Exhibit 13

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

2000 compared to 1999

     Consolidated  results of  operations  for 2000  reflect an  increase in net
sales of $2,639,000 or 12.9% to $23,036,000  and a decrease in operating  income
of $54,000 or 10.8% to $444,000  after a first quarter  personnel  restructuring
charge of $315,000, compared to operating income of $498,000 for the prior year.
Net income of  $315,000  was  recorded  for 2000,  after the net  effects of the
personnel  restructuring charge of $189,000,  compared to net income of $242,000
reported  for the prior  year.  Diluted  net income per share for 2000 was $.14,
reflecting the  restructuring  charge of $.08 per diluted  share.  For the prior
year, diluted net income per share of $.14 was also reported.

     The increase in consolidated net sales of $2,639,000 for 2000 was primarily
attributable   to  an  increase  of   $2,524,000   in  net  sales  of  microwave
micro-circuitry  products  from  $3,394,000  in  1999  to  $5,918,000  from  the
Company's  subsidiary Filtran  Microcircuits Inc. ("FMI"),  from the date of its
acquisition  on  February  25,  1999.  An increase in  shipments  of  electronic
components of $115,000 also contributed to the increase.

     Orders of $27,558,000 were received for 2000, which included $7,045,000 for
FMI, an increase  of  $8,094,000  or 41.6%  compared  to  $19,464,000  in orders
received for 1999.  Backlog  increased by $4,522,000 or 73.9% to  $10,640,000 at
year-end 2000 compared to $6,118,000  at year-end  1999.  Customer  requests for
design work are currently under development  utilizing the Company's proprietary
Multi-Mix(R)  Microtechnology.  The  Company  believes  that its  satellite  and
defense customers will continue to increase their orders during fiscal 2001, and
the  Company  anticipates  orders  for  its  new  Multi-Mix(R)   Microtechnology
products,  for  which  a  significant  capital  investment  has  been  made  and
substantial  research and  development  costs have been  incurred.  However,  an
extended   delay  or   reduction   in  new  orders  for  the  new   Multi-Mix(R)
Microtechnology  products  could have a  material  adverse  financial  impact on
future sales and earnings.

     Cost of sales  increased  $1,234,000  or 11.6%,  and as a percentage of net
sales decreased 0.6% to 51.4%. Cost reductions were achieved from  manufacturing
efficiencies  attributable  to a  reduction  in direct  labor and  manufacturing
overhead  costs,  related in part to the transfer of further  production  to the
Costa Rica  manufacturing  facility,  and other  manufacturing cost improvements
resulting  from the first  quarter 2000  personnel  restructuring.  Depreciation
expense  included in cost of sales was $1,504,000,  an increase of $261,000,  of
which $223,000 was associated with Multi-Mix(R)  Microtechnology capital assets.
The increase in  depreciation  expense was a result of higher capital  equipment
purchases in the current and prior years.

     Gross profit for the electronic  components segment of $8,302,000 was 48.5%
of segment net sales of $17,118,000  in 2000 compared to  $8,319,000,  which was
48.9% of segment net sales of  $17,003,000  in the prior year.  Gross profit for
the  microwave  micro-circuitry  segment was  $2,884,000 or 48.7% of segment net
sales of $5,918,000 compared to $1,462,000 or 43.0% of the 1999 period's segment
net sales of $3,394,000.

     Selling,  general  and  administrative  expenses  of  $8,402,000  increased
$1,346,000 or 19.1%, and when expressed as a percentage of net sales,  increased
1.9% to 36.5%. This increase  included $451,000 from FMI to $1,082,000  compared
to $631,000 in 1999 from the date of FMI's acquisition. Other increases resulted
from  higher  sales  commission  expenses,  selling  and  marketing  expenses in
connection with the Company's new Multi-Mix(R) Microtechnology product line, and
incentive compensation and profit sharing payments of $280,000.


                                       -1-
<PAGE>

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

     Amortization   expense  of   $154,000  is   attributable   to  goodwill  of
approximately  $3,100,000  arising from the  acquisition  of FMI, which is being
amortized on a straight-line basis over a life of twenty years, compared to last
year's short post-acquisition period amortization expense of $132,000.

     Research and development expenses for new products were $1,871,000 in 2000,
and decreased  $225,000 or 10.7% compared to the prior year. Except for $292,000
of  expenses  at FMI,  which  declined  by  $151,000  from  the  previous  year,
substantially  all of the  research  and  development  expenses in 2000 were for
Multi-Mix(R)  Microtechnology products. The Company anticipates spending similar
amounts for product development in fiscal year 2001.

     The restructuring charge of $315,000 relates to severance and certain other
costs incurred for the  termination of fifteen  persons during the first quarter
of fiscal  2000,  of which  $296,000  was related to the  electronic  components
segment and $19,000 was related to the microwave  micro-circuitry  segment.  The
operating  loss after the  restructuring  charge for the  electronic  components
segment was $893,000 compared to operating income of $242,000 or 1.4% of segment
net sales in the prior year. Operating income after the restructuring charge for
the  microwave  micro-circuitry  segment was  $1,337,000 or 22.6% of segment net
sales compared to operating income of $256,000 or 7.6% in the prior year.

     Interest  expense,  net was $59,000 for 2000  compared to $220,000  for the
prior year and was  principally  incurred  on  borrowings  under a term loan and
revolving  credit  facility in connection with the acquisition of FMI during the
first  quarter of 1999.  The decrease in 2000 was  primarily  due to  offsetting
interest  income  that arose from  proceeds  related to the  issuance  of common
stock.

     The  provision  for income taxes was $70,000 for 2000 with an effective tax
rate of 18.2%  compared to $35,000 for 1999 with an effective tax rate of 12.6%.
The principal  adjustments  to the statutory  Federal income tax rate of 34% for
2000 relate to $117,000 in tax credits  associated with research and development
expenditures  and foreign sales  corporation tax benefits of $21,000,  partially
offset by a $52,000 cost due to non-deductible amortization of goodwill.

1999 compared to 1998

     Results of operations for 1999 reflect an increase in net sales of $295,000
to  $20,397,000  and an increase in  operating  income of $188,000 to  $498,000,
although a  restructuring  charge of $510,000  was reported in 1998 that reduced
1998 operating income to $310,000. Net income of $242,000 for 1999 decreased 29%
compared to net income of $340,000 for 1998, after the 1998 restructuring charge
net of tax of  $327,000.  Diluted  net  income per share of $.14  decreased  26%
compared to diluted net income per share of $.19,  after the 1998  restructuring
charge of $.18 per share.

     The increase in net sales was attributable to the inclusion of $3.4 million
of net sales of microwave  micro-circuitry products from FMI, which was acquired
on February 25, 1999, partly offset by reduced electronic  components  shipments
of $3.1 million,  resulting from a smaller firm order backlog that existed as of
the  beginning of 1999,  and a reduction  in orders,  resulting  from  decreased
demand for the Company's core products which occurred during 1999.

     Orders of $19,464,000 were received for 1999, which included  $2,900,000 in
new orders for FMI, an increase of $2,952,000 or 17.9%  compared to  $16,512,000
in orders  received  for 1998.  Compared to  year-end  1998,  backlog  decreased
$50,000 to $6,118,000.

     Cost of sales decreased  $931,000 or 8.1%. Cost of sales as a percentage of
net sales  decreased  5.5% to 52.0% for 1999.  The decrease in cost of sales was
achieved from  manufacturing  efficiencies,  reduction in labor  expense,  and a
favorable  sales product mix. These  decreases were primarily  attributable to a
reduction in direct labor and  manufacturing  overhead  costs partly  related to
efficiency  improvements  resulting  from 1998's fourth  quarter  restructuring.
Depreciation  expense  included in cost of sales was $1,243,000,  an increase of
$303,000 that resulted from higher  capital  equipment  purchases in the current
and  prior  years,   of  which   $63,000  was   associated   with   Multi-Mix(R)
Microtechnology capital assets, and $117,000 was due to the acquisition of FMI.


                                       -2-
<PAGE>

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

     Gross profit for the electronics components segment of $8,319,000 was 48.9%
of segment net sales of $17,003,000  in 1999 compared to  $8,554,000,  which was
42.6% of segment net sales of  $20,102,000  in 1998.  Although the percentage of
gross profit  margin  improved 6.3  percentage-points,  the gross profit  amount
decreased  $235,000 or 2.7% as a result of the sales  decline.  Gross profit for
the FMI microwave  micro-circuitry  segment,  which was acquired on February 25,
1999, was $1,462,000 or 43.0% of segment net sales of $3,394,000 in 1999.

     Selling,   general  and  administrative  expenses  of  $7,056,000  in  1999
increased  $375,000 or 5.6%,  and when  expressed as a percentage  of net sales,
increased 1.4% to 34.6% for the year.  Increases in these  expenses  during 1999
were related to new product samples  activity,  and higher selling and marketing
expenses in  connection  with the  Company's  new  Multi-Mix(R)  Microtechnology
product line,  and the inclusion of expenses from recently  acquired FMI.  Also,
the increases in selling,  general and administrative expenses arose from higher
depreciation  expense of $69,000,  and were  partially  offset by a reduction in
compensation costs as a result of the 1998 restructuring.

     Amortization   expense  of   $132,000  is   attributable   to  goodwill  of
approximately  $3,100,000  arising from the  acquisition  of FMI, which is being
amortized on a straight-line basis over a life of twenty years.

     Research  and  development   expenses  for  new  products,   primarily  the
Multi-Mix(R)  Microtechnology,  and the  inclusion  of $443,000  in  development
expenses  from FMI, were  $2,096,000  for 1999, an increase of $1,043,000 or 99%
compared to 1998.

     Operating  income for the  electronics  components  segment was $242,000 in
1999 or 1.4% of segment  net sales  compared to $310,000 or 1.5% of net sales in
1998, which was after the  restructuring  charge of $510,000 in 1998.  Operating
income for the FMI  microwave  micro-circuitry  segment was  $256,000 or 7.6% of
segment net sales.

     Interest expense, net was $221,000 for 1999 and was principally incurred on
borrowings of $2,500,000  for capital  expenditures  under a term loan facility,
and  borrowings of $2,000,000  under a revolving  credit  facility in connection
with the  acquisition  of FMI  during  the  first  quarter  of 1999,  which  was
partially  offset by interest  income.  During 1998, the Company earned interest
income of $110,000 on its invested cash balances.

     The  provision  for income taxes was $35,000 for 1999 with an effective tax
rate of 12.6%  compared to $80,000 for 1998 with an effective tax rate of 19.0%.
The principal  adjustments  to the statutory  Federal income tax rate of 34% for
1999 relate to $91,000 in tax credits  associated  with research and development
expenditures  and foreign sales  corporation tax benefits of $43,000,  partially
offset by a $45,000 cost due to non-deductible amortization of goodwill.

Liquidity and Capital Resources

     The Company had liquid  resources  comprised  of cash and cash  equivalents
totaling  approximately  $3,400,000 at the end of 2000 compared to approximately
$1,100,000 at the end of 1999. The Company's  working capital was  approximately
$9,400,000  and  its  current  ratio  was 3.0 at the  end of  2000  compared  to
$4,200,000 and 1.8,  respectively,  at the end of 1999.  Current  liabilities at
year-end  1999  included  $2,000,000 of  indebtedness  under a revolving  credit
facility,  which the  Company  repaid on April 7,  2000 from the  proceeds  of a
private placement of common stock.


                                       -3-
<PAGE>

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

     The  Company's  operating  activities  provided cash flows of $1,690,000 in
2000 compared to $2,115,000  in 1999.  The primary  reasons for the reduction in
operating cash flows are due to increases in accounts  receivable,  inventories,
which includes $660,000  associated with Multi-Mix(R)  Microtechnology,  current
and other long-term assets, and deferred  compensation  payments,  offset by the
increase in net income,  increases in accounts and income taxes payable, accrued
liabilities,  and higher depreciation and amortization charges. The Company made
net investments in property,  plant and equipment of $3,986,000 in 2000 compared
to $2,463,000 in 1999. These capital  expenditures are related to new production
and test  equipment  capabilities  in connection  with the  introduction  of new
products and enhancements to existing products.  The depreciated cost of capital
equipment  associated  with  Multi-Mix(R)   Microtechnology  was  $4,004,000  at
year-end  2000, an increase of  $2,472,000  compared to $1,532,000 at the end of
the prior year.

     The Company has a $7,000,000  revolving credit and term loan agreement with
Summit Bank (recently  acquired by Fleet National Bank) with an interest rate at
one-half  percent below the bank's  floating  prime rate.  The Company  borrowed
$2,500,000 for capital  expenditures under the term loan facility and $2,000,000
under its revolving  credit  facility in connection  with the acquisition of FMI
during the first quarter of 1999. The  $2,000,000  outstanding at the end of the
prior year under the revolving  credit facility was repaid on April 7, 2000. The
outstanding  term loan balance of $1,667,000 was repaid on October 26, 2000 from
the  proceeds of a private  placement  of common  stock and  warrants.  The full
amount of $4,500,000 of the revolving  credit  facility is available for working
capital and general corporate purposes.

     Management  believes that the $4,500,000  revolving credit facility,  which
has been extended to June 2001,  together with its present liquid  resources and
cash  flows  that are  expected  to be  provided  by  operations,  will  provide
sufficient resources for currently contemplated  operations in fiscal year 2001.
Management  is  currently  discussing  an  extension  of and an  increase in the
Company's lines of credit with its bank.

     The Company  entered  into a stock  purchase and  exclusivity  agreement on
April  7,  2000  with  Ericsson  Microelectronics,  A.B.  and  Ericsson  Holding
International,  B.V.  ("EHI")  pursuant to which the Company sold to EHI 375,000
shares of Company  common stock from its  treasury,  representing  approximately
17.5% of the Company's outstanding common stock after giving effect to the sale,
for an aggregate cash purchase price of $3,375,000.

     On October 26, 2000, the Company entered into  subscription  agreements for
Common Stock and warrants with each of three groups of investors:  (i) investors
led by Adam Smith Investment  Partners,  L.P. and certain of its affiliates (the
"Adam  Smith  Investors"),  (ii) EHI,  and (iii)  three  members of the board of
directors  of  the  Company  (the   "Director   Investors").   Pursuant  to  the
subscription  agreements,  the Company sold to the investors units at a price of
$12.80  per unit,  each  unit  consisting  of one  share of common  stock of the
Company and one three-year  warrant to purchase one  additional  share of common
stock of the Company with an exercise price of $21.25 ("Units"). Pursuant to the
subscription  agreements,  the Adam Smith Investors purchased 240,000 Units, EHI
purchased 100,000 Units and the Director Investors purchased 20,000 Units for an
aggregate  cash  purchase   price  of  $4,608,000.   The  common  stock  portion
represented  approximately  14% of the  outstanding  stock of the Company  after
giving effect to the sales.


                                       -4-
<PAGE>

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

     The  Company's  capital   expenditures  for  new  projects  and  production
equipment has exceeded its depreciation and amortization expenses in fiscal 2000
by  approximately  $2,100,000,  and it is  anticipated  that it will  exceed its
depreciation  and  amortization  expenses in fiscal 2001. The Company has issued
purchase order  commitments to processing  equipment  vendors for  approximately
$2,000,000  for capital  equipment and $700,000 to a general  contractor for the
initial stage of a 19,200  square-foot  building  addition to its West Caldwell,
New Jersey  manufacturing  facility,  which is projected  to cost  approximately
$4,300,000,  including  improvements  to  the  existing  facility.  The  Company
anticipates that such equipment will be purchased and become operational and the
building expansion and improvements will be completed during fiscal 2001.

     Effective  January 2001, the Company has modified its existing  lease,  and
entered into a resource sharing  arrangement with a previous  customer,  for its
Costa Rica  manufacturing  facility,  reducing the size to  approximately  8,200
square-feet and extending the lease to December 2004.

     In February 2001, the Company  entered into a new five-year  lease in Costa
Rica for approximately 36,200 square-feet for a new Multi-Mix(R) Microtechnology
manufacturing facility.

     The Company has been  authorized by its Board of Directors to repurchase up
to 110,000  shares of its common stock,  from time to time,  depending on market
conditions.  During 1999, the Company  repurchased 56,000 shares of common stock
at a cost of $346,000.  No shares were repurchased during fiscal 2000 and 12,000
shares were  repurchased  prior to 1999. The Company is authorized to repurchase
up to 42,000 additional shares under the program.

     Periodically,  the Company  explores the  possibility of acquiring  similar
manufacturers of electronic  devices or companies in related fields.  Management
believes that any such  acquisitions and business  operation  expansion could be
financed  through  its liquid  and  capital  resources  currently  available  as
previously  discussed and/or through additional  borrowing or issuance of equity
or debt securities.  The additional debt from any acquisitions,  if consummated,
would  increase  the  Company's  debt-to-equity  ratio  and such  debt or equity
securities  might,  at least in the near  term,  have a  dilutive  effect on net
income per share. In February 1999, the Company acquired  Filtran  Microcircuits
Inc. See Notes to Consolidated Financial Statements.

Recent Accounting Pronouncements

     In June 2000, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  ("SFAS")  No.  138,  "Accounting  for  Certain
Derivative Instruments and Certain Hedging Activities," an amendment to SFAS No.
133,  "Accounting  for Derivative  Instruments  and Hedging  Activities,"  which
defers  implementation  of SFAS No. 133 to fiscal years beginning after June 15,
2000.  SFAS No. 133  establishes  new  accounting  and  reporting  standards and
requires  that  every  derivative   instrument   (including  certain  derivative
instruments embedded in other contracts) be recorded as assets or liabilities in
the balance sheet measured at fair value.  SFAS No. 133 requires that changes in
the fair  value of  derivatives  be  recognized  currently  in  earnings  unless
specific  hedge  accounting  criteria  are met.  The Company does not expect the
adoption of these  statements  in January 2001 to have a material  impact on the
Company's financial position, results of operations or cash flows.

     In December  1999,  the  Securities  and Exchange  Commission  issued Staff
Accounting  Bulletin  No. 101 ("SAB  101")  "Revenue  Recognition  in  Financial
Statements," which provides  additional  guidance on revenue recognition as well
as  criterion  when  revenue is generally  realized  and earned.  The  Company's
financial  statements reflect the accounting guidance in SAB 101 for all periods
presented.


                                       -5-
<PAGE>

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

Forward-Looking Statements

     This Annual Report on Form 10-KSB  contains  statements  relating to future
results of the Company (including certain  projections and business trends) that
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of  certain  risks and  uncertainties.  These  risks and  uncertainties
include,  but are not limited to:  general  economic  and  industry  conditions;
slower than anticipated penetration into the satellite  communications,  defense
and wireless  markets;  the risk that the benefits expected from the acquisition
of  Filtran  Microcircuits  Inc.  are  not  realized;  the  ability  to  protect
proprietary  information  and  technology;   competitive  products  and  pricing
pressures;  the risk  that the  Company  will not be able to  continue  to raise
sufficient  capital to expand its  operations as currently  contemplated  by its
business  strategy;   risks  relating  to  governmental  regulatory  actions  in
communications and defense programs; risks associated with demand for and market
acceptance of existing and newly developed products;  and inventory risks due to
technological  innovation and product  obsolescence,  as well as other risks and
uncertainties,  including but not limited to those detailed from time to time in
the Company's Securities and Exchange Commission filings.  These forward-looking
statements  are made only as of the date hereof,  and the Company  undertakes no
obligation  to update or revise  the  forward-looking  statements,  whether as a
result of new information, future events or otherwise.


                                       -6-
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Merrimac Industries, Inc.:

     We have audited the  accompanying  consolidated  balance sheets of Merrimac
Industries,  Inc. and  Subsidiaries as of December 30, 2000 and January 1, 2000,
and the related consolidated  statements of operations and comprehensive income,
shareholders'  equity and cash  flows for each of the three  years in the period
ended December 30, 2000. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly,  in all material  respects,  the financial  position of Merrimac
Industries,  Inc. and  Subsidiaries as of December 30, 2000 and January 1, 2000,
and the results of their  operations  and cash flows for each of the three years
in the period ended December 30, 2000 in conformity with  accounting  principles
generally accepted in the United States.



                                                       /s/ ARTHUR ANDERSEN LLP
                                                       -----------------------
                                                           ARTHUR ANDERSEN LLP






Roseland, New Jersey
March 1, 2001


                                      -7-

<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999
<TABLE>
<CAPTION>
                                                                   2000             1999            1998
                                                               -----------      -----------      -----------
<S>                                                           <C>              <C>              <C>
OPERATIONS
Net sales .................................................    $23,035,682      $20,397,031      $20,101,835
                                                               -----------      -----------      -----------
Costs and expenses:
   Cost of sales ..........................................     11,849,929       10,616,404       11,547,529
   Selling, general and administrative ....................      8,401,571        7,055,785        6,680,968
   Research and development ...............................      1,870,745        2,095,498        1,052,812
   Amortization of goodwill ...............................        154,216          131,718              -
   Restructuring charge ...................................        315,000              -            510,311
                                                               -----------      -----------      -----------

                                                                22,591,461       19,899,405       19,791,620
                                                               -----------      -----------      -----------
Operating income ..........................................        444,221          497,626          310,215
Interest and other expense (income), net ..................         59,165          220,371         (110,085)
                                                               -----------      -----------      -----------
Income before income taxes ................................        385,056          277,255          420,300
Provision for income taxes ................................         70,000           35,000           80,000
                                                               -----------      -----------      -----------

Net income ................................................    $   315,056      $   242,255      $   340,300
                                                               ===========      ===========      ===========


Net income per common share-basic .........................           $.15             $.14             $.19
Net income per common share-diluted .......................           $.14             $.14             $.19
                                                               -----------      -----------      -----------
Weighted average number of shares outstanding-basic........      2,134,542        1,746,968        1,766,120
Weighted average number of shares outstanding-diluted......      2,309,807        1,765,831        1,805,212
                                                               -----------      -----------      -----------
COMPREHENSIVE INCOME

Net income.................................................    $   315,056      $   242,255      $   340,300
Comprehensive income (loss):
  Foreign currency translation adjustment..................       (193,564)         142,589              -
                                                               -----------      -----------      -----------
Comprehensive income.......................................    $   121,492      $   384,844      $   340,300
                                                               ===========      ===========      ===========
</TABLE>
See accompanying notes.


                                       -8-
<PAGE>

CONSOLIDATED BALANCE SHEETS

December 30, 2000 and January 1, 2000
<TABLE>
<CAPTION>
                                                                                    2000           1999
                                                                                -----------     -----------
<S>                                                                            <C>             <C>
Assets
Current assets:
   Cash and cash equivalents ...............................................    $ 3,425,390     $ 1,108,141
   Accounts receivable, net.................................................      5,617,085       3,774,796
   Income tax refunds receivable............................................         42,924         427,330
   Inventories..............................................................      3,627,535       2,913,423
   Other current assets ....................................................        384,224         386,507
   Deferred tax assets .....................................................        871,000         744,000
                                                                                -----------     -----------
                  Total current assets .....................................     13,968,158       9,354,197
                                                                                -----------     -----------
Property, plant and equipment, at cost .....................................     22,789,788      19,213,264
   Less accumulated depreciation and amortization .. .......................     12,770,791      11,337,477
                                                                                -----------     -----------
Property, plant and equipment, net..........................................     10,018,997       7,875,787

Other assets ...............................................................        752,381         563,507
Goodwill, net of accumulated amortization of $285,934 and $131,718..........      2,774,248       3,047,623
                                                                                -----------     -----------
                  Total Assets .............................................    $27,513,784     $20,841,114
                                                                                ===========     ===========
Liabilities and Shareholders' Equity

Current liabilities:
   Current portion of long-term debt .......................................    $   119,932     $ 2,627,267
   Accounts payable ........................................................      2,838,198       1,164,584
   Accrued liabilities .....................................................      1,432,128       1,311,791
   Income taxes payable.....................................................        173,000             -
                                                                                -----------     -----------
                  Total current liabilities ................................      4,563,258       5,103,642

Long-term debt, net of current portion .....................................        402,828       1,769,447
Deferred compensation ......................................................        185,406         234,734
Deferred tax liabilities ...................................................        458,000         232,000
                                                                                -----------     -----------
                  Total liabilities ........................................      5,609,492       7,339,823
                                                                                -----------     -----------

Commitments and contingencies

Shareholders' equity:
   Common stock, par value $.50 per share;
      5,000,000 shares authorized; 2,805,373 and 2,698,309 shares issued ...      1,402,686       1,349,154
   Common stock warrants....................................................        837,200             -
   Additional paid-in capital ..............................................     12,608,146      11,256,532
   Retained earnings .......................................................      9,507,366       9,192,310
   Accumulated comprehensive income (loss)..................................        (50,975)        142,589
                                                                                -----------     -----------
                                                                                 24,304,423      21,940,585

   Less treasury stock, at cost - 208,904 and 958,904 shares................     (1,760,131)     (8,079,294)
   Less loan to officer-shareholder ........................................       (640,000)       (360,000)
                                                                                -----------     -----------
                  Total shareholders' equity ...............................     21,904,292      13,501,291
                                                                                -----------     -----------
                  Total Liabilities and Shareholders' Equity ...............    $27,513,784     $20,841,114
                                                                                ===========     ===========
</TABLE>

See accompanying notes.


                                       -9-
<PAGE>

<TABLE>
<CAPTION>


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

                                                    Common     Additional              Accumulated                        Loan to
                                 Common Stock        Stock       Paid-in    Retained  Comprehensive   Treasury  Stock     Officer-
                              Shares     Amount    Warrants(A)  Capital(B)  Earnings   Income(Loss)   Shares   Amount    Shareholder
                             -------------------------------------------------------------------------------------------------------
<S>                          <C>        <C>         <C>       <C>           <C>          <C>         <C>       <C>         <C>
                             -------------------------------------------------------------------------------------------------------
Balance, January 3, 1998     2,651,131  $1,325,566  $    -    $ 9,709,244  $10,995,086   $   -      1,074,839  $9,227,065   $105,000
                             -------------------------------------------------------------------------------------------------------
Net income..................                                                   340,300
Exercise of options.........    39,274      19,637                326,811
Tax benefit-stock options*..                                       40,122
Issuance of stock options**.                                       53,100
Cash dividends..............                                                    (1,009)
Stock dividend..............                                    1,008,288   (2,384,322)              (160,290) (1,376,026)
Purchase of common stock....                                                                            8,000      54,525
Sale of common stock........                                       83,308                             (20,000)   (171,692)
Loan to officer-shareholder.                                                                                                 255,000
                             -------------------------------------------------------------------------------------------------------
Balance, January 2, 1999.... 2,690,405   1,345,203       -     11,220,873    8,950,055       -        902,549   7,733,872    360,000
                             -------------------------------------------------------------------------------------------------------
Net income..................                                                   242,255
Exercise of options.........     7,904       3,951                 35,659
Purchase of common stock....                                                                           56,355     345,422
Foreign currency translation                                                             142,589
                             -------------------------------------------------------------------------------------------------------
Balance, January 1, 2000.... 2,698,309   1,349,154       -     11,256,532    9,192,310   142,589      958,904   8,079,294    360,000
                             -------------------------------------------------------------------------------------------------------
Net income..................                                                   315,056
Exercise of options.........   107,064      53,532                893,369
Sale of common stock........                                      458,245                            (750,000) (6,319,163)
Sale of common stock warrants                        837,200
Loan to officer-shareholder.                                                                                                 280,000
Foreign currency translation                                                            (193,564)
                             -------------------------------------------------------------------------------------------------------
Balance, December 30, 2000   2,805,373  $1,402,686  $837,200  $12,608,146  $ 9,507,366  $(50,975)     208,904  $1,760,131   $640,000
                             =======================================================================================================
</TABLE>


(A) Common stock warrants for 360,000 shares of common stock are exercisable at
    $21.25 per share and expire October 26, 2003.

(B) Tax benefits associated with the exercise of employee stock options are
    recorded to additional paid-in capital when such benefits are realized.

*   Tax benefit resulting from exercise  of stock options and subsequent
    disposition of stock.

**  Compensation expense, net of tax effect, from issuance of stock options at
    a discount from fair market value.


See accompanying notes.



                                      -10-
<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999
<TABLE>
<CAPTION>
                                                                   2000             1999            1998
                                                               -----------      -----------      -----------
<S>                                                           <C>              <C>              <C>
Cash flows from operating activities:
    Net income ............................................    $   315,056      $   242,255      $   340,300
    Adjustments to reconcile net income to net cash
      provided by operating activities:
        Depreciation and amortization .....................      1,842,679        1,503,752        1,103,142
        Amortization of goodwill ..........................        154,216          131,718              -
        Deferred compensation .............................         13,219           37,084          287,622
        Deferred income taxes .............................        330,000          330,000           88,000
        Stock-based compensation expense ..................            -                -             87,400
        Changes in operating assets and liabilities
         net of acquisition in 1999:
          Income tax refunds receivable....................        351,622           (7,686)        (413,018)
          Accounts receivable .............................     (1,842,289)         695,392         (663,844)
          Inventories .....................................       (714,112)         391,911        1,407,313
          Other current assets ............................         35,068           65,053         (209,703)
          Deferred tax assets .............................       (231,000)           3,000           25,313
          Other assets ....................................       (188,874)        (206,977)        (205,736)
          Accounts payable ................................      1,673,614         (497,055)         337,505
          Accrued liabilities .............................        319,860         (297,103)         154,748
          Income taxes payable ............................        173,000          (15,114)         (45,825)
          Deferred compensation ...........................       (262,071)        (261,272)         (52,500)
          Loan to officer-shareholder......................       (280,000)             -                -
                                                               -----------      -----------      -----------
Net cash provided by operating activities .................      1,689,988        2,114,958        2,240,717
                                                               -----------      -----------      -----------
Cash flows from investing activities:
  Cash acquired with acquisition...........................            -            203,323              -
  Acquisition of business .................................            -         (4,700,402)             -
  Purchases of capital assets .............................     (4,018,931)      (2,465,277)      (3,149,336)
  Proceeds from sales of capital assets ...................         33,041            1,683           23,645
                                                               ------------     -----------      -----------
Net cash used in investing activities .....................     (3,985,890)      (6,960,673)      (3,125,691)
                                                               -----------      -----------      -----------
Cash flows from financing activities:
    Debt assumed with acquisition .........................            -            451,126              -
    Borrowing under term loan .............................            -          2,500,000              -
    Borrowing under revolving credit facility .............            -          3,000,000              -
    Borrowing under lease facility.........................        343,500              -                -
    Repayment of borrowings ...............................     (4,217,453)      (1,554,412)             -
    Repurchase of common stock ............................            -           (345,422)         (54,525)
    Proceeds from the issuance of common stock and
      common stock warrants, net...........................      7,614,608              -                -
    Proceeds from the exercise of stock options............        946,901           39,610          378,449
    Payment of dividends ..................................            -                -             (1,009)
                                                               -----------      -----------      -----------
Net cash provided by financing activities .................      4,687,556        4,090,902          322,915
                                                               -----------      -----------      -----------
Effect of exchange rate changes............................        (74,405)          10,288              -
                                                               -----------      -----------      -----------
Net increase (decrease) in cash and cash equivalents ......      2,317,249         (744,525)        (562,059)
Cash and cash equivalents at beginning of year ............      1,108,141        1,852,666        2,414,725
                                                               -----------      -----------      -----------
Cash and cash equivalents at end of year ..................    $ 3,425,390      $ 1,108,141      $ 1,852,666
                                                               ===========      ===========      ===========
Supplemental disclosures of cash flow information:
   Cash paid during the year for:
     Income taxes .........................................    $    38,000      $   139,000      $   390,000
     Loan interest ........................................    $   223,000      $   279,000              -
                                                               ===========      ===========      ===========

Supplemental disclosure of non-cash investing activity:

     Loan to officer-shareholder ..........................            -                -        $   255,000
                                                               ===========      ===========      ===========
</TABLE>
See accompanying notes.


                                      -11-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

1. Summary of significant accounting policies

     Principles of consolidation:  The financial statements include the accounts
of the Company and its wholly-owned  subsidiaries.  All significant intercompany
accounts have been eliminated in consolidation.

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

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

     Contract  revenues:  Sales  and  related  cost of sales  under  fixed-price
contracts are recorded as deliveries are made. Prior to shipment,  manufacturing
costs  incurred on such  contracts  are  recorded as work in process  inventory.
Anticipated  future losses on contracts  are charged to income when  identified.
Revenue related to  non-recurring  engineering  charges is generally  recognized
upon shipment of initial production units or based on contractually  established
stages of completion.

     Investments:  The Company  follows the provisions of Statement of Financial
Accounting  Standards No. 115,  "Accounting for Certain  Investments in Debt and
Equity Securities".  Available-for-sale  securities are carried at quoted market
values.  Unrealized  gains and losses are  included as a separate  component  of
shareholders' equity.  Realized gains and losses,  determined using the specific
identification method, are included in income in the period incurred.

     Inventories: Inventories are valued at the lower of average cost or market.
Provision is made for potential  losses on slow moving and obsolete  inventories
when identified.

     Foreign  currency  translation:  The financial  statements of the Company's
foreign  subsidiaries  have been translated into U.S. dollars in accordance with
Statement  of  Financial   Accounting   Standards  No.  52,  "Foreign   Currency
Translation".  This  statement  provides  that all  balance  sheet  accounts  be
translated at year-end rates of exchange,  except  shareholders' equity accounts
translated at historical  rates.  Income and expense  accounts are translated at
the  average  of  exchange  rates in  effect  during  the  year.  The  resulting
translation  adjustment  is reported as a separate  component  of  shareholders'
equity  and  accumulated   comprehensive   income.   Realized  foreign  exchange
transaction gains and losses, which are not material, are included in income.

     Comprehensive  Income:  In June 1997,  the Financial  Accounting  Standards
Board issued  Statement of Financial  Accounting  Standards No. 130,  "Reporting
Comprehensive Income ("SFAS 130")". SFAS 130 defines comprehensive income, which
includes items in addition to those reported in the statement of operations, and
requires disclosures about the components of comprehensive income. Comprehensive
income includes all changes in shareholders' equity during a period except those
resulting from investments by or distributions to shareholders.  The Company has
determined the components of comprehensive income impacting the Company consists
primarily of cumulative translation adjustments.

     Reclassifications:  Certain  prior-year  amounts have been  reclassified to
conform to the current year presentation.



                                       -12-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

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

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

     Assets under  construction are not depreciated  until the assets are placed
into service. Fully depreciated assets included in property, plant and equipment
at December 30, 2000 and January 1, 2000 amounted to $7,428,000 and  $7,218,000,
respectively.

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

     Goodwill: Goodwill represents the excess of cost over the fair value of net
assets of an acquired business. The cost is being amortized over a 20 year life
using the  straight-line  method.  Goodwill is reviewed for impairment  whenever
events and changes in circumstances indicate that the carrying amount may not be
recoverable.

     Advertising:  The Company expenses the cost of advertising and promotion as
incurred.  Advertising  costs  charged  to  operations  were  $215,000  in 2000,
$195,000 in 1999 and $213,000 in 1998.

     Income taxes:  The Company uses the liability  method to account for income
taxes.  Under this method,  deferred tax assets and  liabilities  are determined
based on temporary  differences  between  financial  reporting  and tax bases of
assets and  liabilities,  and are measured  using the enacted tax rates and laws
that will be in effect when the differences  are expected to reverse.  Valuation
allowances are  established  when necessary to reduce deferred tax assets to the
amount  expected to be realized.  Tax benefits  associated  with the exercise of
stock  options are recorded to  additional  paid-in  capital in the year the tax
benefits are realized.

     Savings and Investment Plan: The Company's Savings and Investment Plan is a
401(k) plan (the "Plan") that  provides  eligible  employees  with the option to
defer and  invest up to 16% of their  compensation,  with 50% of the first 6% of
such savings  matched by the Company.  The Company's  contributions  to the Plan
were  $163,000  in 2000,  $165,000 in 1999 and  $167,000  in 1998.  The Board of
Directors may also  authorize a  discretionary  amount to be  contributed to the
Plan and allocated to eligible employees annually. The amount contributed to the
Plan was $45,000 in 2000. No discretionary  contribution amounts were authorized
for 1999 and 1998.

     Stock-based  compensation:  Effective  December  31,  1995,  the  Financial
Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation,"  which  permitted the Company to elect to account for stock-based
compensation arising under its stock option and stock subscription plans and key
employee  incentive  plan by using a fair value based  method or  continuing  to
measure  compensation  expense  using the intrinsic  value method  prescribed by
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees". The Company has elected to continue using the intrinsic value method
and make the pro forma  disclosures  required by Statement No. 123 of net income
and net income per share as if the fair value  based  method of  accounting  had
been applied (see Note 8). Since the Company generally grants options and rights
to  subscribe to purchase  shares at or near the market price of the  underlying
share on the date of grant,  it will not be required to  recognize  compensation
expense as a result of such grants.


                                      -13-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

     Research  and  development:   Research  and  development   expenditures  of
$1,871,000 in 2000,  $2,096,000 in 1999 and  $1,053,000 in 1998 were expensed as
incurred.

     Net income per share:  Effective  January 3, 1998, the Company  adopted the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share," which  establishes the new standard for computation and  presentation of
net income per common  share.  Under the  standard,  both basic and  diluted net
income  per  common  share are  presented.

     Basic net income per common  share is  calculated  by dividing  net income,
less dividends on preferred stock, if any, by the weighted average common shares
outstanding during the period.

     The  calculation  of diluted net income per common share is similar to that
of basic net income per common share,  except that the  denominator is increased
to  include  the  number  of  additional  common  shares  that  would  have been
outstanding  if  all  potentially  dilutive  common  shares,  principally  those
issuable under stock options, were issued during the reporting period (see Notes
8 and 12).

     Accounting  period:  The  Company's  fiscal  year is the 52-53 week  period
ending on the Saturday  closest to December 31. The Company has quarterly  dates
that  correspond  with the  Saturday  closest  to the last day of each  calendar
quarter and each  quarter  consists of 13 weeks in a 52-week  year.  Every fifth
year,  the  additional  week to make a 53-week  year  (fiscal  year 1997 was the
latest  and fiscal  year 2002 will be the next) is added to the fourth  quarter,
making such quarter consist of 14 weeks.

     Recent Accounting  Pronouncements:  In June 2000, the Financial  Accounting
Standards Board issued Statement of Financial  Accounting Standards ("SFAS") No.
138,  "Accounting  for  Certain  Derivative   Instruments  and  Certain  Hedging
Activities,"   an  amendment  to  SFAS  No.  133,   "Accounting  for  Derivative
Instruments and Hedging Activities," which defers implementation of SFAS No. 133
to fiscal years  beginning  after June 15, 2000.  SFAS No. 133  establishes  new
accounting and reporting standards and requires that every derivative instrument
(including  certain  derivative  instruments  embedded  in other  contracts)  be
recorded as assets or  liabilities  in the balance sheet measured at fair value.
SFAS No.  133  requires  that  changes  in the  fair  value  of  derivatives  be
recognized  currently in earnings unless specific hedge accounting  criteria are
met.  The Company does not expect the  adoption of these  statements  in January
2001 to have a material impact on the Company's financial  position,  results of
operations or cash flows.

     In December  1999,  the  Securities  and Exchange  Commission  issued Staff
Accounting  Bulletin  No. 101 ("SAB  101")  "Revenue  Recognition  in  Financial
Statements," which provides  additional  guidance on revenue recognition as well
as  criterion  when  revenue is generally  realized  and earned.  The  Company's
financial  statements reflect the accounting guidance in SAB 101 for all periods
presented.


                                      -14-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

2. Private Placements of Common Stock and Warrants to Purchase Common Stock

     On April 7, 2000, the Company entered into a stock purchase and exclusivity
agreement with Ericsson Microelectronics, A.B. ("Ericsson") and Ericsson Holding
International,  B.V.  ("EHI")  pursuant to which the Company sold to EHI 375,000
newly issued shares of Company common stock, representing approximately 17.5% of
the Company's  outstanding  common stock after giving effect to the sale, for an
aggregate purchase cash price of $3,375,000.  The stock purchase and exclusivity
agreement  also  provides  that the  Company  will  design,  develop and produce
exclusively for Ericsson  Multi-Mix(R) products that incorporate active RF power
transistors   for  use  in  wireless  base  station   applications,   television
transmitters  and certain  other  applications  that are intended for  Bluetooth
transceivers  and that the Company will  generally be the priority  supplier for
such  products.  Accordingly,  Ericsson  will  receive  first  priority  on  all
Multi-Mix(R)  resources of the Company and will have priority  access to Filtran
Microcircuit Inc. proprietary technology and manufacturing capabilities.

     In  connection  with EHI's  purchase of the  Company's  common  stock,  the
Company and EHI also entered into a registration rights agreement which provides
EHI with two demand registrations at any time following April 7, 2002.

     On October 26, 2000, the Company entered into  subscription  agreements for
common stock and warrants with each of three groups of  investors:  (i)investors
led by Adam Smith Investment  Partners,  L.P. and certain of its affiliates (the
"Adam  Smith  Investors"),  (ii) EHI,  and (iii)  three  members of the board of
directors  of  the  Company  (the   "Director   Investors").   Pursuant  to  the
subscription  agreements,  the Company sold to the investors units at a price of
$12.80  per unit,  each  unit  consisting  of one  share of common  stock of the
Company and one three-year  warrant to purchase one  additional  share of common
stock of the Company with an exercise price of $21.25 ("Units"). Pursuant to the
subscription  agreements,  the Adam Smith Investors purchased 240,000 Units, EHI
purchased 100,000 Units and the Director Investors purchased 20,000 Units for an
aggregate  cash  purchase   price  of  $4,608,000.   The  common  stock  portion
represented  approximately  14% of the  outstanding  stock of the Company  after
giving effect to the sales.

     The warrants were valued using the  Black-Scholes  option  valuation  model
with  a  resulting   allocation  of  the  aggregate   proceeds  from  the  Units
attributable  to the warrants of $837,200,  net of issue  costs.  The  following
assumptions were utilized to value the warrants: price per share of common stock
of $15.25; expected life of three years; expected volatility of 40%; a risk free
interest rate of 6%; an expected yield of 0.0%; and a liquidity discount of 33%.

     In  connection  with the  purchase by EHI and the Adam Smith  Investors  of
Merrimac  common  stock  and  warrants,  the  Company,  EHI and the  Adam  Smith
Investors also entered into registration rights agreements which provide EHI and
the  Adam  Smith  Investors  each  with  two  demand  registrations  at any time
following October 26, 2002.


                                      -15-

<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and January 2, 1999

3. Acquisition of Filtran Microcircuits Inc.

     In February  1999,  the Company  completed  the  acquisition  of all of the
outstanding  stock of  privately  held  Filtran  Microcircuits  Inc.  ("FMI") of
Ottawa,  Ontario,  Canada.  FMI,  which  had 1998  sales of  approximately  $3.2
million, is a manufacturer of microwave  micro-circuitry.  The purchase price of
$4,700,000 which included  $203,000 cash and included the assumption of $451,000
existing  indebtedness,  was  financed by utilizing  an existing  unused  credit
facility.   The  acquisition  has  been  accounted  for  as  a  purchase,   and,
accordingly,  the purchase price has been allocated to the underlying assets and
liabilities  based on their  estimated  fair values at the date of  acquisition,
with the excess cost of $3,179,000 initially recorded as goodwill which is being
amortized over 20 years.

     The  unaudited  pro forma  combined  results  for the  comparative  periods
presented for 2000,  as if FMI had been  acquired at the beginning of 1998,  are
estimated to be as follows:


                                                         1999           1998
                                                      -----------   -----------
  Net sales ......................................    $21,027,000   $23,425,000
  Net income .....................................        201,000        88,000
  Diluted net income per share ...................           $.11          $.05


     The  pro  forma  results  are  based  on  various  assumptions  and are not
necessarily  indicative of what would have actually occurred had the acquisition
and related financing  transactions been completed at the beginning of 1998, nor
are they necessarily indicative of future consolidated results.

4. Inventories

Inventories consist of the following:

                                                         2000           1999
                                                      -----------    ----------

Finished goods ...................................     $  363,387    $  666,186
Work in process ..................................      1,493,784     1,004,037
Raw materials and
  purchased parts ................................      1,770,364     1,243,200
                                                       ----------    ----------
                                                       $3,627,535    $2,913,423
                                                       ==========    ==========

     Total  inventories  are net of valuation  allowances  for  obsolescence  of
$1,018,000 in 2000 and $1,166,000 in 1999. The Company  disposed of $300,000 and
$414,000 of obsolete inventories in 2000 and 1999, respectively.

5. Property, plant and equipment

Property, plant and equipment consists of the following:

                                                         2000          1999
                                                      -----------   -----------

Land and land improvements .......................    $   673,220   $   658,776
Building .........................................      2,891,844     2,816,542
Machinery and equipment ..........................     12,395,396     9,643,004
Office equipment,
   furniture and fixtures ........................      6,829,328     6,094,942
                                                      -----------   -----------
                                                      $22,789,788   $19,213,264
                                                      ===========   ===========


                                      -16-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and January 2, 1999

6. Current and long-term debt:

The Company was obligated under the following debt instruments at
December 30, 2000 and January 1, 2000:
<TABLE>
<CAPTION>
                                                                     2000          1999
                                                                    -------     ----------
<S>                                                                 <C>        <C>
Summit Bank:
Revolving credit facility, interest 1/2% below prime,
due June 2001 (A)................................................    $  -       $2,000,000
Term loan, interest 1/2% below prime, due December 2003(A)......        -        2,041,667

The Bank of Nova Scotia:
Equipment loans, interest prime plus 1% due November 2000(B).....       -           56,042
Capital leases, interest 7.0%, due October 2003..................   211,600        299,005
Capital leases, interest 8.7%, due May 2005......................   311,160            -
                                                                    -------     ----------
                                                                    522,760      4,396,714
Less current portion.............................................   119,932      2,627,267
                                                                   --------     ----------
Long-term portion................................................  $402,828     $1,769,447
                                                                   ========     ==========
</TABLE>

     (A) The Company has entered  into a  $7,000,000  revolving  credit and term
loan  agreement  with Summit Bank,  with interest at one-half  percent below the
bank's  floating prime rate. Up to $4,500,000 was available at December 30, 2000
for future  borrowing  needs of the  Company  for  working  capital  and general
corporate  purposes.  The Company has extended its revolving credit facility due
date to June 30,  2001.  The full amount  outstanding  of the  revolving  credit
facility  was  repaid  April 7,  2000.  The  outstanding  term loan  balance  of
$1,667,000  was  repaid  on  October  26,  2000.  The term loan was  secured  by
$2,500,000 of tangible personal property.

     The weighted average  interest rate on borrowings  during 2000 was 8.3% and
7.4% in 1999.  The interest rate was 9.0% at the end of 2000 and 7.5% at the end
of 1999.

     (B) The weighted  average  interest rate on equipment loans during 2000 was
8.4% and 7.5% during 1999.  The rate at the end of 1999 was 8.0%.  There were no
borrowings at December 30, 2000.  The equipment  loans were covered by a general
security agreement.

     At December 30, 2000 and January 1, 2000,  the fair value of the  Company's
debt approximates carrying value. The fair value of the Company's long-term debt
is estimated based on current interest rates.

     Capital  leases  included in property,  plant and  equipment,  net,  have a
depreciated cost of approximately  $192,000 at December 30, 2000 and $138,000 at
January 1, 2000.

     The payments required under the long-term  obligations  listed above during
the years following December 30, 2000 are set forth below:

                               2001 ................................    119,932
                               2002 ................................    191,230
                               2003 ................................     56,725
                               2004 ................................     61,744
                               2005 ................................     93,129

7. Accrued liabilities

Accrued liabilities consist of the following:
                                                      2000              1999
                                                   ----------        ----------
Commissions ...................................... $  362,623        $  181,720
Vacation .........................................    107,439           103,041
Employee compensation ............................    317,177           145,290
Warranty reserve .................................    150,000           150,000
Deferred compensation ............................     48,980           248,504
Other  ...........................................    445,909           483,236
                                                   ----------        ----------
                                                   $1,432,128        $1,311,791
                                                   ==========        ==========


                                      -17-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999


8. Stock option and stock purchase plans

     Under the Company's 1993 Stock Option Plan,  324,210 shares of common stock
were initially reserved for issuance. The 1993 Option Plan provides for issuance
of qualified and non-qualified  options. The qualified options may not be issued
at less than 100% of the fair  market  value of the  shares on the date of grant
and they may be exercised at any time between one and ten years from the date of
grant.  The  non-qualified  options may be granted to  employees  at an exercise
price  determined by the Stock Option  Committee of the Board of Directors which
may not be less than par value. Such options may become exercisable  immediately
after the grant and/or at any time before the tenth anniversary of the grant. As
of December  30,  2000,  options for the  purchase of a total of 191,070  shares
remained  outstanding  of which  178,570 are  exercisable  under the 1993 Option
Plan, and options for 23,375 shares were available for future grant.

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

     In 1997,  the Company's  Shareholders  approved a long-term  incentive plan
("LTIP")  pursuant to which 275,000  shares of the  Company's  common stock were
initially  reserved  for grant to  eligible  employees.  The LTIP  provides  for
issuance of Incentive Stock Options,  Non-qualified  Stock Options,  Bonus Stock
and  Discounted  Stock  Options.  Under  this  plan,  the  Company  may grant to
employees  who  hold  positions  no  more  senior  than  mid-level   management,
discounted  stock  options for up to 110,000  shares of common  stock,  with the
option price per share of common  stock to be at least  greater than or equal to
50% of the fair market value of the common stock on the date of grant.  In 1997,
discounted  stock  options  for the  purchase of 6,900  shares  were  granted at
$14.00,  a discount of $3.00  below the fair market  value at the date of grant.
During 1998,  discounted  options were granted for the purchase of 10,825 shares
at $9.75,  a discount of $1.50 below the fair market  value at the date of grant
and 7,200  shares at $11.75,  a discount of $2.88 below fair market value at the
date of grant.  As of December  30,  2000,  options for the  purchase of 222,464
shares remain outstanding, of which 128,414 are exercisable under the LTIP.

     In  addition,  (i)  qualified  options  for the  purchase of a total of 660
shares  remained  outstanding  and  exercisable  under  the  Company's  1983 Key
Employee Stock Option Plan (however, options can no longer be granted under this
plan);  and (ii)  non-qualified  options  for the  purchase of a total of 33,000
shares  remained  outstanding and exercisable as a result of grants by the Board
of Directors in 1996 to non-employee  directors at fair market value on the date
of grant.


                                      -18-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

8. Stock option and stock purchase plans (continued)

     A summary  of all stock  option  activity  and  information  related to all
options outstanding follows:
<TABLE>
<CAPTION>
                                            2000                       1999                        1998
                                    ------------------         -------------------         -------------------
                                    Weighted                   Weighted                    Weighted
                                    average     Shares         average     Shares          average     Shares
                                    exercise   or price        exercise   or price         exercise   or price
                                      price   per share          price   per share           price   per share
                                    -------------------        -------------------         -------------------
<S>                                  <C>      <C>               <C>       <C>               <C>      <C>
Outstanding,
beginning of year ...............      $9.51   500,734           $10.66   392,893            $11.24   289,212
Stock dividend adjustment .......                                                                      36,558
Granted   .......................       7.36    52,950             6.79   158,500             12.71    96,625
Exercised .......................       9.33   (89,164)                                        9.83   (23,800)
Cancelled .......................       8.11   (17,326)            9.93   (50,659)            10.46    (5,702)
                                    -------------------        -------------------         -------------------
Outstanding at end of year.......       9.35   447,194             9.51   500,734             10.66   392,893
                                    -------------------        -------------------         -------------------
Exercisable at end of year.......      $9.63   340,644           $10.24   318,008            $10.40   303,503
                                    -------------------        -------------------         -------------------
Option price range at end of year         $5.00-$15.50               $5.00-$13.64                $5.00-$13.64
                                    -------------------        -------------------         -------------------
Weighted average estimated fair
 value of options granted during
 the year........................                $3.44                      $2.57                       $4.62
                                    -------------------        -------------------         -------------------
</TABLE>

     The approximate  weighted average of the remaining  contractual life of the
outstanding options at December 30, 2000 was 6.6 years.

     In 1995, the Company's Shareholders approved a stock purchase plan pursuant
to which 215,942 shares of the Company's  common stock were  initially  reserved
for sale to eligible employees. Under this plan, the Company may grant employees
the right to  subscribe  to purchase  shares of common stock from the Company at
85% of the  market  value on  specified  dates  and pay for the  shares  through
payroll deductions over a period of up to 27 months.

A summary of stock purchase plan subscription activity is as follows:
<TABLE>
<CAPTION>
                                            2000                       1999                        1998
                                    -------------------        -------------------         -------------------
                                    Weighted                   Weighted                    Weighted
                                    average     Shares         average    Shares           average     Shares
                                    exercise   or price        exercise   or price         exercise   or price
                                      price   per share          price   per share           price   per share
                                    -------------------        -------------------         -------------------
<S>                                   <C>       <C>              <C>       <C>               <C>       <C>
Subscribed,
 beginning of year ..............      $6.14    50,392           $10.35    11,806             $9.93    16,056
Subscribed ......................                                  5.95    53,969             11.03    16,308
Stock dividend adjustment........                                                                       2,626
Purchased .......................       6.47   (17,900)            4.82    (7,904)             7.62   (15,474)
Cancelled .......................       5.95    (3,626)            7.02    (7,479)             9.84    (7,710)
                                    -------------------        -------------------         -------------------
Subscribed at end of year........      $5.95    28,866           $ 6.14    50,392            $10.35    11,806
                                    -------------------        -------------------         -------------------
Subscription price
 range, end of year..............                $5.95               $5.95-$11.03                $9.18-$11.03
                                    -------------------        -------------------         -------------------
Weighted average estimated
 fair value of rights granted
 during the year ................                  -                        $2.68                       $4.29
                                    -------------------        -------------------         -------------------
</TABLE>
 The weighted average  remaining  contractual  life of an outstanding  stock
subscription at December 30, 2000 was approximately 0.7 years.


                                      -19-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

8. Stock option and stock purchase plans (continued)

    2000 Key Employee Incentive Plan

     In June  2000,  the  shareholders  of the  Company  approved  the  2000 Key
Employee  Incentive Plan,  which provides for an award  consisting of restricted
stock of approximately  five percent of the average number of outstanding shares
of Company  Common Stock  during a six-month  period upon the  attainment  of an
average market  capitalization  during the same six-month period of $50,000,000,
and an additional award of  approximately  five percent of the average number of
outstanding  shares  upon the  attainment  of an average  market  capitalization
during a subsequent  six-month  period of $80,000,000.  Any shares of restricted
stock awarded vest annually over a three-year period.

     The Company applied Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to  Employees"  in  accounting  for its Key Employee  Incentive
Plan. Under such accounting, compensation expense will begin to be recorded once
the target market capitalizations are achieved.  Accordingly, for the year ended
December  30,  2000,  the Company did not record any  compensation  expense with
respect to the plan.

     SFAS  No.  123  "Accounting  for  Stock-Based  Compensation"  requires  the
disclosure  of pro forma net income  and net income per share as if the  Company
adopted the fair value method of accounting for stock-based  awards. The Company
has  determined  the fair value of shares which may be awarded to key  employees
under the 2000 Key Employee  Incentive Plan as if the shares were awarded on the
date of the approval of the Plan by the shareholders.  The Company has estimated
the fair value of the restricted stock awards,  vesting on a straight-line basis
over  a  three-year  period  using  the  Black-Scholes  option  valuation  model
utilizing the assumptions as set forth below in 2000.

     As  explained  in Note 1,  the  Company  has  adopted  the  disclosure-only
provisions of Statement No. 123. Accordingly, no earned or unearned compensation
cost was recognized in the accompanying  consolidated  financial  statements for
stock options and stock purchase plan subscription  rights granted in 2000, 1999
and 1998 except for the discounted stock options granted in 1998.

     The table  below  sets  forth the pro forma net  income  (loss) and the pro
forma  diluted  net  income  (loss)  per  share  information  as  calculated  in
accordance with Statement No. 123.
<TABLE>
<CAPTION>
                                                  2000       1999        1998
                                                --------   --------    --------
<S>                                             <C>         <C>        <C>
Net income - as reported  ..................... $315,056   $242,255    $340,300
Net income (loss) - pro forma  ................   21,056    (75,745)     78,400
                                                --------   ---------   --------

Net income per share - as reported ............     $.14       $.14        $.19
Net income (loss) per share - pro forma .......     $.01      $(.04)       $.04
                                                --------   ---------   --------
</TABLE>
     The  Statement  No. 123 method of  accounting  has been  applied to options
granted  in  periods  after  December  31,  1994  and the  resulting  pro  forma
compensation expense may not be indicative of pro forma expense in future years.

     The fair value of each of the options and purchase plan subscription rights
granted  in 2000,  1999 and 1998 was  estimated  on the date of grant  using the
Black-Scholes  option valuation model.

     The following weighted average assumptions were utilized:
<TABLE>
                                                   2000       1999        1998
                                                  -----      ------      ------
<S>                                              <C>        <C>         <C>
Expected option life (years).....................   4.5        3.0         5.0
Expected volatility.............................. 50.00%     40.00%      35.00%
Risk-free interest rate..........................  6.00%      6.25%       5.50%
Expected dividend yield..........................  0.00%      0.00%       0.00%
</TABLE>
     However,  the Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options,  which have no vesting restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility. Because the Company's employee stock options and subscription rights
have characteristics  significantly  different from those of traded options, and
because changes in the subjective  input  assumptions can materially  affect the
fair  value  estimate,  in  management's  opinion,  the  existing  models do not
necessarily  provide a reliable single measure of the fair value of its employee
stock options and subscription rights.


                                      -20-

<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

9. Income taxes

     The  provision  (benefit)  for  income  taxes  consists  of  the  following
components:
<TABLE>
<CAPTION>
                                            2000           1999           1998
                                         ----------     ----------     ---------
<S>                                     <C>            <C>            <C>
Current tax provisions (benefit)
   Federal .........................     $(439,000)     $(219,000)     $  1,000
   Foreign .........................       299,000        (12,000)          -
   State ...........................      (120,000)       (64,000)       (9,000)
                                         ----------     ----------     ---------
                                          (260,000)      (295,000)       (8,000)
                                         ----------     ----------     ---------
Deferred tax provision (benefit):

   Federal .........................       240,000        256,000        63,000
   Foreign..........................        20,000            -             -
   State ...........................        70,000         74,000        25,000
                                         ----------     ---------      ---------
                                           330,000        330,000        88,000
                                         ----------     ---------      ---------
Provision for income taxes..........     $  70,000      $  35,000      $ 80,000
                                         ==========     =========      =========
</TABLE>
     Temporary  differences which gave rise to a significant portion of deferred
tax assets and  liabilities  at  December  30,  2000 and January 1, 2000 are as
follows:
<TABLE>
<CAPTION>
                                                           2000           1999
                                                         --------      ---------
<S>                                                     <C>           <C>
Current deferred tax assets:
  Inventory valuation allowance ...................      $395,000      $458,500
  Capitalized inventory costs .....................        50,000        48,000
  Warranty cost ...................................        64,500        64,500
  Deferred compensation ...........................        21,000        76,000
  Net operating loss carryforwards................        556,000          -
  Other ...........................................        84,500        97,000
                                                         --------      ---------
                                                        1,171,000       744,000
  Less valuation allowance.........................      (300,000)          -
                                                         --------      ---------
                                                          871,000       744,000
                                                         --------      ---------

Non-current deferred tax assets:
  Deferred compensation ...........................        80,000       132,500
  Other............................................         6,000           -
Non-current deferred tax liabilities:
  Depreciation and amortization ...................      (469,000)     (316,500)
  State income taxes ..............................       (44,000)      (48,000)
  Research and development credits.................       (31,000)          -
                                                         ---------     ---------
                                                         (458,000)     (232,000)
                                                         ---------     ---------
       Net deferred tax assets ....................      $413,000      $512,000
                                                         =========     =========
</TABLE>

     The  statutory  federal  income tax rate is reconciled to the effective tax
rate computed by dividing the provision for income taxes by income before income
taxes as follows:
<TABLE>
<CAPTION>
                                                         2000        1999         1998
                                                        ------      ------       ------
<S>                                                      <C>         <C>         <C>
Statutory rate .......................................   34.0%       34.0%        34.0%

Effect of:
   State income tax, net of federal income tax effects   (8.6)        3.2          2.5
   Foreign sales corporation income ..................   (5.3)      (15.7)       (12.9)
   Foreign subsidiary income .........................     -           -          (2.3)
   Research and development credits ..................  (30.3)      (32.9)        (4.9)
   Goodwill amortization .............................   13.6        16.2           -
   Other .............................................   14.8         7.8          2.6
                                                        ------      ------       ------
Effective tax rate ...................................   18.2%       12.6%        19.0%
                                                        ======      ======       ======
</TABLE>


                                      -21-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

9.  Income taxes (continued)

     As of December 30, 2000, the Company had net operating  loss  carryforwards
for both Federal and state income tax purposes of approximately $1,400,000 which
are  available  to  offset  future   taxable   income  through  2020  and  2007,
respectively.  Also,  the  Company  has  approximately  $650,000  of future  tax
deductions related to the exercise of employee stock options.  In addition,  the
Company has Federal income tax credit  carryforwards  of  approximately  $70,000
expiring through 2020.

     Due to the  uncertainties  related to among  other  things,  the extent and
timing of its future  taxable  income,  the Company has  recorded a deferred tax
asset valuation allowance of $300,000 as of December 30, 2000.

     The provision for foreign  income taxes is based upon foreign income before
income taxes of approximately $1,000,000 during 2000.

     Deferred   Federal  and  state   income  taxes  are  not  provided  on  the
undistributed  cumulative earnings of foreign subsidiaries because such earnings
are considered to be invested  permanently in those operations.  At December 30,
2000,  the  cumulative  earnings  of  foreign  subsidiaries  were  approximately
$700,000. The amount of unrecognized deferred tax liability on the undistributed
cumulative earnings was approximately $100,000.

10. Stock dividend

     On May 5,  1998,  the Board of  Directors  declared  a 10%  stock  dividend
payable on June 5, 1998 to  shareholders  of record on May 15, 1998.  Fractional
shares  were  cashed-out  and  payments  were  made to  shareholders  in lieu of
fractional shares on June 5, 1998.

11. Business segment and geographic data

     The  Company's  operations  are  conducted  primarily  through two business
segments:  (1) electronic  components and (2) microwave  micro-circuitry.  These
segments, and the principal operations of each, are as follows:

     Electronic components: Design, manufacture and sale of electronic component
devices  offering  extremely  broad  frequency  coverage  and  high  performance
characteristics for communications,  defense and aerospace applications.  Of the
identifiable  assets, 96% are located in the United States and 4% are located in
Costa Rica.

     Microwave  micro-circuitry:  Design,  manufacture  and sale of  microstrip,
bonded  stripline and thick  metal-backed  Teflon(R) (PTFE) and mixed dielectric
multilayer  circuits for  communications,  defense and  aerospace  applications.
Identifiable assets are located in Canada.

                                      -22-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

     Information  about the  Company's  operations in different  industries  and
geographic areas follows. Operating income is net sales less operating expenses.
Operating  expenses  exclude  interest  expense,  other income and income taxes.
Assets  are  identified   with  the  appropriate   operating   segment  and  are
substantially all located in the North America geographic area. Corporate assets
consist  principally of cash.  Corporate  expenses and  inter-segment  sales are
immaterial.

<TABLE>
<CAPTION>
                                                2000             1999              1998
                                               ------------------------------------------
                                                     (In thousands of dollars)
<S>                                              <C>              <C>              <C>
Industry segments:
    Sales to unaffiliated customers:
             Electronic components             $17,118          $17,003           $20,102
             Microwave micro-circuitry           5,918            3,394               -
                                               -------          -------           -------
             Consolidated                      $23,036          $20,397           $20,102
                                               =======          =======           =======

    Income before provision for income taxes:
      Operating income (loss):
             Electronic components             $  (893)         $   242           $   310
             Microwave micro-circuitry           1,337              256               -
      Interest and other (expense)
        income, net                                (59)            (221)              110
                                               -------          -------           -------
             Consolidated                      $   385          $   277           $   420
                                               =======          =======           =======

      Identifiable assets:
             Electronic components             $18,805          $14,939           $15,062
             Microwave micro-circuitry           5,284            4,794               -
             Corporate                           3,425            1,108             1,853
                                               -------          -------           -------
             Consolidated                      $27,514          $20,841           $16,915
                                               =======          =======           =======

      Depreciation and amortization:
             Electronic components             $ 1,598          $ 1,331           $ 1,103
             Microwave micro-circuitry             399              305               -
                                               -------          -------           -------
             Consolidated                      $ 1,997          $ 1,636           $ 1,103
                                               =======          =======           =======
      Capital expenditures, net:
             Electronic components             $ 3,365          $ 2,166           $ 3,126
             Microwave micro-circuitry             621              297               -
                                               -------          -------           -------
             Consolidated                      $ 3,986          $ 2,463           $ 3,126
                                               =======          =======           =======
      Geographic areas:
             Sales to unaffiliated customers:
             North America                     $20,514          $17,060           $17,008
             Europe                              1,260            1,792             2,134
             Far East                            1,208            1,527               914
             Other                                  54               18                46
                                               -------          -------           -------
             Consolidated                      $23,036          $20,397           $20,102
                                               =======          =======           =======

 </TABLE>


                                      -23-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

     The Company's  customers are primarily major industrial  corporations  that
integrate the Company's  products into a wide variety of defense and  commercial
systems.  The Company's customers include The Boeing Company,  Raytheon Company,
Northrop  Grumman  Corporation,  Lockheed  Martin  Corporation,  Loral  Space  &
Communications  LTD.,  TRW,  Inc.,  and Motorola,  Inc. Sales to any one foreign
geographic area did not exceed 10% of net sales for 2000 or 1999, and were 10.6%
to Europe in 1998. Sales to Lockheed Martin  Corporation  were 12.2%,  10.0% and
13.4% of net sales in 2000,  1999 and 1998,  respectively.  Sales to The  Boeing
Company  (which  acquired  the  space  and  communications  business  of  Hughes
Electronics  Corporation,  a customer of the Company,  in 2000) were 9.1% of net
sales in 2000.  Pro  forma  combined  sales to The  Boeing  Company  and  Hughes
Electronics  Corporation  were  21.3%  and  16.7% of net sales in 1999 and 1998,
respectively.  Sales to The Boeing  Company  were 10.4% and 6.3% of net sales in
1999 and 1998,  respectively,  and sales to Hughes Electronics  Corporation were
10.9% and 10.3% of net sales for 1999 and 1998, respectively.

     Accounts receivable are financial  instruments that expose the Company to a
concentration  of credit risk. A substantial  portion of the Company's  accounts
receivable are from customers in the defense industry,  and approximately 46% of
its  receivables  at  December  30, 2000 were from five  customers.  Exposure to
credit risk is limited by the large number of customers comprising the remainder
of the Company's  customer base,  their  geographical  dispersion and by ongoing
customer credit evaluations performed by the Company.


12. Net income per common share

     The following  table  summarizes  the  calculation of basic and diluted net
income per common share for 2000, 1999 and 1998:
<TABLE>
<CAPTION>
                                                                         2000          1999            1998
                                                                      ----------------------------------------
<S>                                                                   <C>            <C>            <C>
Numerator:
Net income available to common shareholders .........................  $ 315,056    $  242,255      $  340,300
                                                                      ----------------------------------------
Denominator:
Weighted average shares outstanding for basic net income per share ..  2,134,542     1,746,968       1,766,120
Effect of dilutive securities - stock options                            175,265        18,863          39,092
                                                                      ----------------------------------------
Weighted average shares outstanding for diluted net income per share.  2,309,807     1,765,831       1,805,212
                                                                      ----------------------------------------
Net income per share - basic .......................................        $.15          $.14            $.19
Net income per share - diluted .....................................        $.14          $.14            $.19
                                                                      ----------------------------------------
</TABLE>

     At December 30, 2000, there were 360,000 common stock warrants  outstanding
excluded  from the  calculation  of  dilutive  securities  because  the  warrant
exercise price of $21.25 was greater than the average market value of the common
shares.

     If the sales of  375,000  shares  of  Company  Common  Stock on April 7 and
360,000  Units on October  26, 2000  referred  to in Note 2 had  occurred at the
beginning of the year, the pro forma basic and diluted  weighted  average number
of common shares outstanding would have been:

Basic:
Actual.............................................     2,134,542
Adjustments for sales of:
Common stock, April 7, 2000........................        98,902
Units, October 26, 2000 (a)........................       294,725
                                                        ---------
Basic - pro forma..................................     2,528,169
Effect of dilutive securities-
  stock options....................................       175,265
                                                        ---------
Diluted - pro forma................................     2,703,434
                                                        =========

(a) There is no pro forma  dilutive  impact from the common stock  warrants
included in the Units, as the warrant  exercise price of $21.25 exceeds the per
share market value of the Company's common stock.


                                      -24
-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999


13. Commitments and contingencies

Lease commitments:

     The  Company  leases  real  estate and  equipment  under  operating  leases
expiring at various dates through  February 2006. The leases include  provisions
for rent escalation, renewals and purchase options, and the Company is generally
responsible for taxes, insurance, repairs and maintenance.

     Total rental  expense  charged to operations  amounted to $244,000 in 2000,
$217,000 in 1999 and $120,000 in 1998.  Future  minimum lease  payments,  net of
contractual  facility-sharing  cost reductions of $87,000 per year through 2004,
under  noncancellable  operating  leases with an initial term exceeding one year
are as follows (see Note 17 Subsequent events):

2001..............................  $317,000
2002..............................   356,000
2003..............................   367,000
2004..............................   388,000
2005..............................   428,000
Thereafter........................    45,000


     Capital  leases  included in property,  plant and equipment at December 30,
2000 are as follows:

Machinery and equipment............ $339,000
Less, accumulated depreciation.....  147,000
                                    --------
Total.............................. $192,000
                                    ========

     Future minimum lease payments under capital leases and the present value of
such payments as of December 30, 2000 is as follows:

2001............................... $158,000
2002...............................  218,000
2003...............................   72,000
2004...............................   72,000
2005...............................   98,000
                                    --------
Total minimum lease payments.......  618,000
Less amount representing interest..   95,000
                                    --------
Present value of total minimum
           lease payments.......... $523,000
                                    ========
Purchase obligations:

     The Company has issued purchase order  commitments to processing  equipment
vendors for approximately  $2,000,000 for capital  equipment,  and $700,000 to a
general  contractor  for the  initial  stage  of a 19,200  square-foot  building
addition  to its West  Caldwell,  New Jersey  manufacturing  facility,  which is
projected  to  cost  approximately  $4,300,000,  including  improvements  to the
existing facility.  The Company anticipates that the equipment will be purchased
and become  operational  and the building  expansion  and  improvements  will be
completed during fiscal 2001.


                                     -25-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

Consulting and employment agreements; deferred compensation:

     The Company has been a party to an employment  agreement with its Chairman,
President and Chief  Executive  officer that provides him with a minimum  annual
salary of 240,000 for an initial term and  automatically  renews for  successive
twelve-month  periods thereafter unless terminated  pursuant to the terms of the
agreement. On August 31, 2000, the employment agreement was amended by extending
the  initial  term of the  agreement  by five years to  December  31,  2007.  In
connection with the amendment of the agreement, the Company loaned the executive
$280,000 with a variable interest rate,  payable annually.  Under the employment
agreement,  as amended,  the executive will receive, on August 31 in each of the
next five years, an annual special bonus in the form of forgiveness of a portion
of the  principal  of and  interest on the loan equal to the sum of $56,000 plus
the accrued interest on the loan.

     In  connection  with the  acquisition  of FMI, a subsidiary  of the Company
entered into an employment agreement with the President of FMI that provides for
a  minimum  annual  salary  of  $130,000  (Canadian).  The  initial  term of the
agreement  ends on February  25, 2002 and  automatically  renews for  successive
twelve-month periods thereafter,  unless terminated pursuant to the terms of the
agreement. In addition, the President of FMI can elect to receive either a bonus
of 10% of  compensation or a grant of immediately  exercisable  stock options of
the Company, determined pursuant to the terms of the agreement.

     The  Company  is party to a  retirement  agreement  with  its  former  Vice
Chairman and Chief  Technology  Officer  which became  effective on December 31,
1998.  Pursuant to the retirement  agreement,  such former  officer  received an
initial  payment of  $151,700  in 1998,  and  received a payment of  $185,500 in
January 1999 and a final payment of $185,500 in January  2000. In addition,  the
agreement  provides for the  continuation  of health  insurance  benefits  until
December 2009.

     The  Company  is  party  to a  consulting  agreement  with  a  former  Vice
President,  which  initial term ended  February 2001 and  automatically  renewed
pursuant to the terms of the agreement for an  additional  twelve-month  period.
The agreement will renew for successive  twelve-month  periods thereafter unless
otherwise  terminated  pursuant  to the terms of the  agreement.  The  agreement
provides for a minimum payment of $24,000 per year and includes health insurance
and other certain benefits.

     The Company  entered into a consulting  agreement on January 1, 1998 with a
director of the Company who is also the beneficial owner of more than 10% of the
Company's  Common Stock. The term of the consulting  agreement,  which initially
ended on January  1, 1999,  automatically  renews  for  successive  twelve-month
periods until terminated pursuant to the terms of the agreement.  The consulting
agreement provides this director with an annual fee of $36,000 for his services.

     The Company is party to a  shareholder's  agreement dated as of October 30,
1998 with a former director and Chairman of the Company who is also a beneficial
owner  of  more  than  5%  of  the  Company's  Common  Stock.  Pursuant  to  the
shareholder's  agreement,   this  former  director  provides  the  Company  with
consulting  services for a fee of $5,000 per month.  The term of the  consulting
agreement expires October 2001, unless earlier terminated in accordance with the
terms of the shareholder's agreement.

     The Company is party to a retirement agreement effective January 1997, with
its former Vice  President,  Secretary  and  Controller,  that provides him with
annual payments of $30,000 for ten years.

     In connection  with the  consulting  and  retirement  agreements  described
above, the Company recognized expense of approximately  $13,000 in 2000, $37,000
in 1999 and  $288,000  in 1998.  The Company  accrues  the present  value of the
estimated  future payments over the periods of the projected term of each of the
respective agreements.  The minimum benefits payable in 2001 are estimated to be
$49,000 and the present value of the estimated future  consulting and retirement
benefits   payable   beyond  2001  and  accrued  as  of  December  30,  2000  is
approximately $185,000.


                                      -26-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

Litigation:

     The Company is a party to lawsuits, both as a plaintiff and as a defendant,
arising  from the normal  course of business.  It is the opinion of  management,
that the disposition of these various  lawsuits will not have a material adverse
effect to the  consolidated  financial  position or results of operations of the
Company.

14. Restructuring and related charges

     As a result of accelerating the transfer of increased levels and complexity
of production to the Company's Costa Rica  manufacturing  facility,  the Company
implemented  a reduction of its  workforce  and provided  severance  benefits to
certain employees during the first quarter of 2000. The restructuring charge for
the first  quarter of 2000 was  $315,000,  and  charges  net of tax  benefits of
$189,000 or $.10 per diluted share and $.08 per diluted share for the year, as a
result of increases in common  shares from  private  placements  after the first
quarter 2000. The reduction in workforce  affected  fifteen  persons,  primarily
electronic   components   manufacturing  labor,  and  the  full  amount  of  the
restructuring charge has been paid.

     Because of the weakness in orders for its products, the Company announced a
reduction of its  workforce  and offered  early  retirement  packages to certain
employees during the fourth quarter of 1998. The  restructuring  charge for 1998
was $510,000,  and charges net of tax benefits of $327,000 or $.18 per share, as
a result of the reduction in workforce and voluntary early retirements affecting
fourteen  persons.  During 1999, all termination  benefits  pursuant to the 1998
restructuring plan were paid.

15. Transactions with management and loans to officer-shareholder

     On May 4, 1998,  the Company sold 20,000 (22,000 after giving effect to the
Company's  10% stock  dividend on June 5, 1998)  shares of Common Stock from its
treasury to Mason N. Carter, Chairman,  President and Chief Executive Officer of
the Company,  at a price of $12.75 per share (the  approximate  average  closing
price of the  Company's  Common  Stock  during the first  quarter of 1998).  The
Company  extended  to Mr.  Carter  a loan of  $255,000  in  connection  with the
purchase of these shares and amended a prior loan to Mr.  Carter of $105,000.  A
new  promissory  note for a total of $360,000,  due May 4, 2003,  with  interest
payments due  quarterly,  calculated  at a variable  interest  rate based on the
prime rate of the Company's lending bank, was executed by Mr. Carter in favor of
the Company.  Payment of the interest  accrued from November 1998 until November
1999, however,  will be deferred until the end of the term of the new promissory
note.  Payment of the loan is  secured  by the  pledge of the  33,000  shares of
Common Stock that were  purchased by Mr.  Carter with the proceeds of the loans.
The sale of these shares of Common Stock was exempt from registration  under the
Securities Act of 1933, as amended (the "Act"), as a transaction not involving a
public offering under Section 4(2) of the Act.

     In addition,  on August 31, 2000,  in  connection  with an amendment of Mr.
Carter's  employment  agreement,  the Company  loaned Mr.  Carter  $280,000 with
interest  calculated at a variable  interest rate based on the prime rate of the
Company's lending bank, payable annually. In addition,  pursuant to Mr. Carter's
amended employment agreement, Mr. Carter will receive an annual special bonus on
the next five anniversaries of the agreement  amendment's effective date, in the
form of  forgiveness  of a portion of the principal of and interest on the loan.
Each  special  bonus shall be in the sum of (i) $56,000 and (ii) an amount equal
to accrued interest on the loan.

                                      -27-
     <PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 30, 2000, January 1, 2000 and  January 2, 1999

16. Shareholder Rights Plan

     On March 5,  1999,  the  Board  of  Directors  of the  Company  approved  a
shareholder  rights plan and  declared a dividend of one common  share  purchase
right (a "Right") for each outstanding share of Common Stock of the Company. The
dividend was payable on March 19, 1999 (the "Record  Date") to  shareholders  of
record as of the close of  business  on that date.  Each Right will  entitle the
holder to purchase from the Company,  upon the occurrence of certain events, one
share of Common Stock for $25.00.

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

17. Subsequent events

     Delaware reincorporation:

     On February 22, 2001, the Company (previously  incorporated in the State of
New Jersey) was reincorporated in the State of Delaware.  In connection with the
reincorporation,  each share of Common Stock,  par value $0.50 per share, of the
Company  prior to the  reincorporation  was  converted  into one share of Common
Stock, par value $0.01 per share, of the Company, as reincorporated in Delaware.
As a result of the reincorporation,  the authorized capital stock of the Company
was increased to 20 million  shares of common  stock,  par value $0.01 per share
(from 5 million  shares of common stock prior to the  reincorporation),  and one
million shares of preferred stock, par value $0.01 per share.

     Lease modification and resource sharing agreement:

     The Company  entered  into an  agreement  effective  January  2001,  with a
customer to  relinquish  to this  customer  approximately  half of the Company's
17,000 square-foot leased manufacturing  facility in Costa Rica. Associated with
the transaction, the Company entered into a new four-year lease agreement with a
five-year  renewal option with its Costa Rica landlord for the reduced space. In
addition,  the Company transferred certain employees to its customer,  agreed to
share certain  personnel  resources  and common costs,  and committed to provide
certain management, administrative and other services to its customer.

     In connection with the transaction,  the Company received $200,000 from its
customer and will receive further  payments of $250,000 over a two-year  period.
The Company will reduce its rent expense by approximately $87,000 during each of
the next four years to an aggregate amount of approximately $348,000.

     The Company deferred  approximately  $102,000 of costs at December 30, 2000
incurred in connection  with entering into this agreement and other  incremental
costs,  for the purpose of providing  this customer  with trained  personnel and
certain other services  required for their dedicated  manufacturing  capability.
Such costs are  classified  in the balance sheet as other assets at December 30,
2000,  and will be recovered  through the $200,000  payment  received in January
2001 as described above.


END OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      -28-
<PAGE>

QUARTERLY FINANCIAL INFORMATION

     Summarized  quarterly  unaudited  financial data reported for 2000 and 1999
follows:
<TABLE>
<CAPTION>
2000                                        April 3         July 1       September 30      December 30
                                          ----------      ----------     ------------      -----------
<S>                                       <C>             <C>             <C>              <C>
Net sales .............................   $4,911,373      $4,949,424      $6,437,186       $6,737,699
Gross profit ..........................    2,475,026       2,344,948       3,134,690        3,231,089
Net income (loss)(A)...................     (164,387)         39,705         219,144          220,594
                                          -----------     ----------     -----------       -----------
Net income per (loss) share - basic ...        $(.09)           $.02            $.10             $.09
Net income per (loss) share - diluted..        $(.09)           $.02            $.09             $.08
                                          -----------     ----------     -----------       -----------
1999                                        April 3         July 3         October 2        January 1
                                          -----------     ----------     -----------       -----------
<CAPTION>
<S>                                       <C>             <C>             <C>              <C>
Net sales .............................   $4,738,531      $5,125,245      $5,328,250       $5,205,005
Gross profit ..........................    2,311,791       2,399,094       2,633,768        2,435,974
Net income (loss) .....................      212,966          81,919         109,708         (162,338)
                                          ----------      ----------     -----------       -----------
Net income per (loss) share - basic ...         $.12            $.05            $.06            $(.09)
Net income per (loss) share - diluted..         $.12            $.05            $.06            $(.09)
                                          ----------      ----------     -----------       -----------
</TABLE>



(A) Reflects  the effects of a  restructuring  charge of $315,000  (see Note 14)
which  reduced net income by  $189,000  or $.10 per share for the first  quarter
2000 and $.08 for fiscal year 2000.



QUARTERLY COMMON STOCK DATA
<TABLE>
<CAPTION>
                                        2000                               1999
                           ----------------------------------------------------------------------

Quarter                    1st      2nd     3rd       4th      1st      2nd      3rd     4th
Market price per share:    ----------------------------------------------------------------------
<S>                        <C>     <C>      <C>       <C>      <C>      <C>      <C>     <C>
         High .........    $12     $18 3/8  $17 3/8   $24       $7       $8 3/4  $10 1/4   $8 1/4

         Low ..........      5 7/8   8 1/8   13 1/4    14 1/4    4 5/8    5        5 1/4    5 3/8
                           ----------------------------------------------------------------------
</TABLE>
     The common  stock of the Company is listed on the American  Stock  Exchange
and trades under the symbol MRM.

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


                                      -29-