development Expenses	9.4	%	8.3	%
Amortization of Acquired Intangibles	1.3	%	1.4	%
Loss from Operations	(1.8	)%	(8.2	)%
Interest Expense	(1.3	)%	(1.6	)%
Loss Before Benefit for Income Taxes	(3.1	)%	(9.8	)%
Benefit for Income Taxes	—	%	(2.9	)%
Net Loss	(3.1	)%	(6.9	)%

Revenues by product line within the Undersea Systems segment were as follows:

	Six Months Ended March 31,
	2003		2002
Product Line:
Underwater Acoustics	$	2,267	$	1,576
Geophysical Exploration Equipment		2,020		2,413
Other Undersea Products		522		1,002
Total	$	4,809	$	4,991

The Package Inspection Systems segment has only one product line.

Sales. Net sales increased by 5.5% in the first six months of fiscal year 2003 to $8,771 as compared to $8,313 in the first six months of fiscal year 2002. Sales of the Package Inspection Systems Division increased by 19.3% to 3,962 in the first six months of fiscal year 2003 as compared to $3,322 in the first six months of fiscal year 2002. The increase resulted largely from the timing of orders, increased market

15

penetration, and new products. Sales of the Undersea Systems Division decreased by 3.6% to $4,809 in the first six months of fiscal year 2003 as compared to $4,991 in the first six months of fiscal year 2002. The decrease in sales was concentrated in the Geophysical Exploration Equipment product line and was a result of decreased industry demand for geophysical hydrophones for use in exploration by the oil and gas industries, and in the Other Undersea Products line related to the sale by the Company of its Imaging products line in the second quarter of fiscal year 2002 and to decreased demand for the Company’s remotely operated vehicles (ROVs), as compared to the first six months of fiscal year 2002. These decreases were largely offset by increased demand for the Company’s Underwater Acoustics products. During the six months ended March 31, 2003, approximately 10% of the Company’s sales were to a single customer.

Gross Profit. Gross Profit increased by 25.3% to $3,320 for the first six months of fiscal year 2003 as compared to $2,650 for the first six months of fiscal year 2002. As a percentage of sales, gross profit was 37.9% in the first six months of fiscal year 2003 as compared to 31.9% in the first six months of fiscal year 2002. The increase in gross profit percentage is attributed primarily to the higher sales volume, improved gross margins in the products of the Undersea Systems Division, and a reduction of $75 in inventory reserves in fiscal year 2003 as a result of decreased inventories as compared to the first six months of fiscal year 2002.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by 0.1% to $2,540 for the first six months of fiscal year 2003 as compared to $2,523 in the first six months of fiscal year 2002. As a percentage of sales, selling, general and administrative expenses decreased to 29.0% in the first six months of fiscal year 2003 as compared to 30.4% for the first six months of fiscal year 2002. The decrease in selling, general and administrative expenses as a percentage of sales is a result of increased sales volume partially offset by slightly increased spending on selling, general and administrative expenses as compared to the first six months of fiscal year 2002.

Research and Development Expenses. Research and development expenses increased 18.8% to $823 for the first six months of fiscal year 2003 as compared to $693 in the first six months of fiscal year 2002. As a percentage of sales, research and development expenses increased to 9.4% of sales in the first six months of fiscal year 2003 from 8.3% in the first six months of fiscal year 2002. The increase in the overall level of expenditures in the first six months of fiscal year 2003 is a result of accelerated efforts to complete the design and development of several projects and is consistent with the Company’s operational plans.

Amortization of Acquired Intangibles. Amortization of acquired intangibles was $119 in the first six months of fiscal years 2003 and 2002. The amortization of acquired intangibles relates to the purchased technology in the Datasonics acquisition during fiscal year 1999.

Interest Expense. Interest Expense decreased to $113 in the first six months of fiscal year 2003 as compared to $130 in the first six months of fiscal year 2002. The decrease in interest expense dollars was a result of reduced principal on the variable rate term loan used to finance the Datasonics acquisition.

Benefit for Income Taxes. The benefit for income taxes decreased to $0 in the first six months of fiscal year 2003 as compared to a benefit of $245 in the first six months of fiscal year 2002. The effective tax rate used in the second quarter of fiscal year 2002 was 30.0%. The rate used in fiscal year 2002 is lower than the statutory rate due primarily to the benefit from the Company’s Foreign Sales Corporation. In 2003, the Company has provided a valuation reserve against deferred tax assets generated. Accordingly, no benefit was recorded.

Liquidity and Capital Resources. The Company’s cash and cash equivalents decreased $51 from September 30, 2002 to March 31, 2003. Cash of $415 was generated in operating activities, primarily the result of the net loss incurred during the first six months and a decrease in customer deposits and deferred revenue and accounts payable and accrued expenses, offset by depreciation and amortization and a decrease in both inventory and refundable income taxes. The Company has continued its focus on reducing inventory. The Company used $23 and $443 in its investing and financing activities, respectively. Investing activities represents primarily the purchase of property, plant, and equipment and

16

financing activities represents the payment of the installment payments on the term note and the line of credit. The Company does not have any significant contractual obligations or commercial commitments aside from its obligation to the bank that requires quarterly payments of $197 through August 2006.

The Company has a credit facility with a bank. This facility provides for loans under two notes: a $5,500 variable rate term note and a $600 variable rate line of credit. The term note is payable in 84 consecutive equal monthly installments of principal with interest at prime (4.25% at March 31, 2003) plus 2%, or 7%, whichever is higher. The term note matures in August 2006. Principal payments under the term note will be $ 393 for the second half of fiscal year 2003, $786 in each of the fiscal years 2004 and 2005, and $720 in fiscal 2006. The line of credit expires on January 31, 2004. Borrowings under the line of credit are payable as follows: monthly payments of interest only and unpaid principal and accrued and unpaid interest at maturity. The interest rate under the line of credit is either prime (4.25% at March 31, 2003) plus 2%, or 7%, whichever is higher. Advances are limited to 45% of eligible accounts receivable. The availability under the line of credit was $600 as of March 31, 2003. There were $350 in advances outstanding under the line of credit as of March 31, 2003. The credit facility is secured by substantially all of the assets of the Company and requires the Company to meet certain covenants, including debt service coverage. As of March 31, 2003, the Company was in compliance with these covenants.

The Company believes it is well positioned to finance future working capital requirements and capital expenditures during the next twelve months through current cash balances, cash flow from operations, income tax refunds, and availability from its line of credit. In addition, management is actively pursuing the sale of certain excess real estate. On November 1, 2002, the Company’s Board of Directors approved management’s plan to sell certain excess real estate owned by the Company. The Company has entered into an agreement to sell a portion of the excess real estate for a gross sales price of $2.5 million. There are several contingencies related to the transaction and all of the contingency periods have not yet expired. The Company expects that the sale of such real estate, if completed, could generate a significant gain during fiscal 2003. A portion of the sale proceeds will be used to pay down the Company’s term loan.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.

The statements in this Quarterly Report on Form 10-QSB and in oral statements which may be made by representatives of the Company relating to plans, strategies, economic performance and trends and other statements that are not descriptions of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include: the timing of large project orders, competitive factors, shifts in customer demand, government spending, economic cycles, availability of financing, potential tax disputes, contractual contingencies affecting asset sales, and level of success in implementing inventory reduction programs, as well as the factors described in this report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected or intended.

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Item 3. Control and Procedures

(a) Within 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. “Disclosure controls and procedures” are controls and procedures that are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based upon that evaluation, the Company’s Chief Executive Office and Chief Financial Officer concluded that Company’s disclosure controls and procedures are substantially effective for these purposes as of the date of the evaluation.

(b) There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. “Internal controls” are procedures which are designed with the objective of providing reasonable assurance that (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all so as to permit the preparation of financial statements in conformity with generally accepted accounting principles.

Part II—OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

The exhibits set forth in the

Exhibit Index on the following

page are filed herewith as a

part of this report.

(b) Reports on Form 8-K

None

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SIGNATURE

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

BENTHOS, INC.
By:	/s/    FRANCIS E. DUNNE, JR.
	Francis E. Dunne, Jr. Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer)

DATE: May 13, 2003

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CERTIFICATIONS

I, Ronald L. Marsiglio, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Benthos, Inc.;

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) Presented in the quarterly report our conclusions about the effectiveness of disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003	/s/    RONALD L. MARSIGLIO
	Ronald L. Marsiglio, President and Chief Executive Officer

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I, Francis E. Dunne, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Benthos, Inc.;

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) Presented in the quarterly report our conclusions about the effectiveness of disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003	/s/    FRANCIS E. DUNNE, JR.,
	Francis E. Dunne, Jr., Vice President, Chief Financial Officer and Treasurer

21

BENTHOS, INC.

EXHIBIT INDEX

Exhibit
3.1	Restated Articles of Organization(1)
3.2	Articles of Amendment dated April 28, 1997(2)
3.3	Articles of Amendment dated April 20, 1998(5)
3.4	By-Laws(1)
3.5	By-Law Amendments adopted January 23, 1998(4)
4.1	Common Stock Certificate(1)
10.1	Employment Contract with Samuel O. Raymond(1)
10.2	Amendment to Employment Contract with Samuel O. Raymond(2)
10.3	Employment Contract with John L. Coughlin(1)
10.4	Amended and Restated Employment Agreement with John L. Coughlin(10)
10.5	Severance Agreement with John L. Coughlin(13)
10.6	Employment Agreement with Ronald L. Marsiglio dated May 21, 2001(15)
10.7	Employment Agreement with Francis E. Dunne, Jr.(11)
10.8	Employment Agreement with James R. Kearbey dated as of January 1, 2003.
10.9	Employee Stock Ownership Plan(1)
10.10	First Amendment to Employee Stock Ownership Plan(2)
10.11	Second Amendment to Employee Stock Ownership Plan(8)
10.12	Third Amendment to Employee Stock Ownership Plan(8)
10.13	Fourth Amendment to Employee Stock Ownership Plan(11)
10.14	Fifth Amendment to Employee Stock Ownership Plan(11)

10.15	Benthos, Inc. Employee Stock Ownership Plan as Amended and Restated Effective as of October 1, 2002(19)
10.16	401(k) Retirement Plan (1993)(1)
10.17	First Amendment to 401(k) Retirement Plan(2)
10.18	Second Amendment to 401(k) Retirement Plan(2)
10.19	Third Amendment to 401(k) Retirement Plan(3)
10.20	401(k) Retirement Plan (1999)(8)
10.21	First Amendment to 1999 401(k) Retirement Plan(11)
10.22	Second Amendment to 1999 401(k) Retirement Plan(11)
10.23	Third Amendment to 1999 401(k) Retirement Plan(14)
10.24	Supplemental Executive Retirement Plan(1)
10.25	1990 Stock Option Plan(1)
10.26	Stock Option Plan for Non-Employee Directors(1)
10.27	1998 Non-Employee Directors’ Stock Option Plan(4)
10.28	Benthos, Inc. 2000 Stock Incentive Plan(9)
10.29	License Agreement between the Company and The Penn State Research Foundation dated December 13, 1993(1)
10.30	Technical Consultancy Agreement between the Company and William D. McElroy dated July 12, 1994(1)
10.31	Technical Consultancy Agreement between the Company and William D. McElroy dated October 1, 1996(3)
10.32	General Release and Settlement Agreement between the Company and Lawrence W. Gray dated February 8, 1996(1)
10.33	Line of Credit Loan Agreement between the Company and

2

	Cape Cod Bank and Trust Company dated September 24, 1990, as amended(1)
10.34	Commercial Mortgage Loan Extension and Modification Agreement between the Company and Cape Cod Bank and Trust Company, dated July 6, 1994(1)
10.35	Credit Agreement between the Company and Cape Cod Bank and Trust Company dated August 18, 1999(8)
10.36	First Amendment to Credit Agreement dated March 23, 2001(14)
10.37	Second Amendment to Credit Agreement dated December 12, 2001(17)
10.38	Third Amendment to Credit Agreement dated January 29, 2003.
10.39	License Agreement between the Company and Optikos Corporation dated July 29, 1997(3)
10.40	Hydrophone License Agreement between the Company and Syntron, Inc. dated December 5, 1996(6)
10.41	Amendment Number 1 to Hydrophone License Agreement between the Company and Syntron, Inc. dated September 11, 1998(6)
10.42	Asset Purchase Agreement among Benthos, Inc., Datasonics, Inc., and William L. Dalton and David A. Porta(7)
10.43	Settlement Agreement and Mutual Release dated October 18, 2001 between the Company and RJE International, Inc.(16)
10.44	Amendment of Settlement Agreement and General Release dated June 10, 2002.(19)
10.45	Amendment and Termination of Consulting Agreement between the Company and William D. McElroy dated February 15, 2002(18)
10.46	Standard Form Purchase and Sale Agreement among the Company and certain of its subsidiaries and Falmouth Economic Development & Industrial Corporation dated March 21, 2003.
21	Subsidiaries of the Registrant(19)
99	Statement Pursuant to 18 U.S.C. §1350

3

(1) Previously filed as an exhibit to Registrant’s Registration Statement on Form 10-SB filed with the Commission on December 17, 1996 (File No. O-29024) and incorporated herein by this reference.

(2) Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 30, 1997 (File No. O-29024) and incorporated herein by this reference.

(3) Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended June 29, 1997 (File No. O-29024) and incorporated herein by this reference.

(4) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 1997 (File No. O-29024) and incorporated herein by this reference.

(5) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 1998 (File No. 0-29024) and incorporated herein by this reference.

(6) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 1998 (File No. 0-29024) and incorporated herein by this reference.

(7) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K filed on or about August 27, 1999 (File No. 0-29024) and incorporated herein by this reference.

(8) Previously filed as an exhibit to Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 1999 (File No. 0-29024) and incorporated herein by this reference.

(9) Previously filed as an exhibit to the Registrant’s definitive proxy statement filed on Schedule 14A on or about January 18, 2000 and incorporated herein by this reference.

(10) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 1999 (File No. 0-29024) and incorporated herein by this reference.

(11) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2000 (File No. 0-29024) and incorporated herein by this reference.

4

(12) Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2000 (File No. 0-29024) and incorporated herein by this reference.

(13) Previously filed as an exhibit to Amendment No. 1 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2000 (File No. 0-29024) and incorporated herein by this reference.

(14) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2001 (File No. 0-29024) and incorporated herein by this reference.

(15) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2001 (File No. 0-29024) and incorporated herein by this reference.

(16) Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2001 (File No. 0-29024) and incorporated herein by this reference.

(17) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 2001 (File No. 0-29024) and incorporated herein by this reference.

(18) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2002 (File No. 0-29024) and incorporated herein by this reference.

(19) Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002 (File No. 0-29024) and incorporated herein by this reference.

5

EX-10.8

EXHIBIT 10.8

EMPLOYMENT AGREEMENT

AGREEMENT effective as of January 1, 2003 (the “Effective Date”) between BENTHOS, INC., a Massachusetts corporation with a usual place of business situated at 49 Edgerton Drive, North Falmouth, Massachusetts 02556 (the “Company”) and JAMES R. KEARBEY, of 4N336 Fox Mill Boulevard, St. Charles, IL 60175 (the “Executive”).

W I T N E S S E T H:

WHEREAS, the Executive possesses useful knowledge and skills and has extensive experience in the developing, marketing and selling of machines related to the inspection of the integrity of containers in the food, pharmaceutical and beverage industries;

WHEREAS, subject to the terms and conditions hereinafter set forth, the Company wants to employ the Executive as a Vice President of the Company and the Executive wants to accept such employment by the Company;

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants, terms, and conditions set forth in this Agreement, the Company and the Executive hereby mutually agree as follows:

1. Employment. The Company shall employ the Executive and the Executive will serve the Company as a Vice President, subject to the election of the Executive to such office from time to time by the Board of Directors of the Company during the Term, as hereinafter defined, upon the terms and conditions provided herein.

2. Term. Subject to earlier termination as hereinafter provided, the employment of the Executive hereunder shall be for a term of two (2) years, commencing on the Effective Date which shall be extended for successive two (2) year terms thereafter until either party provides the other with at least one hundred eighty (180) days notice, prior to the termination of the first two (2) year term or any subsequent two (2) year term thereafter, in which event this Agreement would terminate on the last day of the two year term in which such notice was received (the “Term”).

3. Capacity and Performance.

a. During the Term hereof, the Executive shall be employed by the Company on a full-time basis and shall perform such duties and responsibilities exclusively on behalf of the Company as may be designated from time to time by the President of the Company.

b. During the Term, the Executive’s services shall be exclusive to the Company and the Executive shall devote the full business time and the best efforts, business judgment, skill and knowledge of the Executive to the advancement of the

1

business and interests of the Company and to the discharge of the duties of the Executive hereunder. The Executive shall not engage in any other business activity or serve in any industry, trade, professional, governmental, or academic position during the Term of this Agreement, except as may be approved in advance by the Company. The Executive agrees to perform Executive’s services well and faithfully and to the best of the Executive’s abilities and to carry out the policies and directives of the Company. The Executive agrees to take no action prejudicial to the interests of the Company during the Executive’s employment hereunder.

4. Compensation and Benefits. As compensation for all services performed by the Executive hereunder during the Term hereof and subject to the satisfactory performance of the duties and obligations of the Executive to the Company, the compensation and benefits to be earned by the Executive pursuant to this Agreement are as follows:

a. Base Salary. During the Term hereof, the Company shall pay the Executive a base salary of One Hundred Thirty-Six Thousand ($136,000.00) Dollars per annum, payable in accordance with the payroll practices of the Company for its employees and subject to increase from time to time by the Company, in its sole discretion. Such base salary, as from time to time adjusted, is hereafter referred to as the “Base Salary”.

b. Base Salary Adjustments. From time to time during the Term, the Company will review the Base Salary and may make such upward adjustments, if any, as the Company, in its sole discretion determines to be appropriate in light of the performance of the Executive.

c. Discretionary Incentive Compensation Bonus. The Executive will be eligible to participate in any discretionary incentive compensation bonus plan of the Company which is generally made available to the executives of the Company.

d. Stock Options. On November 19, 2002, the Executive was granted additional incentive stock options for seven thousand five hundred (7,500) shares of common stock, $.06 2/3 par value, of the Company, which will vest at the rate of twenty-five (25%) percent per year.

e. Other Benefits. The Executive will be entitled to three (3) weeks vacation each year. The Executive shall also be entitled to the same number of sick days per year and any fringe benefits and perquisites that may from time to time be afforded generally to senior executive officers of the Company. Without limiting the generality of the foregoing, the Executive shall be entitled to participate in or receive benefits under any 401(k), pension, employee stock ownership plan, retirement plan, life insurance, health and accident plan, disability insurance plan or other arrangement made available by the Company now or in the future, generally to the senior executive officers of the Company, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements and of the terms of this Agreement. The Company may

2

alter, modify, add to or delete its employee benefit plans at any time as it, in its sole judgment, determines to be appropriate, without recourse by the Executive.

f. Expenses. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive (in accordance with the policies and procedures established from time to time by the Company) in the performance of the duties of the Executive hereunder, provided such expenses are properly accounted for in accordance with the policies of the Company.

5. Termination of Employment and Severance Benefits. Notwithstanding the provisions of Section 2 above, the employment of the Executive hereunder shall terminate prior to the expiration of the Term under the following circumstances:

a. Death. In the event of the death of the Executive during the Term, the employment of the Executive hereunder shall immediately and automatically terminate. In such event, the Company shall pay to the estate of the Executive any earned and unpaid Base Salary and any incentive or bonus compensation that is earned but unpaid, prorated through the date of death of the Executive.

b. Disability. The Company may terminate the employment of the Executive hereunder in the event the Executive becomes disabled during the Term due to any illness, injury, accident or condition of either a physical or psychological nature and, as a result, is unable to perform substantially all of the duties and responsibilities of the Executive hereunder on a full time basis, for sixty (60) consecutive calendar days, or for ninety (90) calendar days cumulatively within any twelve (12) month period, or if in the opinion of a duly licensed physician the same is likely to occur. At the request of the Company, the Executive shall submit to a medical examination by a physician selected by the Company to whom the Executive, or the duly appointed guardian of the Executive, if any, has no reasonable objection. If the Executive shall refuse to submit to such medical examination, then the determination of the Board of Directors on disability shall be conclusive. The Board of Directors may designate another employee to act in the place of the Executive during any period of disability. Notwithstanding any such designation, the Executive shall continue to receive Base Salary in accordance with the provisions of Section 4.a. above to the extent permitted by the then applicable benefit plans of the Company, until either (i) the Executive becomes eligible for disability income benefits under the disability income plan of the Company, or (ii) the termination of the employment of the Executive, whichever shall first occur. While receiving disability income payments under any disability income plan of the Company, the Executive shall not be entitled to receive any Base Salary but shall continue to participate in Company benefit plans under Section 4e hereof pursuant to and subject to the terms of such plans until the termination of the employment of the Executive.

c. By the Company for Cause. The Company may terminate the employment of the Executive hereunder for cause at any time upon notice to the Executive setting forth in reasonable detail the nature of such cause. The following shall

3

constitute cause for termination:

1. Failure, refusal or inability of the Executive to satisfactorily perform (other than by reason of disability), or to carry out any proper direction of the Company, with respect to the services to be rendered by Executive hereunder, or the manner of rendering such services, or Executive’s willful misconduct, or gross negligence in the performance of, the duties and responsibilities of the Executive to the Company;

2. Failure of the Executive to execute and deliver from time to time any confidentiality agreement or other agreement related to the protection of the intellectual property of the Company which is required by the Company to be executed and delivered by any executive of the Company, including without limitation the Non-competition Agreement, as hereinafter defined;

3. Commission by the Executive of any act of fraud or embezzlement;

4. Breach by the Executive of any provision of this Agreement;

5. Willful violation by the Executive of federal or state securities laws;

6. Conviction of the Executive of, or a plea of no contest to, any felony; or

7. Other conduct by the Executive that is materially harmful to the business, interests, or reputation of the Company.

Upon the giving of written notice to the Executive of termination of the employment of the Executive for cause, the Company shall have no further obligation or liability to the Executive, other than for the payment of Base Salary earned and unpaid at the date of termination.

d. By the Company Without Cause. The Company may terminate this Agreement at any time without cause, provided that the Company shall pay the Executive the severance benefits as provided for in Section 6 or, if applicable, under Section 7 in the event of a Change of Control, as hereinafter defined.

6. Compensation of Executive Upon Termination. If the employment of the Executive is terminated due to death or disability of the Executive, then the Executive will be compensated in accordance with the provisions of Section 5 hereof. In the event of the termination of the employment of the Executive by the Company without cause for the convenience of the Company and not because of disability or death of the Executive, the Company shall pay the Executive severance pay in accordance with this Section 6. Provided that the Executive satisfies the requirements of severance set forth in Section 8 below, if prior to the

4

expiration of the Term hereof, the Company terminates the Executive for any reason other than for cause pursuant to Section 5(c) hereof, or disability or death of the Executive pursuant to Sections 5(a) and 5(b) hereof, then the Company shall pay the Executive severance pay equal to the Executive’s Base Salary for six (6) months and will be based on the Base Salary of the Executive for the 6-month period immediately preceding the date of termination. Acceptance by the Executive of the severance pay shall constitute full settlement of any claim the Executive may assert against the Company, its affiliates, directors, officers, employees or agents.

7. Compensation of Executive Upon a Change in Control.

a. Provided that the Executive satisfies the requirements of severance set forth in Section 8 below, if a Change of Control occurs and, within one (1) year following such Change of Control the Company terminates the Executive’s employment other than for cause as defined in Section 5. c. hereof or disability or death of the Executive, then the Company shall pay the Executive, within ten (10) business days of such termination, a lump sum payment equal to the Executive’s Base Salary for six (6) months and will be based on the Base Salary of the Executive for the 6-month period immediately preceding the date of termination. Acceptance by the Executive of such lump sum payment shall constitute full settlement of any claims the Executive may assert against the Company, its affiliates, directors, officers, employees or agents.

b. Notwithstanding the foregoing or any other provision of this Agreement, the payments and benefits to which the Executive would be entitled pursuant to this Section 7 as a result of a Change of Control shall be reduced to the maximum amount for which the Company will not be limited in its deduction pursuant to Section 280G of the Internal Revenue Code of 1986, as amended, and any successor provision.

c. A Change of Control shall be deemed to take place if at any time during the term hereof: (A) any Person or “group” (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934), other than the Company or any of its Affiliates, becomes a beneficial owner (within the meaning of Rule 13d-3 as promulgated under the Securities Exchange Act of 1934), directly or indirectly, of securities representing fifty (50%) percent or more of the total number of votes that may be cast for the election of directors of the Company and two-thirds (2/3) of the Board has not consented to such event prior to its occurrence or within sixty (60) days thereafter, provided that if the consent occurs after the event it shall only be valid for purposes of this Section 7 if a majority of the consenting Board is comprised of directors of the Company who were such immediately prior to the event; (B) any merger or consolidation involving the Company or any sale or other transfer of all or substantially all of the assets of the Company, or any combination of the foregoing, and two-thirds (2/3) of the Board has not consented to such event prior to its occurrence or within sixty (60) days thereafter, provided that if the consent occurs after the event it shall only be valid for purposes of this Section 7 if a majority of the consenting Board is comprised of directors of the Company who were such immediately prior to the event; or (C) within twelve (12) months after a tender offer or exchange offer for voting securities of the Company (other

5

than by the Company) the individuals who were directors of the Company immediately prior thereto shall cease to constitute a majority of the Board.

d. Notwithstanding any other provision of this Agreement, if the Executive is terminated without cause and not because of death or disability, then the Executive is entitled to benefits under either Section 7 or this Section 8 and in no event shall the severance pay of Executive in either event exceed the Base Salary of the Executive for the 6-month period immediately preceding the date of termination.

8. Requirements of Severance. The obligation of the Company to pay severance pay to the Executive under either Section 6 or Section 7 hereof is contingent upon the Executive executing and delivering, all in form and substance satisfactory to the Company, (i) a general release of the Company by the Executive in form and substance satisfactory to the Company in its sole discretion, (ii) a resignation as Vice President of the Company and any other office, trusteeship, appointment or elected position related to the Company and held by the Executive and (iii) satisfactory evidence to the Company that the Executive has returned all property, confidential information, and all proprietary information and documents of the Company to the Company.

9. Non-Competition; Non-Solicitation. Attached hereto as Exhibit A is a certain Employee Non-Competition Nondisclosure and Assignment of Inventions Agreement which is hereby incorporated herein by reference (the “Noncompetition Agreement”). The Executive shall execute and deliver to the Company the Noncompetition Agreement simultaneously with the execution of this Agreement.

10. Arbitration. Any dispute, controversy or claim arising out of, in connection with, or relating to the performance of this Agreement shall be settled by arbitration in the City of Boston, Massachusetts, before a single arbitrator pursuant to the rules then in effect of the American Arbitration Association. The fees and expenses of the arbitrator shall be borne equally by the Executive and the Company. Any award shall be final, binding and conclusive upon the Executive and the Company and the judgment rendered thereon may be entered in any court having jurisdiction thereof. This Section 11 will not preclude or affect in any manner the rights of the Company to equitable relief pursuant to Section 9 of this Agreement.

11. Conflicting Agreements. The Executive hereby represents and warrants that the execution of this Agreement and the performance of the obligations of the Executive hereunder will not breach or be in conflict with any other agreement to which the Executive is a party or is bound and that the Executive is not now subject to any covenants against competition or similar covenants that would affect the performance of the Executive hereunder. The Executive will not disclose to the Company or use on behalf of the Company any proprietary information of a third party without the consent of such third party.

12. Assignment. The Executive acknowledges that the services to be rendered by the Executive hereunder are unique and personal in nature. Accordingly, the Executive may not assign any of his rights or delegate any of his duties or obligations under this Agreement. The

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rights and obligations of the Company under this Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company.

13. Severability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each such remaining portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.

14. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach.

15. Notices. Any and all notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be effective when delivered in person or deposited in the United States mail, postage prepaid, registered or certified, and addressed to the Executive at the last known address of the Executive on the books of the Company or, in the case of the Company, at its principal place of business, attention of the President, or to such other address as either party may specify by notice to the other, with a copy to John T. Lynch, Esq., Davis, Malm & D’Agostine, P.C., One Boston Place, 37^th Floor, Boston, Massachusetts 02108.

16. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior communications, agreements and understandings, written or oral, with respect to the terms and conditions of the Executive’s employment, including the Executive’s salary, bonus, or other compensation of any description, equity participation, pension, post-retirement benefits, severance or other remuneration, except for a certain Incentive Stock Option Agreements evidencing awards of stock option grants to the Executive, which shall remain in full force and effect.

17. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by an expressly authorized representative of the Company who is authorized by a vote of the Board of Directors of the Company to execute such amendment or modification on behalf of the Company.

18. Headings. The headings and captions in this Agreement are for convenience only and in no way define or describe the scope or content of any provision of this Agreement.

19. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument.

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20. Governing Law. This is a Massachusetts contract and shall be construed and enforced under and be governed in all respects by the laws of the Commonwealth of Massachusetts, without regard to the conflict of laws principals thereof, and this Agreement shall be deemed to be performable in Massachusetts. The Executive hereby further agrees that the language of all parts of this Agreement shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either of the parties.

IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and by the Executive as of the day and year first above written.

Company:	BENTHOS, INC.
	By:	/s/    RONALD L. MARSIGLIO
		Ronald L. Marsiglio, Chief Executive Officer and President
Executive:		/s/    JAMES R. KEARBEY
		James R. Kearbey

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EXHIBIT A

FORM OF

EMPLOYEE NONCOMPETITION, NONDISCLOSURE  

AND

ASSIGNMENT OF INVENTIONS AGREEMENT

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BENTHOS, INC.

EMPLOYEE NONCOMPETITION, NONDISCLOSURE

AND

ASSIGNMENT OF INVENTIONS AGREEMENT

The undersigned Employee (the “Employee”), in consideration for becoming or continuing to be employed, for being paid or continuing to be paid compensation, for being allowed to participate in the incentive compensation program for certain managers, by BENTHOS, INC., a Massachusetts corporation (the “Company”) and for other good and valuable consideration paid or given by the Company to the Employee, the Employee hereby agrees to the following terms and provisions:

1. Definitions. For the purposes hereof, the following terms shall have the following meanings:

(A) “Inventions” means: (i) all software, products, designs, specifications, trademarks, service marks, discoveries, formulae, processes, manufacturing techniques, trade secrets, inventions, improvements and ideas, whether or not patentable, which relate to the business of the Company, its affiliates, predecessors, or subsidiaries, if any; (ii) all copyrightable work prepared or used by the Employee as an employee within the scope of employment or engagement of the Employee by the Company; and (iii) Employee’s use of any Confidential Information (as hereinafter defined), which shall be work for hire owned by the Company. Included in the foregoing definition are all rights to obtain, register, perfect and enforce the aforementioned proprietary interests.

(B) “Confidential Information” means information pertaining to any aspect of the business of the Company which is: (i) non-public information not known by actual or potential competitors of the Company, its affiliates, or subsidiaries, if any; (ii) Proprietary Information (as hereinafter defined); (iii) information designated as or otherwise considered by the Company to be confidential; or (iv) proprietary or confidential information of the Company’s distributors, joint venturers, licensors and licensees, customers, suppliers and other third parties with whom the Company does business, whether of a technical nature or otherwise, including without limitation, all third party proprietary or confidential information that the Company is obligated to keep confidential.

(C) “Proprietary Information” means all information consisting of or regarding: (i) any Invention owned or being developed by the Company; (ii) the Company’s existing, planned or foreseeable product and marketing strategies; and (iii) the identity of the Company’s existing or potential customers, distributors, joint venture partners, licensees or licensors, and suppliers.

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2. Freedom to Contract. The Employee represents and warrants that the Employee is free to enter into this Agreement, has not made and will not make any agreements in conflict with this Agreement, and will not disclose to the Company, or use for the Company’s benefit, any trade secrets or confidential information which are the property of any other party.

3. Performance of Duties. The Employee will perform for the Company such duties as may be designated by the Company from time to time. As long as the Employee is employed by the Company, the Employee will devote his or her best efforts to the interest of the Company and will not engage in other employment, business relationships or any other activities detrimental to the best interests of the Company.

4. Noncompetition Covenant. The Employee agrees that, during the term of his employment with the Company and for a period of one (1) year thereafter, the Employee will not, directly or indirectly, render services to, work for or on behalf of, have an interest in, make any loan to, or assist in any manner any business that is competitive with that in which the Company was engaged or planned to engage on the date of the Employee’s termination from the Company, provided that, if the Employee is employed by or serves as a consultant to a subsidiary, division or other affiliate of a competitor (the “Affiliate”) and the Affiliate is not itself engaged in direct competition, such employment or consultation shall not be in violation of this provision so long as the duties and responsibilities of the Employee with respect to such employment or consultation are limited to the business of the Affiliate. For the purposes of this Paragraph, the Employee shall not be deemed a stockholder if the employee holds less than two (2%) per cent of the outstanding shares of any publicly owned corporation engaged in a business which is competitive with the Company if the Employee is not then in a control position with regard to such publicly owned corporation.

5. Nonsolicitation. During the period of employment of the Employee by the Company and for a period of one (1) year after the termination of such employment (for any reason whatsoever, whether voluntary or involuntary), the Employee will not directly or indirectly, either for the Employee or for any other person or entity, divert, or take away or attempt to divert or take away, any of the Company’s customers, business or prospective customers in existence at the time of the termination of the employment of the Employee. For purposes of this Agreement, “prospective customers” shall include those customers being solicited by the Company or contemplated to be solicited at the time of the termination of the employment of the Employee. During the period of the employment of the Employee by the Company and for a period of one (1) year thereafter, the Employee will not solicit or discuss with any employee of the Company the employment of such Company employee by any commercial enterprise, other than for the benefit of the Company, nor recruit, attempt to recruit, hire, or attempt to hire, in any capacity, including but not limited to, as an employee, consultant, agent or director thereof any such Company employee other than on behalf of the Company.

6. Nondisclosure Obligation. The Employee shall hold and maintain confidential and private in trust and use only for the benefit of the Company all Confidential Information. The Employee shall not at any time, either during or subsequent to the term of this Agreement,

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use for the benefit of the Employee or others, or disclose or divulge to any person or entity, any Confidential Information which shall at all times remain property of the Company.

7. Assignment of Inventions. Any and all Inventions which the Employee may have invented, discovered, originated, designed, made or conceived, or may invent, discover, originate, design, make or conceive, during the course of the employment of the Employee with the Company and for one (1) year thereafter, whether or not reduced to writing, or in any computer software format, either solely or jointly with others and whether or not during working hours or by or with the facilities of the Company, and which relate to the business of the Company, shall be the sole and exclusive property of the Company and shall be assigned by the Employee to the Company or to the Company’s nominees without the payment of additional compensation to the Employee. The Employee and each such other person shall promptly and fully disclose each and all such Inventions to the Company or to the Company’s nominees. The Employee further agrees to participate in the preparation of and to execute at any time, upon the request and at the expense of the Company, for the benefit of the Company or the nominees of the Company, any and all applications, instruments, assignments and other documents, which the Company shall deem necessary or desirable to protect the entire right, title and interest of the Company in and to the Inventions. The Employee shall, upon the request and at the expense of the Company or any person to whom the Company may have granted rights, execute any and all applications, assignments, instruments and papers, which the Company shall deem necessary or desirable for the protection or perfection of such rights, including the execution of patent applications, to make all rightful oaths, to testify in any proceeding in the Patent Office or in the courts, and generally to do everything lawfully possible to aid the Company, its successors, assigns and nominees to obtain, enjoy and enforce proper patent or other protection in the United States and in foreign countries for the Inventions to be assigned under this Agreement. The obligations set forth in this Section with respect to Inventions shall continue beyond the termination of the employment of the Employee.

8. Nondisparagement. During the course of the employment of the Employee and thereafter, the Employee will not libel, slander or otherwise disparage the Company, or any of the successors, assigns, shareholders, directors, officers, employees, or agents of the Company.

9. Technical Records. The Employee shall make and maintain adequate and current written records of all Inventions worked on, conceived, designed, made, developed or reduced to practice by the Employee during the period of employment of the Employee by the Company. Immediately upon the Company’s request and promptly upon termination of the Employee’s employment with the Company, the Employee shall deliver to the Company all memoranda, notes, records, reports, photographs, drawings, plans, papers, Proprietary Information or other documents made or compiled by the Employee or made available to the Employee during the course of the employment of the Employee by the Company, and any copies or abstracts thereof, whether or not of a secret or confidential nature, and all of such memoranda or other documents shall, during and after the employment of the Employee by the Company, be and shall be deemed to be the property of the Company.

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10. Specific Performance. The Company is hereby authorized to demand specific performance of any covenant contained in this Agreement, and the Employee hereby irrevocably waives any defense based on the adequacy of a remedy at law that might be asserted as a bar to the remedy of specific performance in any action brought by the Company. The Employee acknowledges that the covenants made by the Employee in this Agreement are of value to the Company only if performed and performed fully by the Employee, and, therefore, it is not possible to compensate fully the Company in damages for the failure of the Employee to perform obligations of the Employee hereunder. As a consequence, in the event of a breach by the Employee of this Agreement, the Company shall be entitled to injunctive relief to enforce those provisions of this Agreement and such other full and complete relief as a court of equity would then afford, in addition to all other relief and remedies available to the Company.

11. Employment Contract. On or about the date hereof the Company and the Employee are executing and delivering a certain Employment Agreement which governs the employment relationship of the Employee with the Company.

12. Miscellaneous. This Agreement contains the entire understanding and agreement of the Employee with respect to the subject matter hereof and it supersedes all prior understandings and agreements with respect thereto. The rights and obligations of the parties hereto shall inure to the benefit of, and shall be binding upon, the successors and assigns of each of them. Neither this Agreement nor any term covenant, condition or other provision hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. If one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject matter so as to be unenforceable by law, such provision(s) shall be construed and reformed by the appropriate judicial body by limiting and reducing such provision(s) so as to be enforceable to the maximum extent of the then applicable law. The obligations of the Employee under this Agreement shall survive the termination of the employment of the Employee by the Company regardless of the manner of such termination. This Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts and shall be an instrument under seal. This Agreement shall be effective no matter when signed from the first date of the Employee’s employment. The Employee acknowledges that the Employee has read and understands this Agreement.

Executed as an instrument under seal as of the 1^st day of January, 2003.

Employee (Signature)

JAMES R. KEARBEY

Printed Name of Employee

4N336 Fox Mill Blvd

St. Charles, IL 60175

Address of Employee

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EX-10.38

EXHIBIT 10.38

THIRD AMENDMENT TO CREDIT AGREEMENT

This Third Amendment to Credit Agreement is made as of this 29^th day of January, 2003, by and between Cape Cod Bank and Trust Company, NA (“Lender”), a National Association, with offices at 2 Barlows Landing Road, Pocasset, Massachusetts 02559 and Benthos, Inc. (“Borrower”), a Massachusetts corporation with its principal place of business at 49 Edgerton Drive, North Falmouth, Massachusetts 02556.

RECITALS:

A. Borrower and Lender entered into a certain Credit Agreement dated August 18, 1999, as amended by a First Amendment to Credit Agreement and Amendment to Revolving Note and Term Note dated March 23, 2001 and as further amended by a Second Amendment to Credit Agreement dated December 12, 2001 (the “Credit Agreement”) regarding: (i) a Commercial Variable Rate Revolving or Draw Note dated August 18, 1999, as amended by an Amendment dated December 8, 2000, a Second Amendment dated March 23, 2001, a Third Amendment dated July 9, 2001 and a Fourth Amendment dated December 12, 2001 (the “Revolving Note”), (ii) a Commercial Variable Rate Promissory Note August 18, 1999, as amended by an Amendment dated October 17, 2000, a Second Amendment dated March 23, 2001 and a Third Amendment dated December 12, 2001 (the “Term Note”), and (iii) other instruments and agreements executed in conjunction therewith;

B. Borrower and Lender now desire to further amend the Credit Agreement and to further amend the Revolving Note as set forth herein and in a separate amendment of even date herewith to said Revolving Note.

AGREEMENTS:

Now, therefore, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Lender and the Borrower hereby agree as follows:

1. Capitalized terms used herein shall have the meaning given to them in the Credit Agreement unless separately defined herein.

2. As of January 29th, 2003, the outstanding principal balance of the Revolving Loan under the Revolving Note is $300,000.00 and the outstanding principal balance of the Term Loan under the Term Note is $2,815,472.21.

3. The definition of “Expiration Date” as set forth in Section 1.01 of the Credit Agreement is hereby amended to be January 31, 2004.

4. Section 6.02 of the Credit Agreement is hereby amended by adding the following paragraph:

“(e) assurance in form and substance satisfactory to Lender from the Borrower’s auditors that the Borrower’s year end September 30, 2002 audit (and future assurances for future year end audits) will not contain a “going concern opinion”.

5. Section 8.02(a) of the Credit Agreement is hereby deleted and replaced with the following paragraph:

a. “The Borrower will maintain a ratio of Current Assets to Current Liabilities of greater than or equal to:

(i) 1.53 to 1.00 as of December 31, 2002;

(ii) 1.49 to 1.00 as of March 31, 2003;

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(iii) 1.52 to 1.00 as of June 30, 2003; and

(iv) 1.64 to 1.00 as of September 30, 2003.”

6. Section 8.02(b) of the Credit Agreement is hereby deleted and replaced with the following:

b. “The Borrower shall maintain a ratio of Total Debt to Tangible Net Worth less than or equal to:

(i) 2.71 to 1.00 as of December 31, 2002;

(ii) 2.71 to 1.00 as of March 31, 2003;

(iii) 2.35 to 1.00 as of June 30, 2003; and

(iv) 1.87 to 1.00 as of September 30, 2003.

Tangible Net Worth shall equal total assets minus total liabilities minus intangible assets.”

7. Section 8.02(c) of the Credit Agreement is hereby deleted and replaced with the following:

c. “The Borrower shall maintain a ratio of Cash Flow to Debt Service Payments, which on a cumulative basis for the applicable period shall be greater than or equal to the following:

(i) (negative) - .32 to 1.00 for quarter ending December 31, 2002;

(ii) .13 to 1.00 for quarter ending March 31, 2003;

(iii) .73 to 1.00 for quarter ending June 30, 2003; and

(iv) .96 to 1.00 for quarter ending September 30, 2003.

This ratio will be calculated on a cumulative basis and will be determined as follows: (x) Net profit after taxes (a) plus interest

3

expense, (b) plus seventy-five percent (75%) of depreciation, (c) plus amortization (y) divided by interest expense plus the current maturity of principal for the year.”

8. Section 10.01 of the Credit Agreement is hereby amended by deleting from subsection (b) the words “Arthur Anderson, LLP” and inserting the words “BDO Seidman, LLP” in its place and by adding the following paragraph:

“(o) promptly upon receipt thereof, copies of all management letters and other reports which are submitted to Borrower by its independent auditors.”

9. Section 11.01(m) of the Credit Agreement is amended by deleting “September 20, 2001” and inserting “September 30, 2002” in its place.

10. Except as provided herein, the Credit Agreement, as previously amended, shall remain unchanged. The Credit Agreement as previously amended and as further amended hereby is hereby ratified and confirmed.

Witness:	BENTHOS, INC.
/s/    FRANCIS E. DUNNE, JR.	By:	/s/    RONALD L. MARSIGLIO
	Name:	Ronald L. Marsiglio
	Title:	Chief Executive Officer and President
Witness:	CAPE COD BANK AND TRUST COMPANY, NA
/s/    SUSAN E. DESROCHES	By:	/s/    TIMOTHY F. KELLEHER III
	Name:	Timothy F. Kelleher III
	Title:	Senior Vice President

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EX-10.46

EXHIBIT 10.46

STANDARD FORM

PURCHASE AND SALE AGREEMENT

1. PARTIES AND MAILING ADDRESSES (fill in)	This 21ST day of March, 2003 Evets, LLC, a Delaware limited liability company (“Evets”); Leumas, LLC, a Delaware limited liability company (“Leumas”) and Benthos, Inc., a Massachusetts corporation (“Benthos”), EVETS, Leumas and Benthos are sometimes collectively hereinafter called the SELLER, having a mailing address of 49 Edgerton Drive, North Falmouth, MA 02556, agrees to SELL and Falmouth Economic Development & Industrial Corporation, a Massachusetts economic and development corporation, organized pursuant to c. 121C by vote at the Annual Town Meeting on April 7, 1981, having an address of: Falmouth Town Hall, 59 Town Hall Square, Falmouth, MA 02540, hereinafter called the BUYER or PURCHASER, agrees to BUY, upon the terms hereinafter set forth, the following described premises:
2. DESCRIPTION (fill in and include title reference)	The land off North Falmouth Highway – Route 28A – Falmouth, Massachusetts, consisting of approximately 26.12 acres, more or less, as more fully described on Exhibit A hereto together with the building and improvements thereon including the building known and numbered as 37 Edgerton Drive (“TT Building”).
3. BUILDINGS, STRUCTURES, IMPROVEMENTS, FIXTURES (fill in or delete)	Included in the sale as a part of said premises are the buildings, structures, and improvements now thereon, and the fixtures belonging to the SELLER and used in connection therewith including, if any, all wall-to-wall carpeting, drapery rods, automatic garage door openers, venetian blinds, window shades, screens, screen doors, storm windows and awnings, shutters, furnaces, heaters, heating equipment, stoves, ranges, oil and gas burners and fixtures appurtenant thereto, hot water heaters, plumbing and bathroom fixtures, garbage disposers, electric and other lighting fixtures, mantels, outside television antennas, fences, gates, trees, shrubs, plants and, ONLY IF BUILT IN, air conditioning equipment, ventilators, dishwashers, washing machines and dryers; and dryers; and.
	but excluding
4. TITLE DEED (fill in) * Include here by specific reference any restrictions, easements, rights and obligations in party walls not included in (b), leases, municipal and other liens, other encumbrances, and make provision to protect SELLER against BUYER’s breach of SELLER’s covenants in leases, where necessary.	Said premises are to be conveyed by a good and sufficient quitclaim deed running to the BUYER, or to the nominee designated by the BUYER by written notice to the SELLER at least seven days before the deed is to be delivered as herein provided, and said deed shall convey a good and clear record and marketable title thereto, free from encumbrances, except (a)    Provisions of existing building and zoning laws; (b)    Existing rights and obligations in party walls which are not the subject of written    agreement; (c)    Such taxes for the then current year as are not due and payable on the date of the    delivery of such deed; (d)    Any liens for municipal betterments assessed after the date of this agreement; (e)    Easements, restrictions and reservations of record, if any, so long as the same do not    prohibit or materially interfere with BUYER’s proposed use of said premises;
	*(f)
5. PLANS	If said deed refers to plan necessary to be recorded therewith the SELLER shall deliver such plan with the deed in form adequate for recording or registration.
6. REGISTERED TITLE	In addition to the foregoing, if the title to said premises is registered, said deed shall be in form sufficient to entitle the BUYER to a Certificate of Title of said premises, and the SELLER shall deliver with said deed all instruments, if any, necessary to enable the BUYER to obtain such Certificate of Title.
7. PURCHASE PRICE (fill in) space is allowed to write out the amounts if desired	The agreed purchase price for said premises is Two Million Five Hundred Thousand and no/100 ($2,500,000) dollars, of which $     90,000     have been paid as deposit this day and $     10,000     have been previously paid $2,400,000     are to be paid at the time of delivery of the deed in cash, or by                        certified, cashier’s treasurer’s or bank check(s). $ 2,500,000     Total

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8. TIME FOR PERFORMANCE;     DELIVERY OF DEED (fill in)	Such deed is to be delivered at 10:00 o’clock A.M on the 1st day of July 2003, at the Barnstable County Registry of Deeds, or at BUYER’s option, at the offices of BUYER’s lender’s attorney or BUYER’s attorney, unless otherwise agreed upon in writing. It is agreed that time is of the essence of this agreement.
9. POSSESSION and     CONDITION of PREMISE     (attach a list of exceptions, if     any)	Full possession of said premises free of all tenants and occupants, except as herein provided, is to be delivered at the time of the delivery of the deed, said premises to be than (a) in the same condition as they now are, reasonable use and wear thereof excepted, and (b) not in violation of said building and zoning laws, and (c) in compliance with the provisions of any instrument referred to in clause 4 hereof and (d) with respect to the TT Building, in broom clean condition and free of all debris and personal property. The BUYER shall be entitled personally to enter said premises prior to the delivery of the deed in order to determine whether the condition thereof complies with the terms of this clause.
10. EXTENSION TO PERFECT       TITLE OR MAKE       PREMISES CONFORM       (Change period of time if       desired).	If the SELLER shall be unable to give title or to make conveyance, or to deliver possession of the premises, all as herein stipulated, or if at the time of the delivery of the deed the premises do not conform with the provisions hereof, the SELLER shall use reasonable efforts to remove any defects in title, or to deliver possession as provided herein, or to make the said premises conform to the provisions hereof, as the case may be, in which event the SELLER shall give written notice thereof to the BUYER at or before the time for performance hereunder, and thereupon the time for performance hereof shall be extended for a period of thirty days. The SELLER shall not be required to expend in excess of $10,000 in the exercise of such reasonable efforts hereunder, exclusive of monetary liens.
11. FAILURE TO PERFECT       TITLE OR MAKE       PREMISES       CONFORM, etc.	If at the expiration of any such extended time for the performance pursuant to Paragraph 10 above, SELLER shall have failed so to remove any defects in title, deliver possession, or make the premises conform, as the case may be, all as herein agreed, or if at any time during the period of this agreement or any extension thereof, the holder of a mortgage on said premises shall refuse to permit the insurance proceeds, if any, to be used for such purposes, then any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto.
12. BUYER’s ELECTION TO       ACCEPT TITLE	The BUYER shall have the election, at either the original or any extended time for performance, to accept such title as the SELLER can deliver to the said premises in their then condition and to pay therefore the purchase price without deduction, in which case the SELLER shall convey such title, except that in the event of such conveyance in accord with the provisions of this clause, if the said premises shall have been damaged by fire or casualty insured against, then the SELLER shall, unless the SELLER has previously restored the premises to their former condition, either (a)    pay over or assign to the BUYER, on delivery of the deed, all amounts recovered or   recoverable on account of such insurance, less any amounts reasonably expended   by the SELLER for any partial restoration, or (b)    if a holder of a mortgage on said premises shall not permit the insurance proceeds or a   part thereof to be used to restore the said premises to their former condition or to be so   paid over or assigned, give to the BUYER a credit against the purchase price, on   delivery of the deed, equal to said amounts so recovered or recoverable and retained   by the holder of the said mortgage less any amounts reasonably expended by the   SELLER for any partial restoration.
13. ACCEPTANCE OF       DEED	The acceptance of a deed by the BUYER or his nominee as the case may be, shall be deemed to be a full performance and discharge of every agreement and obligation herein contained or expressed, except such as are, by the terms hereof, to be performed after the delivery of said deed.
14. USE OF MONEY TO       CLEAR TITLE	To enable the SELLER to make conveyance as herein provided, the SELLER may, at the time of delivery of deed, use the purchase money or any portion thereof to clear the title of any or all encumbrances or interests, provided that all instruments so procured are recorded simultaneously with the delivery of said deed.
15. INSURANCE Insert amount       (list additional types of       insurance and amounts as       agreed)	Until the delivery of the deed, the SELLER shall maintain insurance on said premises as follows: Type of Insurance                                    Amount of Coverage (a) Fire and Extended Coverage     *$     As presently insured. (b)

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16. ADJUSTMENTS      (list  operating     expenses, if any,     or attach schedule)	Water charges, and taxes for the then current fiscal year, shall be apportioned and fuel value shall be adjusted, as of the day of performance of this agreement and the net amount thereof shall be added to or deducted from, as the case may be, the purchase price payable by the BUYER at the time of delivery of the deed. Uncollected rents for the current rental period shall be apportioned if and when collected by either party.
17. ADJUSTMENT OF UNASSESSED AND ABATED TAXES	If the amount of said taxes is not known at the time of the delivery of the deed, they shall be apportioned on the basis of the taxes assessed for the preceding fiscal year, with a reapportionment as soon as the new tax rate and valuation can be ascertained; and, if the taxes which are to be apportioned shall thereafter be reduced by abatement, the amount of such abatement, less the reasonable cost of obtaining the same, shall be apportioned between the parties, provided that neither party shall be obligated to institute or prosecute proceedings for an abatement unless herein otherwise agreed.
18. BROKER’s FEE (fill in fee with dollar amount or percentage; also name of Brokerage firm(s))	A Broker’s fee for professional services of Realty Executives in the amount of four (4%) percent of the purchase price is due from the SELLER to Realty Executives, but only, if, as and when the SELLER receives the full purchase price pursuant to this Agreement and the BUYER accepts and records the SELLER’s deed and not otherwise.
19. BROKER(S) WARRANTY (fill in name)	The Broker(s) named herein Realty Executives warrant(s) that the Broker is duly licensed as such by the Commonwealth of Massachusetts.
20. DEPOSIT (fill in name)	All deposits made hereunder shall be held in escrow by Realty Executives as escrow agent subject to the terms of this agreement and shall be duly accounted for at the time for performance of this agreement. In the event of any disagreement between the parties, the escrow agent may retain all deposits made under this agreement pending instructions mutually given in writing by the SELLER and the BUYER. Such deposits shall be held in an F.D.I.C. insured interest bearing account and the interest shall be divided equally between SELLER and BUYER.
21. BUYER’s DEFAULT; DAMAGES	If the BUYER shall fail to fulfill the BUYER’s agreements herein, all deposits made hereunder by the BUYER shall be retained by the SELLER as liquidated damages and this shall be the SELLER’s sole and exclusive remedy at law or in equity for any default by the BUYER under this Agreement.
23. BROKER AS PARTY	The Broker(s) named herein join(s) in this agreement and become(s) a party hereto, insofar as any provisions of this agreement expressly apply to the Broker(s), and to any amendments or modifications of such provisions to which the Broker(s) agree(s) in writing.
24. LIABILITY OF TRUSTEE, SHAREHOLDER, BENEFICIARY, etc.	If the SELLER or BUYER executes this agreement in a representative or fiduciary capacity, only the principal or the estate represented shall be bound, and neither the SELLER or BUYER so executing, nor any shareholder or beneficiary of any trust, shall be personally liable for any obligation, express or implied, hereunder.
25. WARRANTIES AND REPRESENTATIONS (fill in); if none, state “none”; if any listed, indicate by whom each warranty or representation was made	The BUYER acknowledges that the BUYER has not been influenced to enter into this transaction nor has he relied upon any warranties or representations not set forth or incorporated in this agreement or previously made in writing, except for the following additional warranties and representations, if any, made by either the SELLER or the Broker(s); None.

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27. CONSTRUCTION OF AGREEMENT	This instrument, executed in multiple counterparts, is to be construed as a Massachusetts contract, is to take effect as a sealed instrument, sets forth the entire contract between the parties is binding upon and enures to the benefit of the parties hereto and their respective heirs, devisees, executors, administrators, successors and assigns, and may be cancelled, modified or amended only by a written instrument executed by both the SELLER and the BUYER. If two or more persons are named herein as BUYER their obligations hereunder shall be joint and several. The captions and marginal notes are used only as a matter of convenience and are not to be considered a part of this agreement or to be used in determining the intent of the parties to it.
28. LEAD PAINT LAW	The parties acknowledge that, under Massachusetts law, whenever a child or children under six years of age resides in any residential premises in which any paint, plaster or other accessible material contains dangerous levels of lead, the owner of said premises must remove or cover said paint, plaster or other material so as to make it inaccessible to children under six years of age.
29. SMOKE DETECTORS	The SELLER shall, at the time of the delivery of the deed, deliver a certificate from the fire department of the city or town in which said premises are located stating that said premises have been equipped with approved smoke detectors in conformity with applicable law.
30. ADDITIONAL PROVISIONS	The riders, if any, attached hereto, are incorporated herein by reference.
	See attached Rider.

		FALMOUTH ECONOMIC DEVELOPMENT & INDUSTRIAL CORPORATION
		By:	/s/    HARLYN O. HALVORSON
		BUYER	Harlyn O. Halvorson, Chairman
FALMOUTH ECONOMIC DEVELOPMENT & INDUSTRIAL CORPORATION		FALMOUTH ECONOMIC DEVELOPMENT & INDUSTRIAL CORPORATION
By:	/s/    GLENN P. KELLY	By:	/s/    RICHARD H. CAMPBELL
BUYER	Glenn P. Kelly	BUYER	Richard H. Campbell

FOR RESIDENTIAL PROPERTY CONSTRUCTED PRIOR TO 1978, BUYER MUST ALSO HAVE SIGNED

LEAD PAINT “PROPERTY TRANSFER NOTIFICATION CERTIFICATION”

NOTICE: This a legal document that creates binding obligations. If not understood, consult an attorney.

BENTHOS, INC.		FALMOUTH ECONOMIC DEVELOPMENT & INDUSTRIAL CORPORATION
By:	/s/    RONALD L. MARSIGLIO	By:	/s/    MARY PAT FLYNN
SELLER	Ronald L. Marsiglio, President	BUYER	Mary Pat Flynn

Taxpayer ID/Social Security No.                                 LEUMAS, LLC		Taxpayer ID/Social Security No.                                 EVETS, LLC
By:	/s/    RONALD L. MARSIGLIO	By:	/s/    RONALD L. MARSIGLIO
SELLER	Ronald L. Marsiglio, Manager	SELLER	Ronald L. Marsiglio, Manager
Taxpayer ID/Social Security No.		Taxpayer ID/Social Security No.

REALTY EXECUTIVES
By:	/s/    JOHN HARDING
	John Harding BROKER(S)

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RIDER

TO THAT CERTAIN PURCHASE AND SALE AGREEMENT,

DATED MARCH 21, 2003,

BETWEEN BENTHOS, INC., AS SELLER, AND THE FALMOUTH ECONOMIC

DEVELOPMENT & INDUSTRIAL CORPORATION, AS BUYER

1. Access. From and after the date of this Agreement, the Buyer and the Buyer’s representatives shall have the right to enter upon the Premises at reasonable times and upon reasonable prior notice to the Seller for the purpose of conducting building and land surveys, inspections, soil tests, environmental tests and such other examinations and investigations as the Buyer may desire. The Buyer shall repair any and all damage caused by such entry and restore the Premises, and shall indemnify and save the Seller harmless from and against any loss, cost, damage and liability resulting from or arising out of such entry or activity (but not from any loss, cost, damage, liability or consequences which may arise solely from the test or examination results). In the exercise of the Buyer’s rights pursuant to this Paragraph, Buyer shall not interfere with the conduct of any business or activity being conducted on the Premises. All such activities authorized hereunder shall be at the sole and exclusive risk and cost of Buyer. Notwithstanding anything to the contrary herein, the Buyer’s indemnification obligations under this Section 1 shall survive the delivery of the deed or the termination of this Agreement by either party prior to the Closing.

2. Due Diligence Review Period. The Buyer shall have from the date hereof until 5:00 pm on May 15, 2003 (the “Due Diligence Review Period”) to evaluate the Premises, applicable laws and regulations, and any other matter deemed appropriate by the Buyer in order to satisfy itself, in its sole discretion, as to the suitability of the Premises for its purposes, including, without limitation, satisfactory arrangements with Amerigas. The Buyer shall advise the Seller as soon as possible if the Buyer makes the determination that the Premises are unsuitable even if the Due Diligence Review Period has not expired. If for any reason the Buyer is not satisfied, in Buyer’s sole and absolute discretion, the Buyer may terminate this Agreement by written notice to the Seller if received by the Seller by 5:00 p.m. on May 15, 2003 in which event all deposits hereunder shall be promptly returned to Buyer and this Agreement shall be null and void without further recourse of the parties, except the Buyer’s obligation to indemnify the Seller as provided in Section 1 above. The Buyer’s failure to give timely written notice of termination as aforesaid shall be conclusively deemed to constitute the Buyer’s waiver of the right to terminate this Agreement for due diligence matters.

3. Structural Engineering Inspection. The Buyer shall have a period commencing on the date hereof and ending on May 1, 2003, to have the condition of the Premises inspected, including, without limitation, for structural defects including without limitation, the roof, heating, ventilating and air-conditioning systems, water system, and engineering integrity of any improvement on the Premises. If for any reason the Buyer is not satisfied with the results of said inspection, in Buyer’s sole and absolute discretion, the Buyer may terminate this Agreement by written notice to the Seller received by the Seller by 5:00 p.m. on May 15, 2003, in which event all deposits hereunder shall be promptly returned to Buyer and this Agreement shall be null and void without further recourse of the parties except the Buyer’s obligation to indemnify the Seller as provided in Section 1 above. Buyer’s failure to give timely notice of termination as aforesaid

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shall be conclusively deemed to constitute Buyer’s waiver of the right to terminate this Agreement pursuant to this Section 3.

4. Environmental Inspection. Within three days of the date hereof, the Seller will provide to the Buyer, the Seller’s copy of any current environmental reports related to the Premises. The Buyer shall have a period commencing on the date hereof and ending at 5:00 pm on May 1, 2003 to have the Premises inspected for compliance with environmental laws. If for any reason the Buyer is not satisfied with such environmental inspection, in the Buyer’s sole and absolute discretion, the Buyer may terminate this Agreement by written notice to the Seller received by the Seller by 5:00 p.m. on May 15, 2003, in which event all deposits hereunder shall be promptly returned to the Buyer and this Agreement shall be null and void without further recourse of the parties except the Buyer’s obligation to indemnify the Seller as provided in Section 1 above. The Buyer’s failure to give timely notice of termination as aforesaid shall be conclusively deemed to constitute the Buyer’s waiver of the right to terminate this Agreement for environmental matters except with respect to environmental matters or conditions arising after the date of the inspection.

5. Title V Septic. The building on the Premises is serviced by an on-site subsurface sewage system which is regulated by Title V of the Massachusetts State Environmental Code (“Title V”). The Seller shall cause, at the Seller’s expense, to have the septic system inspected by a person authorized to make such inspections. On or before 5:00 pm March 31, 2003, Seller must deliver to the Buyer a certification from such test that confirms that the sewage system is in compliance with Title V. If the System does not pass inspection, the Seller and the Buyer will attempt to negotiate a solution prior to April 5, 2003. If the Buyer and Seller are unable to reach agreement within such time period, then the Buyer shall have the right, at the Buyer’s election, to cancel and terminate this Agreement, provided that the Buyer gives unconditional and unambiguous written notice of the Buyer’s election to terminate this Agreement under the provisions of this Section 5 to the Seller not later than 5:00 pm on April 16, 2003 in which event all deposits hereunder shall be promptly returned to the Buyer and this Agreement shall be null and void without further recourse of the parties. The Buyer’s failure to give timely notice of termination as aforesaid shall be conclusively deemed to constitute the Buyer’s waiver of the right to terminate this Agreement pursuant to this Section 5.

6. Financing Contingency. Buyer’s obligations hereunder are contingent upon the Buyer obtaining satisfactory financing for this transaction on or before May 15, 2003. The Buyer shall pursue such financing in good faith and with due diligence under the circumstances. If the Buyer, have used such due diligence fails to obtain a firm commitment for such loan by 5:00 pm May 15, 2003, the Buyer may terminate this Agreement by written notice to the Seller received by the Seller by 5:00 p.m. on May 15, 2003, in which event all deposits hereunder shall be promptly returned to the Buyer and this Agreement shall be null and void without further recourse of the parties. The Buyer’s failure to give timely notice of termination as aforesaid shall be conclusively deemed to constitute the Buyer’s waiver of the right to terminate this Agreement for failure to obtain financing pursuant to this Section 6.

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7. Title. Upon execution of this Agreement, the Buyer shall promptly obtain a current title examination of the Premises (the “Title Report”). The Buyer shall have until May 15, 2003 to disapprove matters disclosed by the Title Report which do not conform to the provisons of Section 4 of the standard form portion of this Agreement, including matters which the Buyer determines in its discretion will adversely and materially affect the Buyer’s intended use of the Premises (“Title Matters”), and to give written notice to the Seller of any such disapproved Title Matters. Within three (3) business days of the Seller’s receipt of the Buyer’s disapproved Title Matters, if any, as provided above, the Seller shall notify the Buyer in writing whether or not each such title matter shall be cured or satisfied on or before the closing date, it being expressly understood and acknowledged that the Seller is obligated to use reasonable efforts to do so in accordance with the provisions of Section 10 of the standard form portion of this Agreement. In the event the Buyer shall fail to provide its written notice of Title Matters prior to the expiration of the Due Diligence Review Period, the Buyer shall be deemed to have accepted all title matters disclosed as of the date of this Agreement. Any title matters accepted by the Buyer or deemed accepted by the Buyer under this Section shall constitute exceptions under Section 4 of the standard form portion of this Agreement.

8. Road and Lot Subdivision Plans. On or about February 11, 2003, the Seller filed with the Town of Falmouth Planning Board a certain definitive subdivision plan showing a subdivision road named Edgerton Drive (the “Road Subdivision Plan”). The Buyer’s performance hereunder is contingent upon approval of the Road Subdivision Plan by the Planning Board. If the Planning Board approval requires material changes to the Road Subdivision Plan from the one submitted February 11, 2003 and/or covenants and conditions not customary and usual for the construction of subdivision roads, the Buyer shall have fourteen (14) days from receipt of a copy of the final Road Subdivision Plan and any covenants and/or conditions imposed by the Planning Board in connection therewith (the “Road Subdivision Plan Review Period”) to review and approve any such material changes. If the Buyer is not satisfied with such material changes, in Buyer’s sole and absolute discretion, and does not approve the Road Subdivision Plan as approved, the Seller and the Buyer will attempt to negotiate a solution prior to the expiration of the Road Subdivision Plan Review Period. If the Buyer and the Seller are unable to reach agreement within such time period, then the Buyer shall have the right, at the Buyer’s election, to cancel and terminate this Agreement, provided that the Buyer gives unambiguous written notice of the Buyer’s election to terminate this Agreement not later than 5:00 pm on the day of the expiration of the Road Subdivision Plan Review Period, in which event all deposits hereunder shall be promptly returned to the Buyer and this Agreement shall be null and void without further recourse of the parties. The Buyer shall be solely responsible for all costs and expenses of any construction required under the approved definitive Subdivision Plan and the Buyer shall post a performance bond, cash bond or other form of security (except a covenant securing construction as provided under the Subdivision Control Law unless conveyance of the Premises as contemplated by this Agreement is not prohibited by the covenant) as may be required by the Planning Board. The Buyer shall complete such construction within one (1) year from the date of final approval of the Road Subdivision Plan by the Planning Board or otherwise as required by the Planning Board. If Buyer fails to complete such construction within such one year period, or other period set forth by the Planning Board, then Seller may complete said construction and Buyer will indemnify and hold the Seller

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harmless with respect to the costs related thereto. The obligation of the Buyer to perform the construction as aforesaid shall survive the delivery of the deed.

The Seller will file with the Planning Board for approval a lot configuration plan in the form attached hereto as Exhibit B, dated March 5, 2003 (the “Lot Plan”). The Buyer’s performance hereunder is contingent upon approval of the Lot Plan by the Planning Board. If the Planning Board approval requires any changes to the Lot Plan from Exhibit B (except any relating to Edgerton Drive which have already been approved by the Buyer pursuant to the foregoing paragraph of this Section 8, the Buyer shall have fourteen (14) days from receipt or a copy of the final Lot Plan (the “Lot Plan Review Period”) to review and approve any such changes. If the Buyer is not satisfied, in the Buyer’s sole and absolute discretion, and does not approve the Lot Plan as approved, the Seller and the Buyer will attempt to negotiate a solution prior to the expiration of the Lot Plan Review Period. If the Buyer and Seller are unable to reach agreement within such time period, then the Buyer shall have the right, at the Buyer’s election, to cancel and terminate this Agreement, provided that the Buyer gives unambiguous written notice of the Buyer’s election to terminate this Agreement not later than 5:00 pm on the day of the expiration of the Lot Plan Review Period, in which event all deposits hereunder shall be promptly returned to the Buyer and this Agreement shall be null and void without further recourse of the parties except the Buyer’s obligation to indemnify the Seller as provided in Section 1 above.

9. Edgerton Drive. The Buyer may, at Buyer’s option, undertake, at Buyer’s sole cost and expense, to have Edgerton Drive approved as a public way. Until the approval of Edgerton Drive as a public way, or in the event Edgerton Drive is never approved as a public way by the Town of Falmouth, the maintenance cost, including the cost of snow removal, associated with Edgerton Drive shall be borne by all of the lots (now existing or hereafter created) within the Premises, together with Seller’s Retained Lot on a pro rata basis. Each lot’s pro rata share shall be expressed as a ratio the numerator of which will be 1 and the denominator of which will be the total number of lots comprising the Premises. Such arrangement for the sharing of maintenance costs shall be memorialized in a written agreement to be executed at closing and will be recorded. The provisions of this Section 8 will survive the delivery of the deed.

10. Profit Sharing. In the event the Seller sells all or part of the Premises in the 5-year period following the closing of this transaction to The Health Care and Retirement Group, Inc., or a person or entity party affiliated with said corporation or with Robert E. Tuffy, then the Seller and the Buyer will share equally in any net profit realized by the Buyer in such subsequent sale. At the Closing the Seller and the Buyer will execute an agreement that will be in recordable form which will memorialize this profit sharing arrangement. The provisons of this Section 9 will survive the delivery of the deed.

11. Broker Representation. The Seller and the Buyer warrant and represent to each other that they have dealt with no person who would be entitled to a commission, finders fee or the like regarding the sale of the Premises to the buyer, other than the broker named herein, and each party shall indemnify and hold the other party harmless from any claim, loss, cost and expense (including attorneys’ fees and expenses) resulting from this representation and warranty being untrue. The provisions of this Section 10 will survive the delivery of the deed.

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12. Notices. All notices which may or are required to be given by either party to the other shall be in writing and delivered by hand, by facsimile with a confirmation copy mailed by regular mail, by recognized overnight courier service such as Federal Express, or mailed postage prepaid by Untied States certified mail, return receipt requested, addressed to the parties at their respective addresses as follows:

If to the Seller:

Ronald L. Marsiglio, President

Benthos, Inc.

49 Edgerton Drive

North Falmouth, MA 02556

Facsimile Number: 508-563-6444

With a copy to:

John T. Lynch, Esq.

Davis, Malm & D’Agostine, P.C.

One Boston Place

Boston, Massachusetts 02108

Facsimile Number: 617-305-3120

If to the Buyer:

Falmouth Economic Development & Industrial Corporation

Falmouth Town Hall

59 Town Hall Square

Falmouth, Massachusetts 02540

Facsimile Number: 508-540-5441

With a copy to:

Patrick M. Butler, Esq.

P. O. Box 1630

Route 132

1513 Iyannough Road

Hyannis, Massachusetts 02601

Facsimile Number: 508-771-8079

or at such other address as either party by written notice to the other may from time to time designate. Notices will be effective upon such personal delivery, of if fax, upon the date faxed with confirmation copy sent by regular mail, or if overnight delivery, the date following the day that the notice was sent, or if mailed, upon the date shown on the return receipt, or on the date delivery is first attempted if delivery is refused.

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13. Warranties and Representations. The Buyer hereby acknowledges that the Buyer has been given adequate opportunity to fully inspect and evaluate the Premises and has not been influenced to enter into this transaction nor has it relied upon any warranties or representations made by Seller or the broker named herein not set forth or incorporated into this Agreement.

14. Title Standards. Any matter which is the subject of a Title Standard or Practice Standard of the Massachusetts Conveyancers Association at the time of the delivery of the deed shall be governed by said Title Standard or Practice Standard to the extent applicable.

15. Public Announcement. The Seller may make whatever public announcement of this Agreement it deems necessary to comply with federal securities laws. The Buyer will make no public announcement of this Agreement without the advance written consent of the Seller; it being expressly understood and agreed that this shall not include Buyer’s communications with public agencies and statements made at public hearings.

16. Warranties and Representations. The Buyer acknowledges that it has not been influenced to enter into this transaction nor has it relied upon any warranties or representations not set forth or incorporated in this Agreement or previously made in writing. The Seller represents and warrants to the best of Seller’s knowledge, information and belief, to the Buyer as follows:

(a) The Seller is presently in possession of the Premises, as owner, and there are no contractual obligations which would in any manner prevent the Seller from freely selling the Premises and otherwise complying with the terms of this Agreement, and there are no leases affecting the Premises.

(b) There is no litigation pending for which the Seller has been served, or to the best of the Seller’s knowledge, threatened, against the Seller or any basis therefore that arises out of the ownership of the Premises or that might detrimentally affect the development of the Premises or the value of the Premises or adversely affect the ability of the Seller to perform its obligations under this Agreement.

(c) There are no material agreements or understandings, written or oral, with any governmental officials or agencies, adversely affecting the Premises or the potential development of the Premises which have not been heretofore disclosed to the Buyer in writing.

(d) The Seller has not received any notice that the Premises are in violation of any Federal, State or local environmental, sanitary, health or safety statute, ordinance, code, by-law or regulation and that Seller has no actual knowledge of any such violations.

Each and every warranty and representation made by the Seller in this Section shall (a) have been true and correct when made, and (b) be true and correct as of the day of closing, otherwise the Buyer may, at the Buyer’s option, cancel this Agreement, in which event all deposits made hereunder shall be forthwith refunded to the Buyer and thereupon this Agreement shall be void and without further recourse to the parties hereto, except any and all claims for damages or other rights or remedies the Buyer may have against the Seller arising out of or alleged to have arisen

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out of such breach of warranty or misrepresentation shall survive such cancellation and except the Buyer’s obligation to indemnify the Seller as provided in Section 1 above. Each and every warranty and representation made by the Seller herein shall survive the delivery of the deed hereunder.

17. Seller’s Delivery  At or prior to the closing, the Seller shall deliver to the Buyer the following in form and substance reasonably satisfactory to the Buyer, Buyer’s lender and Buyer’s title insurance company:

(a) duly executed deed contemplated by Section 4, together with a Certificate of Legal Existence of Seller from the Massachusetts Secretary of State, a Corporate Excise Tax Lien Waiver from the Massachusetts Department of Revenue (or, in the alternative, a statement in the deed that the conveyance is not all or substantially all of the Seller’s assets), and a Clerk’s Certificate of Vote and Incumbency;

(b) duly executed parties-in-possession and mechanic’s liens title insurance affidavit and indemnity related thereto in the form requested by the Buyer’s title insurance company;

(c) duly executed non-foreign certification in the form prescribed by IRC Section 1445 and the Treasury Regulations adopted thereunder; and

(d) such other documents, certificates or affidavits as are reasonably and customarily required by the Buyer’s attorney, lender or title insurance company.

BENTHOS, INC.
By:	/s/    RONALD L. MARSIGLIO	By:	/s/    HARLYN O. HALVORSON
	Ronald L. Marsiglio, Pres.
		By:	/s/    RICHARD H. CAMPBELL
LEUMAS, LLC
By:	/s/    RONALD L. MARSIGLIO	By:	/s/    GLENN P. KELLY
	Ronald L. Marsiglio, Manager
		By:	/s/    MARY PAT FLYNN
EVETS, LLC
By:	/s/    RONALD L. MARSIGLIO
	Ronald L. Marsiglio, Manager		(Harlyn O. Halvorson, Chairman Richard H. Campbell Glenn P. Kelly Mary Pat Flynn)

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EX-99

EXHIBIT 99

STATEMENT PURSUANT TO 18 U.S.C. §1350

Pursuant to 18 U.S.C. §1350, each of the undersigned certifies that this Quarterly Report on Form 10-QSB for the period ended March 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Benthos, Inc.

DATE: May 13, 2003	By	/s/    RONALD L. MARSIGLIO
		Ronald L. Marsiglio President, Chief Executive Officer, and Director
DATE: May 13, 2003	By	/s/    FRANCIS E. DUNNE, JR.
		Francis E. Dunne, Jr. Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer)