We may seek to enter into joint ventures, research and development, distribution and other arrangements with third party OEM’s, defense contractors, universities and research institutions and others in order to successfully market our Multi-Mix^® products. In fact, we may find it necessary to enter into such arrangements if our own resources are inadequate to develop recurring sales and a sustained commercial market for these products. There can be no assurance we will be able to enter into such arrangements, or do so on commercially attractive terms, if necessary.

Our business plan anticipates significant future sales from our Multi-Mix^® products. Due to economic and market conditions in the wireless industry over the past several years, telecommunications system service providers substantially reduced their capital equipment purchases from our customers. While these circumstances have resulted in the delay or cancellation of Multi-Mix^® Microtechnology product purchases that had been anticipated from certain specific customers or programs, in connection with the improved conditions in the industry, the Company has implemented a strategic plan utilizing product knowledge and customer focus to expand specific sales opportunities. Continued extended delay or reduction from planned levels in new orders expected from customers for these products could require the Company to pursue alternatives related to the utilization or realization of these assets and commitments. If we are unable to generate significant future sales from these Multi-Mix^® products or identify alternative uses, sufficient to recover our investment, we could have to write down the carrying value of these assets, thereby incurring an impairment charge to earnings, which would significantly harm our operations and financial condition.

We rely on a small number of customers for a substantial portion of our net sales, and declines in sales to these customers could adversely affect our operating results.

Sales to our five largest customers accounted for 42.1% of our net sales in the fiscal year ended December 30, 2006 and our largest customer, Raytheon Company, accounted for 11.1% of our 2006 sales. For 2005, Israel Aircraft Industries Ltd., Lockheed Martin Corporation and Raytheon Company, accounted for 11.2%, 10.9% and 10.5%, respectively, of our net sales for that period. We depend on the continued growth, viability and financial stability of our customers, substantially all of which operate in an environment characterized by rapid technological change, short product life cycle, consolidation, and pricing and margin pressures. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our revenue. Consolidation among our customers may further concentrate our business in a limited number of customers and expose us to increased risks relating to dependence on a small number of customers. In addition, a significant reduction in sales to any of our large customers or significant pricing and margin pressures exerted by a key customer would adversely affect our operating results. In the past, some of our large customers have significantly reduced or delayed the volume of products ordered from us as a result of changes in their business, consolidation or divestitures or for other reasons. We cannot be certain that present or future large customers will not terminate their arrangements with us or significantly change, reduce or delay the amount of products ordered from us, any of which would adversely affect our operating results.

A substantial portion of our sales are related to the defense and military communications sectors. However, in times of armed conflict or war, military spending is concentrated on armaments build up, maintenance and troop support, and not on the research and development and specialty applications that are the Company’s core strengths and revenue generators. Accordingly, our defense and military product sales may decrease, and should not be expected to increase, at times of armed conflicts or war.

Our products are intended for use in various sectors of the satellite, defense and telecommunications industries, which produces technologically advanced products with short life cycles.

Factors affecting the satellite, defense and telecommunications industries, in particular the short life cycle of certain products, could seriously harm our customers and reduce the volume of products they purchase from us. These factors include:

	–	the inability of our customers to adapt to rapidly changing technology and evolving industry standards that result in short product life cycles;

16

Table of Contents

	–	the inability of our customers to develop and market their products, some of which are new and untested; and

	–	the potential that our customers’ products may become obsolete or the failure of our customers’ products to gain widespread commercial acceptance.

The expenses relating to our products might increase, which could reduce our gross margins.

In the past, developing engineering solutions, meeting research and development challenges and overcoming production and manufacturing issues have resulted in additional expenses. These expenses create pressure on our average selling prices and may result in decreased margins of our products. We expect that this will continue. In the future, competition could increase, and we anticipate this may result in additional pressure on our pricing. We also may not be able to increase the price of our products in the event that the cost of components or overhead increase. Changes in exchange rates between the United States and Canadian dollars, and other currencies, might result in further disparity between our costs and selling price and hurt our ability to maintain gross margins.

We carry inventory and there is a risk we may be unable to dispose of certain items.

We procure inventory based on specific customer orders and forecasts. Customers have certain rights of modification with respect to these orders and forecasts. As a result, customer modifications to orders and forecasts affecting inventory previously procured by us and our purchases of inventory beyond customer needs may result in excess and obsolete inventory for the related customers. Although we may be able to use some of these excess components and raw materials in other products we manufacture, a portion of the cost of this excess inventory may not be recoverable from customers, nor may any excess quantities be returned to the vendors. We also may not be able to recover the cost of obsolete inventory from vendors or customers.

Write offs or write downs of inventory generally arise from:

	–	declines in the market value of inventory;

	–	changes in customer demand for inventory, such as cancellation of orders; and

	–	our purchases of inventory beyond customer needs that result in excess quantities on hand and that we are not able to return to the vendor or charge back to the customer.

Our products and therefore our inventories are subject to technological risk. At any time either new products may enter the market or prices of competitive products may be introduced with more attractive features or at lower prices than ours. There is a risk we may be unable to sell our inventory in a timely manner and avoid it becoming obsolete. As of December 30, 2006, our inventories including raw materials, work-in-process and finished goods, were valued at $3.9 million reflecting reductions due to valuation allowances for obsolescence and cost overruns of approximately $1.2 million against these inventories. In the event we are required to substantially discount our inventory or are unable to sell our inventory in a timely manner, we would be required to increase our valuation allowances and our operating results could be substantially adversely affected.

We depend on a limited number of suppliers.

Electronic devices, components and made-to-order assemblies used in our traditional (i.e., non-Multi-Mix) products are generally obtained from a number of suppliers, although certain components are obtained from a limited number of suppliers. Some devices or components are standard items while others are manufactured to our specifications by our suppliers.

Except as described below, we believe that most raw materials used in manufacturing our products are available from alternative suppliers. We do not have binding agreements or commitments with our suppliers for the quantity and prices of our raw materials. Our reliance on suppliers, especially sole source or limited suppliers, involves the risks of adequate capacity and reduced control over delivery schedules and costs. While there may be alternative qualified suppliers for some of these components, substitutes for certain materials are not readily available. Any significant interruption in delivery of such items could have an adverse effect on our operations.

17

---

Table of Contents

Manufacturing of our Multi-Mix products requires certain components and raw materials that currently are only available from a sole supplier or limited number of suppliers, particularly for products intended for specific applications. Our Multi-Mix products utilize certain substrate materials in the fusion bonding process, currently obtained from a single vendor. Although there may be alternative types of substrates that are under evaluation, we have designed its current Multi-Mix products utilizing the current source of supply, and use of alternative substrates could result in design, engineering, manufacturing, performance and cost challenges and delays.

In addition, certain Multi-Mix products utilizing high power RF circuitry designed for telecommunications/wireless base station infrastructure applications require the use of LDMOS transistors which are not currently generally commercially available in the configurations required by us. Our Multi-Mix Resource Module would require such commercially unavailable components when used for commercial high power amplifier base station infrastructure applications but does not depend on these components for military and other commercial applications for which a variety of components are available in the proper configuration from a number of alternative sources. In order to commercialize this high power base station LDMOS application of the Multi-Mix Resource Module, we would need to establish a supply relationship with a vendor willing to provide commercial quantities of the needed components in a configuration that would maximize the value of the patented Multi-Mix Resource Module for this market. The Company continues to seek to establish a supply relationship with an LDMOS transistor provider able to provide such components, and is also considering alternative configurations and components. There is no assurance we will be able to establish such a vendor relationship or alternatives, in which case we would be unable to manufacture commercial quantities of Multi-Mix products for high power base station infrastructure applications, which would have a material adverse effect on our value proposition and marketing efforts with potential customers and our results of operations and profitability.

Any difficulty in obtaining sufficient quantities of such raw materials on a timely basis, and at economic prices, could result in design and engineering changes and expenses, shipment delays and/or an inability to manufacture certain Multi-Mix products. Significant increases in the costs of such materials could also have a material adverse effect on our value proposition and marketing efforts with potential customers and our results of operations and profitability.

We generally do not obtain long-term volume purchase commitments from customers, and, therefore, cancellations, reductions in production quantities and delays in production by our customers could adversely affect our operating results.

We generally do not obtain firm, long-term purchase commitments from our customers. Customers may cancel their orders, choose not to exercise options for further product purchases, reduce production quantities or delay production for a number of reasons. In the event our customers experience significant decreases in demand for their products and services, our customers may cancel orders, delay the delivery of some of the products that we manufactured or place purchase orders for fewer products than we previously anticipated. Even when our customers are contractually obligated to purchase products from us, we may be unable or, for other business reasons, choose not to enforce our contractual rights. Cancellations, reductions or delays of orders by customers would:

	–	adversely affect our operating results by reducing the volumes of products that we manufacture for our customers;

	–	delay or eliminate recoupment of our expenditures for inventory purchased in preparation for customer orders; and

	–	lower our asset utilization, which would result in lower gross margins.

Products we manufacture may contain design or manufacturing defects that could result in reduced demand for our services and liability claims against us.

We manufacture products to our customers’ specifications that are highly complex and may at times contain design or manufacturing defects. Defects have been discovered in products we manufactured in the past and despite our quality control and quality assurance efforts, defects may

18

---

Table of Contents

occur in the future. Defects in the products we manufacture, whether caused by design, manufacturing or component defects, may result in delayed shipments to customers or reduced or cancelled customer orders. Should these defects occur in large quantities or frequently, our business reputation may also be tarnished. In addition, these defects may result in liability claims against us. Even if customers are responsible for the defects, we may assume responsibility for any costs or payments.

We are subject to risks of currency fluctuations.

A portion of our business is conducted in currencies other than the U.S. dollar. Changes in exchange rates among other currencies and the U.S. dollar will affect our cost of sales, operating margins and sales. Our Canadian operations were adversely impacted in fiscal 2005 as a result of changes in the Canadian and U.S. Dollar exchange rates. We cannot predict the impact of future exchange rate fluctuations. In addition, certain of our subsidiaries that have non-U.S. dollar functional currencies transact business in U.S. dollars.

Variations in our quarterly operating results could occur due to factors including changes in demand for our products, the timing of shipments and changes in our mix of net sales.

Our quarterly net sales, expenses and operating results have varied in the past and might vary significantly from quarter to quarter in the future. Quarter-to-quarter comparisons of our operating results are not a good indication of our future performance, and should not be relied on to predict our future performance. Our short-term expense levels and manufacturing and production facilities infrastructure overhead are relatively fixed and are based on our expectations of future net sales. If we were to experience a reduction in net sales in a quarter, we could have difficulty adjusting our short-term expenditures and absorbing our excess capacity expenses. If this were to occur, our operating results for that quarter would be negatively impacted. Other factors that might cause our operating results to fluctuate on a quarterly basis include:

	–	customer decisions to defer, accelerate or cancel orders;

	–	timing of shipments of orders for our products;

	–	changes in the mix of net sales attributable to higher-margin and lower-margin products;

	–	changes in product mix which could cause unexpected engineering or research and development costs;

	–	announcements or introductions of new products by our competitors;

	–	engineering or production delays due to product defects or quality problems and production yield issues; and

	–	dynamic defense budgets which could cause military program delays or cancellations.

Recent changes in accounting for equity-related compensation could impact our financial statements.

On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (Revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’). SFAS 123R is a revision of Financial Accounting Standards No. 123, as amended, ‘‘Accounting for Stock-Based Compensation’’ (‘‘SFAS 123’’) and supercedes Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’. SFAS 123R eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS 123, which generally resulted in no compensation expense being recorded in the financial statements related to the issuance of equity awards to employees. SFAS 123R requires us to measure all employee share-based compensation awards using a fair value method and to record such expense in the consolidated financial statements, as opposed to the pro forma note presentation previously used. We adopted SFAS 123R at the beginning of its first quarter in fiscal 2006, and will apply the provisions of the statement prospectively for any newly issued, modified or settled award after the date of initial adoption, as well as for any awards that were granted prior to the adoption date for which the requisite service period has not

19

---

Table of Contents

been provided as of the adoption date. We continue to use the Black-Scholes option pricing model to calculate total stock compensation expense. The adoption of this statement resulted in a non-cash charge of $189,000 to its operations. As of December 30, 2006 the total future compensation cost related to non-vested stock options and the employee stock purchase plan not yet recognized in the statement of operations was $287,000. Of that total, $154,000, $102,000 and $31,000 are expected to be recognized in 2007, 2008 and 2009, respectively.

We have significant competition in our industry.

The microwave component and subsystems industry continues to be highly competitive. We compete against many companies, both foreign and domestic, many of which are larger and have greater financial and other resources. Our direct competitors in the commercial market are Anaren, Sirenza, Vari-L, Radiall and Sochen. Our major competitors in the military market are Anaren, M/A Com, L-3 Communications (Narda), Sage, TRM and KW Microwave. Major competitors for our Filtran subsidiary in the microwave micro-circuitry market are Labtech, MPC and Precision Instruments. As a direct supplier to OEMs, we also face significant competition from the in-house capabilities of our customers. However, the current trend in the wireless marketplace has been for the OEMs to outsource more design and production work, thereby freeing up their internal resources for other use. Thus, we believe that internal customer competition exists predominantly in our defense and satellite businesses.

In the wireless market, increased price pressure from our customers is a continuing challenge. It is anticipated that this pricing pressure will continue indefinitely.

The principal competitive factors are technical performance, reliability, ability to produce in volume, on-time delivery and price. Based on these factors, we believe that it competes favorably in its markets. We believe that it is particularly strong in the areas of technical performance and on-time delivery in the wireless marketplace. We believe that it competes favorably on price as well.

The RF Microwave components industry is highly competitive and has become more so as defense spending has changed program-spending profiles. Furthermore, current Department of Defense efforts are shifting funds to support troops engaged in existing hostilities around the world. We compete against numerous U.S. and foreign providers with global operations, as well as those who operate on a local or regional basis. In addition, current and prospective customers continually evaluate the merits of manufacturing products internally. Changes in the industries and sectors we service could significantly harm our ability to compete, and consolidation trends could result in larger competitors that may have significantly greater resources with which to compete against us.

We may be operating at a cost disadvantage compared to manufacturers who have greater direct buying power from component suppliers, distributors and raw material suppliers or who have lower cost structures. Our manufacturing processes are generally not subject to significant proprietary protection, and companies with greater resources or a greater market presence may enter our market or increase their competition with us. Increased competition could result in price reductions, reduced sales and margins or loss of market share.

Intellectual property rights in our industry are commonly subject to challenge.

Substantial litigation regarding intellectual property rights exists in our industry. We do not believe our intellectual properties infringe those of others, and are not aware that any third party is infringing our intellectual property rights. A risk always exists that third parties, including current and potential competitors, could claim that our products, or our customers’ products, infringe on their intellectual property rights or that we have misappropriated their intellectual property. We may discover that a third party is infringing upon our intellectual property rights, or has been issued an infringing patent.

Infringement suits are time consuming, complex, and expensive to litigate. Such litigation could cause a delay in the introduction of new products, require us to develop non-infringing technology, require us to enter into royalty or license agreements, if available, or require us to pay substantial

20

---

Table of Contents

damages. We have agreed to indemnify certain customers for infringement of third-party intellectual property rights. We could incur substantial expenses and costs in case of a successful indemnification claim. A significant negative impact would result if a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis.

Our success depends to a significant degree upon the preservation and protection of our product and manufacturing process designs and other proprietary technology. To protect our proprietary technology, we generally limit access to our technology, treat portions of such technology as trade secrets, and obtain confidentiality or non-disclosure agreements from persons with access to the technology. Our agreements with our employees prohibit employees from disclosing any confidential information, technology developments and business practices, and from disclosing any confidential information entrusted to us by other parties. Consultants engaged by us who have access to confidential information generally sign an agreement requiring them to keep confidential and not disclose any non-public confidential information.

We currently have 21 active patents. We plan to pursue intellectual property protection in foreign countries, primarily in the form of international patents, in instances where the technology covered is considered important enough to justify the added expense. By agreement, our employees who initiate or contribute to a patentable design or process are obligated to assign their interest in any potential patent to us.

Our executive officers, engineers, research and development and technical personnel are critical to our business, and without them we might not be able to execute our business strategy.

Our financial performance depends substantially on the performance of our executive officers and key employees. We are dependent in particular on Mason N. Carter, who serves as our Chief Executive Officer, Reynold Green, our Chief Operating Officer, Robert Condon, who serves as our Chief Financial Officer and James Logothetis, our Chief Technology Officer. We are also dependent upon our other highly skilled engineering, research and development and technical personnel, due to the specialized technical nature of our business. If we lose the services of any of our key personnel and are not able to find replacements in a timely manner, our business could be disrupted, other key personnel might decide to leave, and we might incur increased operating expenses associated with finding and compensating replacements.

Our industry is subject to numerous government regulations.

Our products are incorporated into telecom and wireless communications systems that are subject to regulation domestically by various government agencies, including the Federal Communications Commission and internationally by other government agencies. In addition, because of our participation in the satellite and defense industry, we are subject to audit from time to time for compliance with government regulations by various governmental agencies. We are also subject to a variety of local, state and federal government regulations relating to environmental laws, as they relate to toxic or other hazardous substances used to manufacture our products. We believe that we operate our business in material compliance with applicable laws and regulations. However, any failure to comply with existing or future laws or regulations could have a material adverse affect on our business, financial condition and results of operations.

Export controls.

Our products are subject to the Export Administration Regulations (‘‘EAR’’) administered by the U.S. Department of Commerce and may, in certain instances, be subject to the International Traffic in Arms Regulations (‘‘ITAR’’) administered by the U.S. Department of State. EAR restricts the export of dual-use products and technical data to certain countries, while ITAR restricts the export of defense products, technical data and defense services. We believe that it has implemented internal export procedures and controls in order to achieve compliance with the applicable U.S. export control regulations. However, the U.S. government agencies responsible for administering EAR and ITAR

21

---

Table of Contents

have significant discretion in the interpretation and enforcement of these regulations, and it is possible that these regulations could adversely affect the Company’s ability to sell its products to non-U.S. customers.

Some of our operations are outside the United States, which poses risks to our business operations.

A significant percentage of our sales is derived from the operations of its wholly-owned subsidiaries in Costa Rica and Canada. These sales are subject to the risks normally associated with international operations which include, without limitation, fluctuating currency exchange rates, changing political and economic conditions, difficulties in staffing and managing foreign operations, greater difficulty and expense in administering business abroad, complications in complying with foreign laws and changes in regulatory requirements, and cultural differences in the conduct of business.

While we believe that current political and economic conditions in Canada and Costa Rica are relatively stable, such conditions may adversely change so as to effect underlying business assumptions about the current opportunities which exist for doing business in those countries. In particular, the government in Costa Rica could change, the currency exchange rate between the U.S. and Canadian dollars may change adversely (as occurred in 2005 and 2004), or the cost of labor and/or goods and services necessary to our operations may increase.

In future periods, we may be required to record an impairment charge against goodwill, which would have a material adverse effect on our results of operations.

As of December 30, 2006, we had approximately $3,500,000 of goodwill on its balance sheet. This amount represents the remaining excess of the total purchase price over the fair value of net assets acquired of our acquisition of FMI. Goodwill is subject to at least an annual assessment for impairment and more frequently if circumstances indicate a possible impairment. If we are required to record impairment charges related to goodwill, such charges would have the effect of decreasing our net income or increasing losses in such period. If we are required to take a substantial impairment charge, net income per share or net loss per share could be materially adversely affected in such period.

If we are unable to assess that our internal controls over financial reporting are effective as of the end of our 2007 fiscal year or if we receive other than an unqualified opinion on the adequacy of our internal control over financial reporting as of January 3, 2009 and future year-ends as required by Section 404 of the Sarbanes-Oxley Act, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.

As required by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in their annual reports that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, the public accounting firm auditing a company’s financial statements must attest to and report on both management’s assessment as to whether the company maintained effective internal control over financial reporting and on the effectiveness of the company’s internal control over financial reporting.

We are currently undergoing a comprehensive effort to comply with Section 404 of Sarbanes-Oxley. As of the end of our 2007 fiscal year, we are required to provide the report of management on the Company’s internal control over financial reporting in our annual report containing the assessment by management of the effectiveness of our internal control over financial reporting. If, at the end of fiscal year 2007, management is unable to conclude that our internal controls over financial reporting are effective and if our independent auditors issue other than an unqualified opinion on the design, operating effectiveness or management’s assessment of internal control over financial reporting for fiscal year 2008, this could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our shares to decline.

22

---

Table of Contents

ITEM 2.	PROPERTIES.

United States

Merrimac’s administrative offices, research and principal production facilities are located in West Caldwell, New Jersey, on a five-acre parcel owned by Merrimac. The West Caldwell plant comprises 71,200 square feet.

Merrimac owns all of its land, buildings, laboratories, production and office equipment, as well as its furniture and fixtures in West Caldwell, New Jersey. Merrimac believes that its plant and facilities are well suited for Merrimac’s business and are properly utilized, suitably located and in good condition.

Canada

In February 1999, Merrimac entered into a seven-year lease for a 20,000 square-foot manufacturing facility in Ottawa, Ontario, Canada in connection with Merrimac’s acquisition of FMI. Merrimac extended the lease for an additional three-year term in February 2006.

Costa Rica

The Company currently leases a 36,200 square-foot facility in San Jose, Costa Rica under a five-year lease which expired in February 2006 (with a five-year renewal option). The renewal option was exercised in February 2006. This facility, which opened for production in August 2002, is used for manufacturing the Company’s products.

ITEM 3.	LEGAL PROCEEDINGS.

Merrimac is a party to lawsuits, arising in the normal course of business. It is the opinion of Merrimac’s management that the disposition of these various lawsuits will not individually or in the aggregate have a material adverse effect on the consolidated financial position or the results of operations of Merrimac.

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of Merrimac’s stockholders during the fourth quarter of fiscal 2006.

23

---

Table of Contents

PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Merrimac’s Common Stock has been listed and traded on The American Stock Exchange since July 11, 1988, under the symbol MRM. As of March 23, 2007 Merrimac had approximately 200 holders of record. Merrimac believes there are approximately 800 additional holders in ‘‘street name’’ through broker nominees.

The following table sets forth the range of the high and low trading prices as reported by the AMEX for the period from January 1, 2005 to December 30, 2006.

Fiscal Year Ended December 30, 2006			High						Low
First Quarter				$	10.20					$	8.81
Second Quarter				$	9.90					$	8.70
Third Quarter				$	10.40					$	9.75
Fourth Quarter				$	10.40					$	9.75

Fiscal Year Ended December 31, 2005			High						Low
First Quarter				$	10.25					$	8.70
Second Quarter				$	9.40					$	8.44
Third Quarter				$	9.32					$	8.55
Fourth Quarter				$	9.25					$	8.80

Merrimac has not paid any cash dividends to its stockholders since the third quarter of 1997.

Stock Performance Chart

The following performance graph is a line graph comparing the yearly change in the cumulative total stockholder return on the Common Stock against the cumulative return of the AMEX Stock Market (U.S. Companies), and a line of business index comprised of the AMEX Technologies Index for the five fiscal years ended December 30, 2006.

    

24

---

Table of Contents

			12/29/01						12/28/02						1/3/04						1/1/05						12/31/05						12/30/06
Merrimac Industries, Inc.					100.00						41.96						60.07						79.86						79.51						88.34
AMEX Composite					100.00						100.08						144.57						178.46						220.35						262.17
AMEX Technology					100.00						58.27						92.62						109.44						101.88						127.50

Equity Compensation Plan Information

The following table gives information as of December 30, 2006, about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under the Company’s existing equity compensation plans:

			(a)						(b)						(c)
Plan category			Number of securities to be issued upon exercise of outstanding options, warrants and rights						Weighted-average exercise price of outstanding options, warrants and rights						Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders					407,092					$	9.55						414,500
Equity compensation plans not approved by security holders					—						—						—
Total					407,092					$	9.55						414,500

25

---

Table of Contents

ITEM 6.	SELECTED FINANCIAL DATA.

The following selected financial information is qualified by reference to, and should be read in conjunction with, the Company’s consolidated financial statements and the notes thereto, and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ contained elsewhere herein. The selected consolidated statement of operations data for the fiscal years ended December 30, 2006, December 31, 2005 and January 1, 2005 (each audited by Grant Thornton LLP) and the selected consolidated balance sheet data as of December 30, 2006 and December 31, 2005 are derived from the Company’s audited consolidated financial statements which are included elsewhere herein. The selected consolidated balance sheet data as of January 1, 2005 (audited by Grant Thornton LLP) and the selected consolidated statement of operations data for the fiscal years ended January 3, 2004 and December 28, 2002 and the selected consolidated balance sheet data as of January 3, 2004 and December 28, 2002 (audited by Ernst & Young LLP) are derived from the Company’s audited consolidated financial statements not included herein.

			Fiscal Years Ended
			December 30, 2006 (52 weeks)						December 31, 2005 (52 weeks)						January 1, 2005 (52 weeks)						January 3, 2004 (53 weeks)						December 28, 2002 (52 weeks)
			(In thousands, except per share data)
Consolidated Statement of Operations Data:
Net sales				$	27,421					$	29,719					$	30,949					$	27,322					$	24,570
Gross profit					10,134						12,214						12,910						10,577						10,466
Selling, general and administrative					9,864						9,540						9,820						9,536						8,950
Research and development					2,021						1,932						1,723						1,737						2,728
Restructuring charges					286						—						—						160						510
Operating income (loss)					(2,037	)					742						1,367						(856	)					(1,722	)
Interest and other (expense) income, net					(257	)					(218	)					(265	)					(271	)					(176	)
(Loss) gain on disposition of assets					—						(43	)					—						104						—
Income taxes (benefit)					(69	)					(280	)					(96	)					(109	)					237
Net income (loss)					(2,225	)					761						1,198						(914	)					(2,135	)
Net income (loss) per common share:
Basic					(.71	)					.24						.38						(.29	)					(.69	)
Diluted					(.71	)					.24						.38						(.29	)					(.69	)
Weighted average number of common shares outstanding:
Basic					3,142						3,142						3,127						3,121						3,074
Diluted					3,142						3,177						3,154						3,121						3,074
Cash dividends declared per common share					—						—						—						—						—
Consolidated Balance Sheet Data (at year end):
Working capital				$	13,354					$	9,854					$	8,464					$	6,805					$	3,615
Property, plant and equipment, net					12,985						13,973						15,584						17,222						19,282
Total assets					34,254						34,422						34,575						34,020						36,487
Current portion of long-term debt					649						908						905						954						6,240
Long-term debt, net of current portion					4,564						2,071						2,778						4,208						429
Stockholders’ equity					26,284						27,690						26,598						24,838						24,702

26

---

Table of Contents

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

Merrimac Industries, Inc. is involved in the design, manufacture and sale of electronic component devices offering extremely broad frequency coverage and high performance characteristics, and microstrip, bonded stripline and thick metal-backed Teflon^® (PTFE) and mixed dielectric multilayer circuits for communications, defense and aerospace applications. The Company’s operations are conducted primarily through two business segments: (1) electronic components and subsystems and (2) microwave micro-circuitry (through its subsidiary, Filtran Microcircuits Inc.).

The following table provides a breakdown of our sales between these segments:

			2006												2005
			$						% of sales						$						% of sales
Electronic components and Subsystems				$	22,531,000						82.2	%				$	22,483,000						75.7	%
Microwave micro-circuitry(1)				$	5,045,000						18.4	%				$	7,372,000						24.8	%
Less intersegment sales				$	(155,000	)					(0.6	)%				$	(136,000	)					(0.5	)%
Consolidated				$	27,421,000						100.0	%				$	29,719,000						100.0	%

(1)	Substantially all conducted by our Canadian subsidiary, Filtran Microcircuits Inc.

Merrimac is a versatile technologically oriented company specializing in miniature radio frequency lumped-element components, integrated networks, microstrip and stripline microwave components, integrated multifunction subsystems, and ferrite attenuators. Of special significance has been the combination of two or more of these technologies into single components to achieve superior performance and reliability while minimizing package size and weight. Merrimac components are today found in applications as diverse as satellites, military and commercial aircraft, radar, cellular radio systems, medical and dental diagnostic instruments, personal communications systems (‘‘PCS’’) and wireless internet connectivity. Merrimac’s components range in price from $0.50 to more than $10,000 and its subsystems range from $500 to more than $1,500,000.

The following table presents our key customers and the percentage of net sales made to such customers:

			2006						2005						2004
Raytheon Company					11.1	%					10.5	%					13.9	%
Lockheed Martin Corporation					8.7	%					10.9	%					6.6	%
The Boeing Company					8.4	%					5.9	%					7.8	%
L-3 Communications Corporation					7.5	%					4.3	%					2.7	%
Space Systems Loral					6.5	%					2.4	%					1.3	%
Northrop Grumman Corporation					5.9	%					8.8	%					11.9	%
Israel Aircraft Industries Ltd.					3.3	%					11.2	%					6.2	%

Sales to the foreign geographic area of Europe were 7.6%, 14.8% and 8.9% of net sales in fiscal years 2006, 2005 and 2004, respectively.

27

---

Table of Contents

The following table provides a breakdown of the net sales by customer industry segment and geographic area:

			2006																								2005
			North America												Rest of World												North America												Rest of World
			$						%						$						%						$						%						$						%
Military and commercial satellites				$	9,475,000						34.5	%				$	602,000						2.2	%				$	6,960,000						23.4	%				$	933,000						3.1	%
Defense				$	7,202,000						26.3	%				$	1,554,000						5.7	%				$	7,246,000						24.4	%				$	3,899,000						13.1	%
Commercial				$	8,029,000						29.3	%				$	559,000						2.0	%				$	9,746,000						32.8	%				$	935,000						3.2	%

The Company markets and sells its products domestically and internationally through a direct sales force and manufacturers’ representatives. Merrimac has traditionally developed and offered for sale products built to specific customer needs, as well as standard catalog items. The following table provides a breakdown of electronic components sales as derived from initial orders for products custom designed for specific customer applications, repeat orders for such products and from catalog sales:

			2006						2005						2004
Initial designs					23	%					27	%					27	%
Repeat designs					63	%					57	%					58	%
Catalog sales					14	%					16	%					15	%

The Company believes that while its wireless subscriber base continues to grow, the recent economic downturn, resulting in reduced spending by wireless telecommunications service providers, has caused many wireless telecommunications equipment manufacturers to delay or forego purchases of the Company’s products. The Company expects that its defense and satellite customers should continue to maintain their approximate current levels of orders during fiscal year 2007, though there are no assurances they will do so. Nevertheless, in times of armed conflict or war, military spending is concentrated on armaments build up, maintenance and troop support, and not on the research and development and specialty applications that are the Company’s core strengths and revenue generators. Accordingly, our defense and military product sales may decrease and should not be expected to increase, at times of armed conflicts or war. The Company also anticipates increased levels of orders during fiscal year 2007 for its Multi-Mix^® Microtechnology products, based on inquiries from existing customers, requests to quote from new and existing customers and market research. FMI is working to restore orders for automotive and defense applications that were delayed in 2006.

The Company incurred an operating loss in 2006 due to declines in the microwave micro-circuitry segment’s defense orders that had been expected to renew in 2006 and reduced orders from delays in space and defense programs for the electronic components and subsystems segment. The Company has made and will be making operating changes to Filtran to stimulate their sales growth and reduce their costs. The Company has also reduced the cost structure of the electronic components and subsystems segment due to the order delays discussed above. There can be no assurance as to whether or when the Company will become profitable again.

Because of the declining level of orders and sales, the Company reduced its headcount by 15 persons, principally involved in production, manufacturing support, sales and administration. The Company recorded personnel restructuring charges of $286,000, consisting of severance and certain other personnel costs, during the fourth quarter of 2006. The Company anticipates annual savings of $1,500,000 to begin in the first quarter of 2007 from the restructuring and other cost reduction and containment measures to be implemented.

Recently the Company became aware of a problem with purchased material that was utilized in certain products. The Company has evaluated the material and found the problem with the material does not affect the functionality and reliability of the products. This problem did cause shipment

28

---

Table of Contents

delays of approximately $1,000,000 of products that were expected to be sold in the first quarter of 2007. The delay in shipments will have a significant negative impact on the results of operations for the first quarter of 2007.

Cost of sales for the Company consists of materials, salaries and related expenses, and outside services for manufacturing and certain engineering personnel and manufacturing overhead. Our products are designed and manufactured in the Company’s facilities. The Company’s manufacturing and production facilities infrastructure overhead are relatively fixed and are based on its expectations of future net sales. Should the Company experience a reduction in net sales in a quarter, it could have difficulty adjusting short-term expenditures and absorbing any excess capacity expenses. If this were to occur, the Company’s operating results for that quarter would be negatively impacted. In order to remain competitive, the Company must continually reduce its manufacturing costs through design and engineering innovations and increases in manufacturing efficiencies. There can be no assurance that the Company will be able to reduce its manufacturing costs.

Depreciation and amortization expenses exceeded capital expenditures for new projects and production equipment during 2006 by approximately $900,000, and the Company anticipates that depreciation and amortization expenses will exceed capital expenditures in fiscal year 2007 by approximately $300,000. The Company intends to issue up to $2,400,000 of purchase order commitments for capital equipment from various vendors. The Company anticipates that such equipment will be purchased and become operational during fiscal year 2007. The Company’s planned equipment purchases and other commitments are expected to be funded through cash resources and cash flows expected to be generated from operations, and supplemented by the Company’s $5,000,000 revolving credit facility, which expires October 18, 2008.

Selling, general and administrative expenses consist of personnel costs for administrative, selling and marketing groups, sales commissions to employees and manufacturing representatives, travel, product marketing and promotion costs, as well as legal, accounting, information technology and other administrative costs. The Company expects to continue to make significant and increasing expenditures for selling, general and administrative expenses, especially in connection with implementation of its strategic plan for generating and expanding sales of Multi-Mix^® products.

Research and development expenses consist of materials, salaries and related expenses of certain engineering personnel, and outside services related to product development projects. The Company charges all research and development expenses to operations as incurred. The Company believes that continued investment in research and development is critical to the Company’s long-term business success. We intend to continue to invest in research and development programs in future periods, and expect that these costs will increase over time, in order to develop new products, enhance performance of existing products and reduce the cost of current or new products.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The Company’s management makes certain assumptions and estimates that impact the reported amounts of assets, liabilities and stockholders’ equity, and sales and expenses. These assumptions and estimates are inherently uncertain. The management judgments that are currently the most critical are related to the accounting for the Company’s investments in Multi-Mix^® Microtechnology, contract revenue recognition, inventory valuation, valuation of goodwill and valuation of deferred tax assets. Below is a further description of these policies as well as the estimates involved.

29

---

Table of Contents

Impairment of long-lived assets

The following is a summary of the carrying amounts of the Multi-Mix^® Microtechnology net assets included in the Company’s consolidated financial statements at December 30, 2006 and the related future planned purchases and lease obligation commitments through January 2011.

Net assets:
Property, plant and equipment, at cost				$	14,954,000
Less accumulated depreciation and amortization					8,207,000
Property, plant and equipment, net					6,747,000
Inventories					494,000
Other assets, net					130,000
Total net assets at December 30, 2006				$	7,371,000
Commitments:
Planned equipment purchases for 2007				$	750,000
Lease obligations through January 2011					775,000
Total commitments				$	1,525,000
Total net assets and commitments				$	8,896,000

Approximately 35% of the property, plant and equipment may be utilized in other areas of our electronic components and subsystems operations.

The Company anticipates receiving additional orders during 2007 for its Multi-Mix^® Microtechnology products, based on inquiries from existing customers, requests to quote from new and existing customers and market research, for which substantial research and development costs have also been incurred. Due to economic and market conditions in the wireless industry since 2000, wireless telecommunications system service providers substantially reduced their capital equipment purchases from our customers. While these circumstances have resulted in the delay or cancellation of Multi-Mix^® Microtechnology product purchases that had been anticipated from certain specific customers or programs, in connection with the improved conditions in the industry, the Company has implemented a strategic plan utilizing product knowledge and customer focus to expand specific sales opportunities. Continued extended delay or reduction from planned levels in new orders expected from customers for these products could require the Company to pursue alternatives related to the utilization or realization of these assets and commitments. Should these alternatives not be realized, the Company would have to write down the value of these assets, thereby incurring an impairment charge to earnings, the net result of which would be materially adverse to the financial results and condition of the Company. In accordance with the Company’s evaluation of Multi-Mix^® under SFAS No. 144, the Company has determined no provision for impairment is required at this time. Management will continue to monitor the recoverability of the Multi-Mix^® assets.

Contract Revenue Recognition

The Company recognizes revenue in accordance with the provisions of Staff Accounting Bulletin No. 104. Contract revenue and related costs on fixed-price and cost-reimbursement contracts that require customization of products to customer specifications are recorded when title transfers to the customer, which is generally on the date of shipment. Prior to shipment, manufacturing costs incurred on such contracts are recorded as work-in-process inventory. Anticipated losses on contracts are charged to operations when identified. Revenue related to non-recurring engineering charges is generally recognized upon shipment of the related initial units produced or based upon contractually established stages of completion.

The cost rates utilized for cost-reimbursement contracts are subject to review by third parties and can be revised, which can result in additions to or reductions from revenue. Revisions which result in reductions to revenue are recognized in the period that the rates are reviewed and finalized; additions

30

---

Table of Contents

to revenue are recognized in the period that the rates are reviewed, finalized, accepted by the customer, and collectability from the customer is assured. The Company submits financial information regarding the cost rates on cost-reimbursement contracts for each fiscal year in which the Company performed work on cost-reimbursement contracts. The Company does not record any estimates on a regular basis for potential revenue adjustments, as there currently is no reasonable basis on which to estimate such adjustments given the Company’s very limited experience with these contracts. During 2004, the Company recognized a revenue reduction of $12,000 related to a cost-reimbursement contract. The Company recognized revenue of $715,000 and $106,000 related to cost-reimbursement contracts in 2006 and 2005, respectively.

Inventory Valuation

Inventories are valued at the lower of average cost or market. Inventories are periodically reviewed for their projected manufacturing usage utilization and, when slow-moving or obsolete inventories are identified, a provision for a potential loss is made and charged to operations. Total inventories are net of valuation allowances for obsolescence and cost overruns of $1,174,000 at December 30, 2006 and $1,084,000 at December 31, 2005, of which $85,000 and $50,000, respectively, represented cost overruns.

Procurement of inventory is based on specific customer orders and forecasts. Customers have certain rights of modification with respect to these orders and forecasts. As a result, customer modifications to orders and forecasts affecting inventory previously procured by us and our purchases of inventory beyond customer needs may result in excess and obsolete inventory for the related customers. Although we may be able to use some of these excess components and raw materials in other products we manufacture, a portion of the cost of this excess inventory may not be recoverable from customers, nor may any excess quantities be returned to the vendors. We also may not be able to recover the cost of obsolete inventory from vendors or customers.

Write offs or write downs of inventory generally arise from:

	–	declines in the market value of inventory; and

	–	changes in customer demand for inventory, such as cancellation of orders; and

	–	our purchases of inventory beyond customer needs that result in excess quantities on hand and that we are not able to return to the vendor or charge back to the customer.

Valuation of Goodwill

With the adoption of SFAS No. 142 by the Company on December 30, 2001, goodwill is no longer subject to amortization over its estimated useful life. However, goodwill is subject to at least an annual assessment for impairment and more frequently if circumstances indicate a possible impairment. The Company performed the annual assessment during the fourth quarter of 2006 and determined there was no impairment.

As shown in footnote 9 of the consolidated financial statements, the sales and operating income of the Company’s microwave micro-circuitry segment, conducted through its Filtran Microcircuits, Inc. subsidiary, declined during 2006. The segment’s backlog decreased approximately $1,500,000 since the end of fiscal year 2004 and $200,000 since the end of fiscal year 2005.The principal reason for the reduction in sales was due to declines in the segment’s defense orders that had been expected to renew in 2006. Operating income declined due to the decreased sales, a higher cost structure and reductions in production yields during 2006.

In response to the decline in FMI’s results, the Company instituted management changes at Filtran during the fourth quarter of 2006. The Company has begun manufacturing certain Filtran products and is currently evaluating plans to move the manufacturing of other Filtran products to its Costa Rica facility to utilize the benefits of the more efficient production equipment and the lower direct labor costs at that facility. If the performance of FMI does not improve after making the changes listed above, the Company may be required to record an impairment charge to its goodwill.

31

---

Table of Contents

Valuation of Deferred Tax Assets

The Company currently has significant deferred tax assets resulting from net operating loss carryforwards, tax credit carryforwards and deductible temporary differences, which should reduce taxable income in future periods. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company’s 2002, 2003 and 2006 net losses weighed heavily in the Company’s overall assessment. As a result of the assessment, the Company established a full valuation allowance for its remaining net domestic deferred tax assets at December 28, 2002. This assessment continued unchanged from 2003 through 2006. In 2006 and 2005 the Company recorded additional valuation allowances for certain Canadian deferred tax assets of $427,000 and $270,000, respectively, because it believed that the probability of realization of such assets was uncertain. Management believes that a valuation allowance is not required for the remainder of FMI’s recorded deferred tax assets as they are more likely than not to be realized.

CONSOLIDATED STATEMENTS OF OPERATIONS SUMMARY

The following table displays line items in the Consolidated Statements of Operations as a percentage of net sales.

			Percentage of Net Sales
			Years Ended
			(Unaudited)
			December 30, 2006						December 31, 2005						January 1, 2005
Net sales					100.0	%					100.0	%					100.0	%
Costs and expenses:
Cost of sales					63.0						58.9						58.3
Selling, general and administrative					36.0						32.1						31.7
Research and development					7.4						6.5						5.6
Restructuring charge					1.0						—						—
					(107.4	)					97.5						95.6
Operating income (loss)					(7.4	)					2.5						4.4
Interest and other expense, net					(.9	)					(.7	)					(.8	)
(Loss) gain on disposition of assets					—						(.1	)					—
Income (loss) before income taxes					(8.3	)					1.7						3.6
Benefit for income taxes					(.2	)					(.9	)					(.3	)
Net income (loss)					(8.1	)%					2.6	%					3.9	%

2006 COMPARED TO 2005

Net sales.

Consolidated results of operations for 2006 reflect a decrease in net sales from 2005 of $2,297,000 or 7.7% to $27,421,000. This decrease was attributable to a $2,327,000 decrease in net sales of microwave micro-circuitry products from the Company’s Filtran business offset in part by a $48,000 increase in sales for the electronic components and subsystems segment. The decrease in sales of the microwave micro-circuitry segment for 2006 was due to declines in the segment’s defense orders that had been expected to renew in 2006. Net sales for the electronic components and subsystems segment for 2006 were essentially flat, but below expectation due to reduced orders from delays in space and defense programs. Sales for 2006 for the electronic components and subsystems segment included $1,200,000 of revenue recognized in connection with the early close out of a fixed price customer contract during the second quarter.

Backlog represents the amount of orders the Company has received that have not been shipped as of the end of a particular fiscal period. The orders in backlog are a measure of future sales and

32

---

Table of Contents

determine the Company’s upcoming material, labor and service requirements. The book-to-bill ratio for a particular period represents orders received for that period divided by net sales for the same period. The Company looks for this ratio to exceed 1.0, indicating the backlog is being replenished at a higher rate than the sales being removed from the backlog.

The following table presents key performance measures that we use to monitor our operating results:

			2006						2005
Beginning Backlog				$	13,139,000					$	12,945,000
Plus Bookings				$	26,667,000					$	29,913,000
Less Net Sales				$	27,421,000					$	29,719,000
Ending Backlog				$	12,385,000					$	13,139,000
Book-to-Bill Ratio					0.97						1.01

Orders of $26,667,000 were received for 2006, a decrease of $3,246,000 or 10.9% compared to $29,913,000 in orders received for 2005. The decrease in orders for fiscal year 2006 as compared to fiscal year 2005 was due to our key account customers loss of significant orders that were to include Merrimac products as well as from delays in expected satellite and defense programs for all product lines, including our Multi-Mix^® products. Backlog decreased by $754,000 to $12,385,000 at the end of 2005 compared to $13,139,000 at year-end 2005.

Cost of sales and gross profit.

The following table provides comparative gross profit information, by product segment, for the past two years.

			$						Increase/ (Decrease) From Prior Year						% of Segment Net Sales			$						Increase/ (Decrease) From Prior Year						% of Segment Net Sales
Electronic Components and Subsystems gross profit				$	9,175,000					$	(1,107,000	)			40.7%				$	10,281,000					$	(1,060,000	)			45.7%
Microwave Micro-Circuitry gross profit				$	959,000					$	(973,000	)			19.0%				$	1,933,000					$	364,000				26.2%
Consolidated gross profit				$	10,134,000					$	(2,080,000	)			37.0%				$	12,214,000					$	(696,000	)			41.1%

The decrease in gross profit for 2006 for the electronic components and subsystems segment was due to higher warranty costs from the Company’s transition from components to a designer and provider of integrated assemblies and subsystems, more competitive pricing on certain products and higher fixed manufacturing costs.

Depreciation and amortization expense included in 2006 consolidated cost of sales was $2,333,000, a decrease of $529,000 compared to 2005. The decrease in depreciation and amortization expense was due to certain production and testing equipment becoming fully depreciated during 2005 and 2006. For 2006, approximately $1,490,000 of depreciation and amortization expense was associated with Multi-Mix^® Microtechnology capital assets.

FMI sales include intersegment sales of $155,000 and $136,000 in 2006 and 2005, respectively. The decrease in gross margin percent for 2006 is due to higher material and overhead costs and lower production yields.

Selling, general and administrative expenses.

Selling, general and administrative expenses of $9,864,000 for 2006 increased by $324,000 or 3.4%, and when expressed as a percentage of net sales, increased by 3.9 percentage points to 36.0%

33

---

Table of Contents

compared to 2005. The 2006 selling, general and administrative expenses increased due to higher selling, marketing and administrative expenses related to higher compensation partially offset by lower commissions on the lower sales level.

Research and development expenses.

Research and development expenses for new products were $2,021,000 for 2006, an increase of $89,000 or 4.6% and when expressed as a percentage of net sales, an increase of 0.9 percentage points to 7.4% compared to 2005. Except for $112,000 of expenses at FMI (a decrease of $42,000 from such FMI expenses in 2005) substantially all of the research and development expenses were related to Multi-Mix^® Microtechnology, Multi-Mix PICO^® and power amplifier products. The Company anticipates that these expenses will increase in future periods in connection with further implementation of our strategic plan for Multi-Mix^®.

Restructuring charge.

Because of the declining level of orders and sales, the Company reduced its headcount by 15 persons, principally involved in production, manufacturing support, sales and administration. The Company recorded a personnel restructuring charge of $286,000, consisting of severance and certain other personnel costs, during the fourth quarter of 2006. Such charges increased the net loss by $.09 per share. The Company paid $146,000 of these restructuring charge in 2006. Substantially all of the remaining 2006 restructuring charge will be paid in 2007. The Company anticipates annual savings of $1,500,000 to begin in the first quarter of 2007 from the restructuring and other cost reduction and containment measures to be implemented.

Operating income (loss).

Consolidated operating loss for 2006 was $2,038,000 compared to consolidated operating income of $742,000 for 2005. Consolidated operating loss for 2006 included a non-cash charge of $189,000 for share-based compensation resulting from the adoption of SFAS No. 123R.

For 2006, the Company’s operating loss for its electronic components and subsystems segment was $1,526,000 compared to operating income of $280,000 for 2005. The lower operating income for the electronic components and subsystems segment was due to the segment’s lower gross profit, restructuring charges, higher research and development costs and higher selling, marketing and administrative costs compared to 2005. For 2006, operating loss for the microwave micro-circuitry segment was $511,000 compared to operating income of $462,000 for 2005 due to the lower gross profit from the reduced 2006 sales level.

Interest and other expense, net.

Interest and other expense, net was $257,000 for 2006 compared to interest and other expense, net of $218,000 for 2005. Interest expense for 2006 includes the write-off of $167,000 of unamortized deferred debt costs related to its prior financing agreement. Interest expense for 2006 and 2005 was principally incurred on borrowings under the term loans which the Company consummated during the fourth quarter of 2003 and refinanced in October 2006. The Company instituted a cash management program in the fourth quarter of 2005 that generated increased interest income on the Company’s free cash balances during 2006 as compared to 2005.

Income taxes.

The Company’s effective tax rate for the year ended December 31, 2005 reflects U.S. Federal Alternative Minimum Tax and State income taxes for the respective years. The current foreign tax benefit for the year ended December 30, 2006 represents refundable Canadian provincial tax credits for which FMI, as a technology company, has qualified. The 2005 current benefit reflects a $30,000 domestic tax benefit related to tax planning on the 2004 returns. The current foreign tax benefit for the year ended December 31, 2005 represents refundable Canadian provincial tax credits as described above for FMI.

34

---

Table of Contents

Internal Revenue Service Code Section 382 places a limitation on the utilization of net operating loss carryforwards when an ownership change, as defined in the tax law, occurs. Generally, an ownership change occurs when there is a greater than 50 percent change in ownership. If such change should occur, the actual utilization of net operating loss carryforwards, for tax purposes, would be limited annually to a percentage of the fair market value of the Company at the time of such change. The Company may become subject to these limitations depending on change in ownership.

Net income (loss).

Net loss for 2006 was $2,225,000 compared to net income of $761,000 for 2005 for the reasons described above. Net loss per share for 2006 was $.71 compared to net income per diluted share of $.24 per share for 2005.

2005 COMPARED TO 2004

Net sales.

Consolidated results of operations for 2005 reflect a decrease in net sales from 2004 of $1,230,000 or 4.0% to $29,719,000. This decrease was attributable to a $2,657,000 decrease in net sales of electronic components and subsystems offset in part by a $1,416,000 increase in sales of microwave micro-circuitry products from the Company’s wholly-owned subsidiary FMI. The decrease in net sales for the electronic components and subsystems segment for 2005 is due to reduced orders from delays in space and defense programs. In times of armed conflict or war, military spending is concentrated on armaments build up, maintenance and troop support, and not on the research and development and specialty applications that are the Company’s core strengths and revenue generators. The increase in sales of the microwave micro-circuitry segment for 2005 was due to new orders from both existing and new customers due to the continued efforts to diversify FMI into wireless base stations, automotive and defense applications.

Backlog represents the amount of orders the Company has received that have not been shipped as of the end of a particular fiscal period. The orders in backlog are a measure of future sales and determine the Company’s upcoming material, labor and service requirements. The book-to-bill ratio for a particular period represents orders received for that period divided by net sales for the same period. The Company looks for this ratio to exceed 1.0, indicating the backlog is being replenished at a higher rate than the sales being removed from the backlog.

The following table presents key performance measures that we use to monitor our operating results:

			2005						2004
Beginning Backlog				$	12,945,000					$	12,395,000
Plus Bookings				$	29,913,000					$	31,499,000
Less Net Sales				$	29,719,000					$	30,949,000
Ending Backlog				$	13,139,000					$	12,945,000
Book-to-Bill Ratio					1.01						1.02

Orders of $29,913,000 were received for 2005, a decrease of $1,586,000 or 5.0% compared to $31,499,000 in orders received for 2004. Backlog increased by $194,000 to $13,139,000 at the end of 2005 compared to $12,945,000 at year-end 2004.

35

---

Table of Contents

Cost of sales and gross profit.

The following table provides comparative gross profit information, by product segment, for the past two years.

			$						Increase/ (Decrease) From Prior Year						% of Segment Net Sales			$						Increase/ (Decrease) From Prior Year						% of Segment Net Sales
Electronic Components and Subsystems gross profit				$	10,281,000					$	(1,060,000	)			45.7%				$	11,341,000					$	1,841,000				45.1%
Microwave Micro-Circuitry gross profit				$	1,933,000					$	364,000				26.2%				$	1,569,000					$	492,000				26.3%
Consolidated gross profit				$	12,214,000					$	(696,000	)			41.1%				$	12,910,000					$	2,333,000				41.7%

The decrease in gross profit for 2005 for the electronic components and subsystems segment was due to the overall decrease in segment sales. Cost of sales for the electronic components and subsystems segment also reflects a reduction of intersegment purchases from FMI of $12,000 for 2005.

Depreciation expense included in 2005 consolidated cost of sales was $2,862,000, a decrease of $8,000 compared to 2004. For 2005, approximately $1,641,000 of depreciation expense was associated with Multi-Mix^® Microtechnology capital assets.

FMI sales include intersegment sales of $136,000 and $148,000 in 2005 and 2004, respectively. The decrease in gross margin percent for 2005 is due to higher material and overhead costs, including additional overtime, related to the new defense orders booked in 2004. During the second half of 2004, gross profit margin at FMI was negatively impacted by the weakness of the U.S. dollar against the Canadian dollar. The higher material and overtime costs for such defense orders are not expected to continue into future periods, but certain additional overhead costs may affect future results.

Selling, general and administrative expenses.

Selling, general and administrative expenses of $9,540,000 for 2005 decreased by $280,000 or 2.8%, and when expressed as a percentage of net sales, increased by 0.4 percentage points to 32.1% compared to 2004. The 2005 selling, general and administrative expenses decreased due to lower commissions related to the lower sales level in 2005.

Research and development expenses.

Research and development expenses for new products were $1,932,000 for 2005, an increase of $209,000 or 12.1% and when expressed as a percentage of net sales, an increase of 0.9 percentage points to 6.5% compared to 2004. Except for $154,000 of expenses at FMI (a decrease of $44,000 from such FMI expenses in 2004) substantially all of the research and development expenses were related to Multi-Mix^® Microtechnology, Multi-Mix PICO^® and power amplifier products. The Company anticipates that these expenses will increase in future periods in connection with further implementation of our strategic plan for Multi-Mix^®.

Operating income.

Consolidated operating income for 2005 was $742,000 compared to consolidated operating income of $1,367,000 for 2004. Two expenses which reduced operating income for 2004 were $150,000 for employee incentive compensation payments and $75,000 for a profit-sharing contribution to the Company’s 401(k) Plan, did not recur in 2005.

For 2005, the Company’s operating income for its electronic components and subsystems segment was $280,000 compared to operating income of $1,178,000 for 2004. The lower operating income for the electronic components and subsystems segment was due to the segment’s lower gross profit from lower sales, partially offset by lower operating expenses compared to 2004. For 2005, operating income for the microwave micro-circuitry segment was $462,000 compared to operating income of $189,000 for 2004 due to the increase in gross margin from the higher sales level.

36

---

Table of Contents

Interest and other expense, net.

Interest and other expense, net was $218,000 for 2005 compared to interest and other expense, net of $265,000 for 2004. Interest expense for 2005 and 2004 was principally incurred on borrowings under the revolving line of credit and term loans which the Company consummated during the fourth quarter of 2003. The reduction of interest and other expense was due to lower outstanding debt balances during 2005 as the Company repaid $1,502,000 throughout 2004.

Income taxes.

The Company’s effective tax rate for the years ended December 31, 2005 and January 1, 2005 reflects U.S. Federal Alternative Minimum Tax and State income taxes for the respective years. The 2005 current benefit reflects a $30,000 domestic tax benefit related to tax planning on the 2004 returns. The current foreign tax benefit for the year ended December 31, 2005 represents refundable Canadian provincial tax credits for which FMI, as a technology company, has qualified. The 2004 current tax provision in the amount of $122,000 was based on certain statutory limitations on the use of the Company’s net operating loss carryforwards. Tax benefits were recorded in the amount of $218,000 in 2004 primarily associated with FMI’s research and development expenses incurred in Canada.

Internal Revenue Service Code Section 382 places a limitation on the utilization of net operating loss carryforwards when an ownership change, as defined in the tax law, occurs. Generally, an ownership change occurs when there is a greater than 50 percent change in ownership. If such change should occur, the actual utilization of net operating loss carryforwards, for tax purposes, would be limited annually to a percentage of the fair market value of the Company at the time of such change. The Company may become subject to these limitations depending on change in ownership.

Net income.

Net income for 2005 was $761,000 compared to net income of $1,198,000 for 2004. Net income per diluted share for 2005 was $.24 compared to net income per diluted share of $.38 per share for 2004.

Quarterly Results

The following table sets forth unaudited financial data for each of the Company’s last eight fiscal quarters.

			Fiscal Year Ended December 30, 2006																								Fiscal Year Ended December 31, 2005
			First Quarter						Second Quarter						Third Quarter						Fourth Quarter						First Quarter						Second Quarter						Third Quarter						Fourth Quarter
			(Dollars in thousands) (Unaudited)
Consolidated Statement of Operations Data:
Net sales				$	6,230					$	8,251					$	6,748					$	6,192					$	7,258					$	7,568					$	7,890					$	7,002
Gross profit					2,401						3,711