|  |
|--|
|  |
|  |
|  |
|  |

UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

|  |
|--|
|  |  |  |  |
|  |

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

|        |                                                                                               |
|--------|-----------------------------------------------------------------------------------------------|
|   | ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

For the fiscal year endedDecember  31,  2005

OR

|        |                                                                                                  |
|--------|--------------------------------------------------------------------------------------------------|
|   | TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |

For the transition periodfrom                    to                    

Commission file number 0-11201

|  |
|--|
|  |  |  |  |
|  |

MERRIMACINDUSTRIES, INC.

(Exact Name ofRegistrant as Specified in Its Charter)

|                                                               |  |                                     |  |  |  |  |
|---------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| Delaware                                                      |  | 22-1642321                          |
| (State orOther Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer IdentificationNo.) |
| 41Fairfield Place, West Caldwell, New  Jersey       |  | 07006                               |
| (Addressof Principal Executive Offices)                       |  | (ZipCode)                           |
|                                                               |

(973) 575-1300

(Registrant’s telephone number, includingarea code)

WEBSITE:www.merrimacind.com

Securities registered pursuant toSection 12(b) of the Act:

|                                          |  |                                                               |  |  |  |  |
|------------------------------------------|--|---------------------------------------------------------------|--|--|--|--|
| Title of Each Class       |  | Name of Exchange on Which Registered |
| CommonStock Common Stock Purchase Rights |  | The American StockExchange The American StockExchange         |
|                                          |

Securities registeredpursuant to Section 12(g) of the Act: None

|  |
|--|
|  |  |  |  |
|  |

Indicate bycheck mark if the registrant is a well-known seasoned issuer, asdefined in Rule 405 of the Securities Act.Yes       No

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.Yes       No 

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.Yes       No

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best ofregistrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of "acceleratedfiler and large accelerated filer" in Rule 12b-2 of theExchange Act. (Check one):

Large acceleratedfiler                        Acceleratedfiler                       Non-acceleratedfiler   

Indicate bycheck mark whether the registrant is a shell Company (as defined inRule 12b-2 of the Exchange Act).Yes       No

As of March  24,2006, 3,150,796  shares of common stock of the registrantwere outstanding. The aggregate market value of common stock held bynon-affiliates of the registrant as of July 2, 2005 wasapproximately $19,539,596.

DOCUMENTSINCORPORATED BY REFERENCE

Theregistrant’s Proxy Statement for its 2006 Annual Meeting ofstockholders is hereby incorporated by reference into Part IIIof this Form 10-K.

|  |
|--|
|  |
|  |
|  |
|  |

----

Table ofContents

|          |  |                                                                                                                   |        |        |    |        |  |  |  |  |
|----------|--|-------------------------------------------------------------------------------------------------------------------|--------|--------|----|--------|--|--|--|--|
|     |  |                                                                                                              |        | Page   |
| PARTI    |  |                                                                                                              |   |   |
| Item1.   |  | Business                                                                                                          |        |   | 4  |   |
| Item 1A. |  | Risk Factors                                                                                                      |        |   | 13 |   |
| Item 2.  |  | Properties                                                                                                        |        |   | 21 |   |
| Item 3.  |  | LegalProceedings                                                                                                  |        |   | 21 |   |
| Item4.   |  | Submission of Matters to a Vote of Security Holders                                                               |        |   | 21 |   |
| PARTII   |  |                                                                                                              |   |   |
| Item5.   |  | Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities |        |   | 22 |   |
| Item 6.  |  | Selected FinancialData                                                                                            |        |   | 22 |   |
| Item7.   |  | Management’s Discussion and Analysis of FinancialCondition and Results of Operations                        |        |   | 23 |   |
| Item 7A. |  | Quantitative and QualitativeDisclosures About Market Risk                                                         |        |   | 39 |   |
| Item 8.  |  | Financial Statements                                                                                              |        |   | 40 |   |
| Item 9.  |  | Changes Inand Disagreements with Accountants on Accounting and FinancialDisclosure                                |        |   | 67 |   |
| Item9A.  |  | Controls and Procedures                                                                                           |        |   | 67 |   |
| Item 9B. |  | Other Information                                                                                                 |        |   | 67 |   |
| PARTIII  |  |                                                                                                              |   |   |
| Item10.  |  | Directors and Executive Officers of the Registrant                                                                |        |   | 67 |   |
| Item 11. |  | ExecutiveCompensation                                                                                             |        |   | 69 |   |
| Item12.  |  | Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters                     |        |   | 69 |   |
| Item 13. |  | Certain Relationships and RelatedTransactions                                                                     |        |   | 70 |   |
| Item14.  |  | Principal Accountant Fees and Services                                                                            |        |   | 70 |   |
| Item 15. |  | Exhibits andFinancial Statement Schedules                                                                         |        |   | 71 |   |
|          |

2

----

FORWARD-LOOKINGSTATEMENTS

This Annual Report on Form 10-K contains statementsrelating to future results of the Company (including certainprojections and business trends) that are ‘‘forward-lookingstatements’’ as defined in the Private SecuritiesLitigation Reform Act of 1995. Actual results may differ materiallyfrom those projected as a result of certain risks and uncertainties.These risks and uncertainties include, but are not limited to: risksassociated with demand for and market acceptance of existing and newlydeveloped products as to which the Company has made significantinvestments, particularly its Multi-Mix® products; thepossibilities of impairment charges to the carrying value of ourMulti-Mix® assets, thereby resulting in charges to ourearnings; slower than anticipated penetration into the satellitecommunications, defense and wireless markets; failure of our OriginalEquipment Manufacturer, or OEM, customers to successfully incorporateour products into their systems; changes in product mix resulting inunexpected engineering and research and development costs; delays andincreased costs in product development, engineering and production;reliance on a small number of significant customers; the emergence ofnew or stronger competitors as a result of consolidation movements inthe market; the timing and market acceptance of our or our OEMcustomers’ new or enhanced products; general economic andindustry conditions; the risk that the benefits expected from theCompany’s acquisition of Filtran Microcircuits Inc. are notrealized; the ability to protect proprietary information andtechnology; competitive products and pricing pressures; our ability andthe ability of our OEM customers to keep pace with the rapidtechnological changes and short product life cycles in our industry andgain market acceptance for new products and technologies; foreigncurrency fluctuations between the U.S. and Canadian dollars; risksrelating to governmental regulatory actions in communications anddefense programs; and inventory risks due to technological innovationand product obsolescence, as well as other risks and uncertainties asare detailed from time to time in the Company's Securities andExchange Commission filings. These forward-looking statements are madeonly as of the date of the filing of this Form 10-K, and the Companyundertakes no obligation to update or revise the forward-lookingstatements, whether as a result of new information, future events orotherwise.

3

----

PART I

|               |          |
|---------------|----------|
| ITEM 1.  | BUSINESS |

GENERAL

Merrimac is a leader in the design and manufacture of passive RF(Radio Frequency) and microwave components for industry, government andscience. Merrimac components are today found in applications as diverseas satellites, military and commercial aircraft, radar, cellular radiosystems, medical and dental diagnostic instruments, personalcommunications systems (‘‘PCS’’) and wirelessinternet connectivity.

Merrimac is a versatile technologicallyoriented company specializing in miniature radio frequencylumped-element components, integrated networks, microstrip andstripline microwave components, subsystems and ferrite attenuators. Ofspecial significance has been the combination of two or more of thesetechnologies into single components to achieve superior performance andreliability while minimizing package size and weight.

Merrimacwas originally incorporated as Merrimac Research and Development, a NewYork corporation, in 1954. Merrimac was reincorporated as a New Jerseycorporation in 1994 and subsequently reincorporated as a Delawarecorporation in 2001.

ELECTRONIC COMPONENTS ANDSUBSYSTEMS PRODUCTS

Merrimac manufactures and sellsapproximately 1,500 components and subsystems used in signal processingsystems (the extraction of useable information from radio signals) inthe frequency spectrum of zero to sixty-five GHz. Merrimac'sproducts are designed to process signals having wide bandwidths and areof relatively small size and light weight. When integrated intosubsystems, advantages of lower cost and smaller size are realized dueto the reduced number of connectors, cases and headers. Merrimac'scomponents range in price from $0.50 to more than $10,000 and itssubsystems range from $500 to more than $1,000,000.

Merrimac hastraditionally developed and offered for sale products built to specificcustomer needs, as well as standard catalog items. The following tableprovides a breakdown of electronic components sales as derived frominitial orders for products custom designed for specific customerapplications, repeat orders for such products and from catalogsales:

|                 |  |        |    |         |  |        |    |         |  |        |    |         |  |  |
|-----------------|--|--------|----|---------|--|--------|----|---------|--|--------|----|---------|--|--|
|            |  | 2005   |    | 2004    |  | 2003   |
| Initial designs |  |   | 27 | %  |  |   | 27 | %  |  |   | 35 | %  |
| Repeatdesigns   |  |   | 57 | %  |  |   | 58 | %  |  |   | 48 | %  |
| Catalog sales   |  |   | 16 | %  |  |   | 15 | %  |  |   | 17 | %  |
|                 |

Merrimac maintains a currentproduct catalog on its internet website. The Merrimac catalog includeshundreds of standard components, and provides a selection of passivesignal processing components. These components often form theplatform-basis for customization of designs in which the size, package,finish, electrical parameters, environmental performance, reliabilityand other features are tailored for a specific customerapplication.

Merrimac's strategy is to be a reliablesupplier of high quality, technically innovative signal processingproducts. Merrimac coordinates its marketing, research and development,and manufacturing operations to develop new products and expand itsmarkets. Merrimac's marketing and development activities focus onidentifying and producing prototypes for new military and commercialprograms and applications in aerospace, navigational systems,telecommunications and cellular analog and digital wirelesstelecommunications electronics. Merrimac's research anddevelopment efforts are targeted towards providing customers with morecomplex, reliable, and compact products at lower costs.

Themajor aerospace companies purchase components and subsystems fromMerrimac. Merrimac design engineers work to develop solutions tocustomer requirements that are unique or require 

4

----

special performance. Merrimac is committed tocontinuously enhancing its leading position in high-performanceelectronic signal processing components for communications, defense andaerospace applications.

Improved production efficiencies coupledwith the capacity of the Company's low-cost manufacturing facilityin Costa Rica and more extensive use of automated test equipment suchas Agilent network analyzers have resulted in a considerable reductionof the set-up time to take measurements, calibrate test equipment andprovide data electronically. In addition, computerized cost controlssuch as closed job history and up-to-date work in process costs arealso enhancing Merrimac's competitive position. Merrimac iscontinuing to invest in manufacturing capital equipment in all three ofour facilities to provide greater capacity and flexibility and reduceoperating costs.

In 1998, Merrimac introducedMulti-Mix® Microtechnology capabilities, an innovativeprocess for microwave, multilayer integrated circuits andmicro-multifunction module (MMFM®) technology andsubsystems. This process is based on fluoropolymer compositesubstrates, which are bonded together into a multilayer structure usinga fusion bonding process. The fusion process provides a homogeneousdielectric medium for superior electrical performance at microwavefrequencies. This 3-dimensional Multi-Mix® designconsisting of stacked circuit layers permits the manufacture ofcomponents and subsystems that are a fraction of the size and weight ofconventional microstrip and stripline products.

In 2001,Merrimac introduced its Multi-Mix PICO®Microtechnology. Through Multi-Mix PICO® technology,Merrimac offers a group of products at a greatly reduced size, weightand cost that includes hybrid junctions, directional couplers,quadrature hybrids, power dividers and inline couplers, filters andvector modulators along with 802.11a, 802.11b, and 802.11g WirelessLocal Area Network modules. When compared to conventional multilayerquadrature hybrids and directional coupler products, Multi-MixPICO® is more than 84% smaller in size, withoutthe loss of power or performance. Merrimac continues to add new designsto its Multi-Mix PICO® product line.

In 2001,Merrimac received and started to ship its first 3G production order fora Multi-Mix PICO® integrated solution to be used by oneof the world's largest suppliers of wireless power amplifiers inthe design of new third-generation broadband basestations.

In2004, Merrimac introduced its Multi-Mix Zapper® productline. The Multi-Mix Zapper® addresses the demands ofthe wireless market for high quality products manufactured in volumewith continued improvement in performance, power and cost.

Inaddition to wireless basestation communications, Multi-MixPICO® products have been or are currently underevaluation for applications in airborne electronic countermeasures,radar systems, smart antennas, satellite communications receivermodules, missiles, commercial Wi-Fi (Wireless Fidelity), WLANs(Wireless Local Area Networks), WiMAX (World Interoperability forMicrowave Access), the U.S. Department of Defense’s nextgeneration fighter jet JSF (Joint Strike Fighter), FCS (Future CombatSystems) and JTRS (Joint Tactical Radio System).

Merrimaccustomers prefer our value-added Multi-Mix PICO®approach over traditional solutions because it enables them to minimizeconsiderable costs of design, test and measurement, packaging, andmanufacturing, as well as the unpredictable follow-on costs typicallyassociated with factory tuning and optimization. Multi-MixPICO® enables customers to gain access to integratedsolutions that simplify their internal design and manufacturingprocesses while reducing the time and costs it takes to implementmanufacturable and repeatable products.

Multi-MixPICO® also enables customers to outsource certainancillary functions, which in turn allows them to maintain focus ontheir own core business competencies.

In the area of broadbandcommunications, Merrimac continues to work on high frequency solutionsthat will bring multimedia internet access to homes and offices throughbroadband systems.

Merrimac's major electronic componentsand subsystems product categories are:

|              |                                                                                                                              |
|--------------|------------------------------------------------------------------------------------------------------------------------------|
| •  | power dividers/combiners thatequally divide input signals or combine coherent signals for nearlylossless power combinations; |

5

----

|              |                                                                                                                                                                                                               |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | I&Qnetworks (a subassembly of circuits which allows two informationsignals (incident and quadrature) to be carried on a single radiosignal for use in digital communication and navigationalpositioning); |

|              |                                                                              |
|--------------|------------------------------------------------------------------------------|
| •  | directionalcouplers that allow for signal sampling along transmission lines; |

|              |                                                                                                                                      |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------|
| •  | phase shifters that accurately andrepeatedly alter a signal's phase transmission to achieve desiredsignal processing ordemodulation; |

|              |                                                                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | hybrid junctionsthat serve to split input signals into two output signals with 0 degreephase difference or 180 degrees out of phase with respect to eachother; |

|              |                                                                                                                                                        |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | balanced mixers thatconvert input frequencies to another frequency; variable attenuatorsthat serve to control or reduce power flow without distortion; |

|              |                                                                                     |
|--------------|-------------------------------------------------------------------------------------|
| •  | Beamformers that permit an antennato electronically track or transmit a signal; and |

|              |                                                                                                                                                                              |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | quadrature couplers that serve tosplit input signals into two output signals 90 degrees out of phasewith respect to each other or combine equal amplitude quadraturesignals. |

These components can be utilized in a variety ofapplications including satellite communications, radar, digitalcommunication systems, global positioning and navigation systems,electronic warfare, electronic countermeasures and cellular andwireless communications.

Merrimac's other productcategories include single side band modulators, image reject mixers,vector modulators and a wide variety of specialized integratedMicro-Multifunction Modules (MMFM®) assemblies. In thelast fiscal year, no one product accounted for more than ten percent oftotal net sales.

In 2005, Merrimac focused its design andmanufacturing efforts on Multi-Mix® multilayersubsystem products for sale to several satcom and military customersduring 2005 and 2006.

In addition, in 2005 Merrimac started thedesign of a high power amplifier for use in basestation infrastructure,military and satcom applications based upon a U.S. Notice of Allowancefor a Patent that is expected to be issued shortly. An important partof basestation infrastructure equipment is the high power transmitamplifier, which must provide extremely linear performance in order toboost signals carrying voice, data and video services withoutdistortion.

Approximately 54% of Merrimac's sales infiscal 2005 were derived from the sales of products for use inhigh-reliability aerospace, satellite, and missile applications. Theseproducts are designed to withstand severe environments without failureor maintenance over prolonged periods of time (from 5 to 20 years).Merrimac provides facilities dedicated to the design, development,manufacture, and testing of these products along with special programmanagement and documentation personnel.

Merrimac's productsare also used in a broad range of other defense and commercialapplications, including radar, navigation, missiles, satellites,electronic warfare and countermeasures, cellular analog and digitalwireless telecommunications electronics and communications equipment.Merrimac's products are also utilized in systems to receive anddistribute television signals from satellites and through othermicrowave networks including cellular radio.

FILTRANMICROCIRCUITS INC.

GENERAL

Established in 1983,and acquired by Merrimac in February  1999, Filtran MicrocircuitsInc. (‘‘FMI’’) is a leading manufacturer ofmicrowave micro-circuitry for the high frequency communicationsindustry. FMI produces microstrip, bonded stripline, and thickmetal-backed Teflon® (PTFE) microcircuits for RFapplications including satellite, aerospace, PCS, fiber optictelecommunications, automotive, navigational and defense applicationsworldwide. FMI participates in the market for millimeter-waveapplications. FMI also supplies mixed dielectric multilayer and highspeed interconnect circuitry to meet customer demand for highperformance and cost-effective packaging.

6

----

FMI's strong technical team,proprietary processes and equipment allow FMI to manufacture precisecircuits, with edge resolution of .0005 inch or better. The accuracyprovided by FMI is particularly valued by customers in high-endapplications who require microwave circuitry with significantreliability and performance.

FMI has successfully pioneeredsputtering techniques for PTH applications on thick-metal backed PTFEcircuitry that offer superior reliability, performance and mechanicalstrength which allows for fabricated integrated three-dimensionalshapes ideally suited for aerospace applications.

FMI has alsoachieved significant results in the area of accuracy of circuit boardimaging. FMI employs specially developed processes using liquidphoto-resists and high-intensity, collimated UV exposure techniques infine line processing for single, double-sided and multilayer PTHboards.

PRODUCTS

FMI produces precisionmicrowave circuitry, having operating frequencies that typically rangefrom 500 MHz to 100 GHz, through the processing of microstrip, bondedstripline, thick metal-backed PTFE and mixed dielectric multilayer. FMIalso produces aluminum, copper and brass backed circuits. Although FMIgenerally purchases pre-bonded materials, it also has the capability tobond substrates to thick metal carriers when requested by customers.FMI also processes thin film circuits on hard substrates such asceramic, ferrite and glass.

FMI has developed innovativeprocessing that provides customers with reliable and high performancecircuitry. FMI has the capability to process:

|              |                                                        |
|--------------|--------------------------------------------------------|
| •  | 1 mil lines and spaces with+/− .2 mil tolerance; |

|              |                     |
|--------------|---------------------|
| •  | embedded resistors; |

|              |                                                                              |
|--------------|------------------------------------------------------------------------------|
| •  | proprietary sputtering techniquesfor blind holes in thick metal-backed PTFE; |

|              |                                                       |
|--------------|-------------------------------------------------------|
| •  | proprietary copper Thin Filmmetallization on ceramic; |

|              |                                 |
|--------------|---------------------------------|
| •  | highpurity, wire-bondable gold; |

|              |                                              |
|--------------|----------------------------------------------|
| •  | plated through hole aspect ratiosup to 10:1; |

|              |                    |
|--------------|--------------------|
| •  | multilayerbonding; |

|              |                        |
|--------------|------------------------|
| •  | conductive bonding;and |

|              |                                                |
|--------------|------------------------------------------------|
| •  | conductive andnon-conductive filled via holes. |

FMI has machining capabilitiesin computer numerically controlled routing, drilling, milling and lasermachining. Machining tolerance ranges from +/− .005 inch to+/− .001 inch.

FMI maintains an ISO 9001:2000 registeredquality assurance program. This quality assurance program along withstringent statistical process control and gate inspections assure thatwhen customers request specified standards based on certain needs, suchneeds are met. FMI typically works to the standard of IPC 6018 unlessotherwise indicated by the customer. FMI can also work in fullcompliance to MIL-PRF-31032 (preceded by MIL-P-55110) or can adopt therequirements of IPC-HF-318, depending on customer needs.

Worldwide applications include: millimeter wave (PCS backhaul, localand multipoint distribution systems, automotive radar, sensors andpoint to multipoint), satellite, aerospace, automotive and defense.

STRATEGIC OVERVIEW

Merrimac seeks to leverage itscore competencies in the development of High Power, High Frequency andHigh Performance products across its three main platforms forgrowth:

|              |                                                   |
|--------------|---------------------------------------------------|
| •  | RF Microwaveelectronic components and subsystems; |

7

----

|              |                               |
|--------------|-------------------------------|
| •  | Microwavemicro-circuitry; and |

|              |                 |
|--------------|-----------------|
| •  | Multi-Mix®. |

Our strategy focuses on:

|              |                                                                   |
|--------------|-------------------------------------------------------------------|
| •  | Providing unique and cutting-edgecustomized technology solutions; |

|              |                                                                                                                                                   |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Expanding existing customerrelationships and attracting new customers with our smaller, morecomplex, more reliable, lower cost product offerings; |

|              |                                                                                                                                                 |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Meeting the advanced needs of ourdefense, satellite and OEM wireless industry customers with innovativespecialty applications and products; and |

|              |                                                                                                                              |
|--------------|------------------------------------------------------------------------------------------------------------------------------|
| •  | Improving and integrating ourinternal development, engineering and production capacities to reducecosts and improve service. |

To do this, we coordinate ourmarketing, research and development, and manufacturing operations todevelop new products and expand our markets.

Merrimac'smarketing and development activities focus on identifying new designopportunities for new long-term military and commercial productionprograms and applications in aerospace, navigational systems,telecommunications and cellular analog and digital wirelesstelecommunications electronics. Merrimac's research anddevelopment efforts are targeted towards providing customers with morecomplex, reliable, and compact products at lower costs.

TheCompany intends to continue to focus on customer service, technologyinnovation and process excellence to further expand its penetrationinto the defense, satellite communications and wireless markets.Essential components of the Company's strategy include thefollowing.

Products.

Our three platforms forgrowth:    RF Microwave, Multi-Mix® and Microwavemicro-circuitry focus on providing unique solutions and deliveringprofitable value to our key customers. High Power, High Frequency andHigh Performance are embedded competencies that drive customer valueand enable Merrimac to consistently meet and exceed the demanding needsand expectations of our customers.

High Power:    Ourthermal management design and processes enable Merrimac products toachieve power levels greater than 500 watts. Our process enables theuse of low loss dielectrics and metals, so that power dissipation isminimized (i.e. less heat is generated). In addition, thick metallayers and thermal vias are utilized to draw out, spread, and sink awayheat generated in the circuits and modules. Further, since thick metallayers are directly bonded to dielectric layers using a hightemperature process, the resulting module is robust, and able towithstand subsequent environmental processing temperatures withoutbeing adversely affected.

High Frequency:    Ourproducts operate efficiently across high frequency bands up to 100 GHz,an ever-growing marketplace requirement. The efficient performance ofcircuits and modules at millimeter wave frequencies is enabled by ourability to miniaturize the printed circuit elements and integrate themwith semiconductor microcircuits (MMICs). Our process allows thefabrication of a homogeneous circuit medium with accurate circuitfeature producibility.

High Performance:    Our focuson technology innovation and process excellence delivers solutions thatperform without failure in all mission-critical environments and underextremely demanding conditions.

Pursue TechnologicalExcellence.

The Company intends to use its technologicalexpertise and leadership in the defense, satellite and wireless marketsto extend its competitive advantage. The Company intends to continue toinvest in research and development and will focus its efforts on newproduct development for specific 

8

----

customer applications requiring integration ofcircuitry and further miniaturization, precision and volumeapplications. The Company will seek to advance its leadership inwireless technology by developing next generation products for themobile and wireless networking markets. In addition, the Company willattempt to build upon its relationships with key original equipmentmanufacturers in order to develop state-of-the-art products.

Merrimac's research and development activities include thedevelopment of new designs for insertion into new programs andapplications to enhance Merrimac's competitive position. Projectsfocusing on surface mounted devices, multilayer, and micro-electronicassemblies are directed toward development of more circuitry insmaller, lower cost, and more reliable packaging that is easier forcustomers to integrate into their products. Merrimac continues toexpand its use of computer-aided design and manufacturing (CAD/CAM) inorder to reduce design and manufacturing costs as well as developmenttime.

Strengthen Customer Relationships and Attract NewCustomers.

Merrimac's customers are primarily majorindustrial corporations that integrate Merrimac's products into awide variety of defense and commercial systems. Merrimac'scustomers include BAE Systems, The Boeing Company, Celestica, Inc.,EADS Astrium, General Dynamics Corporation, ITT, Lockheed MartinCorporation, Loral Space & Communications Ltd., Northrop GrummanCorporation, and Raytheon Company.

Merrimac’s customerswant smaller, lighter, more cost effective and highly integratedcomponents, systems and subsystems for future applications. Merrimacdesign engineers work to develop solutions to customer requirementsthat are unique or require special performance. Merrimac is committedto continuously enhancing its leading position in high-performanceelectronic signal processing components for communications, defense andsatellite applications, thereby attracting new customers and increasingthe reliance of current customers on the Company.

For mostcustomers, Merrimac must be a ‘‘qualified’’supplier, continually demonstrating our ability to meet their demandingdesign and manufacturing standards. For defense contractors, we are amission-critical supplier. For Aerospace companies, our products meetthe high reliability standards of space. In wireless communications,our Multi-Mix products are being ‘‘qualified’’and are supplying solutions to an ever-increasing number of majorOEMs.

The qualification process brings with it subtle, yet veryimportant differences. In defense and satellite communications, we musthave the technology and process excellence to support customapplications in design, manufacturing and testing. In wirelesscommunications, we must have the technology and process excellence tosupport large volume production requirements.

Focus onefficiency and value.

Improved production efficienciescoupled with the capacity of the Company's low-cost manufacturingfacility in Costa Rica and more extensive use of automated testequipment such as Agilent network analyzers have resulted in aconsiderable reduction of the set-up time to take measurements,calibrate test equipment and provide data electronically. In addition,computerized cost controls such as closed job history and up-to-datework in process costs are also enhancing Merrimac's competitiveposition. Merrimac is continuing to invest in manufacturing capitalequipment in all three of our facilities to provide greater capacityand flexibility and reduce operating costs.

Defense andSatellite Communications.

In the defense and satellitecommunications markets, Merrimac’s components are found in adiverse array of applications ranging from national missile defensesystems to fighter jets, electronic warfare, shipboard radarcommunications and other mission-critical applications. Almost allsatellites in orbit today carry aboard some Merrimac technology.

For our prime contractor customers in defense and satellitecommunications, we deliver highly customized solutions that aredesigned for specific applications under very specific design criteriaand 

9

----

rigid requirements. Today defense andsatellite communications customers seek components and subsystems thatmeet higher integration and performance standards in smaller, lighterand less costly to produce integrated modules. These products must haveexceptional shielding properties and must be able to function withoutfailure in environments with wide temperature changes and high levelsof shock and vibration.

The cost rates utilized forcost-reimbursement contracts are subject to review by third parties andcan be revised, which can result in additions to or reductions fromrevenue. Revisions which result in reductions to revenue are recognizedin the period that the rates are reviewed and finalized; additions torevenue are recognized in the period that the rates are reviewed,finalized, accepted by the customer, and collectability from thecustomer is assured. The Company submits financial informationregarding the cost rates on cost-reimbursement contracts for eachfiscal year in which the Company performed work on cost-reimbursementcontracts. The Company does not record any estimates on a regular basisfor potential revenue adjustments, as there currently is no reasonablebasis on which to estimate such adjustments given the Company’svery limited experience with these contracts.

Wireless.

For original equipment manufacturingcustomers in the wireless communications market, we provide TotalIntegrated Packaging Solutions® to customers who preferour value-added Multi-Mix® solutions to conventionalapproaches because it enables them to:

|              |                                                                                                                                                                                                 |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Minimize considerable costs ofdesign, test and measurement, packaging, and manufacturing, as well asthe unpredictable follow-on costs typically associated with factorytuning and optimization; |

|              |                                                                                                                                                                                        |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Utilize modules that integratefunctionality. We dramatically reduce size, weight, cost, componentcount and optimize thermal management by providing leading-edgemultifunction modules; |

|              |                                                                                           |
|--------------|-------------------------------------------------------------------------------------------|
| •  | Reducethe time and costs it takes to implement manufacturable and repeatableproducts; and |

|              |                                                                                                                                                       |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Outsourcefunctions that are not considered their own core competencies, which inturn allow them to maintain focus on their core businesscompetencies. |

Pursue New and ExistingMarkets.

The Company intends to use its core competenciesand market position to pursue other wireless opportunities using thecomponent and integration capabilities of ourMulti-Mix® technology. The Company plans to offer bothcustom components and higher orders of integrated assemblies forexisting and developing space and defense requirements through the RFMicrowave, Microwave micro-circuitry and Multi-Mix®technologies.

Expand Business through StrategicAcquisitions.

The Company intends to pursue opportunisticacquisitions of companies, product lines and technologies thatcomplement its business. The Company will focus on acquisitions thatleverage its technical expertise and business development resources andprovide a competitive advantage for its targeted markets.

MARKETING

Merrimac markets its products in theUnited States and Canada directly to customers through a sales andmarketing staff comprised of 13 employees, including four employeeslocated at FMI in Ottawa, Canada, and through 13 independent domesticsales organizations. Merrimac relies on 20 independent salesorganizations to market its products elsewhere in the world.Merrimac's marketing program focuses on identifying new programsand applications for which Merrimac can develop prototypes leading tovolume production orders.

Merrimac's customers areprimarily major industrial corporations that integrate Merrimac'sproducts into a wide variety of defense and commercial systems.

10

----

Merrimac's customers include:

BAE SystemThe Boeing CompanyCelestica, Inc.EADSAstrium.General Dynamics CorporationITTLockheed MartinCorporationLoral Space & Communications Ltd.NorthropGrumman CorporationRaytheon Company

The following tablepresents our key customers and the percentage of net sales made to suchcustomers:

|                                   |  |        |      |         |  |        |      |         |  |        |      |         |  |  |
|-----------------------------------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--|
|                              |  | 2005   |      | 2004    |  | 2003   |
| Israel Aircraft Industries Ltd.   |  |   | 11.2 | %  |  |   | 6.2  | %  |  |   | 1.1  | %  |
| Lockheed Martin Corporation       |  |   | 10.9 | %  |  |   | 6.6  | %  |  |   | 7.8  | %  |
| Raytheon Company                  |  |   | 10.5 | %  |  |   | 13.9 | %  |  |   | 12.3 | %  |
| NorthropGrumman Corporation  |  |   | 8.8  | %  |  |   | 11.9 | %  |  |   | 12.4 | %  |
| The BoeingCompany                 |  |   | 5.9  | %  |  |   | 7.8  | %  |  |   | 16.1 | %  |
|                                   |

Sales to the foreign geographicarea of Europe were 14.8%, 8.9% and 10.3% of netsales in fiscal years 2005, 2004 and 2003, respectively.

FMI's key customers include:

EndwaveCorporationHerley IndustriesIsrael Aircraft IndustriesLtd.L3 Communications Narda Microwave EastM/A-Com,Inc.Raytheon Canada Ltd.Trak Microwave Corporation

BothMerrimac (www.merrimacind.com or www.multi-mix.com)and FMI (www.filtranmicro.com) have internet addresses.Merrimac's product catalog is available on its website.

EXPORT CONTROLS

The Company's products aresubject to the Export Administration Regulations(‘‘EAR’’) administered by the U.S. Departmentof Commerce and may, in certain instances, be subject to theInternational Traffic in Arms Regulations(‘‘ITAR’’) administered by the U.S. Departmentof State. EAR restricts the export of dual-use products and technicaldata to certain countries, while ITAR restricts the export of defenseproducts, technical data and defense services. Merrimac believes thatit has implemented internal export procedures and controls in order toachieve compliance with the applicable U.S. export control regulations.However, the U.S. government agencies responsible for administering EARand ITAR have significant discretion in the interpretation andenforcement of these regulations, and it is possible that theseregulations could adversely affect the Company's ability to sellits products to non-U.S. customers.

RESEARCH ANDDEVELOPMENT

During 2005, 2004 and 2003, research anddevelopment expenditures amounted to $1,932,000, $1,723,000 and$1,737,000, respectively. With the exception of $154,000 of expenses atFMI, substantially all of the research and development funds in fiscal2005 were expended for new Multi-Mix® Microtechnologyproducts. Merrimac plans to commit research and development funds atsimilar levels in fiscal 2006, and will focus its efforts on newproduct development for specific customer applications requiringintegration of circuitry and further miniaturization, precision andvolume applications.

11

----

Merrimac's research and developmentactivities include the development of prototypes for new programs andapplications and the implementation of new technologies to enhanceMerrimac's competitive position. Projects focusing on surfacemounted devices, multilayer, and micro-electronic assemblies aredirected toward development of more circuitry in smaller, lower cost,and more reliable packaging that is easier for customers to integrateinto their products. Merrimac continues to expand its use of computeraided design and manufacturing (CAD/CAM) in order to reduce design andmanufacturing costs as well as development time. Current research anddevelopment programs at FMI include: laser machining, resistors onorganic materials, high-resolution circuit techniques, resistortrimming, electroless nickel on aluminum housings, and filled viaholes.

ENVIRONMENTAL REGULATION

Federal, stateand local requirements relating to the discharge of substances into theenvironment, the disposal of hazardous waste and other activitiesaffecting the environment have had and will continue to have an impacton Merrimac's manufacturing operations. Thus far, compliance withcurrent environmental requirements has been accomplished withoutmaterial effect on Merrimac's liquidity and capital resources,competitive position or financial statements, and management believesthat such compliance will not have a material adverse effect onMerrimac's liquidity and capital resources, competitive positionor financial statements in the future. Management cannot assess thepossible effect of compliance with future requirements.

BACKLOG

Merrimac manufactures specialized componentsand subsystems pursuant to firm orders from customers and standardcomponents for inventory. As of December  31,  2005, Merrimachad a firm backlog of orders of approximately $13.1  million.Merrimac estimates that over 90% of the orders in its backlog asof December  31,  2005 will be shipped within one year.Merrimac does not consider its business to be seasonal.

COMPETITION

Merrimac encounters competition in allaspects of its business. Merrimac competes both domestically andinternationally in the military and commercial markets, specificallywithin the aerospace and telecommunications areas. Merrimac'scompetitors consist of entities of all sizes. Occasionally, smallercompanies offer lower prices due to lower overhead expenses, andgenerally, larger companies have greater financial and operatingresources than Merrimac, in addition to well-recognized brand names.Merrimac competes on the basis of technological performance, quality,reliability and dependability in meeting shipping schedules as well ason the basis of price. Merrimac believes that its performance withrespect to the above factors have served it well in earning the respectand loyalty of many customers in the industry. These factors haveenabled Merrimac over the years to successfully maintain a stablecustomer base and have directly contributed to Merrimac's abilityto attract new customers.

MANUFACTURING, ASSEMBLY ANDSOURCE OF SUPPLY

Manufacturing operations consist principallyof design, assembly and testing of components and subsystems built frompurchased electronic materials and components, fabricated parts, andprinted circuits. Manual and semi-automatic methods are utilizeddepending principally upon production volumes. Merrimac has its ownmachine shop employing CAD/CAM techniques and etching facilities tohandle soft and hard substrate materials. In addition, Merrimacmaintains testing and inspection procedures intended to monitorproduction controls and enhance product reliability.

Merrimacbegan manufacturing in Costa Rica in the second half of 1996. InFebruary  2001, the Company entered into a five-year lease inCosta Rica for a 36,200 square-foot facility for manufacturingMulti-Mix® Microtechnology products. The lease wasrenewed for an additional five years in 2006. The leaseholdimprovements and capital equipment for this manufacturing facility werecompleted at a cost of approximately $5,600,000 and this facility wasopened for production in August  2002.

12

----

FMI's manufacturing facilityconsists of CAD/CAM, chemical and mechanical processes, quality systemsand research and development of bare circuit board materialsspecifically selected for high frequency applications. Manual andautomatic methods are utilized depending upon the circuit volumes,complexity and existing technologies available to the printed wiringboard industry.

Microwave materials used in FMI's productsare available from Rogers Corporation and Taconic Advanced DielectricDivision. Laminate materials are available from a small number ofqualified suppliers. The suppliers that provide materials to FMIspecialize in the manufacture of microwave materials. Customers oftendirect FMI to use a particular vendor for laminates based uponparticular design specifications.

Merrimac has developed andimplemented a quality system to better satisfy the needs of itscustomers and provide adequate assurance that its products will meet orexceed specified requirements. Merrimac continues to establish andrefine procedures and supporting documentation to enable the fasttransition from prototype engineering to operational manufacturing ofproducts.

In April  2001, FM Approvals (formerly FactoryMutual) granted ISO 9001:2000 Certification to the Company’s FMImanufacturing facility in Ottawa, Ontario, Canada. In October2002, the Multi-Mix® operations in West Caldwell, NewJersey achieved certification to ISO 9001:2000. In December  2002,the Multi-Mix® facility in Costa Rica achievedcertification to ISO 9001:2000. In August  2003, Merrimac’squality system was revised to incorporate the Costa Rica facility withthe West Caldwell facility. During 2003, FM Approvals performedrequired audits and issued certificates of Registration to ISO9001:2000 covering both facilities. In June of 2004, the West Caldwellfacility was surveyed for compliance to the Aerospace standard AS9100.In December  2004, RW TUV issued a certificate of registration tothe West Caldwell facility for ISO 2001:2000 and AS9100. FM Approvalsin Costa Rica and Ottawa, Canada and RW TUV in West Caldwell havemaintained these registrations via periodic audits through March of2006. In September  2006, it is planned to have the Costa Ricafacility surveyed for compliance to AS9100.

Electroniccomponents and raw materials used in Merrimac's products aregenerally available from a sufficient number of qualified suppliers.Some materials are standard items. Subcontractors manufacture certainmaterials to Merrimac's specifications. Merrimac is not dependentupon any single supplier for any of its components or materials.

EMPLOYEE RELATIONS

As of December  31,2005, Merrimac employed approximately 240 full time employees,including 75 employees at FMI and 55 employees at Merrimac's CostaRica facility. None of Merrimac's employees are represented by alabor organization. Management believes that relations with itsemployees are satisfactory.

PATENTS

As ofMarch  24,  2006, Merrimac owns 16 patents with respect tocertain inventions it developed and has received a Notice of Allowancefrom the U.S. Patent and Trademark Office for a new patent that isexpected to be issued shortly. No assurance can be given that theprotection that Merrimac has acquired through patents is sufficient todeter others, legally or otherwise, from developing or marketingcompetitive products. There can be no assurance that any of the patentswill be found valid, if validity is challenged. Although Merrimac hasfrom time to time filed patent applications in connection with theinventions which it believes are patentable, there can be no assurancethat these applications will receive patents.

|               |              |
|---------------|--------------|
| ITEM1A.  | RISK FACTORS |

You should carefullyconsider the matters described below before making an investmentdecision. The risks and uncertainties described below are not the onlyones facing our company. Our business operations may be impaired byadditional risks and uncertainties of which we are unaware or that wecurrently consider immaterial.

13

----

Our business, results of operations orcash flows may be adversely affected if any of the following risksactually occur. In such case, the trading price of our common stockcould decline, and you may lose part or all of your investment.

The market for our products, in particular ourMulti-Mix® products, is new and rapidly evolving. If weare not able to develop or enhance our products, or to respond tocustomer needs, our net sales will suffer.

Our futuresuccess depends in large part on our ability to develop and market ournew line of Multi-Mix® modules, filters, couplers anddelay lines products, particularly to the wireless basestation anddefense sectors. We will also need to continually enhance our existingcore products (passive RF and microwave component assemblies, powerdividers and other micro circuitry products), lower product cost anddevelop new products that maintain technological competitiveness. Ourcore products must meet changing customer, regulatory and particulartechnological requirements and standards, and ourMulti-Mix® products especially must respond to thechanging needs of our customers, particularly our OEM customers. Thesecustomer requirements might or might not be compatible with our currentor future product offerings. We might not be successful in modifyingour products and services to address these requirements and standardsand our business could suffer.

Multi-Mix®Microtechnology and Multi-Mix PICO® Products.

We have made capital investments of approximately $14.2million in our proprietary line of Multi-Mix®Microtechnology products.

While we have generated revenues anddeveloped a customer base for our Multi-Mix® products,if a competitive product or decreased consumer demand for ourMulti-Mix® products resulted in significant decrease inthose revenues, our ability to recover our investment in ourMulti-Mix® Microtechnology product assets could benegatively impacted and result in a write off of the carrying value ofthese assets and an impairment charge to our earnings.

Inaddition, we have invested significant engineering, research anddevelopment, personnel and other resources in developing our Multi-MixZapper® product line, introduced in June  2004.While revenues to date have not been material, we intend to incursignificant additional expenses, including sales and marketing costs,in implementing our strategic plan to commercialize variousapplications of our Multi-Mix® technologies. Theseproducts are direct drop-in replacements for competing technologiesused in virtually all wireless basestations. There are competingtechnologies already in the marketplace, and in order to obtain marketshare we will have to convince customers to convert to our productsfrom those that are already in use.

We may seek to enter intojoint ventures, research and development, distribution and otherarrangements with third party OEM’s, defense contractors,universities and research institutions and others in order tosuccessfully market our Multi-Mix® products. In fact,we may find it necessary to enter into such arrangements if our ownresources are inadequate to develop recurring revenues and a sustainedcommercial market for these products. There can be no assurance we willbe able to enter into such arrangements, or do so on commerciallyattractive terms, if necessary.

Our business plan anticipatessignificant future revenues from our Multi-Mix®products. Due to economic and market conditions in the wirelessindustry over the past several years, telecommunications system serviceproviders substantially reduced their capital equipment purchases fromour customers. While these circumstances have resulted in the delay orcancellation of Multi-Mix® Microtechnology productpurchases that had been anticipated from certain specific customers orprograms, in connection with the improved conditions in the industry,the Company has implemented a strategic plan utilizing productknowledge and customer focus to expand specific sales opportunities.Continued extended delay or reduction from planned levels in new ordersexpected from customers for these products could require the Company topursue alternatives related to the utilization or realization of theseassets and commitments. If we are unable to generate significant futurerevenues from these Multi-Mix® products or identifyalternative uses, sufficient to recover our investment, we could haveto write down the carrying value of these assets, thereby incurring animpairment charge to earnings, which would significantly harm ouroperations and financial condition.

14

----

Our products are intended foruse in various sectors of the satellite, defense and telecommunicationsindustries, which produces technologically advanced products with shortlife cycles.

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

|              |                                                                                                                                                |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the inability of our customers toadapt to rapidly changing technology and evolving industry standardsthat result in short product life cycles; |

|              |                                                                                                            |
|--------------|------------------------------------------------------------------------------------------------------------|
| •  | the inability of our customers todevelop and market their products, some of which are new and untested;and |

|              |                                                                                                                                                             |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the potential that ourcustomers’ products may become obsolete or the failure of ourcustomers’ products to gain widespread commercialacceptance. |

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

In thepast, developing engineering solutions, meeting research anddevelopment challenges and overcoming production and manufacturingissues have resulted in additional expenses. These expenses createpressure on our average selling prices and may result in decreasedmargins of our products. We expect that this will continue. In thefuture, competition could increase, and we anticipate this may resultin additional pressure on our pricing. We also may not be able toincrease the price of our products in the event that the cost ofcomponents or overhead increase. Changes in exchange rates between theUnited States and Canadian dollars, and other currencies, might resultin further disparity between our costs and selling price and hurt ourability to maintain gross margins.

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

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

Write offs orwrite downs of inventory generally arise from:

|              |                                           |
|--------------|-------------------------------------------|
| •  | declines in the market value ofinventory; |

|              |                                                                              |
|--------------|------------------------------------------------------------------------------|
| •  | changes in customerdemand for inventory, such as cancellation of orders; and |

|              |                                                                                                                                                                          |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | our purchases of inventory beyondcustomer needs that result in excess quantities on hand and that we arenot able to return to the vendor or charge back to the customer. |

Our products and therefore our inventories are subject totechnological risk. At any time either new products may enter themarket or prices of competitive products may be introduced with moreattractive features or at lower prices than ours. There is a risk wemay be unable to sell our inventory in a timely manner and avoid itbecoming obsolete. As of December  31,  2005, our inventoriesincluding raw materials, work-in-process and finished goods, werevalued at $3.7  million reflecting reductions due to valuationallowances for obsolescence of approximately $1.1  million againstthese inventories. In the event we are required to substantiallydiscount our inventory or are unable to sell our inventory in a timelymanner, we would be required to increase our valuation allowances andour operating results could be substantially adversely affected.

We generally do not obtain long-term volume purchasecommitments from customers, and, therefore, cancellations, reductionsin production quantities and delays in production by our customerscould adversely affect our operating results.

15

----

We generally do not obtain firm,long-term purchase commitments from our customers. Customers may canceltheir orders, choose not to exercise options for further productpurchases, reduce production quantities or delay production for anumber of reasons. In the event our customers experience significantdecreases in demand for their products and services, our customers maycancel orders, delay the delivery of some of the products that wemanufactured or place purchase orders for fewer products than wepreviously anticipated. Even when our customers are contractuallyobligated to purchase products from us, we may be unable or, for otherbusiness reasons, choose not to enforce our contractual rights.Cancellations, reductions or delays of orders by customers would:

|              |                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------|
| •  | adversely affect our operatingresults by reducing the volumes of products that we manufacture for ourcustomers; |

|              |                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------|
| •  | delay or eliminaterecoupment of our expenditures for inventory purchased in preparationfor customer orders; and |

|              |                                                                        |
|--------------|------------------------------------------------------------------------|
| •  | lowerour asset utilization, which would result in lower gross margins. |

Products we manufacture may contain design or manufacturingdefects that could result in reduced demand for our services andliability claims against us.

We manufacture products to ourcustomers’ specifications that are highly complex and may attimes contain design or manufacturing defects. Defects have beendiscovered in products we manufactured in the past and despite ourquality control and quality assurance efforts, defects may occur in thefuture. Defects in the products we manufacture, whether caused bydesign, manufacturing or component defects, may result in delayedshipments to customers or reduced or cancelled customer orders. Shouldthese defects occur in large quantities or frequently, our businessreputation may also be tarnished. In addition, these defects may resultin liability claims against us. Even if customers are responsible forthe defects, we may assume responsibility for any costs orpayments.

We are subject to risks of currencyfluctuations.

A portion of our business is conducted incurrencies other than the U.S. dollar. Changes in exchange rates amongother currencies and the U.S. dollar will affect our cost of sales,operating margins and revenues. Our Canadian operations were adverselyimpacted in fiscal 2005 and 2004 as a result of changes in the Canadianand U.S. Dollar exchange rates. We cannot predict the impact of futureexchange rate fluctuations. In addition, certain of our subsidiariesthat have non-U.S. dollar functional currencies transact business inU.S. dollars.

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

Sales to our five largest customers accounted for 47.3% ofour net sales in the fiscal year ended December  31,  2005and our three largest customers, Israel Aircraft Industries Ltd.,Lockheed Martin Corporation and Raytheon Company, accounted for11.2%, 10.9% and 10.5%, respectively, of our 2005sales. For 2004, Raytheon Company and Northrop Grumman Corporation,accounted for 13.9%, and 11.9%, respectively, of our netsales for that period. We depend on the continued growth, viability andfinancial stability of our customers, substantially all of whichoperate in an environment characterized by rapid technological change,short product life cycle, consolidation, and pricing and marginpressures. We expect to continue to depend upon a relatively smallnumber of customers for a significant percentage of our revenue.Consolidation among our customers may further concentrate our businessin a limited number of customers and expose us to increased risksrelating to dependence on a small number of customers. In addition, asignificant reduction in sales to any of our large customers orsignificant pricing and margin pressures exerted by a key customerwould adversely affect our operating results. In the past, some of ourlarge customers have significantly reduced or delayed the volume ofproducts ordered from us as a result of changes in their business,consolidation or divestitures or for other reasons. We cannot becertain that present or future large customers will not terminate theirarrangements with us or significantly change, reduce or delay theamount of products ordered from us, any of which would adversely affectour operating results.

16

----

A substantial portion of our revenues arerelated to the defense and military communications sectors. However, intimes of armed conflict or war, military spending is concentrated onarmaments build up, maintenance and troop support, and not on theresearch and development and specialty applications that are theCompany’s core strengths and revenue generators. Accordingly,our defense and military product revenues may decrease, and should notbe expected to increase, at times of armed conflicts or war.

Variations in our quarterly operating results could occur due tofactors including changes in demand for our products, the timing ofshipments and changes in our mix of net revenues.

Ourquarterly net revenues, expenses and operating results have varied inthe past and might vary significantly from quarter to quarter in thefuture. Quarter-to-quarter comparisons of our operating results are nota good indication of our future performance, and should not be reliedon to predict our future performance. Our short-term expense levels andmanufacturing and production facilities infrastructure overhead arerelatively fixed and are based on our expectations of future netrevenues. If we were to experience a reduction in net revenues in aquarter, we could have difficulty adjusting our short-term expendituresand absorbing our excess capacity expenses. If this were to occur, ouroperating results for that quarter would be negatively impacted. Otherfactors that might cause our operating results to fluctuate on aquarterly basis include.

|              |                                                          |
|--------------|----------------------------------------------------------|
| •  | customer decisions to defer,accelerate or cancel orders; |

|              |                                                |
|--------------|------------------------------------------------|
| •  | timing of shipments of orders forour products; |

|              |                                                                                           |
|--------------|-------------------------------------------------------------------------------------------|
| •  | changes in themix of net revenues attributable to higher-margin and lower-marginproducts; |

|              |                                                                                                  |
|--------------|--------------------------------------------------------------------------------------------------|
| •  | changes in productmix which could cause unexpected engineering or research anddevelopment costs; |

|              |                                                                   |
|--------------|-------------------------------------------------------------------|
| •  | announcements or introductions ofnew products by our competitors; |

|              |                                                                                                            |
|--------------|------------------------------------------------------------------------------------------------------------|
| •  | engineering or production delaysdue to product defects or quality problems and production yield issues;and |

|              |                                                                                    |
|--------------|------------------------------------------------------------------------------------|
| •  | dynamic defense budgetswhich could cause military program delays or cancellations. |

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

OnDecember 16, 2004, the Financial Accounting Standards Boardissued Statement of Financial Accounting Standards No. 123(Revised 2004), ‘‘Share-Based Payment’’(‘‘SFAS 123R’’). SFAS 123R is a revision ofFinancial Accounting Standards No. 123, as amended,‘‘Accounting for Stock-BasedCompensation’’ (‘‘SFAS 123’’)and supercedes Accounting Principles Board Opinion No. 25,‘‘Accounting for Stock Issued toEmployees’’. SFAS 123R eliminates the alternative touse the intrinsic value method of accounting that was provided in SFAS123, which generally resulted in no compensation expense being recordedin the financial statements related to the issuance of equity awards toemployees. SFAS 123R requires the Company to measure all employeestock-based compensation awards using a fair value method and to recordsuch expense in the consolidated financial statements, as opposed tothe pro forma note presentation previously used. The Company adoptedSFAS 123R at the beginning of its first quarter in fiscal 2006,and will apply the provisions of the statement prospectively for anynewly issued, modified or settled award after the date of initialadoption, as well as for any awards that were granted prior to theadoption date for which the requisite service period has not beenprovided as of the adoption date. We intend to continue to use theBlack-Scholes option pricing model to calculate total stockcompensation expense. The Company expects the adoption of thisstatement will have a non-cash material effect on its financialstatements, but the Company cannot reasonably estimate the impact ofthe adoption with respect to future grants because certain assumptionsused in the calculation of the value of share-based payments maychange. As of December  31,  2005 the total futurecompensation cost related to vested and non-vested stock options andthe employee stock purchase plan not yet recognized in the statement ofoperations was $185,000. Of that total, $119,000, $57,000 and $9,000are expected to be recognized in 2006, 2007 and 2008, respectively.

17

----

Competition.

Themicrowave component and subsystems industry continues to be highlycompetitive. The Company competes against many companies, both foreignand domestic, many of which are larger and have greater financial andother resources. Direct competitors for Merrimac in the commercialmarket are Anaren, Sirenza, Vari-L, Radiall and Sochen. Majorcompetitors for Merrimac in the military market are Anaren, M/A Com,L-3 Communications (Narda), Sage, TRM and KW Microwave. Majorcompetitors for Filtran in the microwave micro-circuitry market areLabtech, MPC and Precision Instruments. As a direct supplier to OEMs,the Company also faces significant competition from the in-housecapabilities of its customers. However, the current trend in thewireless marketplace has been for the OEMs to outsource more design andproduction work, thereby freeing up their internal resources for otheruse. Thus, the Company believes that internal customer competitionexists predominantly in its defense and satellite businesses.

Inthe wireless market, increased price pressure from the Company’scustomers is a continuing challenge. It is anticipated that thispricing pressure will continue indefinitely.

The principalcompetitive factors are technical performance, reliability, ability toproduce in volume, on-time delivery and price. Based on these factors,the Company believes that it competes favorably in its markets. TheCompany believes that it is particularly strong in the areas oftechnical performance and on-time delivery in the wireless marketplace.The Company believes that it competes favorably on price as well.

The RF Microwave components industry is highly competitive and hasbecome more so as defense spending has changed program spendingprofiles. Furthermore, current Department of Defense efforts areshifting funds to support troops engaged in existing hostilities aroundthe world. We compete against numerous U.S. and foreign providers withglobal operations, as well as those who operate on a local or regionalbasis. In addition, current and prospective customers continuallyevaluate the merits of manufacturing products internally. Changes inthe industries and sectors we service could significantly harm ourability to compete, and consolidation trends could result in largercompetitors that may have significantly greater resources with which tocompete against us.

We may be operating at a cost disadvantagecompared to manufacturers who have greater direct buying power fromcomponent suppliers, distributors and raw material suppliers or whohave lower cost structures. Our manufacturing processes are generallynot subject to significant proprietary protection, and companies withgreater resources or a greater market presence may enter our market orincrease their competition with us. Increased competition could resultin price reductions, reduced sales and margins or loss of marketshare.

Intellectual property.

Substantiallitigation regarding intellectual property rights exists in ourindustry. We do not believe our intellectual properties infringe thoseof others, and are not aware that any third party is infringing ourintellectual property rights. A risk always exists that third parties,including current and potential competitors, could claim that ourproducts, or our customers’ products, infringe on theirintellectual property rights or that we have misappropriated theirintellectual property. We may discover that a third party is infringingupon our intellectual property rights, or has been issued an infringingpatent.

Infringement suits are time consuming, complex, andexpensive to litigate. Such litigation could cause a delay in theintroduction of new products, require us to develop non-infringingtechnology, require us to enter into royalty or license agreements, ifavailable, or require us to pay substantial damages. We have agreed toindemnify certain customers for infringement of third-partyintellectual property rights. We could incur substantial expenses andcosts in case of a successful indemnification claim. A significantnegative impact would result if a successful claim of infringement weremade against us and we could not develop non-infringing technology orlicense the infringed or similar technology on a timely andcost-effective basis.

The Company’s success depends to asignificant degree upon the preservation and protection of its productand manufacturing process designs and other proprietary technology. Toprotect its 

18

----

proprietary technology, the Companygenerally limits access to its technology, treats portions of suchtechnology as trade secrets, and obtains confidentiality ornon-disclosure agreements from persons with access to the technology.The Company’s agreements with its employees prohibits employeesfrom disclosing any confidential information, technology developmentsand business practices, and from disclosing any confidentialinformation entrusted to the Company by other parties. Consultantsengaged by the Company who have access to confidential informationgenerally sign an agreement requiring them to keep confidential and notdisclose any non-public confidential information.

The Companycurrently has 16 active patents and has received a Notice of Allowancefrom the U.S. Patent and Trademark Office for a new patent that isexpected to be issued shortly. The Company plans to pursue intellectualproperty protection in foreign countries, primarily in the form ofinternational patents, in instances where the technology covered isconsidered important enough to justify the added expense. By agreement,Company employees who initiate or contribute to a patentable design orprocess are obligated to assign their interest in any potential patentto the Company.

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

Our financial performance depends substantially onthe performance of our executive officers and key employees. We aredependent in particular on Mason N. Carter, who serves as our ChiefExecutive Officer, Reynold Green, our Chief Operating Officer, RobertCondon, who serves as our Chief Financial Officer and James Logothetis,our Chief Technology Officer. We are also dependent upon our otherhighly skilled engineering, research and development and technicalpersonnel, due to the specialized technical nature of our business. Ifwe lose the services of any of our key personnel and are not able tofind replacements in a timely manner, our business could be disrupted,other key personnel might decide to leave, and we might incur increasedoperating expenses associated with finding and compensatingreplacements.

Government regulation.

TheCompany’s products are incorporated into telecom and wirelesscommunications systems that are subject to regulation domestically byvarious government agencies, including the Federal CommunicationsCommission and internationally by other government agencies. Inaddition, because of its participation in the satellite and defenseindustry, the Company is subject to audit from time to time forcompliance with government regulations by various governmentalagencies. The Company is also subject to a variety of local, state andfederal government regulations relating to environmental laws, as theyrelate to toxic or other hazardous substances used to manufacture theCompany’s products. The Company believes that it operates itsbusiness in material compliance with applicable laws and regulations.However, any failure to comply with existing or future laws orregulations could have a material adverse affect on theCompany’s business, financial condition and results ofoperations.

Export controls.

The Company'sproducts are subject to the Export Administration Regulations(‘‘EAR’’) administered by the U.S. Departmentof Commerce and may, in certain instances, be subject to theInternational Traffic in Arms Regulations(‘‘ITAR’’) administered by the U.S. Departmentof State. EAR restricts the export of dual-use products and technicaldata to certain countries, while ITAR restricts the export of defenseproducts, technical data and defense services. The Company believesthat it has implemented internal export procedures and controls inorder to achieve compliance with the applicable U.S. export controlregulations. However, the U.S. government agencies responsible foradministering EAR and ITAR have significant discretion in theinterpretation and enforcement of these regulations, and it is possiblethat these regulations could adversely affect the Company'sability to sell its products to non-U.S. customers.

Risks ofinternational operations.

A significant percentage of theCompany’s revenues is derived from the operations of itswholly-owned subsidiaries in Costa Rica and Canada. These revenues aresubject to the risks normally 

19

----

associated with international operationswhich include, without limitation, fluctuating currency exchange rates,changing political and economic conditions, difficulties in staffingand managing foreign operations, greater difficulty and expense inadministering business abroad, complications in complying with foreignlaws and changes in regulatory requirements, and cultural differencesin the conduct of business.

While the Company believes thatcurrent political and economic conditions in Canada and Costa Rica arerelatively stable, such conditions may adversely change so as to effectunderlying business assumptions about the current opportunities whichexist for doing business in those countries. In particular, thegovernment in Costa Rica could change, the currency exchange ratebetween the U.S. and Canadian dollars may change adversely (as occurredin 2005 and 2004), or the cost of labor and/or goods and servicesnecessary to the operations of the Company may increase.

Recently enacted changes in the Securities Laws and Regulationsare likely to increase costs.

The Sarbanes-Oxley Act of2002 (the ‘‘Sarbanes-Oxley Act’’) has requiredchanges in some of our corporate governance, securities disclosure andcompliance practice. In response to the requirements of theSarbanes-Oxley Act, the SEC and the American Stock Exchange havepromulgated new rules in a variety of subjects. Compliance with thesenew rules has increased our legal and accounting costs, and we expectthese increased costs to continue indefinitely. These developments mayalso make it more difficult for us to attract and retain qualifiedmembers of our board of directors or qualified executive officers.

If we receive other than an unqualified opinion on theadequacy of our internal control over financial reporting as ofDecember  29,  2007 and future year-ends as required bySection 404 of the Sarbanes-Oxley Act, investors could lose confidencein the reliability of our financial statements, which could result in adecrease in the value of our common stock.

As required bySection 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiringpublic companies to include a report of management on thecompany's internal control over financial reporting in theirannual reports on Form 10-K or 10-KSB that contains an assessment bymanagement of the effectiveness of the Company's internal controlover financial reporting. In addition, the public accounting firmauditing a company's financial statements must attest to andreport on both management's assessment as to whether the companymaintained effective internal control over financial reporting and onthe effectiveness of the company's internal control over financialreporting.

We are currently undergoing a comprehensive effort tocomply with Section 404 of the Sarbanes-Oxley Act. If we are unable tocomplete our assessment in a timely manner or if our independentauditors issue other than an unqualified opinion on the design,operating effectiveness or management’s assessment of internalcontrol over financial reporting, this could result in an adversereaction in the financial markets due to a loss of confidence in thereliability of our financial statements, which could cause the marketprice of our shares to decline.

20

----

|                    |             |
|--------------------|-------------|
| ITEM 2.  | PROPERTIES. |

United States

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

Merrimac owns allof 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 forMerrimac's business and are properly utilized, suitably locatedand in good condition.

Canada

In February  1999,Merrimac entered into a seven-year lease for a 20,000 square-footmanufacturing facility in Ottawa, Ontario, Canada in connection withMerrimac's acquisition of FMI. Merrimac has the option to extendthe lease for an additional three-year term, and exercised such optionin February  2006.

Costa Rica

The Companycurrently leases a 36,200 square-foot facility in San Jose, Costa Ricaunder a five-year lease which expires February  2006 (with afive-year renewal option). The renewal option was exercised inFebruary  2006. This facility, which opened for production inAugust  2002, is used for manufacturing the Company'sproducts.

|                    |                   |
|--------------------|-------------------|
| ITEM 3.  | LEGALPROCEEDINGS. |

Merrimac is a party to lawsuits, arising in thenormal course of business. It is the opinion of Merrimac'smanagement that the disposition of these various lawsuits will notindividually or in the aggregate have a material adverse effect on theconsolidated financial position or the results of operations ofMerrimac.

|                    |                                                     |
|--------------------|-----------------------------------------------------|
| ITEM 4.  | SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS. |

No matters weresubmitted to a vote of Merrimac's stockholders during the fourthquarter of fiscal 2005.

21

----

PART II

|                    |                                                                                                                  |
|--------------------|------------------------------------------------------------------------------------------------------------------|
| ITEM 5.  | MARKET FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES |

Merrimac's Common Stock has beenlisted and traded on The American Stock Exchange since July11,  1988, under the symbol MRM. As of March  24,  2006,Merrimac had approximately 200 holders of record. Merrimac believesthere are approximately 1,200 additional holders in‘‘street name’’ through broker nominees.

The following table sets forth the range of the high and lowtrading prices as reported by the AMEX for the period fromJanuary  4,  2004 to December  31,  2005.

|                                      |  |      |       |        |  |   |      |        |  |  |
|--------------------------------------|--|------|-------|--------|--|---|------|--------|--|--|
| Fiscal Year EndedDecember  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 |   |
|                                      |

|                                    |  |      |       |        |  |   |      |        |  |  |
|------------------------------------|--|------|-------|--------|--|---|------|--------|--|--|
| Fiscal Year EndedJanuary  1,  2005 |  | High |       | Low    |
| First Quarter                      |  | $    | 10.59 |   |  | $ | 5.75 |   |
| Second Quarter                     |  | $    | 10.69 |   |  | $ | 6.91 |   |
| Third Quarter                      |  | $    | 9.35  |   |  | $ | 6.35 |   |
| Fourth Quarter                     |  | $    | 9.50  |   |  | $ | 8.50 |   |
|                                    |

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

Equity Compensation Plan Information

The followingtable gives information as of December  31,  2005, about theCompany’s common stock that may be issued upon the exercise ofoptions, warrants and rights under the Company’s existing equitycompensation plans:

|                                                           |  |                                                                                            |         |                                                                            |  |                                                                                                                                           |       |        |  |        |        |        |  |  |
|-----------------------------------------------------------|--|--------------------------------------------------------------------------------------------|---------|----------------------------------------------------------------------------|--|-------------------------------------------------------------------------------------------------------------------------------------------|-------|--------|--|--------|--------|--------|--|--|
|                                                      |  | (a)                                                                                        |         | (b)                                                                        |  | (c)                                                                                                                                       |
| Plancategory                                              |  | Number of securities to beissued upon exercise of outstanding options, warrants and rights |         | Weighted-average exercise price of outstanding options, warrantsand rights |  | Number of securities remaining available for futureissuance under equity compensation plans (excluding securitiesreflected in column (a)) |
| Equity compensation plansapproved by security holders     |  |                                                                                       | 397,869 |                                                                       |  | $                                                                                                                                         | 9.81  |   |  |   | 19,300 |   |
| Equity compensation plans not approvedby security holders |  |                                                                                       | 33,000  | (1)                                                                   |  | $                                                                                                                                         | 10.00 |   |  |   | 0      |   |
| Total                                                     |  |                                                                                       | 430,869 |                                                                       |  | $                                                                                                                                         | 9.83  |   |  |   | 19,300 |   |
|                                                           |

|  |
|--|
|  |  |
|  |

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (1)    Pursuantto the Company’s 1996 Stock Option Plan for Non-EmployeeDirectors, the Chairman of the board of directors was granted 20,000options and each of the two then non-employee directors was granted15,000 options. Each option had an exercise price of $11.00 and wasexercisable for ten years from the date of grant. 33,000 of suchoptions remain outstanding. All of the outstanding options under suchplan expire September 1, 2006. |

|                    |                         |
|--------------------|-------------------------|
| ITEM 6.  | SELECTED FINANCIAL DATA |

The following selected financial information is qualified byreference to, and should be read in conjunction with, theCompany’s consolidated financial statements and the notesthereto, and ‘‘Management’s Discussion and Analysisof Financial Condition and Results of Operations’’contained elsewhere herein. The selected consolidated statement ofoperations data for the fiscal years ended December 31, 2005 andJanuary 1, 2005 (both audited by Grant Thornton LLP) andJanuary 3, 2004 

22

----

(audited by Ernst & Young LLP) and theselected consolidated balance sheet data as of December 31, 2005and January 1, 2005 are derived from the Company’saudited consolidated financial statements which are included elsewhereherein. The selected consolidated statement of operations data for thefiscal year ended December 28, 2002 and the selectedconsolidated balance sheet data as of January 3, 2004 andDecember 28, 2002 (audited by Ernst & Young LLP) and theconsolidated statement of operations data for the fiscal year endedDecember 29, 2001 and the selected consolidated balance sheet data asof December 29, 2001 (audited by Arthur Andersen LLP) arederived from the Company’s audited consolidated financialstatements not included herein.

|                                                        |  |                                                                |         |                               |  |                                    |         |                                      |  |                                      |         |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------------------|--|----------------------------------------------------------------|---------|-------------------------------|--|------------------------------------|---------|--------------------------------------|--|--------------------------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                   |  | Fiscal Years Ended                                   |
|                                                   |  | December 31,2005(52 weeks)                                |         | January 1,2005(52 weeks) |  | January 3,2004(53 weeks) |         | December 28,2002(52 weeks) |  | December 29,2001(52 weeks) |
|                                                   |  | (In thousands, except per share data) |
| Consolidated Statement of OperationsData:              |  |                                                           |    |                          |  |                               |    |                                 |  |                                 |    |    |  |   |    |    |  |   |    |    |
| Netsales                                               |  | $                                                              | 29,719  |                          |  | $                                  | 30,949  |                                 |  | $                                    | 27,322  |    |  | $      | 24,570  |    |  | $      | 25,793  |    |
| Grossprofit                                            |  |                                                           | 12,214  |                          |  |                               | 12,909  |                                 |  |                                 | 10,577  |    |  |   | 10,466  |    |  |   | 13,279  |    |
| Selling, generaland administrative                     |  |                                                           | 9,540   |                          |  |                               | 9,820   |                                 |  |                                 | 9,536   |    |  |   | 8,950   |    |  |   | 9,531   |    |
| Research anddevelopment                                |  |                                                           | 1,932   |                          |  |                               | 1,723   |                                 |  |                                 | 1,737   |    |  |   | 2,729   |    |  |   | 3,382   |    |
| Restructuringcharges                                   |  |                                                           | — |                          |  |                               | — |                                 |  |                                 | 160     |    |  |   | 510     |    |  |   | — |    |
| Amortization ofgoodwill                                |  |                                                           | — |                          |  |                               | — |                                 |  |                                 | — |    |  |   | — |    |  |   | 148     |    |
| Reincorporationcharges                                 |  |                                                           | — |                          |  |                               | — |                                 |  |                                 | — |    |  |   | — |    |  |   | 330     |    |
| Operating income(loss)                                 |  |                                                           | 742     |                          |  |                               | 1,367   |                                 |  |                                 | (856    | )  |  |   | (1,722  | )  |  |   | (113    | )  |
| Interest and other (expense)income, net                |  |                                                           | (218    | )                        |  |                               | (265    | )                               |  |                                 | (271    | )  |  |   | (176    | )  |  |   | 17      |    |
| (Loss) gain ondisposition of assets                    |  |                                                           | (43     | )                        |  |                               | — |                                 |  |                                 | 104     |    |  |   | — |    |  |   | — |    |
| Income taxes(benefit)                                  |  |                                                           | (280    | )                        |  |                               | (96     | )                               |  |                                 | (109    | )  |  |   | 237     |    |  |   | (120    | )  |
| Net income (loss)                                      |  |                                                           | 761     |                          |  |                               | 1,198   |                                 |  |                                 | (914    | )  |  |   | (2,135  | )  |  |   | 24      |    |
| Net income (loss) per commonshare:                     |  |                                                           |    |                          |  |                               |    |                                 |  |                                 |    |    |  |   |    |    |  |   |    |    |
| Basic                                                  |  |                                                           | .24     |                          |  |                               | .38     |                                 |  |                                 | (.29    | )  |  |   | (.69    | )  |  |   | .01     |    |
| Diluted                                                |  |                                                           | .24     |                          |  |                               | .38     |                                 |  |                                 | (.29    | )  |  |   | (.69    | )  |  |   | .01     |    |
| Weighted average number of common sharesoutstanding:   |  |                                                           |    |                          |  |                               |    |                                 |  |                                 |    |    |  |   |    |    |  |   |    |    |
| Basic                                                  |  |                                                           | 3,142   |                          |  |                               | 3,127   |                                 |  |                                 | 3,121   |    |  |   | 3,074   |    |  |   | 2,624   |    |
| Diluted                                                |  |                                                           | 3,177   |                          |  |                               | 3,154   |                                 |  |                                 | 3,121   |    |  |   | 3,074   |    |  |   | 2,735   |    |
| Cash dividends declared per common share               |  |                                                           | — |                          |  |                               | — |                                 |  |                                 | — |    |  |   | — |    |  |   | — |    |
| Consolidated Balance SheetData(at year end): |  |                                                           |    |                          |  |                               |    |                                 |  |                                 |    |    |  |   |    |    |  |   |    |    |
| Workingcapital                                         |  | $                                                              | 9,854   |                          |  | $                                  | 8,464   |                                 |  | $                                    | 6,805   |    |  | $      | 3,615   |    |  | $      | 3,874   |    |
| Property, plantand equipment, net                      |  |                                                           | 13,973  |                          |  |                               | 15,584  |                                 |  |                                 | 17,222  |    |  |   | 19,282  |    |  |   | 18,963  |    |
| Total assets                                           |  |                                                           | 34,422  |                          |  |                               | 34,575  |                                 |  |                                 | 34,020  |    |  |   | 36,487  |    |  |   | 36,993  |    |
| Current portion of long-termdebt                       |  |                                                           | 908     |                          |  |                               | 905     |                                 |  |                                 | 954     |    |  |   | 6,240   |    |  |   | 4,369   |    |
| Long-term debt, net of currentportion                  |  |                                                           | 2,071   |                          |  |                               | 2,778   |                                 |  |                                 | 4,208   |    |  |   | 429     |    |  |   | 3,872   |    |
| Stockholders’ equity                             |  |                                                           | 27,690  |                          |  |                               | 26,598  |                                 |  |                                 | 24,838  |    |  |   | 24,702  |    |  |   | 22,053  |    |
|                                                        |

|                    |                                                                                           |
|--------------------|-------------------------------------------------------------------------------------------|
| ITEM 7.  | MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS |

OVERVIEW

Merrimac Industries, Inc.is involved in the design, manufacture and sale of electronic componentdevices offering extremely broad frequency coverage and highperformance characteristics, and microstrip, bonded stripline and thickmetal-backed Teflon® (PTFE) and mixed dielectricmultilayer circuits for communications, defense and aerospaceapplications. The Company's operations are conducted primarilythrough two business segments: (1) electronic components and subsystemsand  (2) microwave micro-circuitry (through its subsidiary,Filtran Microcircuits Inc.).

23

----

The following table provides abreakdown of our sales between these segments:

|                             |  |        |            |            |  |        |        |            |  |        |            |         |  |        |        |          |  |  |
|-----------------------------|--|--------|------------|------------|--|--------|--------|------------|--|--------|------------|---------|--|--------|--------|----------|--|--|
|                        |  | 2005   |            | 2004       |
|                        |  | $      |            | % of sales |  | $      |        | % of sales |
| Electronic componentsand    |  |   |       |       |  |   |   |       |  |   |       |    |  |   |   |     |
| Subsystems                  |  | $      | 22,483,000 |       |  |   | 75.7   | %     |  | $      | 25,141,000 |    |  |   | 81.2   | %   |
| Microwavemicro-circuitry(1) |  | $      | 7,372,000  |       |  |   | 24.8   | %     |  | $      | 5,956,000  |    |  |   | 19.2   | %   |
| Less intersegment sales     |  | $      | (136,000   | )     |  |   | (0.5   | )%    |  | $      | (148,000   | )  |  |   | (0.4   | )%  |
| Consolidated                |  | $      | 29,719,000 |       |  |   | 100.0  | %     |  | $      | 30,949,000 |    |  |   | 100.0  | %   |
|                             |

|  |
|--|
|  |  |
|  |

|  |                                                                                                             |
|--|-------------------------------------------------------------------------------------------------------------|
|  | (1)    Substantiallyall conducted by our Canadian subsidiary, Filtran MicrocircuitsInc. |

Merrimac is a versatile technologicallyoriented company specializing in miniature radio frequencylumped-element components, integrated networks, microstrip andstripline microwave components, subsystems and ferrite attenuators. Ofspecial significance has been the combination of two or more of thesetechnologies into single components to achieve superior performance andreliability while minimizing package size and weight. Merrimaccomponents are today found in applications as diverse as satellites,military and commercial aircraft, radar, cellular radio systems,medical and dental diagnostic instruments, personal communicationssystems (‘‘PCS’’) and wireless internetconnectivity. Merrimac's components range in price from $0.50 tomore than $10,000 and its subsystems range from $500 to more than$1,000,000.

Multi-Mix®

In1998, Merrimac introduced Multi-Mix® Microtechnologycapabilities, an innovative process for microwave, multilayerintegrated circuits and micro-multifunction module(MMFM)® technology and subsystems. This process isbased on fluoropolymer composite substrates, which are bonded togetherinto a multilayer structure using a fusion bonding process. The fusionprocess provides a homogeneous dielectric medium for superiorelectrical performance at microwave frequencies. This 3-dimensionalMulti-Mix® design consisting of stacked circuit layerspermits the manufacture of components and subsystems that are afraction of the size and weight of conventional microstrip andstripline products.

Multi-Mix PICO®

In July  2001, Merrimac introduced its Multi-MixPICO® Microtechnology. Through Multi-MixPICO® technology, Merrimac offers a group of productsat a greatly reduced size, weight and cost that includes hybridjunctions, directional couplers, quadrature hybrids, power dividers andinline couplers, filters and vector modulators along with 802.11a,802.11b, and 802.11g Wireless Local Area Network modules. When comparedto conventional multilayer quadrature hybrids and directional couplerproducts, Multi-Mix PICO® is more than 84%smaller in size, without the loss of power or performance. Merrimac hascompleted the development of integrated inline multi-couplers and issupplying these Multi-Mix PICO® products to majorbasestation customers.

In 2005, Merrimac focused itsdesign and manufacturing efforts on Multi-Mix®multilayer subsystem products for several satcom and militarycustomers.

In addition, Merrimac started the design of ahigh power amplifier for use in basestation infrastructure, militaryand satcom applications based upon a U.S. Notice of Allowance for aPatent that is expected to be issued shortly. An important part ofbasestation infrastructure equipment is the high power transmitamplifier, which must provide extremely linear performance in order toboost signals carrying voice, data and video services withoutdistortion.

Merrimac's strategy is to be a reliablesupplier of high quality, technically innovative signal processingproducts. Merrimac coordinates its marketing, research and development,and manufacturing operations to develop new products and expand itsmarkets. Merrimac's marketing and development activities focus onidentifying and producing prototypes for new military and commercialprograms and applications in aerospace, navigational systems,telecommunications and cellular analog and 

24

----

digital wireless telecommunicationselectronics. Merrimac's research and development efforts aretargeted towards providing customers with more complex, reliable, andcompact products at lower costs.

Merrimac'scustomers are primarily major industrial corporations that integrateMerrimac's products into a wide variety of defense and commercialsystems. Merrimac's customers include:

BAESystems The Boeing Company Celestica, Inc. EADS AstriumITT Lockheed Martin Corporation Loral Space &Communications Ltd. Northrop Grumman Corporation RaytheonCompany General Dynamics Corporation

The followingtable presents our key customers and the percentage of net sales madeto such customers:

|                                 |  |        |      |         |  |        |      |         |  |        |      |         |  |  |
|---------------------------------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--|
|                            |  | 2005   |      | 2004    |  | 2003   |
| Israel Aircraft Industries Ltd. |  |   | 11.2 | %  |  |   | 6.2  | %  |  |   | 1.1  | %  |
| Lockheed Martin Corporation     |  |   | 10.9 | %  |  |   | 6.6  | %  |  |   | 7.8  | %  |
| RaytheonCompany                 |  |   | 10.5 | %  |  |   | 13.9 | %  |  |   | 12.3 | %  |
| Northrop Grumman Corporation    |  |   | 8.8  | %  |  |   | 11.9 | %  |  |   | 12.4 | %  |
| The Boeing Company              |  |   | 5.9  | %  |  |   | 7.8  | %  |  |   | 16.1 | %  |
|                                 |

Salesto the foreign geographic area of Europe were 14.8%, 8.9%and 10.3% of net sales in fiscal years 2005, 2004 and 2003,respectively.

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

|                                   |  |               |           |               |  |               |      |               |  |        |           |        |  |        |      |         |  |        |           |        |  |        |      |         |  |   |           |        |  |        |     |         |  |        |        |        |  |  |
|-----------------------------------|--|---------------|-----------|---------------|--|---------------|------|---------------|--|--------|-----------|--------|--|--------|------|---------|--|--------|-----------|--------|--|--------|------|---------|--|---|-----------|--------|--|--------|-----|---------|--|--------|--------|--------|--|--|
|                              |  | 2005          |           | 2004          |  |          |
|                              |  | North America |           | Rest of World |  | North America |      | Rest of World |  |   |
|                              |  | $             |           | %             |  | $             |      | %             |  | $      |           | %      |  | $      |      | %       |  |   |
| Militaryand commercial satellites |  | $             | 6,960,000 |          |  |          | 23.4 | %        |  | $      | 933,000   |   |  |   | 3.1  | %  |  | $      | 6,947,000 |   |  |   | 22.4 | %  |  | $ | 459,000   |   |  |   | 1.5 | %  |  |   |   |   |
| Defense                           |  | $             | 7,246,000 |          |  |          | 24.4 | %        |  | $      | 3,899,000 |   |  |   | 13.1 | %  |  | $      | 9,993,000 |   |  |   | 32.3 | %  |  | $ | 2,134,000 |   |  |   | 6.9 | %  |  |   |   |   |
| Commercial                        |  | $             | 9,746,000 |          |  |          | 32.8 | %        |  | $      | 935,000   |   |  |   | 3.2  | %  |  | $      | 9,818,000 |   |  |   | 31.7 | %  |  | $ | 1,598,000 |   |  |   | 5.2 | %  |  |   |   |   |
|                                   |

Acquired by Merrimacin February  1999, Filtran Microcircuits Inc.(‘‘FMI’’) is a leading manufacturer ofmicrowave micro-circuitry for the high frequency communicationsindustry. FMI produces microstrip, bonded stripline, and thickmetal-backed Teflon® (PTFE) microcircuits for RFapplications including satellite, aerospace, PCS, fiber optictelecommunications, automotive, navigational and defense applicationsworldwide. FMI participates in the market for millimeter-waveapplications. FMI also supplies mixed dielectric multilayer and highspeed interconnect circuitry to meet customer demand for highperformance and cost-effective packaging. FMI's key customersinclude:

|              |                     |
|--------------|---------------------|
| •  | Endwave Corporation |

|              |                   |
|--------------|-------------------|
| •  | Herley Industries |

|              |                                 |
|--------------|---------------------------------|
| •  | Israel Aircraft Industries Ltd. |

|              |                                       |
|--------------|---------------------------------------|
| •  | L3 Communications Narda MicrowaveEast |

|              |               |
|--------------|---------------|
| •  | M/A-Com, Inc. |

|              |                      |
|--------------|----------------------|
| •  | Raytheon Canada Ltd. |

|              |                            |
|--------------|----------------------------|
| •  | Trak Microwave Corporation |

25

----

For more information regarding ourelectronics components and subsystems business and the microwavemicro-circuitry business done by FMI, please see Note 8 of the Notes toConsolidated Financial Statements.

The Company marketsand sells its products domestically and internationally through adirect sales force and manufacturers’ representatives. Merrimachas traditionally developed and offered for sale products built tospecific customer needs, as well as standard catalog items. Thefollowing table provides a breakdown of electronic components sales asderived from initial orders for products custom designed for specificcustomer applications, repeat orders for such products and from catalogsales:

|                 |  |        |    |         |  |        |    |         |  |        |    |         |  |  |
|-----------------|--|--------|----|---------|--|--------|----|---------|--|--------|----|---------|--|--|
|            |  | 2005   |    | 2004    |  | 2003   |
| Initial designs |  |   | 27 | %  |  |   | 27 | %  |  |   | 35 | %  |
| Repeatdesigns   |  |   | 57 | %  |  |   | 58 | %  |  |   | 48 | %  |
| Catalog sales   |  |   | 16 | %  |  |   | 15 | %  |  |   | 17 | %  |
|                 |

The Company believes thatwhile its wireless subscriber base continues to grow, the recenteconomic downturn, resulting in reduced spending by wirelesstelecommunications service providers, has caused many wirelesstelecommunications equipment manufacturers to delay or forego purchasesof the Company's products. The Company expects that its defenseand satellite customers should continue to maintain their approximatecurrent levels of orders during fiscal year 2006, though there are noassurances they will do so. Nevertheless, in times of armed conflict orwar, military spending is concentrated on armaments build up,maintenance and troop support, and not on the research and developmentand specialty applications that are the Company’s core strengthsand revenue generators. Accordingly, our defense and military productrevenues may decrease and should not be expected to increase, at timesof armed conflicts or war. The Company also anticipates increasedlevels of orders during fiscal year 2006 for itsMulti-Mix® Microtechnology products, based on inquiriesfrom existing customers, requests to quote from new and existingcustomers and market research. The improved telecommunications sectorand the continued efforts to diversify FMI into wireless basestations,automotive and defense applications has resulted in additional ordersfor FMI, which the Company anticipates will continue.

Cost of sales for the Company consists of materials, salariesand related expenses, and outside services for manufacturing andcertain engineering personnel and manufacturing overhead. Our productsare designed and manufactured in the Company’s facilities. TheCompany’s manufacturing and production facilities infrastructureoverhead are relatively fixed and are based on its expectations offuture net revenues. Should the Company experience a reduction in netrevenues in a quarter, it could have difficulty adjusting short-termexpenditures and absorbing any excess capacity expenses. If this wereto occur, the Company’s operating results for that quarter wouldbe negatively impacted. In order to remain competitive, the Companymust continually reduce its manufacturing costs through design andengineering innovations and increases in manufacturing efficiencies.There can be no assurance that the Company will be able to reduce itsmanufacturing costs.

Depreciation and amortizationexpenses exceeded capital expenditures for new projects and productionequipment during 2005 by approximately $1,400,000, and the Companyanticipates that depreciation and amortization expenses will exceedcapital expenditures in fiscal year 2006 by approximately $800,000. TheCompany intends to issue up to $2,000,000 of purchase order commitmentsfor capital equipment from various vendors. The Company anticipatesthat such equipment will be purchased and become operational duringfiscal year 2006. The Company’s planned equipment purchases andother commitments are expected to be funded through cash resources andcash flows expected to be generated from operations, and supplementedby the Company’s $5,000,000 revolving credit facility, whichexpires October  8,  2006. The Company anticipates therevolving credit facility will be renewed.

Selling,general and administrative expenses consist of personnel costs foradministrative, selling and marketing groups, sales commissions toemployees and manufacturing representatives, travel, product marketingand promotion costs, as well as legal, accounting, informationtechnology and other administrative costs. The Company expects tocontinue to make significant and increasing 

26

----

expenditures for selling, general andadministrative expenses, especially in connection with implementationof its strategic plan for generating and expanding sales ofMulti-Mix® products.

Research anddevelopment expenses consist of materials, salaries and relatedexpenses of certain engineering personnel, and outside services relatedto product development projects. The Company charges all research anddevelopment expenses to operations as incurred. The Company believesthat continued investment in research and development is critical tothe Company’s long-term business success. We intend to continueto invest in research and development programs in future periods, andexpect that these costs will increase over time, in order to developnew products, enhance performance of existing products and reduce thecost of current or new products.

CRITICAL ACCOUNTINGESTIMATES AND POLICIES

The Company's managementmakes certain assumptions and estimates that impact the reportedamounts of assets, liabilities and stockholders' equity, andrevenues and expenses. These assumptions and estimates are inherentlyuncertain. The management judgments that are currently the mostcritical are related to the accounting for the Company'sinvestments in Multi-Mix® Microtechnology, contractrevenue recognition, inventory valuation, valuation of goodwill andvaluation of deferred tax assets. Below is a further description ofthese policies as well as the estimates involved.

Impairment of long-lived assets

Thefollowing is a summary of the carrying amounts of theMulti-Mix® Microtechnology net assets included in theCompany's consolidated financial statements at December31,  2005 and the related future planned purchases and leaseobligation commitments through January  2011.

Netassets:

|                                               |  |        |            |        |  |  |
|-----------------------------------------------|--|--------|------------|--------|--|--|
| Property, plant and equipment, at cost        |  | $      | 14,153,000 |   |
| Less accumulated depreciationand amortization |  |   | 6,707,000  |   |
| Property, plant and equipment, net            |  |   | 7,446,000  |   |
| Inventories                                   |  |   | 583,000    |   |
| Other assets, net                             |  |   | 170,000    |   |
| Total netassets at December  31, 2005         |  | $      | 8,199,000  |   |
| Commitments:                                  |  |   |       |   |
| Plannedequipment purchases for 2006           |  | $      | 1,200,000  |   |
| Lease obligations through January 2011        |  |   | 925,000    |   |
| Totalcommitments                              |  | $      | 2,125,000  |   |
| Total net assets and commitments              |  | $      | 10,324,000 |   |
|                                               |

27

----

Approximately 32% of theproperty, plant and equipment may be utilized in other areas of ourelectronic components and subsystems operations.

TheCompany anticipates receiving additional orders during 2006 for itsMulti-Mix® Microtechnology products, based on inquiriesfrom existing customers, requests to quote from new and existingcustomers and market research, for which substantial research anddevelopment costs have also been incurred. Due to economic and marketconditions in the wireless industry since 2000, wirelesstelecommunications system service providers substantially reduced theircapital equipment purchases from our customers. While thesecircumstances have resulted in the delay or cancellation ofMulti-Mix® Microtechnology product purchases that hadbeen anticipated from certain specific customers or programs, inconnection with the improved conditions in the industry, the Companyhas implemented a strategic plan utilizing product knowledge andcustomer focus to expand specific sales opportunities. However,continued extended delay or reduction from planned levels in new ordersexpected from customers for these products could require the Company topursue alternatives related to the utilization or realization of theseassets and commitments. Should these alternatives not be realized, theCompany would have to write down the value of these assets, therebyincurring an impairment charge to earnings, the net result of whichwould be materially adverse to the financial results and condition ofthe Company. In accordance with the Company’s evaluation ofMulti-Mix® under SFAS No. 144, the Company hasdetermined no provision for impairment is required at this time.Management will continue to monitor the recoverability of theMulti-Mix® assets.

Contract RevenueRecognition

The Company recognizes revenue in accordancewith the provisions of Staff Accounting Bulletin No. 104. Contractrevenue and related costs on fixed-price and cost-reimbursementcontracts that require customization of products to customerspecifications are recorded when title transfers to the customer, whichis generally on the date of shipment. Prior to shipment, manufacturingcosts incurred on such contracts are recorded as work-in-processinventory. Anticipated losses on contracts are charged to operationswhen identified. Revenue related to non-recurring engineering chargesis generally recognized upon shipment of the related initial unitsproduced or based upon contractually established stages ofcompletion.

The cost rates utilized forcost-reimbursement contracts are subject to review by third parties andcan be revised, which can result in additions to or reductions fromrevenue. Revisions which result in reductions to revenue are recognizedin the period that the rates are reviewed and finalized; additions torevenue are recognized in the period that the rates are reviewed,finalized, accepted by the customer, and collectability from thecustomer is assured. The Company submits financial informationregarding the cost rates on cost-reimbursement contracts for eachfiscal year in which the Company performed work on cost-reimbursementcontracts. The Company does not record any estimates on a regular basisfor potential revenue adjustments, as there currently is no reasonablebasis on which to estimate such adjustments given the Company’svery limited experience with these contracts. During 2003, the Companyrecognized revenue of $269,000 related to a cost-reimbursementcontract. During 2004, the Company recognized a revenue reduction of$12,000 related to a cost-reimbursement contract. The Companyrecognized revenue of $106,000 related to cost-reimbursement contractsin 2005.

Inventory Valuation

Inventories are valued at the lower of average cost ormarket. Inventories are periodically reviewed for their projectedmanufacturing usage utilization and, when slow-moving or obsoleteinventories are identified, a provision for a potential loss is madeand charged to operations. Total inventories are net of valuationallowances for obsolescence and cost overruns of $1,084,000 atDecember  31,  2005 and $1,942,000 at January  1,2005, of which $50,000 and $901,000, respectively, represented costoverruns.

Procurement of inventory is based on specificcustomer orders and forecasts. Customers have certain rights ofmodification with respect to these orders and forecasts. As a result,customer modifications to orders and forecasts affecting inventorypreviously procured by us and our purchases of inventory beyondcustomer needs may result in excess and obsolete inventory for therelated customers. 

28

----

Although we may be able to use some of theseexcess components and raw materials in other products we manufacture, aportion of the cost of this excess inventory may not be recoverablefrom customers, nor may any excess quantities be returned to thevendors. We also may not be able to recover the cost of obsoleteinventory from vendors or customers.

Write offs or writedowns of inventory generally arise from:

|              |                                               |
|--------------|-----------------------------------------------|
| •  | declines in the market value ofinventory; and |

|              |                                                                              |
|--------------|------------------------------------------------------------------------------|
| •  | changes in customerdemand for inventory, such as cancellation of orders; and |

|              |                                                                                                                                                                         |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | our purchases of inventory beyondcustomer needs that result in excess quantities on hand and that we arenot able to return to the vendor or charge back to the customer |

Valuation of Goodwill

With the adoptionof SFAS No. 142 by the Company on December  30,  2001,goodwill is no longer subject to amortization over its estimated usefullife. However, goodwill is subject to at least an annual assessment forimpairment and more frequently if circumstances indicate a possibleimpairment. The Company performed the annual assessment during thefourth quarter of 2005 and determined there was no impairment.

Valuation of Deferred Tax Assets

The Companycurrently has significant deferred tax assets resulting from netoperating loss carryforwards, tax credit carryforwards and deductibletemporary differences, which should reduce taxable income in futureperiods. A valuation allowance is required when it is more likely thannot that all or a portion of a deferred tax asset will not be realized.The Company's 2002 and 2003 net losses weighed heavily in theCompany's overall assessment. As a result of the assessment, theCompany established a full valuation allowance for its remaining netdomestic deferred tax assets at December  28,  2002. Thisassessment continued unchanged in 2003, 2004 and 2005. In 2005 theCompany added a valuation allowance for certain Canadian deferred taxassets of $270,000, because it believed that the probability ofrealization of such assets was uncertain. Management believes that avaluation allowance is not required for the remainder of FMI’srecorded deferred tax assets as they are more likely than not to berealized.

29

----

CONSOLIDATED STATEMENTS OFOPERATIONS SUMMARY

The following table displays lineitems in the Consolidated Statements of Operations as a percentage ofnet sales

|                                      |  |                        |         |                  |  |                 |         |         |  |        |        |          |  |  |
|--------------------------------------|--|------------------------|---------|------------------|--|-----------------|---------|---------|--|--------|--------|----------|--|--|
|                                 |  | Percentage of NetSales |
|                                 |  | YearsEnded             |
|                                 |  | (Unaudited)            |
|                                 |  | December  31, 2005     |         | January  1, 2005 |  | January  3,2004 |
| Net sales                            |  |                   | 100.0   | %           |  |            | 100.0   | %  |  |   | 100.0  | %   |
| Costs andexpenses:                   |  |                   |    |             |  |            |    |    |  |   |   |     |
| Cost of sales                        |  |                   | 58.9    |             |  |            | 58.3    |    |  |   | 61.3   |     |
| Selling,general and administrative   |  |                   | 32.1    |             |  |            | 31.7    |    |  |   | 34.9   |     |
| Research and development             |  |                   | 6.5     |             |  |            | 5.6     |    |  |   | 6.4    |     |
| Restructuring charges                |  |                   | — |             |  |            | — |    |  |   | .6     |     |
|                                 |  |                   | 97.5    |             |  |            | 95.6    |    |  |   | 103.2  |     |
| Operating income (loss)              |  |                   | 2.5     |             |  |            | 4.4     |    |  |   | (3.2   | )   |
| Interest and other expense,net       |  |                   | (.7     | )           |  |            | (.8     | )  |  |   | (1.0   | )   |
| (Loss) gain on disposition of assets |  |                   | (.1     | )           |  |            | — |    |  |   | .4     |     |
| Income (loss) before income taxes    |  |                   | 1.7     |             |  |            | 3.6     |    |  |   | (3.8   | )   |
| Benefit for incometaxes              |  |                   | (.9     | )           |  |            | (.3     | )  |  |   | (.4    | )   |
| Net income (loss)                    |  |                   | 2.6     | %           |  |            | 3.9     | %  |  |   | (3.4   | )%  |
|                                      |

2005 COMPARED TO 2004

Net sales.

Consolidated results of operationsfor 2005 reflect a decrease in net sales from 2004 of $1,230,000 or4.0% to $29,719,000. This decrease was attributable to a$2,657,000 decrease in net sales of electronic components andsubsystems offset in part by a $1,416,000 increase in sales ofmicrowave micro-circuitry products from the Company's wholly-ownedsubsidiary FMI. The decrease in net sales for the electronic componentsand subsystems segment for 2005 is due to reduced orders from delays inspace and defense programs. The Company expects that its orders fromits defense and satellite customers to improve during fiscal year 2006,though there are no assurances they will do so. In times of armedconflict or war, military spending is concentrated on armaments buildup, maintenance and troop support, and not on the research anddevelopment and specialty applications that are the Company’score strengths and revenue generators. The Company also anticipatesincreased levels of orders during fiscal year 2006 for itsMulti-Mix® Microtechnology products, based on inquiriesfrom existing customers, requests to quote from new and existingcustomers and market research. The increase in sales of the microwavemicro-circuitry segment for 2005 was due to new orders from bothexisting and new customers due to the continued efforts to diversifyFMI into wireless basestations, automotive and defense applications.FMI anticipates much of this new order volume to renew in futureperiods.

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

30

----

The following table presents keyperformance 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 NetSales      |  | $      | 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 or5.0% compared to $31,499,000 in orders received for 2004.Backlog increased by $194,000 to $13,139,000 at the end of 2005compared to $12,945,000 at year-end 2004.

Cost of sales andgross profit.

The following table providescomparative gross profit information, by product segment, for the pasttwo years.

|                                                  |  |          |            |                                    |  |                      |            |          |  |                                   |      |                      |  |   |            |        |  |   |           |        |  |        |      |         |  |  |
|--------------------------------------------------|--|----------|------------|------------------------------------|--|----------------------|------------|----------|--|-----------------------------------|------|----------------------|--|---|------------|--------|--|---|-----------|--------|--|--------|------|---------|--|--|
|                                             |  | $— |            | Increase/(Decrease) fromPrior Year |  | % ofSegmentNet Sales |            | $— |  | Increase/(Decrease)fromPrior Year |      | % of SegmentNetSales |
| Electronic Components and Subsystems grossprofit |  | $        | 10,281,000 |                               |  | $                    | (1,060,000 | )   |  |                              | 45.7 | %               |  | $ | 11,341,000 |   |  | $ | 1,841,000 |   |  |   | 45.1 | %  |
| Microwave Micro-Circuitry grossprofit            |  | $        | 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 | %  |
|                                                  |

Thedecrease in gross profit for 2005 for the electronic components andsubsystems segment was due to the overall decrease in segment sales.Cost of sales for the electronic components and subsystems segment alsoreflects a reduction of intersegment purchases from FMI of $12,000 for2005.

Depreciation expense included in 2005 consolidatedcost of sales was $2,862,000, a decrease of $8,000 compared to 2004.For 2005, approximately $1,641,000 of depreciation expense wasassociated with Multi-Mix® Microtechnology capitalassets.

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

Selling, general and administrative expenses.

Selling, general and administrative expenses of $9,540,000for 2005 decreased by $280,000 or 2.8%, and when expressed as apercentage of net sales, increased by 0.4 percentage points to32.1% compared to 2004. The 2005 selling, general andadministrative expenses decreased due to lower commissions related tothe lower sales level in 2005.

Research and developmentexpenses.

Research and development expenses fornew products were $1,932,000 for 2005, an increase of $209,000 or12.1% and when expressed as a percentage of net sales, anincrease 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 suchFMI expenses in 2004) substantially all of the research and developmentexpenses were related to Multi-Mix® Microtechnology,Multi-Mix PICO® and power amplifier products. TheCompany anticipates that these expenses will increase in future periodsin connection with further implementation of our strategic plan forMulti-Mix®.

Operating income.

Consolidated operating income for 2005 was $742,000 comparedto consolidated operating income of $1,367,000 for 2004. Two expenseswhich reduced operating income for 2004 were $150,000 for 

31

----

employee incentive compensation payments and$75,000 for a profit-sharing contribution to the Company’s401(k) Plan, did not recur in 2005.

For 2005, theCompany's operating income for its electronic components andsubsystems segment was $280,000 compared to operating income of$1,178,000 for 2004. The lower operating income for the electroniccomponents and subsystems segment was due to the segment’s lowergross profit from lower sales, partially offset by lower operatingexpenses compared to 2004. For 2005, operating income for the microwavemicro-circuitry segment was $462,000 compared to operating income of$189,000 for 2004.

Interest and other expense, net.

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

Income taxes.

The Company’s effectivetax rate for the years ended December  31,  2005 andJanuary  1,  2005 reflects U.S. Federal Alternative MinimumTax and State income taxes for the respective years. The 2005 currentbenefit reflects a $30,000 domestic tax benefit related to tax planningon the 2004 returns. The current foreign tax benefit for the year endedDecember  31,  2005 represents refundable Canadian provincialtax credits for which FMI, as a technology company, has qualified. The2004 current tax provision in the amount of $122,000 was based oncertain statutory limitations on the use of the Company’s netoperating loss carryforwards. Tax benefits were recorded in the amountof $218,000 in 2004 primarily associated with FMI's research anddevelopment expenses incurred in Canada.

Internal RevenueService Code Section 382 places a limitation on the utilization of netoperating loss carryforwards when an ownership change, as defined inthe tax law, occurs. Generally, an ownership change occurs when thereis a greater than 50 percent change in ownership. If such change shouldoccur, the actual utilization of net operating loss carryforwards, fortax purposes, would be limited annually to a percentage of the fairmarket value of the Company at the time of such change. The Company maybecome subject to these limitations in 2006 depending on change inownership.

Net income.

Net income for2005 was $761,000 compared to net income of $1,198,000 for 2004. Netincome per diluted share for 2005 was $.24 compared to net income perdiluted share of $.38 per share for 2004.

2004COMPARED TO 2003

Net sales.

Consolidated results of operations for 2004 reflect anincrease in net sales from 2003 of $3,627,000 or 13.3% to$30,949,000. This increase was attributable to a $1,179,000 increase innet sales of electronic components and subsystems and a $2,247,000increase in sales of microwave micro-circuitry products from theCompany's wholly-owned subsidiary FMI. The increase in net salesfor the electronic components and subsystems segment for 2004 isattributable to improved orders in 2004 from existing satellite anddefense customers and a higher backlog at the beginning of 2004 ascompared to the beginning of 2003; the higher backlog reflected neworders from existing customers in the Company's defense business.The increase in sales of the microwave micro-circuitry segment for 2004was due to new orders from both existing and new customers due to thecontinued efforts to diversify FMI into wireless basestations,automotive and defense applications.

Backlog representsthe amount of orders the Company has received that have not beenshipped as of the end of a particular fiscal period. The orders inbacklog are a measure of future sales and determine theCompany’s upcoming material, labor and service requirements. Thebook-to-bill ratio 

32

----

for a particular period represents ordersreceived for that period divided by net sales for the same period. TheCompany looks for this ratio to exceed 1.0, indicating the backlog isbeing replenished at a higher rate than the sales being removed fromthe backlog.

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

|                    |  |        |            |        |  |        |            |        |  |  |
|--------------------|--|--------|------------|--------|--|--------|------------|--------|--|--|
|               |  | 2004   |            | 2003   |
| Beginning Backlog  |  | $      | 12,395,000 |   |  | $      | 10,044,000 |   |
| Plus Bookings      |  | $      | 31,499,000 |   |  | $      | 29,673,000 |   |
| Less NetSales      |  | $      | 30,949,000 |   |  | $      | 27,322,000 |   |
| Ending Backlog     |  | $      | 12,945,000 |   |  | $      | 12,395,000 |   |
| Book-to-Bill Ratio |  |   | 1.02       |   |  |   | 1.09       |   |
|                    |

Orders of$31,499,000 were received for 2004, an increase of $1,826,000 or6.2% compared to $29,673,000 in orders received for 2003.Backlog increased by $550,000 to $12,945,000 at the end of 2004compared to $12,395,000 at year-end 2003.

Cost of sales andGross profit.

The following table providescomparative gross profit information, by product segment, for the pasttwo years.

|                                                  |  |      |            |                                    |  |                      |           |        |  |                                   |      |                      |  |   |            |        |  |   |          |         |  |        |      |         |  |  |
|--------------------------------------------------|--|------|------------|------------------------------------|--|----------------------|-----------|--------|--|-----------------------------------|------|----------------------|--|---|------------|--------|--|---|----------|---------|--|--------|------|---------|--|--|
|                                             |  | 2004 |            | 2003                               |
|                                             |  | $    |            | Increase/(Decrease) fromPrior Year |  | % ofSegmentNet Sales |           | $      |  | Increase/(Decrease)fromPrior Year |      | % of SegmentNetSales |
| Electronic Components and Subsystems grossprofit |  | $    | 11,341,000 |                               |  | $                    | 1,841,000 |   |  |                              | 45.1 | %               |  | $ | 9,500,000  |   |  | $ | 604,000  |    |  |   | 39.6 | %  |
| Microwave Micro-Circuitry grossprofit            |  | $    | 1,569,000  |                               |  | $                    | 492,000   |   |  |                              | 26.3 | %               |  | $ | 1,077,000  |   |  | $ | (493,000 | )  |  |   | 29.0 | %  |
| Consolidated gross profit                        |  | $    | 12,910,000 |                               |  | $                    | 2,333,000 |   |  |                              | 41.7 | %               |  | $ | 10,577,000 |   |  | $ | 111,000  |    |  |   | 38.7 | %  |
|                                                  |

Theincreases in gross profit for 2004 for the electronic components andsubsystems segment were due to the overall increase in segment salesalong with savings resulting from the increased utilization of theCompany's West Caldwell, New Jersey and Costa Rica manufacturingproduction facilities, better product mix and the benefits of the costcontainment and restructuring programs instituted during 2003. Cost ofsales for the electronic components and subsystems segment alsoreflects increased staffing to meet production requirements and areduction of intersegment purchases from FMI of $201,000 for 2004.

Depreciation expense included in 2004 consolidated cost ofsales was $2,965,000, an increase of $187,000 compared to 2003. For2004, approximately $1,593,000 of depreciation expense was associatedwith Multi-Mix® Microtechnology capital assets.Increases in depreciation expense were a result of capital equipmentpurchases in the current and prior years.

FMI salesinclude intersegment sales of $148,000 and $349,000 in 2004 and 2003,respectively. The decrease in gross margin percent for 2004 is due tohigher material and overhead costs, including additional overtime,related to the new defense orders booked in 2004. During the secondhalf of 2004, gross profit margin at FMI was negatively impacted by theweakness of the U.S. dollar against the Canadian dollar.

Selling, general and administrative expenses.

Selling, general and administrative expenses of $9,820,000for 2004 increased by $284,000 or 3.0%, and when expressed as apercentage of net sales, decreased by 3.2 percentage points to31.7% compared to 2003. 2003 selling, general and administrativeexpenses included expenses associated with bank modification agreementsentered into during the second quarter and additional professional feesthat were incurred totaling approximately $400,000. The 2004 selling,general and administrative expenses increased due to higher marketingand administrative costs, including higher professional fees forSarbanes-Oxley assessments.

33

----

Research and developmentexpenses.

Research and development expenses fornew products were $1,723,000 for 2004, a decrease of $14,000 or0.9% and when expressed as a percentage of net sales, a decreaseof 0.8 percentage points to 5.6% compared to 2003. Except for$198,000 of expenses at FMI (an increase of $36,000 from such FMIexpenses in 2003) substantially all of the research and developmentexpenses were related to Multi-Mix® Microtechnology andMulti-Mix PICO® products.

Operatingincome.

Consolidated operating income for 2004 was$1,367,000 compared to a consolidated operating loss of $856,000 for2003. Operating income for 2004 was reduced by $150,000 for employeeincentive compensation payments and by $75,000 for a profit-sharingcontribution to the Company’s 401(k) Plan. During 2003 theCompany reduced its head count by 14 persons, principally involved inproduction, manufacturing support, sales and administration. TheCompany recorded personnel restructuring charges of $160,000,consisting of severance and certain other personnel costs during2003.

For 2004, the Company's operating income forits electronic components and subsystems segment was $1,178,000compared to an operating loss of $860,000 for 2003. For 2004, operatingincome for the microwave micro-circuitry segment was $189,000 comparedto operating income of $4,000 for 2003.

Interest and otherexpense, net.

Interest and other expense, net was$265,000 for 2004 compared to interest and other expense, net of$271,000 for 2003. Interest expense for 2004 was principally incurredon borrowings under the revolving line of credit and term loans whichthe Company consummated during the fourth quarter of 2003 at higherinterest rates than the previous facility. Interest expense for 2003was principally incurred on borrowings under the mortgage loan and theterm loan facility with its prior bank that was entered into duringfiscal year 2002. The reduction of interest and other expense was dueto lower outstanding debt balances during 2004 as the Company repaid$1,502,000 throughout 2004.

Income taxes.

The Company’s effective tax rate for the year endedJanuary  1,  2005 reflects U.S. Federal Alternative MinimumTax and State income taxes for the current year in the amount of$122,000 that are due based on certain statutory limitations on the useof the Company’s net operating loss carryforwards. Tax benefitswere recorded in the amount of $218,000 and $109,000 in 2004 and 2003,respectively, primarily associated with FMI's research anddevelopment expenses incurred in Canada.

Internal RevenueService Code Section 382 places a limitation on the utilization of netoperating loss carryforwards when an ownership change, as defined inthe tax law, occurs. Generally, an ownership change occurs when thereis a greater than 50 percent change in ownership. If such change shouldoccur, the actual utilization of net operating loss carryforwards, fortax purposes, would be limited annually to a percentage of the fairmarket value of the Company at the time of such change.

Netincome.

Net income for 2004 was $1,198,000 comparedto a net loss of $914,000 for 2003. Net income per diluted share for2004 was $.38 compared to a net loss of $.29 per share for 2003.

34

----

Quarterly Results

The followingtable sets forth unaudited financial data for each of theCompany’s last eight fiscal quarters.

|                                           |  |                                                              |        |                                                            |  |               |        |                |  |               |        |                |  |              |        |                |  |        |        |        |  |        |        |        |  |        |        |        |  |        |        |        |  |  |
|-------------------------------------------|--|--------------------------------------------------------------|--------|------------------------------------------------------------|--|---------------|--------|----------------|--|---------------|--------|----------------|--|--------------|--------|----------------|--|--------|--------|--------|--|--------|--------|--------|--|--------|--------|--------|--|--------|--------|--------|--|--|
|                                      |  | Fiscal Year Ended December 31, 2005 |        | Fiscal Year Ended January 1, 2005 |
|                                      |  | First Quarter                                                |        | SecondQuarter                                              |  | Third Quarter |        | Fourth Quarter |  | First Quarter |        | Second Quarter |  | ThirdQuarter |        | Fourth Quarter |
|                                      |  | (Dollars in thousands)(Unaudited)                  |
| Consolidated Statement of OperationsData: |  |                                                         |   |                                                       |  |          |   |           |  |          |   |           |  |         |   |           |  |   |   |   |  |   |   |   |  |   |   |   |  |   |   |   |
| Netsales                                  |  | $                                                            | 7,258  |                                                       |  | $             | 7,568  |           |  | $             | 7,890  |           |  | $            | 7,002  |           |  | $      | 7,647  |   |  | $      | 7,896  |   |  | $      | 7,619  |   |  | $      | 7,785  |   |
| Gross profit                              |  |                                                         | 3,034  |                                                       |  |          | 3,268  |           |  |          | 3,250  |           |  |         | 2,662  |           |  |   | 3,348  |   |  |   | 3,308  |   |  |   | 3,162  |   |  |   | 3,091  |   |
| Operating income (loss)                   |  |                                                         | 182    |                                                       |  |          | 416    |           |  |          | 291    |           |  |         | (147   | )         |  |   | 322    |   |  |   | 459    |   |  |   | 383    |   |  |   | 202    |   |
| Net income                                |  |                                                         | 84     |                                                       |  |          | 332    |           |  |          | 228    |           |  |         | 117    |           |  |   | 230    |   |  |   | 443    |   |  |   | 315    |   |  |   | 209    |   |
| Net income pershare:                      |  |                                                         |   |                                                       |  |          |   |           |  |          |   |           |  |         |   |           |  |   |   |   |  |   |   |   |  |   |   |   |  |   |   |   |
| Basic                                     |  |                                                         | .03    |                                                       |  |          | .10    |           |  |          | .07    |           |  |         | .04    |           |  |   | .07    |   |  |   | .14    |   |  |   | .10    |   |  |   | .07    |   |
| Diluted                                   |  |                                                         | .03    |                                                       |  |          | .10    |           |  |          | .07    |           |  |         | .04    |           |  |   | .07    |   |  |   | .14    |   |  |   | .10    |   |  |   | .07    |   |
|                                           |

LIQUIDITY AND CAPITALRESOURCES

The Company had liquid resources comprisedof cash and cash equivalents totaling approximately $4,100,000 at theend of 2005 compared to approximately $2,100,000 at the end of 2004.The Company's working capital was approximately $9,800,000 and itscurrent ratio was 3.2 to 1 at the end of 2005 compared to $8,500,000and 2.9 to 1, respectively, at the end of 2004. At December31,  2005 the Company had available borrowing capacity under itsrevolving line of credit of $3,000,000.

TheCompany’s planned equipment purchases and other commitments areexpected to be funded through cash resources and cash flows expected tobe generated from operations, and supplemented, if necessary, by theCompany’s $5,000,000 revolving credit facility, which expiresOctober  8,  2006. The Company anticipates the revolvingcredit facility will be renewed.

The Company’soperating activities provided net positive cash flows of $4,029,000during 2005 compared to positive cash flows of $4,788,000 during 2004.The primary sources of operating cash flows for 2005 were the netincome of $761,000 which was reduced by depreciation and amortizationof $3,155,000; a decrease in accounts receivable of $1,202,000 and anincrease in customer deposits of $630,000, offset by an increase ininventories of $774,000, an increase in income taxes receivable of$312,000, an aggregate decrease in accounts payable and accruedliabilities of $627,000 and the reduction of income taxes payable of$83,000. The primary sources of operating cash flows for 2004 were netincome of $1,198,000 which was reduced by depreciation and amortizationof $3,210,000, a reduction in inventories of $268,000, and an aggregateincrease in accounts payable and accrued liabilities of $479,000 partlyoffset by a reduction of customer deposits of $156,000 and an increasein accounts receivable of $118,000 and other current assets of$96,000.

The Company made net capital investments inproperty, plant and equipment of $1,474,000 during 2005, compared tonet capital investments made in property, plant and equipment of$1,715,000 during 2004. These capital expenditures are related to newproduction and test equipment capabilities in connection with theintroduction of new products and enhancements to existing products. Thedepreciated cost of capital equipment associated withMulti-Mix® Microtechnology was $7,446,000 at the end of2005, a decrease of $1,427,000 compared to $8,873,000 at the end offiscal year 2004.

The financing agreement with CITconsists of a $5,000,000 revolving line of credit, that is temporarilyreduced by $250,000 until certain conditions are met; a $1,500,000machinery and equipment term loan (‘‘Term LoanA’’) and a $2,750,000  real estate term loan(‘‘Term Loan B’’). In connection with thisfinancing agreement, the Company was required to place, over the lifeof the loan, $1,500,000 as restricted cash collateral with CIT. Therevolving line of credit, which expires October  8,  2006, is

35

----

subject to an availability limit under aborrowing base calculation (85% of eligible accounts receivableas defined in the financing agreement plus 100% of the$1,500,000 restricted cash). At December  31,  2005, theCompany had available borrowing capacity under its revolving line ofcredit of $3,000,000. The revolving line of credit bears interest atthe prime rate plus 1⁄2 percent (currently8.25%). The principal amount of Term Loan A is payable in 60equal monthly installments of $25,000 and bears interest at the primerate plus one percent (currently 8.75%). The principal amount ofTerm Loan B is payable in 84 equal monthly installments of $32,738 andbears interest at the prime rate plus one percent (currently8.75%). As of December  31,  2005, the Company, underthe terms of its agreement with CIT, elected to convert $650,000 ofTerm Loan A and $1,750,000 of Term Loan B from their prime rate base toLIBOR-based interest rate loans. The current LIBOR interest rateoptions were renewed on October  11,  2005 for six months atan interest rate of 7.54%. The current LIBOR interest rateoptions will expire April  12,  2006. The revolving line ofcredit and the term loans are secured by substantially all of theCompany’s assets located within the United States and the pledgeof 65% of the stock of the Company's subsidiaries locatedin Costa Rica and Canada. The provisions of the financing agreementrequire the Company to maintain certain financial and other covenants.The Company was in compliance with these covenants at December31,  2005.

FMI has a revolving credit agreement inplace with The Bank of Nova Scotia for up to $500,000 (Canadian) at theprime rate plus 3⁄4 %. No borrowings wereoutstanding under this agreement at December  31,  2005.

FMI has a $1,800,000 (Canadian) revolving lease line with theBank of Nova Scotia, whereby the Company can obtain funding forprevious production equipment purchases via a sale/leasebacktransaction. As of December  31,  2005, $453,000 (Canadian)has been utilized under this facility. Such leases are payable inmonthly installments for up to five years and are secured by therelated production equipment. Interest rates (typically prime rate plusone percent) are set at the closing of each respective sale/leasebacktransaction. During the first quarter of 2005, FMI obtained $287,000(Canadian) (US$231,000) in connection with the sale/leaseback ofcertain production equipment. The related equipment was originallypurchased by the Company in 2004.

Assets securing capitalleases included in property, plant and equipment, net, have adepreciated cost of approximately $678,000 at December  31,2005 and $611,000 at January  1,  2005.

TheCompany’s contractual obligations as of December  31,2005 are as follows:

|                            |  |                                     |       |                       |  |           |       |           |  |                  |       |        |  |        |       |        |  |        |                                 |        |  |  |
|----------------------------|--|-------------------------------------|-------|-----------------------|--|-----------|-------|-----------|--|------------------|-------|--------|--|--------|-------|--------|--|--------|---------------------------------|--------|--|--|
|                       |  | Payment due by period (inthousands) |
| Contractual Obligations    |  | Total                               |       | Less than 1 year |  | 1-3 years |       | 3-5 years |  | More than 5years |
| Long-Term Debt Obligations |  | $                                   | 2,979 |                  |  | $         | 908   |      |  | $                | 1,291 |   |  | $      | 780   |   |  | $      |     — |   |
| Operating LeaseObligations |  |                                | 2,511 |                  |  |      | 529   |      |  |             | 1,098 |   |  |   | 850   |   |  |   | 34                              |   |
| Total                      |  | $                                   | 5,490 |                  |  | $         | 1,437 |      |  | $                | 2,389 |   |  | $      | 1,630 |   |  | $      | 34                              |   |
|                            |

Depreciation andamortization expenses exceeded capital expenditures for new projectsand production equipment during 2005 by approximately $1,400,000, andthe Company anticipates that depreciation and amortization expenseswill exceed capital expenditures in fiscal year 2006 by approximately$800,000. The Company intends to issue up to $2,000,000 of purchaseorder commitments for capital equipment from various vendors. TheCompany anticipates that such equipment will be purchased and becomeoperational during fiscal year 2006.

The functionalcurrency for the Company’s wholly-owned subsidiary FMI is theCanadian dollar. The change in accumulated other comprehensive incomefor 2005 and 2004 reflect the changes in the exchange rates between theCanadian dollar and the United States dollar for those respectiveperiods. The functional currency for the Company’s Costa Ricaoperations is the United States dollar.

RELATED PARTYTRANSACTIONS

In May  1998, the Company sold22,000 shares of Common Stock to Mason N. Carter, Chairman, Presidentand Chief Executive Officer of the Company, at a price of $11.60 pershare, which approximated the average closing price of theCompany's Common Stock during the first quarter of 

36

----

1998. The Company lent Mr  Carter$255,000 in connection with the purchase of these shares and combinedthat loan with a prior loan to Mr  Carter in the amount of$105,000. The resulting total principal amount of $360,000 was payableMay  4,  2003 and bore interest at a variable interest ratebased on the prime rate. This loan was further amended on July29,  2002. Accrued interest of $40,000 was added to the principal,bringing the principal amount of the loan to $400,000, the due date wasextended to May  4,  2006, and interest (at the same rate aswas previously applicable) is now payable monthly. Mr  Carter haspledged 33,000 shares of Common Stock as security for this loan, whichis a full-recourse loan.

On March 29, 2006, the Companyentered into an agreement with Mason N. Carter, Chairman, President andChief Executive Officer of the Company, to purchase 42,105 shares ofthe Company's common stock owned by Mr. Carter at a purchaseprice of $9.50 per share (the closing price of the common stock onMarch 29, 2006) resulting in a total purchase price for the shares of$399,998. As a condition to the Company's obligation to purchasethe shares, concurrent with the Company's payment of the purchaseprice Mr. Carter will pay to the Company $400,000 (plus any accrued andunpaid interest) in full satisfaction of Mr. Carter's promissorynote in favor of the Company dated July  29, 2002. The closing ofthis transaction is scheduled to occur on April 17,2006.

On August  31,  2000, in connection withan amendment of Mr  Carter's employment agreement, theCompany loaned Mr  Carter an additional $280,000. Interest on theloan varies and is based on the prime rate, payable in accordance withMr  Carter's employment agreement. Each year the Company isrequired to forgive 20% of the amount due under this loan andthe accrued interest thereon. During 2005, the Company forgave $56,000of principal and $3,000 of accrued interest and paid a tax gross-upbenefit of $4,300. During 2004, the Company forgave $56,000 ofprincipal and $4,500 of accrued interest and paid $6,100 for a taxgross-up benefit. During 2003, the Company forgave $56,000 of principaland $7,000 of accrued interest and paid a tax gross-up benefit of$8,300. This loan was fully satisfied in 2005.

Duringfiscal years 2005, 2004 and 2003, respectively, the Company'sGeneral Counsel, Katten Muchin Rosenman LLP, was paid $243,000,$288,000 and $359,000 for providing legal services to the Company. Adirector of the Company is Counsel to the firm of Katten MuchinRosenman LLP but does not share in any fees paid by the Company to thelaw firm.

During fiscal years 2005, 2004 and 2003, theCompany retained Career Consultants, Inc. and SK Associates to performexecutive searches and to provide other services to the Company. TheCompany paid an aggregate of $5,000, $8,000 and $40,000 to thesecompanies during 2005, 2004 and 2003, respectively. A director of theCompany is the Chairman and Chief Executive Officer of each of thesecompanies.

During fiscal year 2003 a director of theCompany was paid $12,000 for providing financial-related consultingservices to the Company. This agreement terminated in April2003.

During each of fiscal years 2005, 2004 and 2003, adirector of the Company was paid $36,000 for providingtechnology-related consulting services to the Company.

During fiscal years 2005, 2004 and 2003, respectively, DuPontElectronic Technologies (‘‘DuPont’’), astockholder, was paid $54,000, $84,000 and $109,000 for providingtechnological and marketing-related personnel and services on acost-sharing basis to the Company under the Technology Agreement datedFebruary  28,  2002. A director of the Company is an officerof DuPont, but does not share in any of these payments.

Each director who is not an employee of the Company receivesa monthly director's fee of $1,500, plus an additional $500 foreach meeting of the Board and of any Committees of the Board attended.In addition, the Chair of the Audit Committee receives an annual fee of$2,500 for his services in such capacity. The directors are alsoreimbursed for reasonable travel expenses incurred in attending Boardand Committee meetings. In addition, pursuant to the 2001 Stock OptionPlan, each non-employee director is granted an immediately exercisableoption to purchase 2,500 shares of the Common Stock of the Company onthe date of each Annual Meeting of Stockholders. Each such option hasan exercise price equal to the fair market value on the date of suchgrant and will expire on the tenth 

37

----

anniversary of the date of the grant. OnJune  21,  2005, non-qualified stock options to purchase anaggregate of 2,500 shares were issued to each of seven directors at anexercise price of $8.95 per share.

On February28,  2002, the Company sold to DuPont 528,413 shares of CommonStock, representing approximately 16.6% of the Company'soutstanding Common Stock after giving effect to the sale, for anaggregate purchase price of $5,284,000. The Company and DuPont havealso agreed to work together to better understand the dynamics of themarkets for high-frequency electronic components and modules. David B.Miller, Vice President and General Manager of DuPont, was appointed tothe Company's Board of Directors.

On December13,  2004 Infineon Technologies AG(‘‘Infineon’’), at such time a 15.2%holder of the Company’s common stock, sold 475,000 shares of theCompany’s common stock to four purchasers in aprivately-negotiated transaction. Two purchasers in such transaction, KHoldings LLC and Hampshire Investments, Limited, each of which isaffiliated with Ludwig G. Kuttner, purchased shares representing anaggregate of approximately 9.6% of the Company’s commonstock. Infineon also assigned to each purchaser certain registrationrights to such shares under the existing registration rights agreementsInfineon had with the Company.

In connection with thetransaction, the Company and Infineon terminated the Stock Purchase andExclusivity Letter Agreement dated April  7,  2000, asamended, which provided that the Company would design, develop andproduce exclusively for Infineon certain Multi-Mix®products that incorporate active RF power transistors for use incertain wireless basestation applications, television transmitters andcertain other applications that are intended for Bluetoothtranceivers.

DuPont and the four purchasers above holdregistration rights which currently give them the right to register anaggregate of 1,003,413 shares of Common Stock of the Company.

RECENT ACCOUNTING PRONOUNCEMENTS

InNovember  2004, SFAS No. 151, ‘‘Inventory Costs (Anamendment of ARB No. 43, Chapter 4),’’ was issued. SFAS No.151 amends Accounting Research Bulletin(‘‘ARB’’) No. 43, Chapter 4, to clarify thatabnormal amounts of idle facility expense, freight, handling costs andwasted materials (spoilage) should be recognized as current-periodcharges. In addition, SFAS No. 151 requires that allocation of fixedproduction overhead to inventory be based on normal capacity of theproduction facilities. SFAS No. 151 is effective for the Company forinventory costs incurred beginning in fiscal 2006. The Company does notbelieve the adoption of SFAS No. 151 will have a material impact on itsfinancial position or results of operations.

InDecember  2004, SFAS No. 123R, ‘‘Share-BasedPayment,’’ a revision of SFAS No. 123,‘‘Accounting for Stock-Based Compensation’’,was issued. SFAS No. 123R replaces existing requirements of SFAS No.123 and APB Opinion No. 25 ‘‘Accounting for Stock-BasedCompensation’’, and requires public companies to recognizethe cost of employee services received in exchange for equityinstruments, with limited exceptions. SFAS No. 123R also affects thepattern in which compensation cost is recognized, the accounting foremployee share purchase plans, and the accounting for income taxeffects of share-based payment transactions. SFAS No. 123R will beeffective for the Company as of the beginning of the 2006 fiscal year.The Company expects the adoption of this statement will have a materialnon-cash effect on its financial statements, but the Company cannotreasonably estimate the impact of the adoption with respect to futuregrants because certain assumptions used in the calculation of the valueof share-based payments may change. As of December  31,  2005the total future compensation cost related to vested and non-vestedstock options and the employee stock purchase plan not yet recognizedin the statement of operations was $185,000. Of that total, $119,000,$57,000 and $9,000 are expected to be recognized in 2006, 2007 and2008, respectively.

The FASB has issued FASB StaffPosition No. 109-1, ‘‘Application of FASB Statement No.109, Accounting for Income Taxes, for the Tax Deduction Provided toU.S. Based Manufacturers by the American Jobs Creation Act of2004.’’ On October  22,  2004, the American JobsCreation Act of 2004 (the ‘‘Act’’) was signedinto law by the President. This Act includes tax relief for domestic

38

----

manufacturers by providing a tax deductionfor up to 9 percent (when fully phased in) of the lesser of (a)‘‘qualified production activities income,’’ or(b) taxable income (after the deduction for the utilization of any netoperating loss carryforwards). As a result of this Act, an issue hasarisen as to whether this deduction should be accounted for as aspecial deduction or a tax rate reduction under SFAS No. 109. The FASBstaff believes that the domestic manufacturing deduction is based onthe future performance of specific activities, including the level ofwages. Accordingly, the FASB staff believes that the deduction providedfor under the Act should be accounted for as a special deduction inaccordance with SFAS No. 109 and not as a tax rate reduction. TheCompany will be utilizing its net operating loss carryforwards tooffset domestic taxable income, thus this provision did not have animpact on its financial position and results of operations in 2005.

In May  2005, SFAS No. 154, Accounting Changes and ErrorCorrections, a replacement of APB Opinion No. 20 and FASB Statement No.3,’’ was issued. This statement provides guidance on theaccounting for and reporting of accounting changes and errorcorrections. This standard applies to voluntary changes in existingaccounting principles and to new accounting standards that do notspecify the transition requirements upon adoption of those standards.Except for changes in depreciation methods, this standard will requireretrospective application of the new accounting principle to previousperiods reported rather than presenting the cumulative effect of thechange as of the beginning of the period of the change. Changes indepreciation methods will be applied on a prospective basis, meaningthe effects of the change will be reflected only in current and futureperiods. Corrections of errors will be reported by restating previouslyissued financial statements. SFAS No. 154 will be effective for theCompany as of the beginning of the 2006 fiscal year. The Company doesnot believe the adoption of SFAS No. 154 will have a material impact onits financial position or results of operations.

|                     |                                                           |
|---------------------|-----------------------------------------------------------|
| ITEM 7A.  | QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK |

Interest Rate Risk

Interest on the Company’s borrowings under itsfinancing agreement with CIT fluctuates with the prime rate and LIBOR.A variation of 1% in the prime rate and LIBOR during the yearended December  31,  2005 would have affected theCompany’s earnings by approximately $20,000.

ForeignCurrency Risk

The Company is subject to currencyexchange rate risk for the assets, liabilities and cash flows of itssubsidiary that operates in Canada. The Company does not utilizefinancial instruments such as forward exchange contracts or otherderivatives to limit its exposure to fluctuations in the value offoreign currencies. There are costs associated with our operations inCanada which require payments in the local currency and paymentsreceived from customers for goods sold in Canada are typically in thelocal currency. We partially manage our foreign currency risk relatedto those payments by maintaining operating accounts in Canada.

A significant portion of the Company’s revenues andreceivables (including those of its Canadian subsidiary) aredenominated in U.S. dollars. A strengthening of the U.S. dollar couldmake the Company’s products less competitive in foreign markets.Alternatively, if the U.S. dollar were to weaken, it would make theCompany’s products more competitive in foreign markets, butcould result in higher costs from its Canadianoperations.

39

----

|              |                      |
|--------------|----------------------|
| ITEM8.  | FINANCIAL STATEMENTS |

REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board ofDirectors and Stockholders ofMerrimac Industries, Inc.

We have audited the accompanying consolidated balance sheetsof Merrimac Industries, Inc. as of December  31,  2005 andJanuary  1,  2005 and the related consolidated statementsof operations and comprehensive income, stockholders’ equity,and cash flows for the years then ended. These financial statements arethe responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company isnot required to have, nor were we engaged to perform an audit of itsinternal control over financial reporting. Our audits includedconsideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financialreporting. Accordingly we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as wellas evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, theconsolidated financial position of Merrimac Industries, Inc. as ofDecember  31,  2005 and January  1,  2005, andthe consolidated results of their operations and their consolidatedcash flows for the years then ended in conformity with accountingprinciples generally accepted in the United States of America.

Our audits were conducted for the purpose of forming anopinion on the basic financial statements taken as a whole. Schedule IIis presented for purposes of additional analysis and is not a requiredpart of the basic financial statements. This schedule has beensubjected to the auditing procedures applied in the audit of the basicfinancial statements and, in our opinion, is fairly stated in allmaterial respects in relation to the basic financial statements takenas a whole.

|                                  |  |  |
|----------------------------------|--|--|
| /s/ Grant Thornton LLP           |
| Edison, New JerseyMarch29,  2006 |
|                                  |

40

----

REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

The Board of Directors andStockholders Merrimac Industries, Inc.

We have audited theaccompanying consolidated statements of operations and comprehensiveincome (loss), stockholders' equity and cash flows of MerrimacIndustries, Inc. for the year ended January 3, 2004. Our audit alsoincluded the financial statement schedule listed in the Index at Item15 for the year ended January 3, 2004. These financial statements andschedule are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statementsand schedule based on our audit.

We conducted our audit inaccordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates madeby management, and evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis forour opinion.

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects,the consolidated results of operations and cash flows of MerrimacIndustries, Inc. for the year ended January 3, 2004, in conformity withU.S. generally accepted accounting principles. Also, in our opinion,the related financial statement schedule for the year ended January 3,2004, when considered in relation to the basic financial statementstaken as a whole, presents fairly in all material respects theinformation set forth therein.

|                                     |  |  |
|-------------------------------------|--|--|
| /s/ Ernst & Young LLP           |
| MetroPark, New JerseyMarch29,  2004 |
|                                     |

41

----

CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME

Years Ended December31,  2005, January  1,  2005 and January3,  2004

|                                                       |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|-------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                  |  | 2005   |            | 2004    |  | 2003   |
| OPERATIONS                                            |  |   |       |    |  |   |       |    |  |   |       |    |
| Netsales                                              |  | $      | 29,719,158 |    |  | $      | 30,949,487 |    |  | $      | 27,322,096 |    |
| Costs andexpenses:                                    |  |   |       |    |  |   |       |    |  |   |       |    |
| Cost ofsales                                          |  |   | 17,504,718 |    |  |   | 18,039,975 |    |  |   | 16,745,329 |    |
| Selling, general andadministrative                    |  |   | 9,540,101  |    |  |   | 9,819,800  |    |  |   | 9,536,144  |    |
| Research and development                              |  |   | 1,932,199  |    |  |   | 1,722,741  |    |  |   | 1,736,649  |    |
| Restructuring charge                                  |  |   | —    |    |  |   | —    |    |  |   | 160,000    |    |
|                                                  |  |   | 28,977,018 |    |  |   | 29,582,516 |    |  |   | 28,178,122 |    |
| Operating income (loss)                               |  |   | 742,140    |    |  |   | 1,366,971  |    |  |   | (856,026   | )  |
| Interest and other expense, net                       |  |   | (218,027   | )  |  |   | (264,482   | )  |  |   | (271,471   | )  |
| (Loss) gain ondisposition of assets                   |  |   | (42,829    | )  |  |   | —    |    |  |   | 104,024    |    |
| Income (loss) beforeincome taxes                      |  |   | 481,284    |    |  |   | 1,102,489  |    |  |   | (1,023,473 | )  |
| Benefit for income taxes                              |  |   | (280,000   | )  |  |   | (96,000    | )  |  |   | (109,000   | )  |
| Net income (loss)                                     |  | $      | 761,284    |    |  | $      | 1,198,489  |    |  | $      | (914,473   | )  |
| Net income (loss) per commonshare-basic               |  | $      | .24        |    |  | $      | .38        |    |  | $      | (.29       | )  |
| Net income (loss) per common share-diluted            |  | $      | .24        |    |  | $      | .38        |    |  | $      | (.29       | )  |
| Weighted average number of shares outstanding-basic   |  |   | 3,142,425  |    |  |   | 3,127,070  |    |  |   | 3,120,557  |    |
| Weighted average number of shares outstanding-diluted |  |   | 3,176,521  |    |  |   | 3,153,854  |    |  |   | 3,120,557  |    |
| COMPREHENSIVEINCOME                                   |  |   |       |    |  |   |       |    |  |   |       |    |
| Net income (loss)                                     |  | $      | 761,284    |    |  | $      | 1,198,489  |    |  | $      | (914,473   | )  |
| Comprehensiveincome:                                  |  |   |       |    |  |   |       |    |  |   |       |    |
| Foreign currencytranslation adjustment                |  |   | 208,534    |    |  |   | 435,724    |    |  |   | 986,351    |    |
| Comprehensiveincome                                   |  | $      | 969,818    |    |  | $      | 1,634,213  |    |  | $      | 71,878     |    |
|                                                       |

See accompanyingnotes.

42

----

CONSOLIDATED BALANCE SHEETS

December  31,  2005 and January  1,2005

|                                                                                                                                 |  |        |            |         |  |        |            |         |  |  |
|---------------------------------------------------------------------------------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                                                                            |  | 2005   |            | 2004    |
| Assets                                                                                                                          |  |   |       |    |  |   |       |    |
| Currentassets:                                                                                                                  |  |   |       |    |  |   |       |    |
| Cash and cashequivalents                                                                                                        |  | $      | 4,081,330  |    |  | $      | 2,166,481  |    |
| Accounts receivable, net of allowance of $50,000 and$59,000, respectively                                                       |  |   | 5,309,786  |    |  |   | 6,472,991  |    |
| Income tax refunds receivable                                                                                                   |  |   | 418,420    |    |  |   | 97,643     |    |
| Inventories, net                                                                                                                |  |   | 3,709,567  |    |  |   | 2,931,259  |    |
| Othercurrent assets                                                                                                             |  |   | 692,832    |    |  |   | 583,029    |    |
| Deferred tax assets                                                                                                             |  |   | 140,000    |    |  |   | 676,000    |    |
| Total current assets                                                                                                            |  |   | 14,351,935 |    |  |   | 12,927,403 |    |
| Property, plant and equipment                                                                                                   |  |   | 38,708,486 |    |  |   | 37,988,352 |    |
| Less accumulated depreciationand amortization                                                                                   |  |   | 24,735,905 |    |  |   | 22,404,372 |    |
| Property, plant and equipment,net                                                                                               |  |   | 13,972,581 |    |  |   | 15,583,980 |    |
| Restricted cash                                                                                                                 |  |   | 1,500,000  |    |  |   | 1,500,000  |    |
| Other assets                                                                                                                    |  |   | 614,553    |    |  |   | 746,714    |    |
| Deferred tax assets                                                                                                             |  |   | 482,000    |    |  |   | 439,000    |    |
| Goodwill                                                                                                                        |  |   | 3,501,193  |    |  |   | 3,377,913  |    |
| Total Assets                                                                                                                    |  | $      | 34,422,262 |    |  | $      | 34,575,010 |    |
| Liabilities and Stockholders'Equity                                                                                             |  |   |       |    |  |   |       |    |
| Currentliabilities:                                                                                                             |  |   |       |    |  |   |       |    |
| Current portion oflong-term debt                                                                                                |  | $      | 907,895    |    |  | $      | 904,940    |    |
| Accounts payable                                                                                                                |  |   | 1,161,199  |    |  |   | 1,309,132  |    |
| Accrued liabilities                                                                                                             |  |   | 1,545,407  |    |  |   | 1,930,682  |    |
| Customerdeposits                                                                                                                |  |   | 863,582    |    |  |   | 233,406    |    |
| Income taxes payable                                                                                                            |  |   | —    |    |  |   | 85,131     |    |
| Deferred income taxes                                                                                                           |  |   | 20,000     |    |  |   | —    |    |
| Total current liabilities                                                                                                       |  |   | 4,498,083  |    |  |   | 4,463,291  |    |
| Long-term debt, net of currentportion                                                                                           |  |   | 2,071,299  |    |  |   | 2,778,135  |    |
| Deferred compensation                                                                                                           |  |   | 19,692     |    |  |   | 53,739     |    |
| Deferred liabilities                                                                                                            |  |   | 2,720      |    |  |   | 33,974     |    |
| Deferred tax liabilities                                                                                                        |  |   | 140,000    |    |  |   | 648,000    |    |
| Total liabilities                                                                                                               |  |   | 6,731,794  |    |  |   | 7,977,139  |    |
| Commitments andcontingencies                                                                                                    |  |   |       |    |  |   |       |    |
| Stockholders'equity:                                                                                                            |  |   |       |    |  |   |       |    |
| Preferred stock,par value $.01 pershare:                                                                                        |  |   |       |    |  |   |       |    |
| Authorized:1,000,000 shares                                                                                                     |  |   |       |    |  |   |       |    |
| No sharesissued                                                                                                                 |  |   |       |    |  |   |       |    |
| Common stock, parvalue $.01 per share:                                                                                          |  |   |       |    |  |   |       |    |
| 20,000,000shares authorized; 3,228,715 and 3,215,070 shares issued; and 3,146,615and 3,132,970 shares outstanding, respectively |  |   | 32,287     |    |  |   | 32,151     |    |
| Additional paid-in capital                                                                                                      |  |   | 18,823,353 |    |  |   | 18,756,710 |    |
| Retainedearnings                                                                                                                |  |   | 8,441,278  |    |  |   | 7,679,994  |    |
| Accumulated other comprehensive income                                                                                          |  |   | 1,367,416  |    |  |   | 1,158,882  |    |
|                                                                                                                            |  |   | 28,664,334 |    |  |   | 27,627,737 |    |
| Less treasury stock, at cost - 82,100 shares                                                                                    |  |   | (573,866   | )  |  |   | (573,866   | )  |
| Less loanto officer-stockholder                                                                                                 |  |   | (400,000   | )  |  |   | (456,000   | )  |
| Total stockholders'equity                                                                                                       |  |   | 27,690,468 |    |  |   | 26,597,871 |    |
| Total Liabilities andStockholders' Equity                                                                                       |  | $      | 34,422,262 |    |  | $      | 34,575,010 |    |
|                                                                                                                                 |

See accompanyingnotes.

43

----

CONSOLIDATED STATEMENTS OFSTOCKHOLDERS' EQUITY

Years Ended December31,  2005, January  1,  2005 and January3,  2004

|                                            |  |              |           |                        |  |                             |        |                  |  |                                           |          |                |  |                           |            |        |  |        |           |         |  |        |           |         |  |        |        |        |  |        |          |         |  |        |          |         |  |        |            |         |  |  |
|--------------------------------------------|--|--------------|-----------|------------------------|--|-----------------------------|--------|------------------|--|-------------------------------------------|----------|----------------|--|---------------------------|------------|--------|--|--------|-----------|---------|--|--------|-----------|---------|--|--------|--------|--------|--|--------|----------|---------|--|--------|----------|---------|--|--------|------------|---------|--|--|
|                                       |  | Common Stock |           | CommonStockWarrants(A) |  | AdditionalPaid-inCapital(B) |        | RetainedEarnings |  | AccumulatedOtherComprehensiveIncome(Loss) |          | Treasury Stock |  | LoantoOfficer-Stockholder |            | Total  |
|                                       |  | Shares       |           | Amount                 |  | Shares                      |        | Amount           |
| Balance, December28, 2002                  |  |         | 3,201,069 |                   |  | $                           | 32,011 |             |  | $                                         | 837,200  |           |  | $                         | 17,841,970 |   |  | $      | 7,395,978 |    |  | $      | (263,193  | )  |  |   | 82,100 |   |  | $      | (573,866 | )  |  | $      | (568,000 | )  |  | $      | 24,702,100 |    |
| Net loss                                   |  |         |      |                   |  |                        |   |             |  |                                      |     |           |  |                      |       |   |  |   | (914,473  | )  |  |   |      |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | (914,473   | )  |
| StockPurchase Plan sales                   |  |         | 1,922     |                   |  |                        | 19     |             |  |                                      |     |           |  |                      | 7,744      |   |  |   |      |    |  |   |      |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | 7,763      |    |
| Expiration of warrants                     |  |         |      |                   |  |                        |   |             |  |                                      | (837,200 | )         |  |                      | 837,200    |   |  |   |      |    |  |   |      |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | —    |    |
| Forgiveness of loan to officer-stockholder |  |         |      |                   |  |                        |   |             |  |                                      |     |           |  |                      |       |   |  |   |      |    |  |   |      |    |  |   |   |   |  |   |     |    |  |   | 56,000   |    |  |   | 56,000     |    |
| Foreign currency translation               |  |         |      |                   |  |                        |   |             |  |                                      |     |           |  |                      |       |   |  |   |      |    |  |   | 986,351   |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | 986,351    |    |
| Balance,January  3, 2004                   |  |         | 3,202,991 |                   |  |                        | 32,030 |             |  |                                      | —  |           |  |                      | 18,686,914 |   |  |   | 6,481,505 |    |  |   | 723,158   |    |  |   | 82,100 |   |  |   | (573,866 | )  |  |   | (512,000 | )  |  |   | 24,837,741 |    |
| Net income.                           |  |         |      |                   |  |                        |   |             |  |                                      |     |           |  |                      |       |   |  |   | 1,198,489 |    |  |   |      |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | 1,198,489  |    |
| Exercise ofstock options                   |  |         | 9,100     |                   |  |                        | 91     |             |  |                                      |     |           |  |                      | 53,859     |   |  |   |      |    |  |   |      |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | 53,950     |    |
| StockPurchase Plan sales                   |  |         | 2,979     |                   |  |                        | 30     |             |  |                                      |     |           |  |                      | 15,937     |   |  |   |      |    |  |   |      |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | 15,967     |    |
| Forgiveness of loan to officer-stockholder |  |         |      |                   |  |                        |   |             |  |                                      |     |           |  |                      |       |   |  |   |      |    |  |   |      |    |  |   |   |   |  |   |     |    |  |   | 56,000   |    |  |   | 56,000     |    |
| Foreign currency translation               |  |         |      |                   |  |                        |   |             |  |                                      |     |           |  |                      |       |   |  |   |      |    |  |   | 435,724   |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | 435,724    |    |
| Balance,January  1,  2005                  |  |         | 3,215,070 |                   |  |                        | 32,151 |             |  |                                      | —  |           |  |                      | 18,756,710 |   |  |   | 7,679,994 |    |  |   | 1,158,882 |    |  |   | 82,100 |   |  |   | (573,866 | )  |  |   | (456,000 | )  |  |   | 26,597,871 |    |
| Net income                                 |  |         |      |                   |  |                        |   |             |  |                                      |     |           |  |                      |       |   |  |   | 761,284   |    |  |   |      |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | 761,284    |    |
| Exercise ofstock options                   |  |         | 5,300     |                   |  |                        | 53     |             |  |                                      |     |           |  |                      | 21,997     |   |  |   |      |    |  |   |      |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | 22,050     |    |
| StockPurchase Plan sales                   |  |         | 8,345     |                   |  |                        | 83     |             |  |                                      |     |           |  |                      | 44,646     |   |  |   |      |    |  |   |      |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | 44,729     |    |
| Forgiveness of loan to officer-stockholder |  |         |      |                   |  |                        |   |             |  |                                      |     |           |  |                      |       |   |  |   |      |    |  |   |      |    |  |   |   |   |  |   |     |    |  |   | 56,000   |    |  |   | 56,000     |    |
| Foreign currency translation               |  |         |      |                   |  |                        |   |             |  |                                      |     |           |  |                      |       |   |  |   |      |    |  |   | 208,534   |    |  |   |   |   |  |   |     |    |  |   |     |    |  |   | 208,534    |    |
| Balance,December  31, 2005                 |  |         | 3,228,715 |                   |  | $                           | 32,287 |             |  | $                                         | —  |           |  | $                         | 18,823,353 |   |  | $      | 8,441,278 |    |  | $      | 1,367,416 |    |  |   | 82,100 |   |  | $      | (573,866 | )  |  | $      | (400,000 | )  |  | $      | 27,690,468 |    |
|                                            |

|  |
|--|
|  |  |
|  |

|     |                                                  |
|-----|--------------------------------------------------|
| (A) | Commonstock warrants expired October  26,  2003. |

|     |                                                                                                                                               |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------|
| (B) | Tax benefitsassociated with the exercise of employee stock options are recorded toadditional paid-in capital when such benefits are realized. |

See accompanyingnotes.

44

----

CONSOLIDATED STATEMENTS OF CASHFLOWS

Years Ended December  31,  2005,January  1,  2005 and January  3,  2004

|                                                                                        |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|----------------------------------------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                                   |  | 2005   |            | 2004    |  | 2003   |
| Cash flows fromoperating activities:                                                   |  |   |       |    |  |   |       |    |  |   |       |    |
| Netincome (loss)                                                                       |  | $      | 761,284    |    |  | $      | 1,198,489  |    |  | $      | (914,473   | )  |
| Adjustments toreconcile net income (loss) to net cash provided by operatingactivities: |  |   |       |    |  |   |       |    |  |   |       |    |
| Depreciationand amortization                                                           |  |   | 3,155,024  |    |  |   | 3,209,631  |    |  |   | 3,191,654  |    |
| Amortization of deferredfinancing costs                                                |  |   | 49,920     |    |  |   | 49,922     |    |  |   | 211,661    |    |
| Amortization of deferredincome                                                         |  |   | —    |    |  |   | —    |    |  |   | (21,822    | )  |
| Loss (gain) on disposition of assets                                                   |  |   | 42,829     |    |  |   | —    |    |  |   | (104,024   | )  |
| Deferred and other compensation                                                        |  |   | 64,754     |    |  |   | 69,305     |    |  |   | 72,414     |    |
| Deferred incometaxes (benefit)                                                         |  |   | 5,000      |    |  |   | (218,000   | )  |  |   | (42,000    | )  |
| Changes in operatingassets andliabilities:                                             |  |   |       |    |  |   |       |    |  |   |       |    |
| Accountsreceivable                                                                     |  |   | 1,202,330  |    |  |   | (117,940   | )  |  |   | (2,365,009 | )  |
| Income tax refundsreceivable                                                           |  |   | (312,074   | )  |  |   | 44,209     |    |  |   | 169,083    |    |
| Inventories                                                                            |  |   | (774,498   | )  |  |   | 267,991    |    |  |   | 846,726    |    |
| Other current assets                                                                   |  |   | (110,494   | )  |  |   | (96,028    | )  |  |   | 31,219     |    |
| Deferred taxassets                                                                     |  |   | 13,000     |    |  |   | (28,000    | )  |  |   | (32,000    | )  |
| Other assets                                                                           |  |   | 82,241     |    |  |   | 57,851     |    |  |   | (248,842   | )  |
| Accounts payable                                                                       |  |   | (234,768   | )  |  |   | 276,182    |    |  |   | 176,432    |    |
| Accrued liabilities                                                                    |  |   | (392,360   | )  |  |   | 202,561    |    |  |   | (126,553   | )  |
| Customerdeposits                                                                       |  |   | 630,176    |    |  |   | (155,805   | )  |  |   | 263,355    |    |
| Income taxes payable                                                                   |  |   | (82,849    | )  |  |   | 84,819     |    |  |   | (38,356    | )  |
| Deferred compensation                                                                  |  |   | (39,747    | )  |  |   | (43,428    | )  |  |   | (43,504    | )  |
| Otherliabilities                                                                       |  |   | (31,254    | )  |  |   | (14,040    | )  |  |   | 67,107     |    |
| Net cash provided byoperating activities                                               |  |   | 4,028,514  |    |  |   | 4,787,719  |    |  |   | 1,093,068  |    |
| Cashflows from investingactivities:                                                    |  |   |       |    |  |   |       |    |  |   |       |    |
| Purchases ofcapital assets                                                             |  |   | (1,774,233 | )  |  |   | (1,714,951 | )  |  |   | (1,265,888 | )  |
| Proceeds from disposition ofcapital assets                                             |  |   | 300,000    |    |  |   | —    |    |  |   | 168,558    |    |
| Net cash used ininvesting activities                                                   |  |   | (1,474,233 | )  |  |   | (1,714,951 | )  |  |   | (1,097,330 | )  |
| Cashflows from financingactivities:                                                    |  |   |       |    |  |   |       |    |  |   |       |    |
| Borrowingsunder revolving credit facility                                              |  |   | 161,017    |    |  |   | —    |    |  |   | 1,634,337  |    |
| Borrowings under mortgageloan                                                          |  |   | —    |    |  |   | —    |    |  |   | 2,750,000  |    |
| Borrowings under term loan                                                             |  |   | —    |    |  |   | —    |    |  |   | 1,500,000  |    |
| Borrowingsfrom revolving lease line                                                    |  |   | 230,753    |    |  |   | —    |    |  |   | —    |    |
| Restricted cash deposited ascollateral                                                 |  |   | —    |    |  |   | —    |    |  |   | (1,500,000 | )  |
| Repayment of borrowings                                                                |  |   | (1,117,745 | )  |  |   | (1,502,231 | )  |  |   | (7,695,717 | )  |
| Proceeds from the exercise of stock options                                            |  |   | 22,050     |    |  |   | 53,950     |    |  |   | —    |    |
| Proceeds from Stock Purchase Plan sales                                                |  |   | 44,729     |    |  |   | 15,967     |    |  |   | 7,763      |    |
| Net cash used in financingactivities                                                   |  |   | (659,196   | )  |  |   | (1,432,314 | )  |  |   | (3,303,617 | )  |
| Effect ofexchange rate changes                                                         |  |   | 19,764     |    |  |   | 73,394     |    |  |   | 149,714    |    |
| Net increase (decrease)in cash and cash equivalents                                    |  |   | 1,914,849  |    |  |   | 1,713,848  |    |  |   | (3,158,165 | )  |
| Cash and cash equivalents atbeginning of year                                          |  |   | 2,166,481  |    |  |   | 452,633    |    |  |   | 3,610,798  |    |
| Cash and cashequivalents at end of year                                                |  | $      | 4,081,330  |    |  | $      | 2,166,481  |    |  | $      | 452,633    |    |
| Supplemental disclosures of cash flowinformation:                                      |  |   |       |    |  |   |       |    |  |   |       |    |
| Cashpaid during the yearfor:                                                           |  |   |       |    |  |   |       |    |  |   |       |    |
| Income taxes                                                                           |  | $      | 210,000    |    |  | $      | 37,500     |    |  | $      | 6,500      |    |
| Loan interest                                                                          |  | $      | 288,000    |    |  | $      | 279,000    |    |  | $      | 285,000    |    |
| Non-cashactivities:                                                                    |  |   |       |    |  |   |       |    |  |   |       |    |
| Unpaidpurchases of capital assets                                                      |  | $      | 77,000     |    |  | $      | —    |    |  | $      | 224,000    |    |
| Note payable for insurancepremiums                                                     |  | $      | —    |    |  | $      | —    |    |  | $      | 192,396    |    |
|                                                                                        |

See accompanyingnotes

45

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004

1.    Natureof business and summary of significant accounting policies

Nature of business:    The Company is involved in thedesign, manufacture and sale of electronic component devices offeringextremely broad frequency coverage and high performancecharacteristics, and microstrip, bonded stripline and thickmetal-backed Teflon® (PTFE) and mixed dielectric multilayercircuits for communications, defense and aerospace applications.

The Company's operations are conducted primarily throughtwo business segments:    (1) electronic components and subsystemsand (2) microwave micro-circuitry.

Principles ofconsolidation:    The financial statements include the accounts ofthe Company and its wholly-owned subsidiaries. All significantintercompany accounts have been eliminated in consolidation.

Cash and cash equivalents:    The Company considers allhighly liquid securities with an original maturity of less than threemonths to be cash equivalents. The Company maintains cash deposits withbanks that at times exceed applicable insurance limits. The Companyreduces its exposure to credit risk by maintaining such deposits withhigh quality financial institutions. The Company has not experiencedany losses in such accounts.

Use of estimates:    Thepreparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect certainreported amounts and disclosures. Accordingly, actual results coulddiffer from those estimates.

Contract revenues:    TheCompany recognizes revenue in accordance with the provisions of StaffAccounting Bulletin No. 104. Contract revenue and related costs onfixed-price and cost-reimbursement contracts that require customizationof products to customer specifications are recorded when titletransfers to the customer, which is generally on the date of shipment.Prior to shipment, manufacturing costs incurred on such contracts arerecorded as work-in-process inventory. Anticipated losses on contractsare charged to operations when identified. Revenue related tonon-recurring engineering charges is generally recognized upon shipmentof the related initial units produced or based upon contractuallyestablished stages of completion.

The cost rates utilizedfor cost-reimbursement contracts are subject to review by third partiesand can be revised, which can result in additions to or reductions fromrevenue. Revisions which result in reductions to revenue are recognizedin the period that the rates are reviewed and finalized; additions torevenue are recognized in the period that the rates are reviewed,finalized, accepted by the customer, and collectability from thecustomer is assured. The Company submits financial informationregarding the cost rates on cost-reimbursement contracts for eachfiscal year in which the Company performed work on cost-reimbursementcontracts. The Company does not record any estimates on a regular basisfor potential revenue adjustments, as there currently is no reasonablebasis on which to estimate such adjustments given the Company’svery limited experience with these contracts. During 2003, the Companyrecognized revenue of $269,000 related to a cost-reimbursementcontract. During 2004, the Company recognized a revenue reduction of$12,000 related to a cost-reimbursement contract. The Companyrecognized revenue of $106,000 related to cost-reimbursement contractsin 2005.

Warranties:    The Company's productssold under contracts have warranty obligations. Estimated warrantycosts for each contract are determined based on the contract terms andtechnology specific issues. The Company accrues estimated warrantycosts at the time of sale and any additional amounts are recorded whensuch costs are probable and can be reasonably estimated. Warrantyexpense was approximately $320,000, $167,000 and $162,000 for 2005,2004 and 2003, respectively. The warranty reserve at December31,  2005 and January  1,  2005 was $168,000 and$178,000, respectively.

Accounts receivable:    TheCompany’s accounts receivable are primarily from companies inthe defense, satellite and telecommunications industries, with 30 daypayment terms. Credit is extended 

46

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

1.    Natureof business and summary of significant accounting policies (continued)

based on evaluation of customer’sfinancial condition. Accounts receivable are stated in the financialstatements net of an allowance for doubtful accounts. Accountsoutstanding longer than the payment terms are considered past due. TheCompany determines its allowance by considering a number of factors,including the length of time trade accounts receivable are past due,the Company’s previous loss history, the customer’scurrent ability to pay its obligations to the Company, and thecondition of the general economy and the industry as a whole. TheCompany writes-off accounts receivable when they becomeuncollectible.

Fair value of financialinstruments:    The carrying amounts of financial instruments,including cash and cash equivalents, accounts receivable and accountspayable approximated fair value as of December  31,  2005 andJanuary  1,  2005 because of the relative short maturity ofthese instruments.

Inventories:    Inventories arestated at the lower of cost or market, using the average cost method.Cost includes materials, labor, and manufacturing overhead related tothe purchase and production of inventories.

Provision ismade for potential losses on slow moving and obsolete inventories whenidentified.

Foreign currency translation:    Thefunctional currency of the Company’s Canadian subsidiary,Filtran Microcircuits Inc. (‘‘FMI’’) is theCanadian dollar. FMI’s assets and liabilities are translatedinto U.S. dollars using exchange rates in effect at the balance sheetdate and their operations are translated using average exchange ratesprevailing during the year. The resulting translation adjustments arereported as a component of accumulated other comprehensive income.Realized foreign exchange transaction gains and losses, which are notmaterial, are included in the consolidated statements ofoperations.

Comprehensive income:    Comprehensiveincome is defined as the change in equity of a company during a periodfrom transactions and other events and circumstances from non-ownersources. Accumulated other comprehensive income at December31,  2005 and January  1,  2005 was attributable solelyto the effects of foreign currency translation.

Property,plant and equipment:    Property, plant and equipment are recordedat cost. Depreciation and amortization is computed for financialpurposes on the straight-line method, while accelerated methods areused, where applicable, for tax purposes. The costs of additions andimprovements are capitalized and expenditures for repairs andmaintenance are expensed as incurred. The costs and accumulateddepreciation applicable to assets retired or otherwise disposed of areremoved from the asset accounts and any gain or loss is included in theconsolidated statements of operations. The following estimated usefullives are used for financial income statement purposes:

|                                         |  |                    |  |  |  |  |
|-----------------------------------------|--|--------------------|--|--|--|--|
| Land improvements                       |  | 10 years           |
| Building                                |  | 25 years           |
| Machinery andequipment                  |  | 3 – 10 years |
| Officeequipment, furniture and fixtures |  | 5 – 10years  |
|                                         |

Assets under construction are notdepreciated until the assets are placed into service. Fully depreciatedassets included in property, plant and equipment at December31,  2005 and January  1,  2005 amounted to $15,219,000and $11,899,000, respectively.

The Company leases variousproperty, plant and equipment. Leased property is accounted for underFinancial Accounting Standard No. 13 ‘‘Accounting forLeases’’ (‘‘SFAS 13’’).Accordingly, leased property that meets certain criteria arecapitalized and the present value of the related lease payments arerecorded as a liability. All other leases are accounted for asoperating leases and the related payments are expensed ratably over therental period. Amortization of assets under capital leases is computedutilizing the straight-line method over the shorter of the remaininglease term or the 

47

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

1.    Natureof business and summary of significant accounting policies (continued)

estimated useful life. Company leases thatinclude escalating lease payments are straight-lined over thenon-cancelable base lease period in accordance with SFAS 13.

Long-lived assets:    The Company accounts for long-livedassets under SFAS 144, ‘‘Accounting for the impairment ordisposal of long-lived assets’’. Management assesses therecoverability of its long-lived assets, which consist primarily offixed assets and intangible assets with finite useful lives, wheneverevents or changes in circumstance indicate that the carrying value maynot be recoverable. The following factors, if present, may trigger animpairment review: (i) significant underperformance relative toexpected historical or projected future operating results; (ii)significant negative industry or economic trends; (iii) significantdecline in the Company's stock price for a sustained period; and(iv)   a change in the Company's market capitalizationrelative to net book value. If the recoverability of these assets isunlikely because of the existence of one or more of the above-mentionedfactors, an impairment analysis is performed using a projecteddiscounted cash flow method. Management must make assumptions regardingestimated future cash flows and other factors to determine the fairvalue of these respective assets. If these estimates or relatedassumptions change in the future, the Company may be required to recordan impairment charge. Impairment charges would be included with costsand expenses in the Company's statements of operations, and wouldresult in reduced carrying amounts of the related assets on theCompany's balance sheets.

Goodwill:    Goodwillprimarily includes the excess purchase price paid over the fair valueof net assets acquired. Effective December  30,  2001, theCompany adopted Statement of Financial Accounting Standards(‘‘SFAS’’), No. 142, ‘‘Goodwill andOther Intangible Assets’’. Under SFAS 142, the Companyceased amortization of goodwill and tests its goodwill on an annualbasis using a two-step fair value based test.

The firststep of the goodwill impairment test, used to identify potentialimpairment, compares the fair value of a reporting unit with itscarrying amount, including goodwill. If the carrying amount of thereporting unit exceeds its fair value, the second step of the goodwillimpairment test must be performed to measure the amount of theimpairment loss, if any. If impairment is determined, the Company willrecognize additional charges to operating expenses in the period inwhich they are identified, which would result in a reduction ofoperating income and a reduction in the amount of goodwill.

The changes in the carrying amount of goodwill for the fiscalyears ended December  31,  2005 and January  1,2005 are as follows:

|                                                           |  |        |           |         |  |        |           |         |  |  |
|-----------------------------------------------------------|--|--------|-----------|---------|--|--------|-----------|---------|--|--|
|                                                      |  | 2005   |           | 2004    |
| Original balance                                          |  | $      | 3,179,341 |    |  | $      | 3,179,341 |    |
| Accumulated amortization through2001                      |  |   | (434,603  | )  |  |   | (434,603  | )  |
| Accumulated foreign currency adjustment through prioryear |  |   | 633,175   |    |  |   | 377,825   |    |
| Foreigncurrency adjustment, current year                  |  |   | 123,280   |    |  |   | 255,350   |    |
| Balance, end of year                                      |  | $      | 3,501,193 |    |  | $      | 3,377,913 |    |
|                                                           |

Advertising:    TheCompany expenses the cost of advertising and promotion as incurred.Advertising costs charged to operations were $110,000 in 2005, $123,000in 2004 and $102,000 in 2003.

Income taxes:    TheCompany uses the liability method to account for income taxes. Underthis method, deferred tax assets and liabilities are determined basedon temporary differences between financial reporting and tax bases ofassets and liabilities, and are measured using the enacted tax ratesand laws that will be in effect when the differences are expected toreverse. Valuation allowances are established when necessary to reducedeferred tax assets to the amount expected to be realized. Tax benefitsassociated with the exercise of stock options are recorded toadditional paid-in capital in the year the tax benefits arerealized.

48

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

1.    Natureof business and summary of significant accounting policies (continued)

Savings and InvestmentPlan:    The Company's Savings and Investment Plan is a 401(k)plan (the ‘‘Plan’’) that provides eligibleemployees with the option to defer and invest up to 25% of theircompensation, with 50% of the first 6% of such savingsmatched by the Company. In May  2003, the Company suspended itsmatching contributions to the Plan, and, accordingly, the Company madeno contributions to the Plan in 2005 and 2004. The Company’scontributions to the Plan were $60,000 in 2003. The Board of Directorsmay also authorize a discretionary amount to be contributed to the Planand allocated to eligible employees annually. A discretionarycontribution amount of $75,000 was authorized for 2004. Nodiscretionary contribution amounts were authorized for 2005 and2003.

Stock-based compensation:    The Companyaccounts for stock options in accordance with SFAS No.  123,‘‘Accounting for Stock-Based Compensation,’’(‘‘SFAS 123’’), which allows companies anoption to either record compensation expense based on the fair value ofstock options granted, as determined by using an option valuationmodel, or to continue following the accounting guidance of AccountingPrinciples Board Opinion No. 25, ‘‘Accounting for StockIssued to Employees,’’ in accounting for its stock optionsand other stock-based employee awards. Because the Company has electedthis treatment, Statement of Financial Accounting Standards No. 123,‘‘Accounting for Stock-Based Compensation,’’(‘‘SFAS No. 123’’) and Statement of FinancialAccounting Standards No. 148, ‘‘Accounting for Stock-BasedCompensation Transition and Disclosure,’’(‘‘SFAS No. 148’’) require disclosure of proforma information which provides the effects on net income (loss) andnet income (loss) per share as if the Company had accounted for itsemployee stock awards under the fair value method prescribed by SFAS123. Under APB No. 25, compensation cost for stock options is measuredas the excess, if any, of the market price of the Company's stockat the date of the grant over the amount an employee must pay toacquire the stock. No stock-based employee compensation cost isreflected in net income (loss) at the date of grant, as all optionsgranted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.

In accordance with SFAS No. 148, ‘‘Accounting forStock-Based Compensation – Transition andDisclosure,’’ the effect on net income (loss) and netincome (loss) per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123, ‘‘Accounting forStock-Based Compensation,’’ to stock-based employeecompensation, and the related assumptions described below, is asfollows:

|                                                                                                                 |  |        |          |         |  |        |           |         |  |        |            |         |  |  |
|-----------------------------------------------------------------------------------------------------------------|--|--------|----------|---------|--|--------|-----------|---------|--|--------|------------|---------|--|--|
|                                                                                                            |  | 2005   |          | 2004    |  | 2003   |
| Net income (loss) – as reported                                                                           |  | $      | 761,284  |    |  | $      | 1,198,489 |    |  | $      | (914,473   | )  |
| Plus:    Stock-based compensation expense included inreported net income (loss), net of tax |  |   | —  |    |  |   | —   |    |  |   | —    |    |
| Less:    Stock-based compensation expense determined usingthe fair value method, net of tax |  |   | (147,000 | )  |  |   | (167,000  | )  |  |   | (289,000   | )  |
| Net income (loss) – proforma                                                                              |  | $      | 614,284  |    |  | $      | 1,031,489 |    |  | $      | (1,203,473 | )  |
| Basic earnings (loss)per share:                                                                                 |  |   |     |    |  |   |      |    |  |   |       |    |
| As reported                                                                                                     |  | $      | .24      |    |  | $      | .38       |    |  | $      | (.29       | )  |
| Proforma                                                                                                        |  | $      | .20      |    |  | $      | .33       |    |  | $      | (.39       | )  |
| Diluted earnings (loss) pershare:                                                                               |  |   |     |    |  |   |      |    |  |   |       |    |
| As reported                                                                                                     |  | $      | .24      |    |  | $      | .38       |    |  | $      | (.29       | )  |
| Proforma                                                                                                        |  | $      | .19      |    |  | $      | .33       |    |  | $      | (.39       | )  |
|                                                                                                                 |

The fair value of each of theoptions and purchase plan subscription rights granted in 2005, 2004,and 2003 was estimated on the date of grant using the Black-Scholesoption valuation model.

49

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

1.    Natureof business and summary of significant accounting policies (continued)

The following weighted averageassumptions were utilized:

|                              |  |        |                 |         |  |        |                 |         |  |        |                 |         |  |  |
|------------------------------|--|--------|-----------------|---------|--|--------|-----------------|---------|--|--------|-----------------|---------|--|--|
|                         |  | 2005   |                 | 2004    |  | 2003   |
| Expected option life (years) |  |   | 2.4   |    |  |   | 2.5   |    |  |   | 2.6   |    |
| Expected volatility          |  |   | 38.00           | %  |  |   | 45.00           | %  |  |   | 50.00           | %  |
| Risk-freeinterest rate       |  |   | 4.00            | %  |  |   | 2.00            | %  |  |   | 3.00            | %  |
| Expected dividend yield      |  |   | 0.00            | %  |  |   | 0.00            | %  |  |   | 0.00            | %  |
|                              |

The Black-Scholes optionvaluation model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input ofhighly subjective assumptions including the expected stock pricevolatility. Because the Company's employee stock options andsubscription rights have characteristics significantly different fromthose of traded options, and because changes in the subjective inputassumptions can materially affect the fair value estimate, inmanagement's opinion, the existing models do not necessarilyprovide a reliable single measure of the fair value of its employeestock options and subscription rights.

Research anddevelopment:    Research and development expenses include materials,salaries and related expenses of certain engineering personnel, andoutside services associated with product development. Research anddevelopment expenditures of approximately $1,932,000 in 2005,$1,723,000 in 2004 and $1,737,000 in 2003 were expensed asincurred.

Deferred financing costs:    During 2003,the Company capitalized $314,000 of deferred financing costs and isamortizing such amount over the life of the related debt.

Net income (loss) per share:    Basic net income (loss)per share are computed by dividing income (loss) available to commonshareholders by the weighted-average number of common sharesoutstanding during the period. Diluted net income (loss) per share iscomputed by dividing income (loss) available to common shareholders bythe weighted-average number of common shares outstanding during theperiod increased to include the number of additional common shares thatwould have been outstanding if the dilutive potential common shares hadbeen issued. The dilutive effect of the outstanding options would bereflected in diluted net income (loss) per share by application of thetreasury stock method.

Accounting period:    TheCompany's fiscal year is the 52-53 week period ending on theSaturday closest to December  31. The Company has quarterly datesthat correspond with the Saturday closest to the last day of eachcalendar quarter and each quarter consists of 13 weeks in a 52-weekyear. Periodically, the additional week to make a 53-week year (fiscalyear 2003 was the latest and fiscal year 2008 will be the next) isadded to the fourth quarter, making such quarter consist of 14weeks.

Recent Accounting Pronouncements:    InNovember  2004, SFAS No. 151, ‘‘Inventory Costs (Anamendment of ARB No. 43, Chapter 4),’’ was issued. SFAS No.151 amends Accounting Research Bulletin(‘‘ARB’’) No. 43, Chapter 4, to clarify thatabnormal amounts of idle facility expense, freight, handling costs andwasted materials (spoilage) should be recognized as current-periodcharges. In addition, SFAS No. 151 requires that allocation of fixedproduction overhead to inventory be based on normal capacity of theproduction facilities. SFAS No. 151 is effective for the Company forinventory costs incurred beginning in fiscal 2006. The Company does notbelieve the adoption of SFAS No. 151 will have a material impact on itsfinancial position or results of operations.

InDecember  2004, SFAS No. 123R, ‘‘Share-BasedPayment,’’ a revision of SFAS No. 123,‘‘Accounting for Stock-Based Compensation’’,was issued. SFAS No. 123R replaces existing requirements of SFAS No.123 and APB Opinion No. 25 ‘‘Accounting for Stock-BasedCompensation’’, and requires public companies to recognizethe cost of employee services received in exchange for equityinstruments, with limited exceptions. SFAS No. 123R also affects thepattern in 

50

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

1.    Natureof business and summary of significant accounting policies (continued)

which compensation cost is recognized, theaccounting for employee share purchase plans, and the accounting forincome tax effects of share-based payment transactions. SFAS No. 123Rwill be effective for the Company as of the beginning of the 2006fiscal year. The Company expects the adoption of this statement willhave a material non-cash effect on its financial statements, but theCompany cannot reasonably estimate the impact of the adoption withrespect to future grants because certain assumptions used in thecalculation of the value of share-based payments may change. As ofDecember  31,  2005 the total future compensation costrelated to vested and non-vested stock options and the employee stockpurchase plan not yet recognized in the statement of operations was$185,000. Of that total, $119,000, $57,000 and $9,000 are expected tobe recognized in 2006, 2007 and 2008, respectively.

TheFASB has issued FASB Staff Position No. 109-1,‘‘Application of FASB Statement No. 109, Accounting forIncome Taxes, for the Tax Deduction Provided to U.S. BasedManufacturers by the American Jobs Creation Act of 2004.’’On October  22,  2004, the American Jobs Creation Act of 2004(the ‘‘Act’’) was signed into law by thePresident. This Act includes tax relief for domestic manufacturers byproviding a tax deduction for up to 9 percent (when fully phased in) ofthe lesser of (a) ‘‘qualified production activitiesincome,’’ or (b) taxable income (after the deduction forthe utilization of any net operating loss carryforwards). As a resultof this Act, an issue has arisen as to whether this deduction should beaccounted for as a special deduction or a tax rate reduction under SFASNo. 109. The FASB staff believes that the domestic manufacturingdeduction is based on the future performance of specific activities,including the level of wages. Accordingly, the FASB staff believes thatthe deduction provided for under the Act should be accounted for as aspecial deduction in accordance with SFAS No. 109 and not as a tax ratereduction. The Company will be utilizing its net operating losscarryforwards to offset domestic taxable income, thus this provisiondid not have an impact on its financial position and results ofoperations in 2005.

In May  2005, SFAS No. 154,Accounting Changes and Error Corrections, a replacement of APB OpinionNo. 20 and FASB Statement No. 3,’’ was issued. Thisstatement provides guidance on the accounting for and reporting ofaccounting changes and error corrections. This standard applies tovoluntary changes in existing accounting principles and to newaccounting standards that do not specify the transition requirementsupon adoption of those standards. Except for changes in depreciationmethods, this standard will require retrospective application of thenew accounting principle to previous periods reported rather thanpresenting the cumulative effect of the change as of the beginning ofthe period of the change. Changes in depreciation methods will beapplied on a prospective basis, meaning the effects of the change willbe reflected only in current and future periods. Corrections of errorswill be reported by restating previously issued financial statements.SFAS No. 154 will be effective for the Company as of the beginning ofthe 2006 fiscal year. The Company does not believe the adoption of SFASNo. 154 will have a material impact on its financial position orresults of operations.

2.    Inventories

Inventories consist of the following:

|                                  |  |                    |           |                  |  |        |           |        |  |  |
|----------------------------------|--|--------------------|-----------|------------------|--|--------|-----------|--------|--|--|
|                             |  | December  31, 2005 |           | January  1, 2005 |
| Finished goods                   |  | $                  | 365,346   |             |  | $      | 263,382   |   |
| Work in process                  |  |               | 1,675,747 |             |  |   | 1,179,606 |   |
| Raw materials andpurchased parts |  |               | 1,668,474 |             |  |   | 1,488,271 |   |
|                             |  | $                  | 3,709,567 |             |  | $      | 2,931,259 |   |
|                                  |

51

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

2.    Inventories (continued)

Total inventories are net ofvaluation allowances for obsolescence and cost overruns of $1,084,000at December  31,  2005 and $1,942,000 at January1,  2005, of which $50,000 and $901,000, respectively, representedcost overruns. The Company disposed of $37,000 and $26,000 of obsoleteinventories in 2005 and 2004, respectively.

3.    Property,plant and equipment

Property, plant and equipment, whichis carried at cost, consists of the following:

|                                          |  |                                           |            |                 |  |        |            |        |  |  |
|------------------------------------------|--|-------------------------------------------|------------|-----------------|--|--------|------------|--------|--|--|
|                                     |  | December  31,2005     |            | January  1,2005 |
| Land and land improvements               |  | $                                         | 671,474    |            |  | $      | 670,724    |   |
| Building                                 |  |                                      | 6,622,162  |            |  |   | 6,581,867  |   |
| Machinery andequipment                   |  |                                      | 23,614,299 |            |  |   | 22,864,570 |   |
| Office equipment, furniture and fixtures |  |                                      | 7,800,551  |            |  |   | 7,871,191  |   |
|                                     |  | $                                         | 38,708,486 |            |  | $      | 37,988,352 |   |
|                                          |

Depreciation expense wasapproximately $3,155,000, $3,210,000 and $3,191,000 for 2005, 2004 and2003, respectively.

4.    Currentand long-term debt

The Company was obligated under thefollowing debt instruments at December  31,  2005 andJanuary  1,  2005:

|                                                                            |  |        |           |        |  |        |           |        |  |  |
|----------------------------------------------------------------------------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
|                                                                       |  | 2005   |           | 2004   |
| The CIT Group/Business Credit, Inc.(A):                                    |  |   |      |   |  |   |      |   |
| Revolving line of credit,interest 1⁄2% above prime                    |  | $      | —   |   |  | $      | —   |   |
| Term loan A,due October  8,  2008, variable interest above LIBOR orprime.  |  |   | 725,000   |   |  |   | 1,075,000 |   |
| Term loan B, due October  8,  2010, variableinterest above LIBOR or prime. |  |   | 1,866,074 |   |  |   | 2,258,930 |   |
| The Bank of Nova Scotia (B):                                               |  |   |      |   |  |   |      |   |
| Capital leases, interest 8.7%,due June 2005                                |  |   | —   |   |  |   | 117,539   |   |
| Capital leases, interest 7.3%, due April2006                               |  |   | 74,025    |   |  |   | 124,125   |   |
| Capitalleases, interest 5.85%, due May  2006.                              |  |   | 36,725    |   |  |   | —   |   |
| Capital leases, interest7.9%, due June  2006                               |  |   | 67,469    |   |  |   | 107,481   |   |
| Capital leases, interest5.8%, due January  2010                            |  |   | 209,901   |   |  |   | —   |   |
|                                                                       |  |   | 2,979,194 |   |  |   | 3,683,075 |   |
| Lesscurrent portion                                                        |  |   | 907,895   |   |  |   | 904,940   |   |
| Long-term portion                                                          |  | $      | 2,071,299 |   |  | $      | 2,778,135 |   |
|                                                                            |

(A)    The financingagreement with CIT consists of a $5,000,000 revolving line of credit,that is temporarily reduced by $250,000 until certain conditions aremet; a $1,500,000 machinery and equipment term loan (‘‘TermLoan A’’) and a $2,750,000  real estate term loan(‘‘Term Loan B’’). In connection with thisfinancing agreement, the Company was required to place, over the lifeof the loan, $1,500,000 as restricted cash collateral with CIT. Therevolving line of credit, which expires October  8,  2006, issubject to an availability limit under a borrowing base calculation(85% of eligible accounts receivable as defined in the financingagreement plus 100% of the $1,500,000 restricted cash). AtDecember  31,  2005, the Company had available borrowingcapacity under its revolving line of 

52

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

4.    Currentand long-term debt (continued)

credit of $3,000,000. The revolving line ofcredit bears interest at the prime rate plus 1⁄2percent (currently 8.25%). The principal amount of Term Loan Ais payable in 60 equal monthly installments of $25,000 and bearsinterest at the prime rate plus one percent (currently 8.75%).The principal amount of Term Loan B is payable in 84 equal monthlyinstallments of $32,738 and bears interest at the prime rate plus onepercent (currently 8.75%). As of December  31,  2005,the Company, under the terms of its agreement with CIT, elected toconvert $650,000 of Term Loan A and $1,750,000 of Term Loan B fromtheir prime rate base to LIBOR-based interest rate loans. The currentLIBOR interest rate options were renewed on October  11,2005 for six months at an interest rate of 7.54%. The currentLIBOR interest rate options will expire April  12,  2006. Therevolving line of credit and the term loans are secured bysubstantially all of the Company’s assets located within theUnited States and the pledge of 65% of the stock of theCompany's subsidiaries located in Costa Rica and Canada. Theprovisions of the financing agreement require the Company to maintaincertain financial and other covenants. The Company was in compliancewith these covenants at December  31,  2005.

(B)    FMI has a revolving credit agreement in place withThe Bank of Nova Scotia for up to $500,000 (Canadian) at the prime rateplus 3⁄4%. No borrowings were outstanding underthis agreement at December  31,  2005.

FMIhas a $1,800,000 (Canadian) revolving lease line with the Bank of NovaScotia, whereby the Company can obtain funding for previous productionequipment purchases via a sale/leaseback transaction. As ofDecember  31,  2005, $453,000 (Canadian) has been utilizedunder this facility. Such leases are payable in monthly installmentsfor up to five years and are secured by the related productionequipment. Interest rates (typically prime rate plus one percent) areset at the closing of each respective sale/leaseback transaction.During the first quarter of 2005, FMI obtained $287,000 (Canadian)(US$231,000) in connection with the sale/leaseback of certainproduction equipment. The related equipment was originally purchased bythe Company in 2004.

Assets securing capital leasesincluded in property, plant and equipment, net, have a depreciated costof approximately $678,000 at December  31,  2005 and $611,000at January  1,  2005.

At December31,  2005 and January  1,  2005, the fair value of theCompany's debt approximates carrying value. The fair value of theCompany's long-term debt is estimated based on current interestrates.

The payments now required under the long-termobligations listed above during the years following December31,  2005 are set forth below:

|            |  |        |           |        |  |  |
|------------|--|--------|-----------|--------|--|--|
| 2006       |  | $      | 907,895   |   |
| 2007       |  |   | 731,869   |   |
| 2008       |  |   | 559,193   |   |
| 2009       |  |   | 436,656   |   |
| 2010       |  |   | 343,581   |   |
| Thereafter |  |   | —   |   |
|       |  | $      | 2,979,194 |   |
|            |

53

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

5.    Accruedliabilities

Accrued liabilities consist of thefollowing:

|                       |  |        |           |        |  |        |           |        |  |  |
|-----------------------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
|                  |  | 2005   |           | 2004   |
| Commissions           |  | $      | 236,580   |   |  | $      | 275,857   |   |
| Vacation              |  |   | 327,158   |   |  |   | 302,446   |   |
| Employee compensation |  |   | 220,051   |   |  |   | 473,796   |   |
| Warranty reserve      |  |   | 168,012   |   |  |   | 177,833   |   |
| Deferred compensation |  |   | 34,818    |   |  |   | 39,000    |   |
| Professional fees     |  |   | 457,221   |   |  |   | 500,078   |   |
| Restructuring         |  |   | —   |   |  |   | 10,200    |   |
| Other                 |  |   | 101,567   |   |  |   | 151,472   |   |
|                  |  | $      | 1,545,407 |   |  | $      | 1,930,682 |   |
|                       |

6.    Stockoption and stock purchase plans

Under the Company's1993 Stock Option Plan, 324,210 shares of common stock were initiallyreserved for issuance. The 1993 Option Plan provides for issuance ofincentive and non-qualified stock options. The incentive options maynot be issued at less than 100% of the fair market value of theshares on the date of grant and they may be exercised at any timebetween one and ten years from the date of grant. The non-qualifiedoptions may be granted to employees at an exercise price determined bythe Stock Option Committee of the Board of Directors which may not beless than fair market value. Such options may become exercisableimmediately after the grant and/or at any time before the tenthanniversary of the grant. As of December  31,  2005, optionsfor the purchase of a total of 112,500 shares remained outstanding ofwhich 109,750 are exercisable under the 1993 Option Plan. No optionswere available for future grant.

The non-qualifiedoptions under the 1993 Stock Option Plan may also be granted tonon-employee directors, provided the option price is at least equal tothe fair market value on the date the option is granted. Such optionsare exercisable after the grant or at any time before the fifthanniversary of the grant.

In 1997, the Company'sstockholders approved a Long Term Incentive Plan(‘‘LTIP’’) pursuant to which 275,000 shares ofthe Company's common stock were initially reserved for grant toeligible employees. The LTIP provides for issuance of Incentive StockOptions, Non-qualified Stock Options, Bonus Stock and Discounted StockOptions. Under this Plan, the Company may grant to employees who holdpositions no more senior than mid-level management, discounted stockoptions for up to 110,000 shares of common stock, with the option priceper share of common stock to be at least greater than or equal to50% of the fair market value of the common stock on the date ofgrant. As of December  31,  2005, options for the purchase of137,169 shares remain outstanding of which all are exercisable underthe LTIP. No options were available for future grant under theLTIP.

In 2001, the Company's stockholders approvedthe 2001 Stock Option Plan pursuant to which 175,000  shares ofthe Company's common stock were reserved for issuance of incentiveand non-qualified stock options. The options may not be issued at lessthan 100% of the fair market value of the shares on the date ofgrant and they may be exercised at any time between one and ten yearsfrom the date of grant. Such options may become exercisable immediatelyafter the grant and/or at any time before the tenth anniversary of thegrant. As of December  31,  2005, options for the purchase ofa total of 148,200 shares remained outstanding of which 123,100 areexercisable under the 2001 Stock Option Plan, and options for 19,300shares were available for future grant.

The non-qualifiedoptions under the 2001 Stock Option Plan may also be granted tonon-employee directors, provided the option price is at least equal tothe fair market value on the date the option is 

54

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

6.    Stockoption and stock purchase plans (continued)

granted. Annual options granted tonon-employee directors are exercisable after the grant or at any timebefore the tenth anniversary of the grant.

In addition,non-qualified options for the purchase of a total of 33,000 sharesremained outstanding and exercisable at $10.00 per share expiringSeptember  1,  2006, as a result of grants by the Board ofDirectors in 1996 to non-employee directors at fair market value on thedate of grant.

A summary of all stock option activity andinformation related to all options outstanding follows:

|                                                                         |  |                              |        |                         |  |                              |             |                        |  |                              |        |                        |  |        |         |         |  |        |         |        |  |        |         |         |  |  |
|-------------------------------------------------------------------------|--|------------------------------|--------|-------------------------|--|------------------------------|-------------|------------------------|--|------------------------------|--------|------------------------|--|--------|---------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--|
|                                                                    |  | 2005                         |        | 2004                    |  | 2003                         |
|                                                                    |  | Weightedaverageexerciseprice |        | Sharesor priceper share |  | Weightedaverageexerciseprice |             | Sharesorpriceper share |  | Weightedaverageexerciseprice |        | Sharesorpriceper share |
| Outstanding at beginning ofyear                                         |  | $                            | 9.81   |                    |  |                         | 431,766     |                   |  | $                            | 9.76   |                   |  |   | 426,116 |    |  | $      | 10.29   |   |  |   | 446,331 |    |
| Granted                                                                 |  |                         | 9.00   |                    |  |                         | 42,600      |                   |  |                         | 8.40   |                   |  |   | 32,500  |    |  |   | 3.46    |   |  |   | 25,000  |    |
| Exercised                                                               |  |                         | 4.16   |                    |  |                         | (5,300      | )                 |  |                         | 5.93   |                   |  |   | (9,100  | )  |  |   | — |   |  |   | — |    |
| Cancelled                                                               |  |                         | 9.49   |                    |  |                         | (38,197     | )                 |  |                         | 8.09   |                   |  |   | (17,750 | )  |  |   | 11.34   |   |  |   | (45,215 | )  |
| Outstanding at end of year                                              |  |                         | 9.83   |                    |  |                         | 430,869     |                   |  |                         | 9.81   |                   |  |   | 431,766 |    |  |   | 9.76    |   |  |   | 426,116 |    |
| Exercisable at end of year                                              |  | $                            | 9.85   |                    |  |                         | 403,019     |                   |  | $                            | 9.83   |                   |  |   | 413,766 |    |  | $      | 9.77    |   |  |   | 415,616 |    |
| Optionprice range at end of year                                        |  |                         |   |                    |  | $                            | 3.10-$17.00 |                   |  | $3.10-$17.00                 |        | $3.10-$17.00           |
| Weightedaverage estimated fair value of options granted during the year |  |                         |   |                    |  | $                            | 1.95        |                   |  |                         |   |                   |  | $      | 2.49    |    |  |   |    |   |  | $      | 1.88    |    |
|                                                                         |

Thefollowing table sets forth information as of December  31,2005 regarding weighted average exercise prices, weighted averageremaining contractual lives and remaining outstanding options under thevarious stock option plans sorted by range of exercise price:

|                     |  |                     |         |                               |  |                                           |       |                   |  |                               |  |        |         |        |  |   |       |        |  |  |  |  |
|---------------------|--|---------------------|---------|-------------------------------|--|-------------------------------------------|-------|-------------------|--|-------------------------------|--|--------|---------|--------|--|---|-------|--------|--|--|--|--|
| Options Outstanding |  | Options Exercisable |
| OptionsPriceRange   |  | NumberOutstanding   |         | WeightedAverageExercise Price |  | Weighted AverageRemainingContractual Life |       | NumberExercisable |  | WeightedAverageExercise Price |
| $3.10-$7.00         |  |                | 93,100  |                          |  | $                                         | 6.03  |              |  | 4.7 years                     |  |   | 93,100  |   |  | $ | 6.03  |   |
| $7.01-$10.00        |  |                | 165,459 |                          |  | $                                         | 9.30  |              |  | 5.1 years                     |  |   | 140,359 |   |  | $ | 9.34  |   |
| $10.01-$13.00       |  |                | 92,310  |                          |  | $                                         | 11.03 |              |  | 1.8 years                     |  |   | 92,310  |   |  | $ | 11.03 |   |
| $13.01-$17.00       |  |                | 80,000  |                          |  | $                                         | 13.94 |              |  | 4.2 years           |  |   | 77,250  |   |  | $ | 13.96 |   |
|                     |

In 2001, the Company'sstockholders approved a stock purchase plan pursuant to which 250,000shares of the Company's common stock were initially reserved forsale to eligible employees. Under this plan, the Company may grantemployees the right to subscribe to purchase shares of common stockfrom the Company at 85% of the market value on specified datesand pay for the shares through payroll deductions over a period of upto 27 months.

55

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

6.    Stockoption and stock purchase plans (continued)

A summary of stock purchase plansubscription activity follows:

|                                                                        |  |                              |        |                         |        |                              |        |                        |      |                              |         |                        |        |        |         |         |         |        |         |        |  |        |         |         |  |  |
|------------------------------------------------------------------------|--|------------------------------|--------|-------------------------|--------|------------------------------|--------|------------------------|------|------------------------------|---------|------------------------|--------|--------|---------|---------|---------|--------|---------|--------|--|--------|---------|---------|--|--|
|                                                                   |  | 2005                         |        | 2004                    |        | 2003                         |
|                                                                   |  | Weightedaverageexerciseprice |        | Sharesor priceper share |        | Weightedaverageexerciseprice |        | Sharesorpriceper share |      | Weightedaverageexerciseprice |         | Sharesorpriceper share |
| Subscribed at beginning of year                                        |  | $                            | 5.36   |                    |        |                         | 33,176 |                   |      | $                            | — |                   |        |   | — |    |         | $      | 12.50   |   |  |   | 3,838   |    |
| Subscribed                                                             |  |                         | 7.48   |                    |        |                         | 22,694 |                   |      |                         | 5.36    |                   |        |   | 36,155  |    |         |   | — |   |  |   | — |    |
| Purchased                                                              |  |                         | 5.36   |                    |        |                         | (8,345 | )                 |      |                         | 5.36    |                   |        |   | (2,979  | )  |         |   | 4.04    |   |  |   | (1,922  | )  |
| Cancelled                                                              |  |                         | 6.80   |                    |        |                         | (3,478 | )                 |      |                         | — |                   |        |   | — |    |         |   | 12.50   |   |  |   | (1,916  | )  |
| Subscribed at end ofyear                                               |  | $                            | 6.34   |                    |        |                         | 44,047 |                   |      | $                            | 5.36    |                   |        |   | 33,176  |    |         | $      | — |   |  |   | — |    |
| Subscription price range end of year                                   |  | $5.36-$7.48                  |        |                    |   |                         |        | $                      | 5.36 |                         |         |                   |   |   |         | $       | — |   |
| Weighted averageestimated fair value of rights granted during the year |  |                         |   |                    |        | $                            | 3.18   |                   |      |                         |    |                   |        | $      | 2.30    |    |         |   |    |   |  | $      | — |    |
|                                                                        |

As ofDecember  31,  2005, there were 181,121 shares available forfuture stock purchase plan subscriptions.

2001 KeyEmployee Incentive Plan:

In June  2001, thestockholders of the Company approved the 2001 Key Employee IncentivePlan, which provides for an award consisting of restricted stock ofapproximately five percent of the average number of outstanding sharesof Company Common Stock during a six-month period upon the attainmentof an average market capitalization during the same six-month period of$50,000,000, and an additional award of approximately five percent ofthe average number of outstanding shares upon the attainment of anaverage market capitalization during a subsequent six-month period of$80,000,000. Any shares of restricted stock awarded vest annually overa three-year period. Approximately 227,000 shares were reserved forissuance under the 2001 Key Employee Incentive Plan at December31,  2005. No awards have been made under this plan. This Planexpires in May  2006.

As permitted by SFAS No. 148,the Company has applied the provisions of APB Opinion No. 25,‘‘Accounting for Stock-Based Compensation,’’for all employee stock option grants and has elected to disclose proforma net income (loss) and income (loss) per share amounts as if thefair-value based method had been applied in measuring compensationcosts.

As explained in Note 1, the Company has adoptedthe disclosure-only provisions of Statement No. 148. Accordingly, noearned or unearned compensation cost was recognized in the accompanyingconsolidated financial statements for stock options and stock purchaseplan subscription rights granted in 2005, 2004 and 2003.

56

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

7.    Incometaxes

The benefit for income taxes consists of thefollowing components:

|                                     |  |        |          |         |  |        |          |         |  |        |          |         |  |  |
|-------------------------------------|--|--------|----------|---------|--|--------|----------|---------|--|--------|----------|---------|--|--|
|                                |  | 2005   |          | 2004    |  | 2003   |
| Current tax (benefit)provision:     |  |   |     |    |  |   |     |    |  |   |     |    |
| Federal                             |  | $      | (20,000  | )  |  | $      | 38,000   |    |  | $      | —  |    |
| Foreign                             |  |   | (255,000 | )  |  |   | —  |    |  |   | (67,000  | )  |
| State                               |  |   | (10,000  | )  |  |   | 84,000   |    |  |   | —  |    |
|                                |  |   | (285,000 | )  |  |   | 122,000  |    |  |   | (67,000  | )  |
| Deferredtax provision(benefit):     |  |   |     |    |  |   |     |    |  |   |     |    |
| Federal                             |  |   | —  |    |  |   | —  |    |  |   | —  |    |
| Foreign                             |  |   | 5,000    |    |  |   | (218,000 | )  |  |   | (42,000  | )  |
| State                               |  |   | —  |    |  |   | —  |    |  |   | —  |    |
|                                |  |   | 5,000    |    |  |   | (218,000 | )  |  |   | (42,000  | )  |
| Benefit for incometaxes   |  | $      | (280,000 | )  |  | $      | (96,000  | )  |  | $      | (109,000 | )  |
|                                     |

Temporarydifferences which gave rise to a significant portion of deferred taxassets and liabilities at December  31,  2005 andJanuary  1,  2005 are as follows:

|                                             |  |        |          |         |  |        |           |         |  |  |
|---------------------------------------------|--|--------|----------|---------|--|--------|-----------|---------|--|--|
|                                        |  | 2005   |          | 2004    |
| Current deferred taxassets:                 |  |   |     |    |  |   |      |    |
| Inventory valuationallowance                |  | $      | 535,000  |    |  | $      | 797,000   |    |
| Capitalized inventory costs                 |  |   | 33,000   |    |  |   | 31,000    |    |
| Warranty cost                               |  |   | 60,000   |    |  |   | 60,000    |    |
| Deferred compensation                       |  |   | 14,000   |    |  |   | 16,000    |    |
| Leaseobligations                            |  |   | 70,000   |    |  |   | —   |    |
| Net operating loss carryforwards            |  |   | —  |    |  |   | 440,000   |    |
| Other                                       |  |   | 163,000  |    |  |   | 314,000   |    |
|                                        |  |   | 875,000  |    |  |   | 1,658,000 |    |
| Lessvaluation allowance                     |  |   | (500,000 | )  |  |   | (940,000  | )  |
| Current deferred taxassets                  |  |   | 375,000  |    |  |   | 718,000   |    |
| Current deferred taxliabilities-            |  |   |     |    |  |   |      |    |
| Research anddevelopment credits and costs   |  |   | (70,000  | )  |  |   | (42,000   | )  |
| Prepaid expenses                            |  |   | (185,000 | )  |  |   | —   |    |
| Net current deferred tax assets   |  |   | 120,000  |    |  |   | 676,000   |    |
|                                             |

57

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

7.    Incometaxes (continued)

|                                           |  |        |            |         |  |        |            |         |  |  |
|-------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
| Non-current deferred taxassets:           |  |   |       |    |  |   |       |    |
| Deferred compensation                     |  |   | 8,000      |    |  |   | 21,000     |    |
| Net operating losscarryforwards           |  |   | 1,151,000  |    |  |   | 603,000    |    |
| Capitalized leases                        |  |   | 62,000     |    |  |   | 51,000     |    |
| Research and development creditsand costs |  |   | 950,000    |    |  |   | 674,000    |    |
| Other                                     |  |   | 144,000    |    |  |   | 174,000    |    |
|                                      |  |   | 2,315,000  |    |  |   | 1,523,000  |    |
| Less valuation allowance                  |  |   | (1,060,000 | )  |  |   | (515,000   | )  |
| Non-current deferred tax assets           |  |   | 1,255,000  |    |  |   | 1,008,000  |    |
| Non-current deferred taxliabilities:      |  |   |       |    |  |   |       |    |
| Depreciation andamortization              |  |   | (913,000   | )  |  |   | (1,191,000 | )  |
| Other                                     |  |   | —    |    |  |   | (26,000    | )  |
| Non-current deferred taxliabilities       |  |   | (913,000   | )  |  |   | (1,217,000 | )  |
| Net non-current deferred taxassets        |  |   | 342,000    |    |  |   | (209,000   | )  |
| Net deferred tax assets                   |  | $      | 462,000    |    |  | $      | 467,000    |    |
|                                           |

The statutory Federal incometax rate is reconciled to the effective tax rate computed by dividingthe benefit for income taxes by income (loss) before income taxes asfollows:

|                                                    |  |        |         |          |  |        |         |          |  |        |         |          |  |  |
|----------------------------------------------------|--|--------|---------|----------|--|--------|---------|----------|--|--------|---------|----------|--|--|
|                                               |  | 2005   |         | 2004     |  | 2003   |
| Statutory Federal income tax rate                  |  |   | 34.0    | %   |  |   | 34.0    | %   |  |   | (34.0   | )%  |
| Effectof:                                          |  |   |    |     |  |   |    |     |  |   |    |     |
| State income tax, net ofFederal income tax effects |  |   | (1.4    | )   |  |   | 7.6     |     |  |   | — |     |
| Research and developmentcredits                    |  |   | — |     |  |   | — |     |  |   | (4.7    | )   |
| Change in valuation allowance                      |  |   | (17.5   | )   |  |   | (35.5   | )   |  |   | 19.5    |     |
| Tax effect offoreign operations                    |  |   | (69.5   | )   |  |   | (19.8   | )   |  |   | 6.0     |     |
| Other                                              |  |   | (3.8    | )   |  |   | 5.0     |     |  |   | 2.5     |     |
| Effective tax benefit                              |  |   | (58.2   | )%  |  |   | (8.7    | )%  |  |   | (10.7   | )%  |
|                                                    |

The Company files a U.S.income tax return which includes its Costa Rican subsidiary. Thissubsidiary is not subject to income tax in Costa Rica as it takesadvantage of that country’s Free Trade Zone Law.

The current foreign tax benefit for the year endedDecember  31,  2005 reflects refundable Canadian provincialtax credits for which FMI, as a technology company, has qualified.

As of December  31,  2005, the Company had netoperating loss carryforwards of approximately $3,100,000 for Federalincome tax purposes and $1,500,000 for state income tax purposes whichare available to offset future taxable income through 2023 and 2013,respectively. The Company utilized approximately $100,000 of its netoperating loss carryforwards for Federal income tax purposes for 2005.Included in the net operating losses as of December  31,2005 are approximately $760,000 of future Federal tax deductionsrelated to the exercise of employee stock options. In addition, theCompany has U.S Federal income tax credit carryforwards ofapproximately $185,000 of which $74,000 expire through 2015, $74,000that expire through 2022 and $37,000 which have no expiration. TheCanadian research and development benefits of $875,000 include $400,000of investment tax credits that expire through 2015, and the remainingbenefits can be carried forward indefinitely.

The Companydecreased its domestic deferred tax asset valuation allowance by$165,000 to $1,290,000, in fiscal year 2005 reflecting utilization ofnet operating loss carryforwards and lower gross deferred 

58

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

7.    Incometaxes (continued)

tax assets. In 2005 the Company added avaluation allowance for certain Canadian deferred tax assets of$270,000, because it believed that the probablility of realization ofsuch assets was uncertain. The Company reduced its domestic deferredtax asset valuation allowance by $391,000 to $1,455,000 in fiscal year2004 reflecting utilization of net operating loss carryforwards. TheCompany's domestic net deferred tax assets have been fullyreserved as of December  31,  2005 and January  1,2005.

The provision (benefit) for foreign income taxes isbased upon foreign income (losses) before income taxes as follows:$249,000 for 2005, $5,000 for 2004 and $(158,000) for 2003. DeferredFederal and state income taxes are not provided on the undistributedcumulative earnings of foreign subsidiaries because such earnings areconsidered to be invested permanently in those operations. AtDecember  31,  2005, the cumulative earnings of foreignsubsidiaries were approximately $1,400,000. The amount of unrecognizeddeferred tax liability on the undistributed cumulative earnings wasapproximately $210,000.

The American Jobs Creation Act of2004 (the Act) allows U.S. companies a one-time opportunity torepatriate non-U.S. earnings through 2005 at a 5.25% rate of taxrather than the normal U.S. tax rate of 34%, provided thatcertain criteria, including qualified U.S. reinvestment, are met.Available tax credits related to the repatriation would be reducedunder provisions of the Act. Because the vast majority of itspermanently reinvested non-U.S. earnings have been deployed in activebusiness operations, the Company did not repatriate any materialportion of its permanently reinvested non-U.S. earnings. Thus, noincremental tax provision effect has been recorded throughDecember  31,  2005.

Internal Revenue ServiceCode Section 382 places a limitation on the utilization of netoperating loss carryforwards when an ownership change, as defined inthe tax law, occurs. Generally, an ownership change occurs when thereis a greater than 50 percent change in ownership. If such change shouldoccur, the actual utilization of net operating loss carryforwards, fortax purposes, would be limited annually to a percentage of the fairmarket value of the Company at the time of such change. The Company maybecome subject to these limitations in 2006 depending on change inownership.

8.    Businesssegment and geographic data

The Company'soperations are conducted primarily through two businesssegments:    (1) electronic components and subsystems and (2)microwave micro-circuitry. These segments, and the principal operationsof each, are as follows:

Electronic components andsubsystems:    Design, manufacture and sale of electronic componentdevices offering extremely broad frequency coverage and highperformance characteristics for communications, defense and aerospaceapplications. Of the identifiable assets, 82% are located in theUnited States and 18% are located in Costa Rica.

Microwave micro-circuitry:    Design, manufacture and saleof microstrip, bonded stripline and thick metal-backedTeflon® (PTFE) and mixed dielectric multilayer circuitsfor communications, defense and aerospace applications. Identifiableassets are located in Canada.

Information about theCompany's operations in different industries and geographic areasfollows. Operating income (loss) is net sales less operating expenses.Operating expenses exclude interest expense, other income and incometaxes. Assets are identified with the appropriate operating segment andare substantially all located in the North America geographic area.Corporate assets consist principally of cash and corporate expenses areimmaterial. Intersegment sales and the resulting intersegment assetsare principally due to transactions from the microwave micro-circuitrysegment to the electronic components segment.

59

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

8.    Businesssegment and geographic data (continued)

|                                                          |  |                          |        |         |  |        |        |         |  |        |        |         |  |  |
|----------------------------------------------------------|--|--------------------------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                                     |  | 2005                     |        | 2004    |  | 2003   |
|                                                     |  | (In thousands ofdollars) |
| Industrysegments:                                        |  |                     |   |    |  |   |   |    |  |   |   |    |
| Sales tounaffiliatedcustomers:                           |  |                     |   |    |  |   |   |    |  |   |   |    |
| Electroniccomponents and subsystems                      |  | $                        | 22,483 |    |  | $      | 25,141 |    |  | $      | 23,962 |    |
| Microwave micro-circuitry                                |  |                     | 7,372  |    |  |   | 5,956  |    |  |   | 3,709  |    |
| Intersegment sales                                       |  |                     | (136   | )  |  |   | (148   | )  |  |   | (349   | )  |
| Consolidated                                             |  | $                        | 29,719 |    |  | $      | 30,949 |    |  | $      | 27,322 |    |
| Income(loss) before (benefit) provision for incometaxes: |  |                     |   |    |  |   |   |    |  |   |   |    |
| Operatingincome (loss):                                  |  |                     |   |    |  |   |   |    |  |   |   |    |
| Electroniccomponents and subsystems                      |  | $                        | 280    |    |  | $      | 1,178  |    |  | $      | (860   | )  |
| Microwave micro-circuitry                                |  |                     | 462    |    |  |   | 189    |    |  |   | 4      |    |
| Interest andother expense, net                           |  |                     | (261   | )  |  |   | (265   | )  |  |   | (167   | )  |
| Consolidated                                             |  | $                        | 481    |    |  | $      | 1,102  |    |  | $      | (1,023 | )  |
| Identifiableassets:                                      |  |                     |   |    |  |   |   |    |  |   |   |    |
| Electronic componentsand subsystems                      |  | $                        | 23,307 |    |  | $      | 25,593 |    |  | $      | 28,063 |    |
| Microwave micro-circuitry                                |  |                     | 7,087  |    |  |   | 6,849  |    |  |   | 5,550  |    |
| Corporate                                                |  |                     | 4,081  |    |  |   | 2,166  |    |  |   | 453    |    |
| Intersegment assets                                      |  |                     | (53    | )  |  |   | (33    | )  |  |   | (46    | )  |
| Consolidated                                             |  | $                        | 34,422 |    |  | $      | 34,575 |    |  | $      | 34,020 |    |
| Depreciation andamortization:                            |  |                     |   |    |  |   |   |    |  |   |   |    |
| Electroniccomponents and subsystems                      |  | $                        | 2,884  |    |  | $      | 2,965  |    |  | $      | 2,964  |    |
| Microwave micro-circuitry                                |  |                     | 271    |    |  |   | 245    |    |  |   | 228    |    |
| Consolidated                                             |  | $                        | 3,155  |    |  | $      | 3,210  |    |  | $      | 3,192  |    |
| Capitalexpenditures:                                     |  |                     |   |    |  |   |   |    |  |   |   |    |
| Electroniccomponents and subsystems                      |  | $                        | 1,575  |    |  | $      | 1,419  |    |  | $      | 1,195  |    |
| Microwave micro-circuitry                                |  |                     | 199    |    |  |   | 296    |    |  |   | 71     |    |
| Consolidated                                             |  | $                        | 1,774  |    |  | $      | 1,715  |    |  | $      | 1,266  |    |
| Geographicareas:                                         |  |                     |   |    |  |   |   |    |  |   |   |    |
| Sales tounaffiliated customers:                          |  |                     |   |    |  |   |   |    |  |   |   |    |
| NorthAmerica                                             |  | $                        | 23,952 |    |  | $      | 26,757 |    |  | $      | 22,389 |    |
| Europe                                                   |  |                     | 4,401  |    |  |   | 2,748  |    |  |   | 2,802  |    |
| Far East                                                 |  |                     | 925    |    |  |   | 1,271  |    |  |   | 1,616  |    |
| Other                                                    |  |                     | 441    |    |  |   | 173    |    |  |   | 515    |    |
| Consolidated                                             |  | $                        | 29,719 |    |  | $      | 30,949 |    |  | $      | 27,322 |    |
|                                                          |

60

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

8.    Businesssegment and geographic data (continued)

The Company's customers areprimarily major industrial corporations that integrate theCompany's products into a wide variety of defense and commercialsystems. The Company's customers include BAE Systems, The BoeingCompany, Celestica, Inc., EADS Astrium, General Dynamics Corporation,ITT, Lockheed Martin Corporation, Loral Space & CommunicationsLtd., Northrop Grumman Corporation and Raytheon Company.

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

|                                 |  |        |      |         |  |        |      |         |  |        |      |         |  |  |
|---------------------------------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--|
|                            |  | 2005   |      | 2004    |  | 2003   |
| Israel Aircraft Industries Ltd. |  |   | 11.2 | %  |  |   | 6.2  | %  |  |   | 1.1  | %  |
| Lockheed Martin Corporation     |  |   | 10.9 | %  |  |   | 6.6  | %  |  |   | 7.8  | %  |
| RaytheonCompany                 |  |   | 10.5 | %  |  |   | 13.9 | %  |  |   | 12.3 | %  |
| Northrop Grumman Corporation    |  |   | 8.8  | %  |  |   | 11.9 | %  |  |   | 12.4 | %  |
| The Boeing Company              |  |   | 5.9  | %  |  |   | 7.8  | %  |  |   | 16.1 | %  |
|                                 |

Accounts receivable arefinancial instruments that expose the Company to a concentration ofcredit risk. A substantial portion of the Company's accountsreceivable are from customers in the defense industry, andapproximately 44% and 64% of its receivables atDecember  31,  2005 and January  1,  2005,respectively, were from five and six customers, respectively. Exposureto credit risk is limited by the large number of customers comprisingthe remainder of the Company's customer base, their geographicaldispersion and by ongoing customer credit evaluations performed by theCompany.

9.    Netincome per common share

The following table summarizesthe calculation of basic and diluted net income (loss) per common sharefor 2005, 2004 and 2003:

|                                                                            |  |        |           |        |  |        |           |        |  |        |           |         |  |  |
|----------------------------------------------------------------------------|--|--------|-----------|--------|--|--------|-----------|--------|--|--------|-----------|---------|--|--|
|                                                                       |  | 2005   |           | 2004   |  | 2003   |
| Numerator:                                                                 |  |   |      |   |  |   |      |   |  |   |      |    |
| Netincome (loss) available to common stockholders                          |  | $      | 761,284   |   |  | $      | 1,198,489 |   |  | $      | (914,473  | )  |
| Denominator:                                                               |  |   |      |   |  |   |      |   |  |   |      |    |
| Weightedaverage shares outstanding for basic net income (loss) per share   |  |   | 3,142,425 |   |  |   | 3,127,070 |   |  |   | 3,120,557 |    |
| Effect of dilutive securities - stock options(1)                           |  |   | 34,096    |   |  |   | 26,784    |   |  |   | —   |    |
| Weighted average shares outstanding fordiluted net income (loss) per share |  |   | 3,176,521 |   |  |   | 3,153,854 |   |  |   | 3,120,557 |    |
| Net income (loss) per share -basic                                         |  | $      | .24       |   |  | $      | .38       |   |  | $      | (.29      | )  |
| Net income (loss) per share - diluted                                      |  | $      | .24       |   |  | $      | .38       |   |  | $      | (.29      | )  |
|                                                                            |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Representsadditional shares resulting from assumed conversion of stock optionsless shares purchased with the proceeds therefrom. |

Diluted net income per share excludes 285,000 and 322,000shares underlying stock options for the years ended December31,  2005 and January  1,  2005, respectively as theexercise price of these options was greater than the average marketvalue of the common shares, resulting in an anti-dilutive effect on netincome per share. Because of the net loss for the year endedJanuary  3,  2004 approximately 426,000  sharesunderlying stock options were excluded from the calculation of dilutednet income per share as the effect would beanti-dilutive.

61

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

10.    Commitmentsand contingencies

Lease commitments:

TheCompany leases real estate and equipment under operating leasesexpiring at various dates through January  2011, which includes a36,200 square-foot manufacturing facility in Costa Rica. The leasesinclude provisions for rent escalation, renewals and purchase options,and the Company is generally responsible for taxes, insurance, repairsand maintenance.

Total rent expense charged to operationsamounted to $462,000 in 2005, $438,000 in 2004 and $498,000 in 2003.Future minimum lease payments under noncancellable operating leaseswith an initial term exceeding one year are as follows:

|            |  |        |         |        |  |  |
|------------|--|--------|---------|--------|--|--|
| 2006       |  | $      | 529,000 |   |
| 2007       |  |   | 549,000 |   |
| 2008       |  |   | 549,000 |   |
| 2009       |  |   | 428,000 |   |
| 2010       |  |   | 422,000 |   |
| Thereafter |  |   | 34,000  |   |
|            |

Lease modification and facilitysharing agreement:

The Company entered into an agreementeffective January  2001, with a customer to relinquish to thiscustomer approximately half of the Company's 17,000 square-footleased manufacturing facility in Costa Rica. Associated with thetransaction, the Company entered into a four-year lease agreement witha five-year renewal option with its Costa Rica landlord for the reducedspace. In addition, the Company transferred certain employees to itscustomer, agreed to share certain personnel resources and common costs,and committed to provide certain management, administrative and otherservices to its customer. On March  31,  2003, the Companyrelinquished the balance of the space to its customer. The completionof these transactions resulted in a gain of $71,000 during the secondquarter of 2003. In connection with the 2001 agreement, the Companyreceived $450,000 from its customer. The Company reduced its facilityoccupancy expenses by approximately $22,000 in 2003.

Capital leases included in property, plant and equipment atDecember  31,  2005 are approximately as follows:

|                                                |  |        |           |        |  |  |
|------------------------------------------------|--|--------|-----------|--------|--|--|
| Machinery and equipment                        |  | $      | 1,463,000 |   |
| Less accumulated depreciation and amortization |  |   | 785,000   |   |
| Total                                          |  | $      | 678,000   |   |
|                                                |

Futureminimum lease payments under capital leases and the present value ofsuch payments as of December  31,  2005 are approximately asfollows (see Note 4):

|                                               |  |        |         |        |  |  |
|-----------------------------------------------|--|--------|---------|--------|--|--|
| 2006                                          |  | $      | 231,000 |   |
| 2007                                          |  |   | 48,000  |   |
| 2008                                          |  |   | 48,000  |   |
| 2009                                          |  |   | 48,000  |   |
| 2010                                          |  |   | 49,000  |   |
| Total minimum leasepayments                   |  |   | 424,000 |   |
| Less amount representinginterest              |  |   | 36,000  |   |
| Present value of total minimum lease payments |  | $      | 388,000 |   |
|                                               |

62

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

10.    Commitmentsand contingencies (continued)

Purchase obligations:

The Company intends to issue commitments to purchase$2,000,000 of capital equipment from various vendors. Such equipmentwill be purchased and become operational during 2006.

Consulting and employment agreements; deferredcompensation:

The Company has been a party to anemployment agreement with its Chairman, President and Chief ExecutiveOfficer that provides him with a minimum annual salary of $240,000 foran initial term and automatically renews for successive twelve-monthperiods thereafter unless terminated pursuant to the terms of theagreement. On August  31,  2000, in connection with anamendment of Mr.  Carter's employment agreement, the Companyloaned Mr.  Carter $280,000. Interest on the loan will becalculated at a variable interest rate based on the prime rate, payablein accordance with Mr.  Carter's employment agreement. Eachyear the Company will forgive 20% of the amount due under thisloan and the accrued interest thereon. During 2005, the Company forgave$56,000 of principal and $3,000 of accrued interest and paid a taxgross-up benefit of $4,300. During 2004, the Company forgave $56,000 ofprincipal and $4,500 of accrued interest and paid $6,100 for a taxgross-up benefit. During 2003, the Company forgave $56,000 of principaland $7,000 of accrued interest and paid a tax gross-up benefit of$8,300. This loan was fully satisfied in 2005.

Asubsidiary of the Company entered into an employment agreement with theFounder and President Emeritus of FMI that provides for a minimumannual salary of $150,000 (Canadian). The term of the agreement endedon August  26,  2004 and was extended through January27,  2006. It was subsequently extended until August  2006 ata minimum annual salary of $120,000 (Canadian).

TheCompany entered into a consulting agreement on January  1,1998 with a director of the Company. The term of the consultingagreement, which initially ended on January  1,  1999,automatically renews for successive twelve-month periods untilterminated pursuant to the terms of the agreement. The consultingagreement provides this director with an annual fee of $36,000 for hisservices.

The Company is party to a retirement agreementeffective January  1997, with its former Vice President, Secretaryand Controller, that provides him with annual payments of $30,000 forten years. This agreement will terminate in December  2006.

In connection with certain of these consulting and retirementagreements that extend beyond one year described above, the Company isobligated to make the following deferred compensation payments:

|                                              |  |        |        |        |  |  |
|----------------------------------------------|--|--------|--------|--------|--|--|
| 2006                                         |  | $      | 36,000 |   |
| 2007                                         |  |   | 9,000  |   |
| 2008                                         |  |   | 9,000  |   |
| 2009                                         |  |   | 9,000  |   |
| Total estimated future deferred compensation |  |   | 63,000 |   |
| Less amount representing interest            |  |   | 8,000  |   |
| Present value ofdeferred compensation        |  | $      | 55,000 |   |
|                                              |

Litigation:

The Company is a party to lawsuits, arising from the normalcourse of business. It is the opinion of management, that thedisposition of these various lawsuits will not have a material adverseeffect to the consolidated financial position or results of operationsof the Company.

11.    Restructuringsand related charges

During 2003 the Company reduced itsheadcount by 14 persons, principally involved in production,manufacturing support, sales and administration. The Company recordedpersonnel restructuring 

63

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

11.    Restructuringsand related charges (continued)

charges of $160,000, consisting of severanceand certain other personnel costs, during the last three quarters of2003. Such charges increased the net loss by $.05 per share. TheCompany paid $129,000 of these restructuring charges in 2003.Substantially all of the remaining 2003 restructuring charges were paidin 2004.

12.    Privateplacements of Common Stock and Warrants to purchase Common Stock

On February  28,  2002, the Company sold to DuPontElectronic Technologies 528,413 shares of Common Stock, representingapproximately 16.6% of the Company's outstanding CommonStock after giving effect to the sale, for an aggregate purchase priceof $5,284,000. The Company and DuPont Electronic Technologies have alsoagreed to work together to better understand the dynamics of themarkets for high-frequency electronic components and modules. David B.Miller, Vice President and General Manager of DuPont ElectronicTechnologies, was appointed to the Company's Board ofDirectors.

On December  13,  2004 InfineonTechnologies AG (‘‘Infineon’’), at such time a15.2% holder of the Company’s common stock, sold 475,000shares of the Company’s common stock to four purchasers in aprivately-negotiated transaction. Two purchasers in such transaction, KHoldings LLC and Hampshire Investments, Limited, each of which isaffiliated with Ludwig G. Kuttner, purchased shares representing anaggregate of approximately 9.6% of the Company’s commonstock. Infineon also assigned to each purchaser certain registrationrights to such shares under the existing registration rights agreementsInfineon had with the Company.

In connection with thetransaction, the Company and Infineon terminated the Stock Purchase andExclusivity Letter Agreement dated April  7,  2000, asamended, which provided that the Company would design, develop andproduce exclusively for Infineon certain Multi-Mix®products that incorporate active RF power transistors for use incertain wireless basestation applications, television transmitters andcertain other applications that are intended for Bluetoothtranceivers.

DuPont and the four purchasers above holdregistration rights which currently give them the right to register anaggregate of 1,003,413 shares of Common Stock of the Company.

13.    Relatedparty transactions

In May  1998, the Company sold22,000 shares of Common Stock to Mason N. Carter, Chairman, Presidentand Chief Executive Officer of the Company, at a price of $11.60 pershare, which approximated the average closing price of theCompany's Common Stock during the first quarter of 1998. TheCompany lent Mr.  Carter $255,000 in connection with the purchaseof these shares and combined that loan with a prior loan to Mr.Carter in the amount of $105,000. The resulting total principal amountof $360,000 was payable May  4,  2003 and bore interest at avariable interest rate based on the prime rate. This loan was furtheramended on July  29,  2002. Accrued interest of $40,000 wasadded to the principal, bringing the principal amount of the loan to$400,000, the due date was extended to May  4,  2006, andinterest (at the same rate as was previously applicable) is now payablemonthly. Mr.  Carter has pledged 33,000 shares of Common Stock assecurity for this loan, which is a full-recourse loan (see note15).

On August  31,  2000, in connection withan amendment of Mr.  Carter's employment agreement, theCompany loaned Mr.  Carter an additional $280,000. Interest on theloan varies and is based on the prime rate, payable in accordance withMr.  Carter's employment agreement. Each year the Company isrequired to forgive 20% of the amount due under this loan andthe accrued interest thereon. During 2005, the Company forgave $56,000of principal and $3,000 of accrued interest and paid a tax gross-upbenefit of $4,300. During 2004, the Company forgave $56,000 ofprincipal and $4,500 of accrued interest and paid $6,100 for a taxgross-up benefit. During 2003, the Company forgave $56,000 of principaland $7,000 of accrued interest and paid a tax gross-up benefit of$8,300. This loan was fully satisfied in 2005.

64

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

13.    Relatedparty transactions (continued)

During fiscal years 2005,2004 and 2003, respectively, the Company's General Counsel, KattenMuchin Rosenman LLP, was paid $243,000, $288,000 and $359,000 forproviding legal services to the Company. A director of the Company isCounsel to the firm of Katten Muchin Rosenman LLP but does not share inany fees paid by the Company to the law firm.

During fiscal years 2005, 2004 and 2003, the Companyretained Career Consultants, Inc. and SK  Associates to performexecutive searches and to provide other services to the Company. TheCompany paid an aggregate of $5,000, $8,000 and $40,000 to thesecompanies during 2005, 2004 and 2003, respectively. A director of theCompany is the Chairman and Chief Executive Officer of each of thesecompanies.

During fiscal year 2003 a director ofthe Company was paid $12,000 for providing financial-related consultingservices to the Company. This agreement terminated in April2003.

During each of fiscal years 2005, 2004 and2003, a director of the Company was paid $36,000 for providingtechnology-related consulting services to the Company.

During fiscal years 2005, 2004 and 2003,respectively, DuPont Electronic Technologies(‘‘DuPont’’), a stockholder, was paid $54,000,$84,000 and $109,000 for providing technological and marketing-relatedpersonnel and services on a cost-sharing basis to the Company under theTechnology Agreement dated February  28,  2002. A director ofthe Company is an officer of DuPont, but does not share in any of thesepayments.

Each director who is not an employee ofthe Company receives a monthly director's fee of $1,500, plus anadditional $500 for each meeting of the Board and of any Committees ofthe Board attended. In addition, the Chair of the Audit Committeereceives an annual fee of $2,500 for his services in such capacity. Thedirectors are also reimbursed for reasonable travel expenses incurredin attending Board and Committee meetings. In addition, pursuant to the2001 Stock Option Plan, each non-employee director is granted animmediately exercisable option to purchase 2,500  shares of theCommon Stock of the Company on the date of each Annual Meeting ofStockholders. Each such option has an exercise price equal to the fairmarket value on the date of such grant and will expire on the tenthanniversary of the date of the grant. On June  21,  2005,non-qualified stock options to purchase an aggregate of 2,500 shareswere issued to each of seven directors at an exercise price of $8.95per share.

14.    Stockholder RightsPlan

On March  5,  1999, the Board ofDirectors of the Company approved a stockholder rights plan anddeclared a dividend of one common share purchase right (a‘‘Right’’) for each outstanding share of CommonStock of the Company. The dividend was payable on March  19,1999 (the ‘‘Record Date’’) to stockholders ofrecord as of the close of business on that date. Each Right willentitle the holder to purchase from the Company, upon the occurrence ofcertain events, one share of Common Stock for $25.00.

Generally, if any person or group acquires beneficialownership of 10% or more of the Company's outstandingCommon Stock, each Right (other than Rights held by such acquiringperson or group) will be exercisable, at the $25.00 purchase price, fora number of shares of Common Stock having a market value of $50.00.Upon an acquisition of the Company, each Right (other than Rights heldby the acquiror) will generally be exercisable, at the $25.00 purchaseprice, for a number of shares of common stock of the acquiror having amarket value of $50.00. In certain circumstances, each Right may beexchanged by the Company for one share of Common Stock. The Rights willexpire on March  19,  2009, unless earlier exchanged orredeemed at $0.01 per Right.

15.    SubsequentEvent

On March 29, 2006, the Company entered into anagreement with Mason N. Carter, Chairman, President and Chief ExecutiveOfficer of the Company, to purchase 42,105 shares of theCompany's 

65

----

NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December31,  2005, January  1,  2005 and January  3,2004  — (Continued)

15.    SubsequentEvent (continued)

common stock owned by Mr. Carter at apurchase price of $9.50 per share (the closing price of the commonstock on March 29, 2006) resulting in a total purchase price for theshares of $399,998. As a condition to the Company's obligation topurchase the shares, concurrent with the Company's payment of thepurchase price Mr. Carter will pay to the Company $400,000 (plus anyaccrued and unpaid interest) in full satisfaction of Mr. Carter'spromissory note in favor of the Company dated July  29, 2002 (seenote 13). The closing of this transaction is scheduled to occur onApril 17, 2006.

END OF NOTES TO CONSOLIDATED FINANCIALSTATEMENTS.

66

----

|              |                                                                                     |
|--------------|-------------------------------------------------------------------------------------|
| ITEM9.  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE |

None.

|               |                         |
|---------------|-------------------------|
| ITEM9A.  | CONTROLS AND PROCEDURES |

As ofDecember  31,  2005 (the end of the period covered by thisreport), the Company's management carried out an evaluation, withthe participation of the Company's Chief Executive Officer andChief Financial Officer, of the effectiveness of the Company'sdisclosure controls and procedures. Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that, asof December  31,  2005, the Company's disclosurecontrols and procedures are effective.

In designing andevaluating the Company's disclosure controls and procedures (asdefined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Actof 1934), management recognized that any controls and procedures, nomatter how well designed and operated, can provide only reasonableassurances of achieving the desired control objectives, as ours aredesigned to do, and management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possiblecontrols and procedures. We believe that our disclosure controls andprocedures provide such reasonable assurance.

No change occurredin the Company's internal controls concerning financial reportingduring the Company's fourth quarter that has materially affected,or is reasonably likely to materially affect, the Company'sinternal controls over financial reporting.

|               |                   |
|---------------|-------------------|
| ITEM9B.  | OTHER INFORMATION |

None.

PARTIII

Pursuant to General Instruction E3 to Form 10-K, portionsof information required by Items 10 through 12 and 14 and indicatedbelow are hereby incorporated by reference to Merrimac'sdefinitive Proxy Statement for the 2006 Annual Meeting of Stockholders(the ‘‘Proxy Statement’’) which Merrimac willfile with the Securities and Exchange Commission not later than 120days after the end of the fiscal year covered by this report.

|                |                                                   |
|----------------|---------------------------------------------------|
| ITEM 10.  | DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT |

Information under the caption ‘‘Electionof Directors’’ contained in the Proxy Statement withrespect to the Board of Directors is incorporated herein byreference.

The following is a list of Merrimac's currentexecutive officers, their ages and their positions. Generally, eachexecutive officer is elected for a term of one year at theorganizational meeting of the Board of Directors following the AnnualMeeting of Stockholders.

67

----

|                       |  |     |  |                                                                                    |  |  |  |  |  |  |
|-----------------------|--|-----|--|------------------------------------------------------------------------------------|--|--|--|--|--|--|
| NAME                  |  | AGE |  | POSITION                                                                           |
| MasonN. Carter        |  | 60  |  | Chairman, Presidentand Chief Executive Officer                                     |
| Robert V. Condon      |  | 59  |  | Vice President, Finance,Treasurer,  Secretary and Chief FinancialOfficer |
| Richard E. Dec        |  | 63  |  | VicePresident, Corporate Relations                                                 |
| Rocco A.DeLillo       |  | 38  |  | Vice President, Research andDevelopment                                            |
| Michael M.  Ghadaksaz |  | 51  |  | Vice President, Market Development                                                 |
| Reynold K. Green      |  | 47  |  | Vice President and ChiefOperating Officer                                          |
| Jayson E. Hahn        |  | 38  |  | Vice President, Information Technology and Chief InformationOfficer           |
| James J. Logothetis   |  | 46  |  | Vice President and Chief Technology Officer                                        |
| Adriana Mazza         |  | 54  |  | Vice President, HumanResources                                                     |
| Michael Pelenskij     |  | 45  |  | Vice President, Manufacturing                                                      |
|                       |

FAMILYRELATIONSHIPS

There are no family relationships amongthe officers listed.

BUSINESS EXPERIENCE OF EXECUTIVEOFFICERS DURING PAST FIVE YEARS

Mr.  Carter hasserved as Chairman of the Board since July  24,  1997, andPresident and Chief Executive Officer since December  16,1996.

Mr.  Condon has been Vice President, Financeand Chief Financial Officer since joining Merrimac in March  1996and was appointed Secretary and Treasurer in January  1997. Priorto joining Merrimac, he was with Berkeley Educational Services as VicePresident, Finance, Treasurer and CFO from 1995 to February1996.

Mr.  Dec has been Vice President, CorporateRelations since November  2002 and was Vice President, BusinessDevelopment from July  2000. He served as Vice President,Marketing since joining Merrimac in March  1997.

Mr.  DeLillo was appointed Vice President, Research andDevelopment in September  2003, after serving as Vice President,Engineering since November  2002. He served as Vice President ofResearch and Development from September  2002 to November2002. Prior to September  2002 he was Director of Research andDevelopment since 1999. He joined the Company in March  1998 as aSenior Research and Development Engineer.

Mr.Ghadaksaz was appointed Vice President of Marketing Development inSeptember  2003, after serving as Director of Market Developmentsince February  2003. Prior to joining Merrimac, he served as aconsultant for wireless telecommunications equipment and devicemanufacturers, U.S. and Canadian venture capital firms and theirportfolio companies. Mr.  Ghadaksaz also served on the AdvisoryBoard of Radical Horizon, an innovative software defined radio solutionprovider. From 1999 to 2002, he served as Director of TechnologyStrategy for the Strategy Sector at Motorola. From 1995 to 1999,Mr.  Ghadaksaz held the positions of Senior Scientist,Applications and Business Development Manager for Hughes CommunicationsProducts Division of Hughes Aircraft Company.

Mr.Green was appointed Vice President and Chief Operating Officer onJanuary  1,  2005. He was Vice President and General Managersince November  2002. He was Vice President and General Manager ofthe RF Microwave Products Group since January  2000. He was VicePresident, Sales from March  1997 to January  2000 and VicePresident of Manufacturing from April  1996 to March  1997.He was a member of the Board of Directors from April  1996 toMay  1997 and did not seek re-election to the Board.

Mr.  Hahn was appointed Vice President, InformationTechnology and Chief Information Officer in October  2000, afterserving as Director, Network Services since June  1998. He servedas Manager, Network Services from June  1997 to June  1998and was Information Technology Support Specialist from December1996 to June  1997.

Mr.  Logothetis wasappointed Vice President and Chief Technology Officer in March2002. Mr.  Logothetis was appointed Vice President,Multi-Mix® Engineering in May  1998, afterrejoining 

68

----

Merrimac in January  1997 to serve asDirector, Advanced Technology. Prior to rejoining Merrimac, he servedas a director for Electromagnetic Technologies, Inc. in 1995 and becameVice President of Microwave Engineering at such corporation in 1996.From 1984 through 1994, Mr.  Logothetis had various engineeringpositions with Merrimac including Group Manager, Engineering.

Mrs.  Mazza was appointed Vice President, HumanResources in December  2005, after serving as Manager of HumanResources of the Company from September  2002 to December2005. She joined the Company in May  2000, serving in varioushuman resource capacities until September  2002. Prior to joiningMerrimac, she worked for Monroe Systems for Business, a division ofLitton Industries; Exxon Office System, a division of Exxon Corporationand did private consulting work in both profit and nonprofitcapacities.

Mr.  Pelenskij was appointed VicePresident Manufacturing in January  2000 after serving as Directorof Manufacturing of the Company from January  1999 toJanuary  2000. Prior to January  1999, Mr.  Pelenskijheld the positions of Manager of Screened Components, RF DesignEngineer, and District Sales Manager at the Company since joining theCompany in 1993.

Information under the caption‘‘Section 16 (a) Beneficial Ownership ReportingCompliance’’ contained in the Proxy Statement relating tocompliance with Section 16 of the Exchange Act is incorporated hereinby reference.

The Company has adopted a code of ethicsthat applies to its chief executive officer and chief financialofficer, its principal executive officer and principal financialofficer, respectively, and all of the Company’s other officers,directors and employees. The Company makes its code of ethics availablefree of charge through its internet website,www.merrimacind.com. The Company will disclose on its web siteat www.merrimacind.com amendments to or waivers from its codeof ethics within four business days following the date of any suchamendment or waiver.

|                |                       |
|----------------|-----------------------|
| ITEM 11.  | EXECUTIVECOMPENSATION |

Information called for by Item 11 is set forthunder the heading ‘‘Executive Compensation’’ inthe Proxy Statement, which information is incorporated herein byreference.

On March 29, 2006, the Compensation Committee of theBoard of Directors of the Company adopted the Company's Amendedand Restated Severance Plan (which replaces the previous plan adoptedin September 2003) for certain key executives. The plan provides, amongother things, that if an executive is terminated by the Company without"cause" or the executive resigns for"good reason" (as such terms are defined inthe plan) within 12 months following a "change incontrol" (as defined therein) the Company, or anysuccessor to the Company, is obligated to pay to the executive one ortwo times (as determined by the Compensation Committee) his annual basesalary and to continue to provide health insurance benefits for 24months (to the extent not covered by any new employer). All paymentsunder the plan will be payable at such times as determined by theCompensation Committee provided that all such payments are made priorto the later of (1) March 15 of the calendar year following the year inwhich the termination occurs and (2) two and one-half months after theend of the Company's year end in which such termination occurred.All payments will be made so as to comply with Section 409A of theInternal Revenue Code. In connection with any payment under the plan,the Compensation Committee may require that the executive enter intosuch non-competition/non-solicitation and confidentiality agreements asit deems appropriate. If an executive has entered into an agreementwith the Company, which agreement covers the subject matter of theplan, such agreement will govern so that the executive will not beentitled to payments under both the agreement and the plan. The plan isattached as Exhibit 10(z) to this Annual Report on Form10-K.

|                |                                                                                               |
|----------------|-----------------------------------------------------------------------------------------------|
| ITEM 12.  | SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |

Information called for by Item 12 is set forth under the heading‘‘Share Ownership of Directors, Executive Officers andCertain Stockholders’’ contained in the Proxy Statement,which information is incorporated herein by reference.

69

----

|                |                                               |
|----------------|-----------------------------------------------|
| ITEM 13.  | CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS |

Information called forby Item 13 is set forth under the subheading ‘‘Certainrelationships and related transactions’’ under the caption‘‘Executive Compensation’’ contained in theProxy Statement, which information is incorporated herein byreference.

On March 29, 2006, the Company entered into anagreement with Mason N. Carter, its Chairman, President and ChiefExecutive Officer, to purchase 42,105 shares of the Company'scommon stock owned by Mr. Carter for a purchase price of $9.50 pershare (the closing price of the common stock on March 29, 2006),resulting in a total purchase price for the shares of $399,998. As acondition to the Company's obligation to purchase the shares,concurrent with the Company's payment of the purchase price Mr.Carter will pay to the Company $400,000 (plus any accrued and unpaidinterest) in full satisfaction of Mr. Carter's promissory note infavor of the Company dated July 29, 2002. The closing of thistransaction is scheduled to occur on April 17, 2006. The agreement withMr. Carter is attached as Exhibit 10(aa) to this Annual Report on Form10-K.

|                |                                       |
|----------------|---------------------------------------|
| ITEM 14.  | PRINCIPAL ACCOUNTANT FEES ANDSERVICES |

Information called for by Item 14 is set forth underthe caption ‘‘Principal Accountant Fees andServices’’ contained in the Proxy Statement, whichinformation is incorporated herein by reference.

70

----

|                |                                           |
|----------------|-------------------------------------------|
| ITEM 15.  | EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES |

|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |  |
|---------------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| EXHIBITNUMBER |  | DESCRIPTION OF EXHIBIT                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3(a)          |  | Certificate of Incorporation of Merrimac is hereby incorporated byreference to  Exhibit 3(i)(b) to Post-Effective Amendment No. 2 tothe Registration Statement on Form S-8 (No. 33-68862) of Merrimac datedFebruary  23,  2001.                                                                                                                                                                                         |
| 3(b)          |  | By-laws of Merrimac are hereby incorporated by reference to Exhibit3(ii)(b) to Post-Effective Amendment No. 2 to the RegistrationStatement on Form S-8 (No.  33-68862) of Merrimac datedFebruary  23,  2001.                                                                                                                                                                                                            |
| 4(a)          |  | Stockholder Rights Agreement dated as of March  9,  1999,between Merrimac and ChaseMellon Stockholder Services, L.L.C., asRights Agent, is hereby incorporated by reference to Exhibit 1 toMerrimac's Current Report on  Form 8-K filed with theSecurities and Exchange Commission on March  9,1999.                                                                                                                    |
| 4(b)          |  | Amendment No. 1 dated as ofJune  9,  1999, to the Stockholder Rights Agreement dated asof March  9,  1999, between Merrimac and ChaseMellonStockholder Services, L.L.C., as Rights Agent, is hereby incorporatedby reference to Exhibit 1 to Merrimac's Current Report on Form 8-Kfiled with the Securities and Exchange Commission on June9,  1999.                                                                    |
| 4(c)          |  | Amendment No. 2 datedas of April  7,  2000, to the Stockholder Rights Agreementdated as of March  9,  1999, between Merrimac and ChaseMellonStockholder Services, L.L.C., as Rights Agent, is hereby incorporatedby reference to Exhibit 1(b) to Merrimac's Current Report on Form8-K filed with the Securities and Exchange Commission on April10,  2000.                                                              |
| 4(d)          |  | Amendment No. 3 datedas of October  26,  2000, to the Stockholder Rights Agreementdated as of March  9,  1999, between Merrimac and ChaseMellonStockholder Services, L.L.C., as Rights Agent, is hereby incorporatedby reference to Exhibit 2 to Merrimac's Current Report on Form 8-Kfiled with the Securities and Exchange Commission on October27,  2000.                                                            |
| 4(e)          |  | Amendment No. 4 datedas of February  21,  2001, to the Stockholder RightsAgreement dated as of March  9,  1999, between Merrimac andMellon Investor Services, L.L.C. (formerly known as ChaseMellonStockholder Services, L.L.C.), as Rights Agent, is hereby incorporatedby reference to Exhibit 1(d) to Merrimac's Current Report on Form 8-K filed with the Securities and Exchange Commission onFebruary  21,  2001. |
| 4(f)          |  | Amendment No. 5, dated February  28,  2002, to the RightsAgreement, between Merrimac and Mellon Investor Services LLC (f.k.a.ChaseMellon Shareholder Services, L.L.C.), as Rights Agent is herebyincorporated by reference to Exhibit 99.4 to Merrimac's Form 8-Kfiled with the Securities and Exchange Commission on March6,  2002.                                                                                    |
| 4(g)          |  | Amendment No. 6, datedSeptember  18,  2002, to the Rights Agreement, betweenMerrimac and Mellon Investor Services LLC, as Rights Agent is herebyincorporated by reference to Exhibit 99.3 to Merrimac's Form 8-Kfiled with the Securities and Exchange Commission on October10,  2002.                                                                                                                                  |
| 4(h)          |  | Amendment No. 7,dated December  13,  2004, to the Rights Agreement, betweenMerrimac and Wachovia Bank, National Association, as successor RightsAgent, is hereby incorporated by reference to Exhibit 4.1 toMerrimac's Form 8-K filed with the Securities and ExchangeCommission on December  13,  2004.                                                                                                                |
|               |

71

----

|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  |  |
|---------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| EXHIBITNUMBER |  | DESCRIPTION OF EXHIBIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(a)         |  | Registration RightsAgreement dated as of April  7,  2000, between Merrimac andEricsson Holding International, B.V. is hereby incorporated byreference to  Exhibit 10(b) to Merrimac's Quarterly Report onForm 10-QSB for the period ending July  1,  2000.                                                                                                                                                                                                                                                      |
| 10(b)         |  | Registration Rights Agreement datedOctober  26,  2000, between Merrimac and Ericsson HoldingInternational, B.V. is hereby incorporated by reference to Exhibit10(u) to Merrimac's Annual Report on Form 10-KSB dated for theyear ending December  30,  2000.                                                                                                                                                                                                                                                    |
| 10(c)         |  | Registration Rights Agreement, datedFebruary  28,  2002 between Merrimac and DuPont Chemical andEnergy Operations, Inc., a subsidiary of E.I. DuPont de Nemours andCompany is hereby incorporated by reference to Exhibit 99.3 toMerrimac's Form 8-K filed with the Securities and ExchangeCommission on March  6,  2002.                                                                                                                                                                                       |
| 10(d)         |  | Profit Sharing Plan of Merrimac is hereby incorporated by referenceto Exhibit 10(n) to Merrimac's Registration Statement on Form S-1(No. 2-79455).*                                                                                                                                                                                                                                                                                                                                                             |
| 10(e)         |  | 1993 Stock OptionPlan of Merrimac effective March  31,  1993, is herebyincorporated by reference to Exhibit 4(c) to Merrimac'sRegistration Statement on Form S-8 (No.  33-68862) datedSeptember  14, 1993.*                                                                                                                                                                                                                                                                                                     |
| 10(f)         |  | 1997Long-Term Incentive Plan of Merrimac is hereby incorporated byreference to Exhibit A to Merrimac's Proxy Statement filed withthe Securities and Exchange Commission on April  11,1997.*                                                                                                                                                                                                                                                                                                                     |
| 10(g)         |  | Resolutions of the StockOption Committee of the Board of Directors of Merrimac adoptedJune  3,  1998, amending the 1983 Key Employees Stock OptionPlan of Merrimac, the 1993 Stock Option Plan of Merrimac and the 1997Long-Term Incentive Plan of Merrimac and adjusting outstanding awardsthereunder to give effect to Merrimac's 10% stock dividendpaid June  5,  1998, are hereby incorporated by reference toExhibit 10(f) to Merrimac's Annual Report on Form 10-KSB for theyear ending March  30, 1999.* |
| 10(h)         |  | Resolutions of the Stock Purchase Plan Committee of the Board ofDirectors of Merrimac adopted June  3,  1998, amending the1995 Stock Purchase Plan of Merrimac and adjusting outstanding awardsthereunder to give effect to Merrimac's 10% stock dividendpaid June  5,  1998, are hereby incorporated by reference toExhibit 10(g)(2) to Merrimac's Annual Report on Form 10-KSB forthe year ending January  2, 1999.*                                                                                          |
| 10(i)         |  | Resolutions of the Board of Directors of Merrimac, adoptedJune  3,  1998, amending the 1996 Stock Option Plan forNon-Employee Directors of Merrimac and adjusting outstanding awardsthereunder to give effect to Merrimac's 10% stock dividendpaid June  5,  1998, are hereby incorporated by reference toExhibit 10(h)(2)to Merrimac's Annual Report on Form 10-KSB for theyear ending January  2, 1999.*                                                                                                      |
| 10(j)         |  | Amended and Restated Employment Agreement dated as of January1,  1998, between Merrimac and Mason N. Carter is herebyincorporated by reference to Exhibit 10(a) to Merrimac's QuarterlyReport on Form 10-QSB for the period ending July  4,1998.*                                                                                                                                                                                                                                                               |
| 10(k)         |  | Amendment dated August31,  2000 to the Amended and Restated Employment Agreement datedJanuary  1,  1998, between Merrimac and Mason N. Carter ishereby incorporated by reference to Exhibit 10(a) to Merrimac'sQuarterly Report on  Form 10-QSB for the period endingSeptember  30, 2000.*                                                                                                                                                                                                                      |
|               |

72

----

|               |  |                                                                                                                                                                                                                                                           |  |  |  |  |
|---------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| EXHIBITNUMBER |  | DESCRIPTION OF EXHIBIT                                                                                                                                                                                                                                    |
| 10(l)         |  | Amended and RestatedPledge Agreement dated as of May  4,  1998, between Merrimacand Mason N. Carter is hereby incorporated by reference to Exhibit10(c) to Merrimac's Quarterly Report on Form 10-QSB for the periodending July  4, 1998.*                |
| 10(m)         |  | AmendedPromissory Note dated as of May  4,  1998, executed by MasonN. Carter in favor of Merrimac is hereby incorporated by reference toExhibit 10(l) to Merrimac's Annual Report on Form 10-KSB for theyear ending January  2, 1999.*                    |
| 10(n)         |  | Registration Rights Agreement dated as of May  4,  1998,between Merrimac and Mason N. Carter is hereby incorporated byreference to Exhibit 10(e) to Merrimac's Quarterly Report on Form10-QSB for the period ending July  4, 1998.*                       |
| 10(o)         |  | Consulting Agreement dated as of January1,  1998, between Merrimac and Arthur A. Oliner is herebyincorporated by reference to Exhibit 10 to Merrimac's QuarterlyReport on Form 10-QSB for the period ending April  4,1998.*                               |
| 10(p)         |  | Separation Agreement dated asof December  31,  1998, between Merrimac and Eugene W.Niemiec is hereby incorporated by reference to Exhibit 10(p) toMerrimac's Annual Report on Form 10-KSB for the year endingJanuary  2, 1999.*                           |
| 10(q)         |  | Stockholder's Agreement dated as of October  30,1998, between Merrimac and Charles F. Huber II is hereby incorporatedby reference to Exhibit 10 to Merrimac's Quarterly Report on Form10-QSB for the period ending October  3,  1998.                     |
| 10(r)         |  | Shareholder's Agreement dated as ofJune  3,  1999, among Merrimac, William D. Witter, Inc. andWilliam D. Witter is hereby incorporated by reference to Exhibit 10 toMerrimac's Quarterly Report on Form 10-QSB for the period endingJuly  3,  1999.       |
| 10(s)         |  | 2001 KeyEmployee Incentive Plan is hereby incorporated by reference to Exhibit4.01 to Merrimac's Form S-8 (No. 333-63434) dated June  20,2001.*                                                                                                           |
| 10(t)         |  | 2001 Stock Option Plan ishereby incorporated by reference to Exhibit 4.01 to Merrimac'sForm S-8 (No. 333-63436) dated June  20, 2001.*                                                                                                                    |
| 10(u)         |  | 2001 Stock Purchase Plan is hereby incorporatedby reference to Exhibit 4.01 to Merrimac's Form S-8 (No.333-63438) dated June  20, 2001.*                                                                                                                  |
| 10(v)         |  | 2001 Amended and Restated Stock Option Plan is hereby incorporatedby reference to Exhibit 4(i) to Merrimac's Quarterly Report onForm 10-QSB for the period ending June  30, 2001.*                                                                        |
| 10(w)         |  | Financing Agreement, dated October8,  2003, between Merrimac and The CIT Group/Business Credit, Inc.is hereby incorporated by reference to Exhibit 10(qq) toMerrimac’s Form 10-QSB for the period ending September27,  2003.                        |
| 10(x)         |  | Trademark and PatentSecurity Agreement, dated October  8,  2003, between Merrimacand The CIT Group/Business Credit, Inc. is hereby incorporated byreference to  Exhibit 10(rr) to Merrimac’s Form 10-QSB forthe period ending September  27,  2003. |
| 10(y)         |  | Mortgage and Security Agreement, datedOctober  8,  2003, by Merrimac in favor of The CITGroup/Business Credit, Inc. is hereby incorporated by reference toExhibit 10(ss) to Merrimac’s Form 10-QSB for the period endingSeptember  27,  2003.       |
| 10(z)+        |  | Merrimac Severance Plan, as adopted March 29, 2006 and replaces theSeptember 17, 2003 Severance Plan.*                                                                                                                                                    |
| 10(aa)+       |  | Stock Purchase Agreement, dated March 29,2006, between Merrimac and Mason N. Carter.                                                                                                                                                                      |
|               |

73

----

|               |  |                                                                                                                                                |  |  |  |  |
|---------------|--|------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| EXHIBITNUMBER |  | DESCRIPTION OF EXHIBIT                                                                                                                         |
| 21+           |  | Subsidiaries ofMerrimac.                                                                                                                       |
| 23.1+         |  | Consent of IndependentRegistered Public Accounting Firm Grant Thornton LLP.                                                                    |
| 23.2+         |  | Consent of Independent Registered PublicAccounting Firm Ernst & Young LLP.                                                                 |
| 31.1+         |  | Chief Executive Officer's Certificate, pursuant to Section 302of the Sarbanes-Oxley Act of 2002.                                               |
| 31.2+         |  | Chief Financial Officer's Certificate, pursuant to Section 302of the Sarbanes-Oxley Act of 2002.                                               |
| 32.1+         |  | Chief Executive Officer's Certificate, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002. |
| 32.2+         |  | Chief FinancialOfficer's Certificate, pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.  |
|               |

|  |
|--|
|  |  |
|  |

|   |                                                                                    |
|---|------------------------------------------------------------------------------------|
| * | Indicatesthat exhibit is a management contract or compensatory plan orarrangement. |

|   |                                                     |
|---|-----------------------------------------------------|
| + | Indicates thatexhibit is filed as an exhibithereto. |

74

----

MERRIMACINDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE II VALUATIONAND QUALIFYING ACCOUNTS(In thousands)

|                                                     |  |                                 |        |                                 |  |                              |         |            |  |                           |         |        |  |        |         |           |  |        |         |        |  |  |
|-----------------------------------------------------|--|---------------------------------|--------|---------------------------------|--|------------------------------|---------|------------|--|---------------------------|---------|--------|--|--------|---------|-----------|--|--------|---------|--------|--|--|
| Description                                         |  | Balanceat Beginningof Year |        | ChargedtoCosts andExpenses |  | Charged toOtherAccounts |         | Deductions |  | Balanceat End ofYear |
| Deducted from assetaccounts:                        |  |                            |   |                            |  |                         |    |       |  |                      |    |   |  |   |    |      |  |   |    |   |
| For the2003 fiscal year ended January 3,2004   |  |                            |   |                            |  |                         |    |       |  |                      |    |   |  |   |    |      |  |   |    |   |
| Allowance fordoubtful accounts(a)                   |  | $                               | 40     |                            |  | $                            | 17      |       |  | $                         | — |   |  | $      | 7       | (d)  |  | $      | 50      |   |
| Reserve for inventoryobsolescence(b)                |  | $                               | 1,088  |                            |  | $                            | 253     |       |  | $                         | — |   |  | $      | 300     |      |  | $      | 1,041   |   |
| Reserve for cost overruns(b)                        |  | $                               | 146    |                            |  | $                            | 601     |       |  | $                         | — |   |  | $      | — |      |  | $      | 747     |   |
| Restructuringcharges(c)                             |  | $                               | 179    |                            |  | $                            | 160     |       |  | $                         | — |   |  | $      | 236     |      |  | $      | 103     |   |
| Warranty reserve(c)                                 |  | $                               | 150    |                            |  | $                            | — |       |  | $                         | — |   |  | $      | — |      |  | $      | 150     |   |
| Valuationallowance on deferred tax assets           |  | $                               | 1,350  |                            |  | $                            | 496     |       |  | $                         | — |   |  | $      | — |      |  | $      | 1,846   |   |
| Deductedfrom assetaccounts:                         |  |                            |   |                            |  |                         |    |       |  |                      |    |   |  |   |    |      |  |   |    |   |
| For the2004 fiscal year ended January 1,2005   |  |                            |   |                            |  |                         |    |       |  |                      |    |   |  |   |    |      |  |   |    |   |
| Allowance fordoubtful accounts(a)                   |  | $                               | 50     |                            |  | $                            | 30      |       |  | $                         | — |   |  | $      | 21      | (d)  |  | $      | 59      |   |
| Reserve for inventoryobsolescence(b)                |  | $                               | 1,041  |                            |  | $                            | 211     |       |  | $                         | — |   |  | $      | 211     |      |  | $      | 1,041   |   |
| Reserve for cost overruns(b)                        |  | $                               | 747    |                            |  | $                            | 168     |       |  | $                         | — |   |  | $      | 14      |      |  | $      | 901     |   |
| Restructuring charges(c)                            |  | $                               | 103    |                            |  | $                            | — |       |  | $                         | — |   |  | $      | 93      |      |  | $      | 10      |   |
| Warranty reserve(c)                                 |  | $                               | 150    |                            |  | $                            | 28      |       |  | $                         | — |   |  | $      | — |      |  | $      | 178     |   |
| Valuationallowance on deferred tax assets           |  | $                               | 1,846  |                            |  | $                            | — |       |  | $                         | — |   |  | $      | 391     |      |  | $      | 1,455   |   |
| Deducted fromassetaccounts:                         |  |                            |   |                            |  |                         |    |       |  |                      |    |   |  |   |    |      |  |   |    |   |
| For the2005 fiscal year ended December 31,2005 |  |                            |   |                            |  |                         |    |       |  |                      |    |   |  |   |    |      |  |   |    |   |
| Allowance fordoubtful accounts(a)                   |  | $                               | 59     |                            |  | $                            | (9      | )     |  | $                         | — |   |  | $      | — |      |  | $      | 50      |   |
| Reserve for inventory obsolescence(b)               |  | $                               | 1,041  |                            |  | $                            | 99      |       |  | $                         | — |   |  | $      | 106     |      |  | $      | 1,034   |   |
| Reserve for costoverruns(b)                         |  | $                               | 901    |                            |  | $                            | (851    | )     |  | $                         | — |   |  | $      | — |      |  | $      | 50      |   |
| Restructuring charges(c)                            |  | $                               | 10     |                            |  | $                            | — |       |  | $                         | — |   |  | $      | 10      |      |  | $      | — |   |
| Warrantyreserve(c)                                  |  | $                               | 178    |                            |  | $                            | (10     | )     |  | $                         | — |   |  | $      | — |      |  | $      | 168     |   |
| Valuation allowance on deferred tax assets          |  | $                               | 1,455  |                            |  | $                            | 270     |       |  | $                         | — |   |  | $      | 165     |      |  | $      | 1,560   |   |
|                                                     |

|  |
|--|
|  |  |
|  |

|     |                                 |
|-----|---------------------------------|
| (a) | Includedin accounts receivable. |

|     |                       |
|-----|-----------------------|
| (b) | Included ininventory. |

|     |                                 |
|-----|---------------------------------|
| (c) | Included in accruedliabilities. |

|     |                                                                |
|-----|----------------------------------------------------------------|
| (d) | Comprised ofuncollected accounts charged against theallowance. |

75

----

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of theSecurities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

|                      |  |                                      |  |                                                              |  |  |  |  |  |  |
|----------------------|--|--------------------------------------|--|--------------------------------------------------------------|--|--|--|--|--|--|
|                 |  | MERRIMAC INDUSTRIES,INC.(Registrant) |
| Date: March 31, 2006 |  | By:                                  |  | /s/ Mason N. Carter                                          |
|                 |  |                                 |  | Mason N. CarterChairman, President andChiefExecutive Officer |
|                      |

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed belowby the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

|                                                                                                                                                                                    |  |                  |  |                                                                                                                   |  |  |  |  |  |  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------|--|-------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| Signature                                                                                                                                                                          |  | Date             |  | Title                                                                                                             |
|             /s/Mason N. Carter            (Mason N.Carter) |  | March31, 2006    |  | Chairman, PresidentandChief Executive Officer(Principal executive officer andDirector)                            |
|             /s/ AlbertH. Cohen            (Albert H.Cohen) |  | March  24,  2006 |  | Director                                                                                                          |
|            /s/ Edward H.Cohen           (Edward H.Cohen)             |  | March  29,  2006 |  | Director                                                                                                          |
|     /s/ Fernando L.Fernandez    (Fernando L.Fernandez)                                                                                     |  | March  25,  2006 |  | Director                                                                                                          |
|            /s/ Joel H.Goldberg           (Joel H.Goldberg)           |  | March  21,  2006 |  | Director                                                                                                          |
|             /s/David B. Miller            (David B.Miller) |  | March  21,  2006 |  | Director                                                                                                          |
|            /s/ Arthur A.Oliner           (Arthur A.Oliner)           |  | March  29,  2006 |  | Director                                                                                                          |
|          /s/ Harold J.Raveché         (Harold J.Raveché)                   |  | March  21,  2006 |  | Director                                                                                                          |
|          /s/ Robert V.Condon         (Robert V.Condon)                                   |  | March 31, 2006   |  | Vice President, Finance,Treasurer,Secretary and Chief Financial Officer(principalfinancial and accountingofficer) |
|                                                                                                                                                                                    |

----