Exhibit 13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

1996 compared to 1995

     In 1996  net  sales  were  $14,153,000  compared  to  $14,397,000  in 1995.
Operations  generated a loss of $589,000 in 1996. After excluding the $1,382,000
restructuring charge recognized in 1996, operations generated income of $793,000
compared to operating  income of  $2,309,000  in 1995. A net loss of $297,000 in
1996  compares  to net  income of  $1,652,000  in 1995.  The  operating  loss is
primarily  due to the  increases  in cost of  sales  and  selling,  general  and
administrative expenses coupled with the restructuring charge.

     Net foreign sales amounted to $4,390,000 or 31.0% of net sales, an increase
of $161,000 or 3.8% compared to prior year's  foreign sales of  $4,229,000.  Net
domestic  sales  amounted  to  $9,763,000  or 69.0% of net sales,  a decrease of
$405,000  or 4.0%  compared  to prior  year's  domestic  sales  of  $10,168,000.
Management  attributes  approximately  $200,000 of the decrease to the continued
decline of net domestic defense activity.

     Orders increased $1,776,000 or 11.9% to $16,729,000 in 1996 and the backlog
of firm unfilled orders increased $2,575,000 or 45.5% to $8,231,000 at year-end.

     Cost of sales as a percentage of net sales  increased 8.1% to 58.2%,  which
amounted to an increase of  $1,032,000.  The primary  reasons for the  increases
were the loss of  production  time  from  Total  Quality  Management  (TQM)  and
ISO-9001 quality standards program training and  implementation,  as well as the
setup costs for the new manufacturing facility in Costa Rica, which items in the
aggregate were $811,000. In addition, higher compensation rates due to the merit
pay increases that became  effective at midyear 1995;  additional  manufacturing
personnel  hired to reduce the number of backlog ship days;  the doubling of the
matching  contribution  rate by the Company to the  Company's  401(k) Plan;  and
fixed  overhead  increases  not fully  absorbed  because the shipment  shortfall
impacted cost of sales.

     Selling,  general and  administrative  expenses increased $331,000 and as a
percentage  of net  sales  increased  from  32.7% in 1995 to 35.6% in 1996.  The
increases are due primarily to aggregate  costs of $464,000 for TQM and ISO-9001
training,  instruction and  implementation  costs and a comprehensive  marketing
analysis  utilizing an outside  consulting firm, as well as higher  compensation
expenses resulting from 1995 midyear merit increases to all employees.

1995 compared to 1994

     Results of operations  reflect increases in: net sales of $804,000 or 5.9%;
operating  income of $215,000 or 10.3%; net income of $221,000 or 15.4%; and net
income per share of $.14 or 17.3%.

     Net foreign sales amounted to $4,229,000 or 29.4% of net sales, an increase
of $703,000 or 19.9%  compared to prior year's net foreign sales of  $3,526,000.
The increase was attributable to further  expansion into foreign markets through
our network of 17 sales representative  organizations and the rapid expansion of
the space and  wireless  communications  markets in the Far East.  Net  domestic
sales amounted to $10,168,000 or 70.6% of net sales,  an increase of $101,000 or
1.0%  compared to prior year's net  domestic  sales of  $10,067,000.  Management
attributes  this slight  change to the  continued  decline of  domestic  defense
activity.


     Orders increased  $1,200,000 or 8.7% to $14,953,000 in 1995 and the backlog
of firm unfilled orders increased $545,000 or 10.7% to $5,656,000 at year-end.

     Cost of sales  increased  $715,000  or 11.0% and,  as a  percentage  of net
sales,  increased  2.3%. The primary reasons for that increase were: a diversion
of  production  labor for the  newly  adopted  TQM and  ISO-9001  programs;  the
manufacture  of  prototypes  and  shipments  of  products  which are  considered
developmental;  and merit pay  increases to the  manufacturing  and  supervisory
staff that became effective at mid-year.

     Selling, general and administrative expenses decreased $118,000 or 2.4% and
as a  percentage  of net sales  were  32.7%,  a  decrease  of 2.8%.  There  were
increases in: sales commissions of $92,000 as net sales increased;  professional
fees (legal) of $89,000 from defending our claims  regarding a 1992  acquisition
disagreement;  contributions  to the Company's  Savings and  Investment  Plan of
$54,000  resulting  from the doubling of the matching  contribution  rate by the
Company;  and the Profit Sharing Plan contribution  increase of $36,000 or 14.3%
to  $288,000.  These  increases  were offset by  decreases  in  advertising  and
promotion expenses of $36,000 or 20.5%,  proposal expenses of $180,000 or 27.2%,
and development  expenses of $123,000 or 31.0%, as personnel  concentrated their
efforts on expediting shipments.

                                      -1-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

     The Company's  financial  condition remained strong throughout 1996. At the
end  of  1996,  the  Company  had  liquid  resources  comprised  of  cash,  cash
equivalents  and   investments  in   available-for-sale   securities,   totaling
approximately  $2,400,000  compared  to  $4,600,000  at  the  end of  1995.  The
Company's  working  capital stood at $7,960,000 and its current ratio was 5.7 at
the end of 1996 compared to  $10,024,000  and 7.0,  respectively,  at the end of
1995.

     The Company's operating activities generated cash flows of $792,000 in 1996
compared to  $2,193,000  in 1995 and  $2,263,000  in 1994.  The decrease in cash
flows is  primarily  the result of the  decline in 1996  operating  income.  The
Company made net  investments in property,  plant and equipment of $1,003,000 in
1996  compared to $447,000 in 1995 and  $1,103,000  in 1994.  During  1996,  the
Company made open market  purchases  of 154,100  shares of its common stock at a
cost of  $1,630,000.  Purchases  of common  stock  were  $1,035,000  in 1995 and
$904,000 in 1994. The Company paid cash  dividends  quarterly at the annual rate
of $.40 per share on its common stock amounting to $617,000 in 1996, $676,000 in
1995 and $691,000 in 1994. Lacking clear cut growth  opportunities,  the Company
in the  past  has  returned  a  substantial  portion  of its net  income  to the
stockholders.  Achievement  of the growth  anticipated  by the new Management of
Merrimac will inevitably cause a review of our dividend policy.


     The Company has a $3,000,000  unsecured  line of credit  agreement with The
Bank of New  York,  at the  bank's  floating  prime  rate,  and the full line is
available  for  future  borrowing.  Management  believes  that  with the  liquid
resources and the unused line of credit available at the end of 1996, along with
cash flows  expected to be  generated  from  operations,  the Company  will have
sufficient  resources  for  currently  contemplated   operations  in  1997.  The
Company's  manufacturing facility in Costa Rica became operational in the second
half of 1996 and expansion  plans there are being  contemplated  for the current
year. The Company's capital  expenditure program for new projects and production
equipment is anticipated to exceed its depreciation and amortization expenses in
1997.

     The  Company was  authorized  on November 1, 1996 to purchase up to 100,000
shares of its common stock,  from time-to-time  depending on market  conditions,
and has purchased 4,100 shares to date under such authorization.

     The  Company  is  also  exploring  the  possibility  of  acquiring  similar
manufacturers  of  electronic  devices,  although it currently has no definitive
plans or agreements.  Management  believes that such  acquisitions  and business
operations  expansion could be financed through the liquid and capital resources
currently available as previously discussed, and/or through additional borrowing
or issuance of equity or debt securities.



                                      -2-
<PAGE>

CONSOLIDATED STATEMENTS OF INCOME


Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
<TABLE>
<CAPTION>

                                                           1996          1995           1994
                                                       ----------------------------------------
<S>                                                    <C>           <C>            <C>
Net sales ..........................................   $14,152,970   $14,396,633    $13,592,787

Costs and expenses:
    Cost of sales ..................................     8,240,639     7,208,152      6,493,598
    Selling, general and administrative ............     5,041,606     4,710,752      4,828,601
    Amortization of intangible assets ..............        77,568       169,180        176,735
    Restructuring Charge ...........................     1,381,709                         
                                                       ----------------------------------------
                                                        14,741,522    12,088,084     11,498,934
                                                       ----------------------------------------
Operating income (loss) ............................      (588,522)    2,308,549      2,093,853
Interest and other income, net......................        97,300       282,517        174,343
                                                       ----------------------------------------
Income (loss) before income taxes ..................      (491,252)    2,591,066      2,268,196
Provision (credit)for income taxes .................      (194,000)      939,000        837,000
                                                       ----------------------------------------

Net income (loss) ..................................   $  (297,252)  $ 1,652,066    $ 1,431,196
                                                       ========================================
Net income (loss) per common share .................         $(.19)        $ .95          $ .81
                                                       ----------------------------------------
Weighted average number of shares outstanding ......     1,585,981     1,736,675      1,765,375
                                                       ----------------------------------------
</TABLE>
See accompanying notes.








                                      -3-
<PAGE>


CONSOLIDATED BALANCE SHEETS

December 28, 1996 and December 30, 1995
<TABLE>
<CAPTION>
                                                                                              1996            1995
                                                                                           ---------------------------
Assets

<S>                                                                                        <C>               <C>
Current assets:
    Cash and cash equivalents .........................................................    $ 1,265,581     $ 2,295,186
    Investments in Available-for-sale securities ......................................      1,140,832       2,297,705
    Accounts receivable ...............................................................      1,850,042       2,373,181
    Inventories .......................................................................      4,165,818       3,920,010
    Other current assets ..............................................................        271,810         112,215
    Deferred tax assets ...............................................................        968,000         691,200
                                                                                           ---------------------------
                  Total current assets ................................................      9,662,083      11,689,497
                                                                                           ---------------------------
Property, plant and equipment, at cost ................................................     12,668,930      12,085,514
    Less accumulated depreciation and amortization ....................................      9,326,688       8,957,870
                                                                                           ---------------------------
    Net property, plant and equipment .................................................      3,342,242       3,127,644
Deferred Tax Assets ...................................................................         47,000
Other assets ..........................................................................         30,440         371,371
                                                                                           ---------------------------
                  Total Assets ........................................................    $13,081,765     $15,188,512
                                                                                           ===========================
Liabilities and Stockholders' Equity

Current liabilities:
    Accounts payable ..................................................................    $   750,763     $   386,303
    Accrued liabilities ...............................................................        952,880         955,277
    Income taxes payable ..............................................................                        323,549
                                                                                           ---------------------------
                  Total current liabilities ...........................................      1,703,643       1,665,129
Deferred Compensation .................................................................        249,100
Deferred tax liabilities ..............................................................                        154,500
                                                                                           ---------------------------
                  Total liabilities ...................................................      1,952,743       1,819,629
                                                                                           ---------------------------

Contingencies
Stockholders' equity:
    Common stock, par value $.50 per share;
       5,000,000 shares authorized; 2,585,749 and 2,549,452 shares issued ...... ......      1,292,875       1,274,726
    Additional paid-in capital ........................................................      9,005,330       8,723,124
    Retained earnings .................................................................     10,051,720      10,965,750
    Unrealized holding gain on available-for-sale securities, net .....................          6,162           1,900
                                                                                           ---------------------------
                                                                                            20,356,087      20,965,500

    Less treasury stock, at cost - 1,074,839 and 920,739 shares .......................      9,227,065       7,596,617
                                                                                           ---------------------------
                  Total stockholders' equity ..........................................     11,129,022      13,368,883
                                                                                           ---------------------------
                  Total Liabilities and Stockholders Equity ...........................    $13,081,765     $15,188,512
                                                                                           ===========================
</TABLE>

See accompanying notes.


                                      -4-
<PAGE>



<TABLE>
<CAPTION>


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
                                                                                    
                                                                   Additional     Unrealized
                                           Common Stock              paid-in         holding     Retained       Treasury Stock
                                       Shares        Amount          capital      gain (loss)    earnings     Shares      Amount
----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>          <C>            <C>            <C>           <C>         <C>         <C>
Balance, January 1, 1994               2,469,440   $1,234,720     $8,112,426                  $ 9,249,440     730,535   $5,657,665
----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                                      1,431,196
Exercise of options                       38,423       19,212        231,238
Shares issued                             13,333        6,666        144,996
Tax benefit - stock options*                                          48,800
Effect of change in fair value of
  available-for-sale Securities                                                   $(213,720)
Cash dividends                                                                                   (690,939)
Purchase of common stock                                                                                      100,200      903,907
----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994             2,521,196    1,260,598      8,537,460       (213,720)    9,989,697     830,735    6,561,572
----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                                      1,652,066
Exercise of options                       28,256       14,128        164,364
Tax benefit - stock options*                                             
Effect of change in fair value of                                     21,300
  available-for-sale securities                                                     215,620
Cash dividends                                                                                   (676,013)
Purchase of common stock                                                                                        90,004   1,035,045
----------------------------------------------------------------------------------------------------------------------------------
Balance December 30, 1995              2,549,452    1,274,726      8,723,124          1,900    10,965,750      920,739   7,596,617
----------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                                                (297,252)
Exercise of options                       36,297       18,149        268,206
Tax benefit - stock options*                                          14,000
Effect of change in fair value of
  available-for-sale securities                                                       4,262
Cash dividends                                                                                   (616,778)
Purchase of common stock                                                                                       154,100   1,630,448
----------------------------------------------------------------------------------------------------------------------------------
Balance December 28, 1996              2,585,749   $1,292,875     $9,005,330      $   6,162   $10,051,720    1,074,839  $9,227,065
</TABLE>

*Tax benefit resulting from exercise and disposition of stock options.
See accompanying notes.    



                                      -5-
<PAGE>



CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
<TABLE>
<CAPTION>
                                                                     1996           1995           1994
Cash flows from operating activities:                            ------------------------------------------

<S>                                                              <C>             <C>           <C>
    Net income (loss) .......................................    $ (297,252)     $1,652,066    $ 1,431,196
    Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
        Depreciation and amortization .......................       890,859         850,637        837,863
        Loss on available-for-sale securities ...............        17,650
        Write-off of intangible assets ......................       244,500
        Deferred compensation ...............................       279,100
        Deferred income taxes ...............................      (481,248)        (46,621)      (110,000)
        Changes in operating assets and liabilities:
          Accounts receivable ...............................       523,139        (321,528)       116,994
          Inventories .......................................      (245,808)       (272,180)       (11,574)
          Other current assets ..............................      (145,595)         76,685          6,147
          Other assets ......................................         2,178          15,253       (165,000)
          Accounts payable ..................................       364,460          68,053        (28,129)
          Accured liabilities ...............................       (32,397)        120,067        102,670
          Income taxes payable ..............................      (323,549)         52,492         82,613
                                                                 ------------------------------------------
Net cash provided by operating activities ...................       791,681       2,192,924      2,262,780
                                                                 ------------------------------------------
Cash flows from investing activities:
    Purchase of capital assets ..............................    (1,012,259)      ( 450,977)    (1,116,551)
    Proceeds from sales of capital assets ...................         9,071           3,690         13,212
    Proceeds from sales and maturities 
      of available-for-sale securities ......................     2,272,070       1,292,983        400,000
    Purchase of investment securities .......................    (1,129,297)
                                                                 ------------------------------------------
Net cash provided by (used in) investing activities .........       139,585         845,676       (703,339)
                                                                 ------------------------------------------
Cash flows from financing activities:
    Repurchase of common stock ..............................    (1,630,448)     (1,035,045)      (903,907)
    Proceeds from the issuance of common stock ..............       286,355         178,492        250,450
    Payments of dividends ...................................      (616,778)       (676,013)      (690,939)
                                                                 ------------------------------------------
Net cash used in financing activities .......................    (1,960,871)     (1,532,566)    (1,344,396)
                                                                 ------------------------------------------
Net increase (decrease) in cash and cash equivalents ........    (1,029,605)      1,506,034        215,045
Cash and cash equivalents at beginning of year ..............     2,295,186         789,152        574,107
                                                                 ------------------------------------------
Cash and cash equivalents at end of year ....................    $1,265,581      $2,295,186    $   789,152
                                                                 ------------------------------------------
Supplemental disclosures of cash flows information:
   Cash paid during the year for:
     Income taxes ...........................................    $  712,500      $  833,776    $   885,295
                                                                 ------------------------------------------

Supplemental disclosure of non-cash investing and
   financing activity:
     Unrealized holding gain (loss) on available-for-sale
       securities, less deferred tax provision of $4,200, 
       $143,000 and benefit of $142,000 .....................    $    4,262      $  215,620    $  (213,720)
     Tax benefit related to employees' stock options ........        14,000          21,300         48,800
     Decrease in intangible assets ..........................                      (105,664)       (38,666)
     Issuance of common stock ...............................                                      151,662
                                                                 ------------------------------------------
</TABLE>
See accompanying notes.



                                      -6-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994

1.Summary of significant accounting policies


     Principles of consolidation:  The financial statements include the accounts
of the Company, Industrias Merrimac Incorporada,  S.A. a wholly-owned subsidiary
located  in San  Jose,  Costa  Rica and  Merrimac  International,  Inc.  FSC,  a
wholly-owned  foreign sales  corporation.  All  intercompany  accounts have been
eliminated in consolidation.

     Cash  and  cash  equivalents:  The  Company  considers  all  highly  liquid
securities  with an  original  maturity  of less  than  three  months to be cash
equivalents. The Company maintains cash deposits with banks that at times exceed
applicable  insurance limits. The Company reduces its exposure to credit risk by
maintaining such deposits with high quality financial  institutions.  Because of
their liquidity and short-term maturities, the carrying value of these financial
instruments equals their fair value.

     Use of estimates:  The  preparation  of financial  statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates and assumptions  that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.

     Contract  revenues:  Sales and  related  costs of sales  under  fixed-price
contracts are recorded as deliveries are made. Prior to shipment,  manufacturing
costs  incurred on such  contracts  are  recorded as work in process  inventory.
Anticipated future losses on contracts are charged to income when identified.

     Investments:  Effective January 2, 1994, the Company adopted the provisions
of Statement of Financial  Accounting Standards No. 115, "Accounting for Certain
Investments  in Debt and Equity  Securities"  and  classified  its  portfolio of
investment  securities,  as  available-for-sale  securities that were carried at
quoted  market  values.  Unrealized  gains and losses are included as a seperate
component of stockholders' equity.  Realized gains and losses,  determined using
the  specific  identification  method,  are  included  in income  in the  period
incurred.  The cumulative effect of adopting  Statement No. 115 as of January 2,
1994 was not material.

     Inventories:  Inventories are valued at the lower of average cost or market
and consist of the following:

                                                       1996                 1995
                                                 -------------------------------

Finished goods .......................           $  885,863           $1,079,983
Work in process ......................            2,134,013            1,404,901
Raw materials and
purchased parts ......................            1,145,942            1,435,126
                                                 -------------------------------
                                                 $4,165,818           $3,920,010
                                                 ===============================


Total inventories are net of valuation allowances for obsolescence of $1,761,000
in 1996 and $1,138,000 in 1995.

     Depreciation:  Depreciation  is  computed  for  financial  purposes  on the
straight-line method, while accelerated methods are used, where applicable,  for
tax  purposes.  The  following  estimated  useful  lives are used for  financial
statement purposes:

Land improvements .....................................                 10 years
Building ..............................................                 25 years
Machinery and equipment ...............................             3 - 10 years
Office equipment, furniture and fixtures...............             5 - 10 years

     Assets under  construction are not depreciated  until the assets are placed
into service.  Fully depreciated assets in use at December 28, 1996 and december
30, 1995 amounted to $6,040,000 and $6,016,000 respectively.

     Long-lived  assets:  Effective  December  31,  1995,  the  Company  adopted
Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of"
Under Statement No. 121,  impairment  losses on long-lived assets are recognized
when events or changes in  circumstances  indicate that the  undiscounted  cash
flows  estimated  to be  generated  by such assets are less than their  carrying
value. Impairment losses are then measured by comparing the fair value of assets
to their carrying amounts.

                                      -7-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 28, 1996, Decemeber 30, 1995, and December 31, 1994

1. Summary of significant accounting policies (continued)


     During 1996, the Company determined that its intangible  assets,  comprised
primarily  of the excess of cost over the fair  value of net assets of  acquired
businesses,  had become  impaired and estimated that they would not generate any
significant cash flows in future periods. Accordingly, the carrying value of the
impaired  assets of $244,500 was written off in  conjunction  with certain other
restructuring charges (see Note 12). Prior to such determination, the intangible
assets  were  being  amortized  on a  straight-line  basis over a period of five
years.  The  implementation  of Statement  No.121 did not have any effect on the
determination of the amount written off.

     Advertising: The Company expenses the cost of advertising and promotions as
incurred.  Advertising  costs  charged  to  operations  were  $150,000  in 1996,
$140,000 in 1995 and $176,000 in 1994.

     Income taxes:  The Company uses the asset and  liability  method to account
for income taxes.  Under this method,  deferred tax assets and  liabilities  are
determined based on temporary  differences  between financial  reporting and tax
bases of assets and  liabilities,  and are measured  using the enacted tax rates
and laws that will be in effect when the  differences  are  expected to reverse.
Valuation  allowances  are  established  when  necessary to reduce  deferred tax
assets to the amount expected to be realized.

     Profit Sharing Plan:  Based on the annual  authorization  from the Board of
Directors, 10% of pre-tax income as adjusted before the profit sharing provision
($145,000 in 1996,  $288,000 in 1995 and $252,000 in 1994) is  contributed  to a
trust fund and allocated to eligible employees.

     Savings and  Investment  Plan: The Company's  Savings and  Investment  Plan
(401(k) plan) permits  eligible  employees to save and invest up to 16% of their
regular  compensation  with  50% (25%  prior  to  1995) of the  first 6% of such
savings  matched by the Company.  The Company's  contributions  to the Plan were
$142,000 in 1996, $105,000 in 1995 and $51,000 in 1994.

     Stock-based compensation:  Effective December 31, 1995, the Company adopted
the provisions of Statement No. 123, "Accounting for Stock-Based  Compensation,"
which  permitted  it to elect to account for  stock-based  compensation  arising
under its stock option and stock  subscription plans by using a fair value based
method or continuing to measure  compensation  expense using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock  Issued to  Employees."  The Company  has  elected to  continue  using the
intrinsic value method and make the pro forma disclosures  required by Statement
No. 123 of net income and net income per share as if the fair value based method
of accounting had been applied (see Note 6). Since the Company  generally grants
options and rights to subscribe  to purchase  shares at or near the market price
of the  underlying  share  on the date of  grant,  it will  not be  required  to
recognize compensation expense as a result of such grants.

     Research and development: Research and development expenditures of $246,000
in 1996, $275,000 in 1995 and $398,000 in 1994 were expensed as incurred.

Interest expense:  Interest expense was not material in 1996, 1995 and 1994.

     Net  income  (loss) per  share:  Net income  (loss) per share is based upon
weighted  average  number  of  common  shares  and  common   equivalent   shares
outstanding  during the year.  Common  equivalent shares arise from the dilutive
effects of shares that may be purchased  under stock  option and purchase  plans
(see Note 6).

     Accounting  period:  The  Company's  fiscal year is the 52 - 53 week period
ending on the  Saturday  closest to December  31.  There were 52 weeks in fiscal
year 1996, 1995 and 1994 (see Note 13).

                                       -8-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 28, 1996, Decemeber 30, 1995, and December 31, 1994

     2. Investments in  available-for-sale securities

     The  amortized  cost  of  the  Company's  portfolio  of  available-for-sale
investments in marketable  equity  securities at December 28, 1996 and municipal
debt  securities  at December 30, 1995 is  reconciled  to the fair market value,
which was also the  carrying  value,  of the  portfolio at December 28, 1996 and
December 30, 1995 as follows:

                                                             1996      1995     
                                                         -----------------------
Amortized cost ...............................           $1,130,470  $2,294,548
Gross  unrealized gains.......................               10,876       8,278
Gross unrealized losses ......................                 (514)     (5,121)
                                                         -----------------------
Fair market value ............................           $1,140,832  $2,297,705
                                                         =======================

     The net unrealized gains of $10,362 in 1996 and $3,157 in 1995 are included
as a separate  component of stockholders'  equity,  net of deferred tax effects.
Sales of securities  totaled  $2,275,000 in 1996 and $993,000 in 1995.  Realized
gains and losses in 1995 and 1994 were not material.
                                     

     3. Property Plant and equipment

Property Plant and equipment consist of the following:

                                                       1996               1995
                                                  ------------------------------

Land and land improvements ...............        $   547,446        $   547,446
Building .................................          2,238,868          2,245,928
Machinery and equipment ..................          5,850,630          5,654,608
Office equipment,
   furniture and fixtures ................          4,031,986          3,637,532
                                                  ------------------------------
                                                  $12,668,930        $12,085,514
                                                  ==============================
4.Accrued liabilities

Accrued liabilities consist of the following:
                                                       1996               1995
                                                  ------------------------------
Commissions ..........................            $   140,656        $   143,833
Vacation .............................                185,853            152,403
Profit sharing .......................                144,525            270,960
Employee compensation ................                164,820            212,373
Warranty reserve .....................                150,000            100,000
Other  ...............................                167,026             75,708
                                                  ------------------------------
                                                  $   952,880        $   955,277
                                                  ==============================

5.Line of credit

     The Company has a $3,000,000  unsecured Bank line of credit  agreement with
interest  payable  at the  prime  rate.  There  were  no  borrowing  or  amounts
outstanding  under this line of credit  agreement or any previous line of credit
agreements  at either  December 28, 1996 or December  30, 1995,  or December 31,
1994.

                                      -9-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 28, 1996, Decemeber 30, 1995, and December 31, 1994

6.Stock options and Stock Purchase Plans

     Under the Company's  1993 Stock Option Plan,  300,000  shares of the common
stock were  initially  reserved for issuance.  The 1993 Option Plan provides for
issuance of qualified and non-qualified  options.  The qualified options may not
be issued at less than 100% of the fair  market  value of the shares on the date
of grant;  they may be  exercised at any time between one and ten years from the
date of grant.  The  non-qualified  options  may be granted to  employees  at an
exercise  price  determined  by the  Stock  Option  Committee  of the  Board  of
Directors  which  may not be less  than  par  value.  Such  options  may  become
exercisable  immediately  after the grant  and/or at any time  before  the tenth
anniversary of the grant.

     The  non-qualified  options may also be granted to non-employee  directors,
provided the option price is at least equal to the closing price on the date the
option is granted.  Such options may become  exercisable  immediately  after the
grant and/or at any time before the fifth anniversary of the grant.

     As of December  28,  1996,  options for the  purchase of a total of 118,150
shares  remained  outstanding  and  exercisable  under the 1993 Option Plan, and
options for 169,550 shares were available for future grant (however, options for
100,000 of those shares were issued to executive officers on December 31, 1996).
In addition,  (i) qualified  options for the purchase of a total of 8,962 shares
remained outstanding and exercisable under the Company's 1983 Key Employee Stock
Option Plan  (however,  options can no longer be granted  under this plan);  and
(ii) nonqualified  options for the purchase of a total of 50,000 shares remained
outstanding  and  exercisable as a result of grants by the Board of Directors in
1996 to nonemployee directors at fair market value on the date of grant.

     A summary  of all stock  option  activity  and  information  related to all
options outstanding follows:
<TABLE>
<CAPTION>

                                   1996                         1995                         1994
--------------------------------------------------------------------------------------------------------------
                        Weighted                      Weighted                    Weighted
                         average        Shares         average      Shares         average       Shares
                        exercise        or price      exercise      or price      exercise       or price
                           price        per share        price      per share        price       per share
--------------------------------------------------------------------------------------------------------------
<S>                        <C>      <C>                 <C>    <C>                  <C>       <C>
Outstanding 
beginning of year ......   $8.90        140,684          $8.59      54,527           $7.80         73,645
Granted   ..............   11.00         60,000           9.00      97,000            9.75          4,500  
Exercised ..............    7.82        (20,572)          5.50      (3,493)           6.03        (22,118) 
Cancelled ..............    9.10         (3,000)          7.51      (7,350)          10.88         (1,500)
--------------------------------------------------------------------------------------------------------------
Outstanding at end of year  9.74        177,112           8.90     140,684            8.59         54,527
--------------------------------------------------------------------------------------------------------------
Exercisable at end of year  9.74        177,112           8.72      49,684            8.59         54,527
--------------------------------------------------------------------------------------------------------------
Option price range at end        
 of year                            $5.50-11.00                $5.50-10.88                    $4.45-10.88
--------------------------------------------------------------------------------------------------------------
Weighted average fair value 
 of options granted during                                 
 the year                                 $1.98                      $2.88
--------------------------------------------------------------------------------------------------------------

The approximate  weighted average remaining  contractual life of the outstanding
options at December 28, 1996 was 8.3 years.
</TABLE>


                                      -10-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994


6.Stock Option and Stock Purchase Plans (continued)

     In 1995, the Company's stockholders approved a stock purchase plan pursuant
to which 200,000 shares of the Company's  common stock were  initially  reserved
for sale to eligible employees. Under this plan, the Company may grant employees
the right to  subscribe  to purchase  shares of common stock from the Company at
85% of the  market  value on  specified  dates  and pay for the  shares  through
payroll deductions over a period of up to 27 months.

     The Company's stockholders had approved another stock purchase plan in 1985
pursuant to which 275,000  shares of the Company's  common stock were  initially
reserved  for sale to  employees  on terms  similar  to those of the 1995  stock
purchase plan. This plan expired on December 31, 1994.

A summary of Stock Purchase Plan subscription activity is as follows:
<TABLE>
<CAPTION>

                                    1996                         1995                           1994
-------------------------------------------------------------------------------------------------------------
                         Weighted                      Weighted                    Weighted
                          Average          Shares       average          Shares     average            Shares
                         exercise        or price      exercise        or price    exercise          or price
                            price       per share         price      per shares       price         per share
--------------------------------------------------------------------------------------------------------------
<S>                       <C>            <C>           <C>            <C>             <C>           <C>
Subscribed at 
 beginning of year ....... $7.30            16,932      $ 7.01           43,442       $8.03            29,981
Subscribed ............     9.46            18,649                                     6.69            29,766
Purchased .............     7.98           (15,725)       6.43          (24,763)       7.18           (16,305)
Cancelled .............     8.70            (1,582)       9.24           (1,747)
--------------------------------------------------------------------------------------------------------------
Subscribed at end of year   8.66            18,274        7.30           16,932        7.01            43,442
--------------------------------------------------------------------------------------------------------------
Subscription price 
 range at end of year                   $6.69-9.46                   $6.69-9.24                    $4.68-9.24
--------------------------------------------------------------------------------------------------------------
Weighted average fair 
value of rights granted
during the year ........                     $3.10
--------------------------------------------------------------------------------------------------------------

</TABLE>

     The weighted average  remaining  contractual  life of an outstanding  stock
subscription at December 28, 1996 was approximately one year.

     As  explained  in Note 1,  the  Company  has  adopted  the  disclosure-only
provisions of Statement  123.  Accordingly,  no earned or unearned  compensation
cost was recognized in the accompanying  consolidated  financial  statements for
stock options and purchase plan  subscription  rights  granted in 1996 and 1995.
Had compensation  cost been determined based on the fair value at the grant date
for all awards in 1996 and 1995,  consistent  with the  provisions  of Statement
123, the  Company's net income (loss) and net income (loss) per share would have
been adjusted to the pro forma amounts set forth below:

                                                    1996              1995
--------------------------------------------------------------------------------
Net income (loss) - as reported ...........      $(297,252)        $1,652,066
Net income (loss) - pro forma .............       (495,252)         1,395,066
Net income (loss) per share-as reported ...           (.19)               .95
Net income (loss) per share-pro forma .....           (.31)               .80
--------------------------------------------------------------------------------


     The fair value of each of the options and purchase plan subscription rights
granted  in 1996  and  1995  was  estimated  on the  date  of  grant  using  the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions:  dividend  yield of 3.4%;  expected  volatility of .25%;  risk-free
interest rate of 6%; and expected lives of two years. However, the Black-Scholes
option  valuation  model was developed  for use in estimating  the fair value of
traded options which have no vesting restrictions and are fully transferable. In
addition,  option  valuation  models  require  the  input of  highly  subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics  significantly  different from those
of traded options,  and because changes in the subjective input  assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options and stock subscription rights.

                                      -11-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994


7.Income taxes

     The provision for income taxes consists of the following components:

                                             1996           1995          1994
Current tax provisions:                  ---------------------------------------
Federal ............................     $ 214,000      $ 767,000     $ 739,000
State ..............................        65,000        219,000       208,000
                                         ---------------------------------------
                                           279,000        986,000       947,000
                                         ---------------------------------------
Deferred tax benefit:

Federal ............................      (369,000)       (46,000)     (101,000)
State ..............................      (104,000)        (1,000)       (9,000)
                                         ---------------------------------------
                                          (473,000)       (47,000)     (110,000)
                                         ---------------------------------------
Provision for income taxes .........     $(194,000)     $ 939,000     $ 837,000


     Temporary  differences which gave rise to a significant portion of deferred
tax assets and  liabilities  at December  28, 1996 and  December 30, 1995 are as
follows:

                                                               1996       1995
                                                           ---------------------
Current deferred tax assets:
  Inventory valuation allowance ...................        $  755,000   $489,600
  Depreciation and amortization ...................            17,800
  Capitalized inventory costs .....................            69,600    107,400
  Warranty cost ...................................            64,500     43,000
  Deferred compensation ...........................           131,300
  Other ...........................................            66,000     51,200
                                                           ---------------------
                                                            1,104,200    691,200


Non-current deferred tax liabilities:
  Depreciation and amortization ...................                      101,000
  State Income taxes ..............................            89,100     53,400
                                                           ---------------------
                                                               89,100    154,500
                                                           ---------------------
       Net deferred tax assets ....................        $1,015,100   $536,700
                                                           =====================


     The change in net deferred tax assets  during 1996 of $478,000 is comprised
of the deferred tax credit of $473,000  included in the provision for income tax
and the deferred tax provision  associated  with the unrealized  holding gain on
available-for-sale securities of $5,000 included in stockholders' equity.


     The change in net deferred  tax assets  during 1995 of $96,000 is comprised
of the deferred tax credit of $47,000  included in the  provision for income tax
and the deferred tax provision  associated  with the unrealized  holding gain on
available-for-sale securities of $143,000 included in stockholders' equity.

                                      -12-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994


7.Income taxes (continued)

     The  statutory  federal  income tax rate is reconciled to the effective tax
rate  computed by dividing  the  provision  (credit)for  income  taxes by income
(loss) before income taxes as follows:

<TABLE>
<CAPTION>

                                                          1996       1995        1994
                                                        -------------------------------
<S>                                                      <C>         <C>         <C>
Statutory rate .......................................  (34.0)%       34.0%       34.0%

Effect of:
   State income tax expense net of federal deduction     (5.2)        5.5         6.5
   Tax exempt interest ...............................   (6.2)       (2.2)       (2.7)
   Foreign Sales Corporation .........................   (3.3)       (1.6)       (1.3)
   Loss on foreign subsidiary ........................    7.6
   Other .............................................    1.5          .5          .4
                                                        -------------------------------
Effective tax rate ...................................  (39.6)%      36.2%       36.9%
</TABLE>


8.Cash dividends

     The  Company  has  paid  dividends  of $.10  per  share in each of the four
quarters in fiscal 1996, 1995 and 1994.


9.Nature of business

     Management considers the Company to be in one business segment: the design,
manufacture and sale of electronic  devices  offering  extremely broad frequency
coverage and high performance characteristics. The Company sells to customers in
the communications, defense and aerospace industries.

     Foreign sales amounted to approximately  $4,390,000 in 1996,  $4,229,000 in
1995 and $3,526,000 in 1994. All sales by the Company's foreign subsidiaries are
intercompany. Sales to any one foreign geographic area did not exceed 10% of net
sales for 1996,  1995 or 1994.  Sales to  Lockheed  Martin  (1996) and  Raytheon
Company (1994)  amounted to 10.8% and 10.0% of net sales,  respectively.  No one
Company accounted for more than 10% of net sales in 1995.

     Accounts receivable are financial  instruments that expose the Company to a
concentration  of credit risk. A substantial  portion of the Company's  accounts
receivable  are  from  customers  in  the  defense  industry,  and  24%  of  its
receivables  at December 28, 1996 were from five  customers.  Exposure to credit
risk is limited by the large number of customers comprising the remainder of the
Company's  customer  base,  their  geographical  dispersion  and by  ongoing
customer credit evaluations, performed by the Company.

                                      -13-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994


10. Adjustment to cost of acquired business
 
     In May 1992, the Company  acquired the business and assets of an electronic
components  manufacturer in a transaction  that was accounted for as a purchase.
In addition  to an initial  payment of cash,  the Company  agreed to issue up to
40,000 shares of the Company's  common stock to the sellers in  installments  in
January  1993,  1994 and 1995,  or make  certain  cash  payments  instead of the
issuance of such shares.  The number of shares to be issued and/or the amount of
the cash to be paid was contingent upon the market value of the Company's shares
on specified dates. The Company included  $249,000  representing the approximate
market  value  of  the  40,000  contingently  issuable  shares  at the  date  of
acquisition  as part of the initial cost of the  acquisition  and allocated that
amount to intangible assets with an estimated useful life of five years.

     Based on the  original  terms of the  agreement,  and changes in the market
value of the Company's  shares and the  resolution of disputes with the sellers,
the Company was  required to issue  13,333  shares of common stock with a market
value of  $151,662  to the  sellers  in 1994 and no  payments  thereafter.  As a
result,  the  Company  reduced the  carrying  value of the  intangible  asset by
approximately $106,000 in 1995 and $39,000 in 1994.


11. Contingencies

     On July 1, 1993, the Company filed a $750,000 amended complaint against the
former principals of an acquired Canadian business in the United States District
Court for the  District of New Jersey,  for  misrepresentations  made by them in
conjunction with the Stock Purchase  Agreement between the parties.  On or about
November 1, 1993, the former principals filed an action in Ontario Court against
the Company for breach of the same Stock Purchase  Agreement,  fraud,  breach of
employment agreements,  wrongful dismissal, breach of lease and damage to leased
premises.   The  former  principals  have  demanded  $(Canadian)   1,000,000  in
compensatory  and  punitive  damages.  During  1995,  the Company and the former
principals  settled the lawsuit  filed in United States  District  Court without
compensation to either party;  however,  the litigation in Ontario is continuing
and the Company has filed a counter claim  demanding  $1,500,000 in compensatory
and punitive damages. The Company believes that the former principals' action is
without merit and intends to pursue its action and vigorously contest the former
principals' lawsuit.

     The  Company  is a party  to  other  lawsuits,  both as a  plaintiff  and a
defendant,  arising  from the normal  course of  business.  It is the opinion of
management,  after  consultation  with counsel,  that the  disposition  of these
various  lawsuits,  including the lawsuit  described above,  will not materially
affect the  consolidated  financial  position  or results of  operations  of the
Company.

                                      -14-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994


12. Restructuring and related changes

     The restructuring of engineering responsibilities and its attendant refocus
of  product  lines  during  1996  impacted  the  valuation  of  inventories.  An
additional review by management of inventories, certain intangibles arising from
acquired product designs, a non-compete  agreement and deferred compensation for
a retiring  senior  officer  resulted in aggregate  charges of $1,382,000, and
charges,  net of tax  benefits,  of $829,000 or $ .52 per share to operations in
1996.

     The  Company  initially  recognized  aggregate   restructuring  charges  of
$1,822,000  in the third quarter of 1996 and charges,  net of tax  benefits,  of
$1,093,000.  The Company  reduced its estimate of the total  charges by $145,000
and reclassified  charges of $295,000 to cost of sales and selling,  general and
administrative expenses in the fourth quarter.


13. Quarterly financial information (unaudited)


     Summarized quarterly financial data reported for 1996 and 1995 follows:

                                          Quarter ended

1996 (13 week basis)       March 30      June 29  September 28   December 28
                         ------------------------------------------------------
Net sales ............   $3,187,345   $3,925,528    $2,997,905    $4,042,192
Gross profit .........    1,548,312    1,767,288     1,068,489     1,528,242
Net income (loss) ....      252,303      312,949    (1,139,257)(B)   276,753(C)
-------------------------------------------------------------------------------
Net income 
 (loss) per share ....         $.15         $.20         $(.73)(B)      $.18(C)
-------------------------------------------------------------------------------
1995 (12-12-16-12          March 25      June 17     October 7   December 30
 week basis)             ------------------------------------------------- ----
Net sales ............   $3,452,193   $3,076,952    $4,355,200    $3,512,288
Gross profit .........    1,811,073    1,427,368     2,054,914     1,895,126
Net income ...........      449,761      279,808       469,020       453,477
-------------------------------------------------------------------------------
Net income per share .         $.26         $.16          $.26          $.27


     (A)  Effective  in 1996,  the  Company  changed  the number of weeks  which
comprise its fiscal quarter to 13 weeks and the quarter-end closing dates to the
last Saturday closest to the last day of the calendar quarter.  Previously,  the
Company had utilized 13 four-week  accounting  periods for closing its books and
quarterly financial information was reported on a 12-12-16-12 week basis.

     (B) Reflects the effects of  restructuring  charges (see Note 12) which, as
adjusted in the fourth  quarter from those  amounts  originally  reported in the
third  quarter,  reduced  net income for the  quarter by  $916,000  or $ .57 per
share.

     (C) Reflects the effects of adjustments to restructuring  charges (see Note
12) which increased net income for the quarter by $87,000 or $ .05 per share.

                                      -15-
<PAGE>

                          QUARTERLY COMMON STOCK DATA
<TABLE>
<CAPTION>

                                    Fiscal 1996                     Fiscal 1995
                          -----------------------------------------------------------------

Quarter                    1st      2nd      3rd     4th     1st     2nd     3rd     4th
Market price per share:   -----------------------------------------------------------------

<S>                        <C>     <C>      <C>     <C>      <C>     <C>     <C>     <C>
         High .......      $11 3/8 11 3/8   11 3/8  12 3/8   9 3/8   9 13/16 12 3/8  12 1/4

         Low ........      10 1/8   9 3/4    9 5/8   9 3/4   7 7/8   8 1/2    9 5/8   9 5/8
                          -----------------------------------------------------------------

</TABLE>



     The common  stock of the Company is listed on the American  Stock  Exchange
and trades under the symbol MRM.

     The market price  information  is provided  with regard to the high and low
bid prices of the common stock of the Company during the periods indicated.






                                      -16-
<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors
Merrimac Industries, Inc.

     We have audited the  accompanying  consolidated  balance sheets of Merrimac
Industries, Inc. and Subsidiaries as of December 28, 1996 and December 30, 1995,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended  December 28, 1996.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly,  in all material  respects,  the financial  position of Merrimac
Industries, Inc. and Subsidiaries as of December 28, 1996 and December 30, 1995,
and their  results of  operations  and cash flows for each of the three years in
the period ended  December 28,  1996,  in  conformity  with  generally  accepted
accounting principles.

     As  described  in  Note 1 to the  consolidated  financial  statements,  the
Company changed its method of valuing investments in debt securities in 1994.



                                                       /s/ J.H. Cohn LLP
                                                       ----------------
                                                           J.H. Cohn LLP
Roseland, New Jersey
February 18, 1997

                                      -17-
<PAGE>