**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**







**FORM 10-K**




**ANNUAL
      REPORT PURSUANT TO SECTIONS 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**(Mark
      One)**


x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934


**For
      the fiscal year ended December 29, 2007**




**OR**




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934


**For
      the transition period from**   **to**




**Commission
      file number 0-11201**





**MERRIMAC
      INDUSTRIES, INC.**




(Exact
      Name of Registrant as Specified in Its Charter)




**Delaware**
            **22-1642321**(State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            (I.R.S.
                Employer
              Identification
                No.)**41
                Fairfield Place, West Caldwell, New 
                Jersey**
            **07006**(Address
                of Principal Executive Offices)
            (Zip
                Code)





**(973) 575-1300**


(Registrant’s
      telephone number, including area code)




**WEBSITE:** www.merrimacind.com




Securities
      registered pursuant to Section 12(b) of the Act:




**Title of Each Class**
            
            **Name of Exchange on Which Registered**Common
                Stock
              Common
                Stock Purchase Rights
            
            The
                American Stock Exchange
              The
                American Stock Exchange





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







Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
o No
x




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes o No
x




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes
xNo
o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See
      definition of "accelerated filer and large accelerated filer and smaller
      reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


Large
                  accelerated filer
              o
              
              Accelerated
                  filer
              o
              
              Non-accelerated
                  filer
              o
              
              Smaller
                  reporting company
              x




Indicate
      by check mark whether the registrant is a shell Company (as defined in Rule
      12b-2 of the Exchange Act).


Yes oNo
x




The
      aggregate market value of common stock held by non-affiliates of the registrant
      as of June 29, 2007, the last business day of the Registrant’s most recently
      completed second fiscal quarter, was approximately $17,716,823.




As
      of
      March 25, 2008, 2,937,384 shares of common stock of the registrant were
      outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




The
      registrant’s Proxy Statement for its 2008 Annual Meeting of stockholders is
      hereby incorporated by reference into Part III of this
      Form 10-K.





**Table
      of Contents**




**Page**PART
              IItem
                1.
            Business
            4Item
                1A.
            Risk
                Factors
            14Item
                1B.
            Unresolved
                Staff Comments
            20Item
                2.
            Properties
            21Item
                3.
            Legal
                Proceedings
            21Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            21PART
                IIItem
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            22Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            24Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            34Item
                8.
            Financial
                Statements and Supplementary Data
            35Item
                9.
            Changes
                In and Disagreements with Accountants on Accounting and Financial
                Disclosure
            59Item
                9A.
            Controls
                and Procedures
            59Item 9A (T).
            Controls
                and Procedures
            59Item
                9B.
            Other
                Information
            59PART
                IIIItem
                10.
            Directors,
                Executive Officers and Corporate Governance
            60Item
                11.
            Executive
                Compensation
            61Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            61Item
                13.
            Certain
                Relationships and Related Transactions and Director
                Independence
            61Item
                14.
            Principal
                Accounting Fees and Services
            61Item
                15.
            Exhibits,
                Financial Statement Schedules
            62Signatures
            65


2


FORWARD-LOOKING
      STATEMENTS




This
      Annual Report on Form 10-K 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: risks associated with demand for and market
      acceptance of existing and newly developed products as to which the Company
      has
      made significant investments, particularly its Multi-Mix® products; the
      possibilities of impairment charges to the carrying value of our Multi-Mix®
assets, thereby resulting in charges to our earnings; risks associated with
      adequate capacity to obtain raw materials and reduced control over delivery
      schedules and costs due to reliance on sole source or limited suppliers; slower
      than anticipated penetration into the satellite communications, defense and
      wireless markets; failure of our Original Equipment Manufacturer or OEM
      customers to successfully incorporate our products into their systems; changes
      in product mix resulting in unexpected engineering and research and development
      costs; delays and increased costs in product development, engineering and
      production; reliance on a small number of significant customers; the emergence
      of new or stronger competitors as a result of consolidation movements in the
      market; the timing and market acceptance of our or our OEM customers' new or
      enhanced products; general economic and industry conditions; the ability to
      protect proprietary information and technology; competitive products and pricing
      pressures; our ability and the ability of our OEM customers to keep pace with
      the rapid technological changes and short product life cycles in our industry
      and gain market acceptance for new products and technologies; risks relating
      to
      governmental regulatory actions in communications and defense programs; and
      inventory risks due to technological innovation and product obsolescence, as
      well as other risks and uncertainties as are 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 of the filing of this Annual Report
      on
      Form 10-K, 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.


3


PART
      I




**ITEM
      1. BUSINESS**




GENERAL





Merrimac
      is a leader in the design and manufacture of active and passive Radio Frequency
      (RF) and microwave components and integrated multifunction assemblies for
      commercial, military and high-reliability markets. Merrimac components and
      integrated assemblies are found in applications as diverse as satellites,
      military and commercial aircraft, radar, cellular radio systems, medical and
      dental diagnostic instruments, personal communications systems and wireless
      connectivity.





Merrimac
      is a versatile technologically oriented company specializing in radio frequency
      Multi-Mix®, stripline, microstrip and discreet element technologies. Of special
      significance has been the combination of two or more of these technologies
      into
      single components and integrated multifunction subassemblies to achieve superior
      performance and reliability while minimizing package size and weight. Merrimac
      maintains ISO 9001:2000 and AS 9100 registered quality assurance
      programs.





Merrimac
      was originally incorporated as Merrimac Research and Development, a New York
      corporation, in 1954. Merrimac was reincorporated as a New Jersey corporation
      in
      1994 and subsequently reincorporated as a Delaware corporation in
      2001.





ELECTRONIC
      COMPONENTS AND SUBSYSTEMS PRODUCTS





Merrimac
      manufactures and sells approximately 1,500 components and subsystems used in
      signal processing systems in the frequency spectrum of DC to 65 GHz. Merrimac's
      products are designed to process signals having wide bandwidths and are of
      relatively small size and light weight. When integrated into subsystems,
      advantages of lower cost and smaller size are realized due to the reduced number
      of connectors, cases and headers. Merrimac's components range in price from
      $0.50 to more than $10,000 and its subsystems range from $500 to more than
      $1,500,000.





Merrimac
      has traditionally developed and offered for sale products built to specific
      customer needs, as well as standard catalog items. The following table provides
      a breakdown of electronic components sales as derived from initial design orders
      for products custom designed for specific customer applications, repeat design
      orders for such products and from catalog sales:





2007
            
            2006Initial
                design orders
            
            
            24
            %
            
            23
            %Repeat
                design orders
            
            
            62
            %
            
            63
            %Catalog
                sale orders
            
            
            14
            %
            
            14
            %





Merrimac
      maintains a current product catalog on its internet website at
      www.merrimacind.com. The Merrimac catalog includes over 1,500 standard, passive,
      signal processing components. These components often form the platform-basis
      for
      customization of designs in which the size, package, finish, electrical
      parameters, environmental performance, reliability and other features are
      tailored for a specific customer application.





Merrimac's
      strategy is to be a reliable supplier of high quality, technically innovative
      signal processing products. Merrimac coordinates its marketing, research and
      development, and manufacturing operations to develop new products and expand
      its
      markets. Merrimac's marketing and development activities focus on identifying
      and producing prototypes for new military and commercial programs and
      applications in aerospace, navigational systems, telecommunications and cellular
      analog and digital wireless telecommunications electronics. Merrimac's research
      and development efforts are targeted towards providing customers with more
      complex, reliable, and compact products at lower costs.





The
      major
      aerospace companies purchase components and subsystems from Merrimac. Merrimac
      design engineers work to develop solutions to customer requirements that are
      unique or require special performance. Merrimac is committed to continuously
      enhancing its leading position in high-performance electronic signal processing
      components and integrated assemblies for communications, defense/aerospace,
      and
      Homeland Security/Global Security and Public Safety applications.





In
      1998,
      Merrimac introduced Multi-Mix® Microtechnology capabilities, an innovative
      process for microwave, multilayer integrated circuits and micro-multifunction
      module (MMFM®) technology and subsystems. This process is based on fluoropolymer
      composite substrates, which are bonded together into a multilayer structure
      using a fusion bonding process. The fusion bonding process provides a
      homogeneous dielectric medium for superior electrical performance at microwave
      frequencies. This 3-dimensional Multi-Mix® design consisting of stacked circuit
      layers permits the manufacture of components and subsystems that are a fraction
      of the size and weight of conventional microstrip and stripline
      products.


4





In
      2001,
      Merrimac introduced its Multi-Mix PICO® Microtechnology. Through Multi-Mix PICO®
technology, Merrimac offers a group of products at a greatly reduced size,
      weight and cost that includes hybrid junctions, directional couplers, quadrature
      hybrids, power dividers and inline couplers, filters and vector modulators
      along
      with 802.11a, 802.11b, and 802.11g Wireless Local Area Network (WLAN) modules.
      When compared to conventional multilayer quadrature hybrids and directional
      coupler products, Multi-Mix PICO® is more than 84% smaller in size, without the
      loss of power or performance. Merrimac continues to add new designs to its
      Multi-Mix PICO® product line.





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





In
      2004,
      Merrimac introduced its Multi-Mix Zapper® product line. The Multi-Mix Zapper®
products address the demands of the wireless and other cost-sensitive markets
      for high quality products manufactured in volume with continued improvements
      in
      performance, with dramatic reductions in size and weight at extremely
      competitive cost.





In
      addition to wireless base station communications, Multi-Mix Zapper®  products
      have been or are currently under evaluation for applications in airborne
      electronic countermeasures, radar systems, smart antennas, satellite
      communications receiver modules, missiles, commercial Wireless Fidelity (Wi-Fi),
      Wireless Local Area Networks (WLANs), World Interoperability for Microwave
      Access (WiMAX) , the U.S. Department of Defense’s next generation jet fighter,
      the Joint Strike Fighter (JSF), the US Army’s Future Combat Systems (FCS)
      program, and the Joint Tactical Radio System (JTRS) cross-services radio.





Merrimac
      customers prefer our value-added Multi-Mix® approach over traditional solutions
      because it enables them to minimize considerable costs of design, test and
      measurement, packaging, and manufacturing, as well as the unpredictable
      follow-on costs typically associated with factory tuning and optimization.
      Multi-Mix® products provide customers with integrated solutions that simplify
      their internal design and manufacturing processes while reducing the time and
      costs it takes to implement manufacturable and repeatable products.





The
      Multi-Mix® technology also enables customers to outsource certain design and
      manufacturing functions, which in turn allows them to maintain focus on their
      own core business competencies.





Merrimac
      supports many commercial and military customers, projects, and programs with
      our
      array of traditional high-frequency technologies, including lumped-element
      and
      stripline approaches. Our continuing evolution of Multi-Mix® Microtechnology
      makes it possible to actively participate in next-generation commercial and
      military designs. At least one leading military satellite communications
      customer has indicated that Multi-Mix® Microtechnology is now their technology
      of choice for higher levels of RF integration. Our customer was able to realize
      a 30-to-50-percent reduction in size compared to their existing conventional
      technology.





In
      the
      commercial area, one version of the Multi-Mix® Resource Module, the Power
      Amplifier Module (PAM), drew the attention of major communications equipment
      manufacturers both in the United States and abroad. A major global  telecommunications
      equipment manufacturer has expressed an interest in converting its cellular
      basestation power amplifiers from discrete component technology to a more
      integrated solution.





WiMAX
      is
      yet another commercial market opportunity for Multi-Mix® Microtechnology. This
      emerging wireless technology promises a practical solution to the “last-mile”
broadband access (telephone, Internet, and television) to the home in
      competition with cable television (CATV) and fiber-optic approaches. Merrimac
      has laid the groundwork for growth in the potentially lucrative WiMAX market
      by
      offering both component solutions and higher levels of integration. Some of
      our
      existing customers are WiMAX equipment suppliers and are using Multi-Mix PICO®
products; these customers offer opportunities for higher levels of integration
      for their WiMAX infrastructure and customer premises equipment (CPE)
      products.




In
      the
      area of broadband communications, Merrimac continues to work on high frequency
      solutions that will bring multimedia internet access to homes and offices
      through broadband systems.


5


Merrimac's
      major electronic components and subsystems product categories are:





·
            power
                dividers/combiners that equally divide input signals or combine coherent
                signals for nearly lossless power combinations;





·
            I&Q
                networks (a subassembly of circuits which allows two information
                signals
                (incident and quadrature) to be carried on a single radio signal
                for use
                in digital communication and navigational
                positioning);





·
            directional
                couplers that allow for signal sampling along transmission
                lines;





·
            phase
                shifters that accurately and repeatedly alter a signal's phase
                transmission to achieve desired signal processing or
                demodulation;





·
            hybrid
                junctions that serve to split input signals into two output signals
                with 0
                degree phase difference or 180 degrees out of phase with respect
                to each
                other;





·
            balanced
                mixers that convert input frequencies to another frequency; variable
                attenuators that serve to control or reduce power flow without
                distortion;





·
            beamformers
                that permit an antenna to electronically track signals when receiving
                and
                electronically adjust radiation patterns when transmitting;
                and





·
            quadrature
                couplers that serve to split input signals into two output signals
                90
                degrees out of phase with respect to each other or combine equal
                amplitude
                quadrature signals.





These
      components can be utilized in a variety of applications including satellite
      communications, radar, digital communication systems, global positioning and
      navigation systems, electronic warfare, electronic countermeasures and cellular
      and wireless communications.





Merrimac's
      other product categories include single-side-band (SSB) modulators, image reject
      mixers, vector modulators, and a wide variety of specialized integrated
      Micro-Multifunction Modules (MMFM®) assemblies. In the last fiscal year, no one
      product accounted for more than ten percent of total net sales.





In
      2005
      and 2006, Merrimac focused its design efforts on Multi-Mix® multilayer subsystem
      products for several satcom and military customers.





In
      addition, in 2006 Merrimac received a patent for a Multi-Mix® power amplifier
      module (PAM) for use in base station infrastructure, military, and satcom
      applications. An important part of base station infrastructure equipment is
      the
      high power transmit amplifier, which must provide extremely linear performance
      in order to boost modulated signals carrying voice, data, and video content
      without distortion. These components can be utilized in a variety of
      applications including satellite communications, radar, digital communication
      systems, global positioning and navigation systems, electronic warfare,
      electronic countermeasures and cellular and wireless
      communications.





In
      2007,
      we achieved record bookings of $28.4 million, which represents 29% growth over
      the previous year. As a result, our year-end backlog also was a record of $18.0
      million.





In
      2007,
      we showed growth in two areas. We received an increased number of orders for
      components used in satellite systems, both commercial and military, adding
      to
      our market share and recognition in the industry as being a leading supplier
      of
      space qualified passive microwave components. Our second area for growth was
      in
      custom Multi-Mix® integrated assemblies in support of military radar systems.
      Multi-Mix® is an enabling technology for next generation radars and EW systems,
      allowing such systems to be more integrated and lighter than their predecessors.
      We are participating in several new development projects for key OEMs.





Approximately
      54% of Merrimac's sales in fiscal 2007 were derived from the sales of products
      for use in high-reliability aerospace, satellite, and missile applications.
      These products are designed to withstand severe environments without failure
      or
      maintenance over prolonged periods of time (from 5 to 20 years). Merrimac
      provides facilities dedicated to the design, development, manufacture, and
      testing of these products along with special program management and
      documentation personnel.





Merrimac's
      products are used in a broad range of other defense and commercial applications,
      including radar, navigation, missiles, satellites, electronic warfare and
      countermeasures, cellular analog and digital wireless telecommunications
      electronics and communications equipment. Merrimac's products are also utilized
      in systems to receive and distribute television signals from satellites and
      through other microwave networks including cellular radio.





In
      2006,
      Merrimac made major advances in the Multi-Mix® Resource Module and the
      Multi-Mix® PAM, working closely with strategic partners supplying high-power
      transistor die for integration into multilayer Multi-Mix® designs. By
      incorporating device die rather than packaged parts, Multi-Mix® PAMs and
      Multi-Mix® Resource Modules with active circuitry can be made in a fraction of
      the size of conventional RF/microwave circuitry. The performance characteristics
      of the Multi-Mix® technology allow these compact, multilayer circuits to
      reliably dissipate the heat from these devices without need of bulky, expensive
      packages.


6





In
      2006,
      Merrimac was granted a patent for its Multi-Mix® Microtechnology from the State
      Intellectual Property Office of the People’s Republic of China (“Method of
      Making Microwave Multifunction Modules Using Fluoropolymer Composite
      Substrates”). Merrimac was also granted a patent for its Multi-Mix®
Microtechnology from the United States Patent and Trademark Office (“Coupler
      Resource Module”). On the customer side, ITT Corporation has awarded Merrimac a
      contract for an advanced Multi-Mix® filter assembly for use in an airborne
      Electronic Countermeasures (ECM) system.





Also
      in
      2006 and 2007, Merrimac aggressively pursued research funding from the United
      States Government to further advance its Multi-Mix® Microtechnology. Several
      white papers were presented to different Department of Defense (“DoD”)
      organizations within the United States Government.





DISCONTINUED
      OPERATIONS-FILTRAN MICROCIRCUITS INC.





GENERAL





Filtran
      Microcircuits Inc. (“FMI”) was established in 1983, and was acquired by Merrimac
      in February 1999. FMI is a manufacturer of microwave micro-circuitry for the
      high frequency communications industry. FMI has been engaged in the production
      of microstrip, bonded stripline, and thick metal-backed Teflon® (PTFE)
      microcircuits for RF applications including satellite, aerospace, PCS, fiber
      optic telecommunications, automotive, navigational and defense applications
      worldwide. FMI has supplied mixed dielectric multilayer and high speed
      interconnect circuitry to meet customer demand for high performance and
      cost-effective packaging.





Merrimac
      management determined, and the Board of Directors approved on August 9, 2007,
      that the Company should divest its FMI operations with the view to enable
      Merrimac to concentrate its resources on RF Microwave and Multi-Mix®
Microtechnology product lines to generate sustainable, profitable growth.
      Beginning with the third quarter of 2007, the Company reflected FMI as a
      discontinued operation and the Company reclassified prior financial statements
      to reflect the results of operations, financial position and cash flows of
      FMI
      as discontinued operations.





On
      December 28, 2007, the Company sold substantially all of the assets of FMI
      to
      Firan Technology Group Corporation (“FTG”), a manufacturer of high
      technology/high reliability printed circuit boards, that has operations in
      Toronto, Ontario, Canada and Chatsworth, California. The transaction was
      effected pursuant to an asset purchase agreement entered into between Merrimac,
      FMI and FTG. The total consideration payable by FTG was $1,482,000 (Canadian
      $1,450,000) plus the assumption of certain liabilities of approximately $368,000
      (Canadian $360,000).  FTG
      paid
      $818,000 (Canadian $800,000) of the purchase price at the closing on December
      28, 2007 and the balance was paid on February 21, 2008 following the conclusion
      of a transitional period.





STRATEGIC
      OVERVIEW




Merrimac
      seeks to leverage its core competencies in the development of High Power, High
      Frequency and High Performance products across its main platforms for
      growth:




·
            RF
                Microwave electronic components and subsystems;
                and




·
            Multi-Mix®.




Our
      strategy focuses on:




·
            Providing
                unique and cutting-edge customized technology
                solutions;




·
            Expanding
                existing customer relationships and attracting new customers with
                our
                smaller, more complex, more reliable, lower cost product
                offerings;




·
            Meeting
                the advanced needs of our defense, satellite and OEM wireless industry
                customers with innovative specialty applications and products;
                and


7




·
            Improving
                and integrating our internal development, engineering and production
                capacities to reduce costs and improve
                service.




To
      do
      this, we coordinate our marketing, research and development, and manufacturing
      operations to develop new products and expand our markets.




Merrimac's
      marketing and development activities focus on identifying new design
      opportunities for new long-term military and commercial production programs
      and
      applications in aerospace, navigational systems, telecommunications and cellular
      analog and digital wireless telecommunications electronics. Merrimac's research
      and development efforts are targeted towards providing customers with more
      complex, reliable, and compact products at lower costs.




Merrimac
      intends to continue to focus on customer service, technology innovation and
      process excellence to further expand its penetration into the defense, satellite
      communications and wireless markets. Essential components of the Merrimac's
      strategy include the following:




*Products.*




Our
      platforms for growth: RF Microwave, Multi-Mix® and High Volume Operations in
      Costa Rica focus on providing unique solutions and delivering profitable value
      to our key customers. High Power, High Frequency and High Performance are
      embedded competencies that drive  customer
      value and enable Merrimac to consistently meet and exceed the demanding needs
      and expectations of our customers.




·
            High
                Power: Our thermal management design and processes enable Merrimac
                products to achieve power levels greater than 500 watts.Our
                process enables the use of low loss dielectrics and metals, so that
                power
                dissipation is minimized (i.e. less heat is generated). In addition,
                thick
                metal layers and thermal vias are utilized to draw out, spread, and
                sink
                away heat generated in the circuits and modules. Further, since thick
                metal layers are directly bonded to dielectric layers using a high
                temperature process, the resulting module is robust, and able to
                withstand
                subsequent environmental processing temperatures without being adversely
                affected.





·
            High
                Frequency: Our products operate efficiently across high frequency
                bands up
                to 100 GHz, an ever-growing marketplace requirement.The
                efficient performance of circuits and modules at millimeter wave
                frequencies is enabled by our ability to miniaturize the printed
                circuit
                elements and integrate them with semiconductor microcircuits (MMICs).
                Our
                process allows the fabrication of a homogeneous circuit medium with
                accurate circuit feature
                producibility.




·
            High
                Performance: Our focus on technology innovation and process excellence
                delivers solutions that perform without failure in all mission-critical
                environments and under extremely demanding
                conditions.




*Pursue
      Technological Excellence* .




We
      intend
      to use our technological expertise and leadership in the defense, satellite
      and
      wireless markets to extend its competitive advantage. We intend to continue
      to
      invest in research and development and will focus our efforts on new product
      development for specific customer applications requiring integration of
      circuitry and further miniaturization, precision and volume applications. We
      will seek to advance our leadership in wireless technology by developing next
      generation products for the mobile and wireless networking markets. In addition,
      we will attempt to build upon our relationships with key original equipment
      manufacturers in order to develop state-of-the-art products.




Merrimac's
      research and development activities include the development of new designs
      for
      insertion into new programs and applications to enhance Merrimac's competitive
      position. Projects focusing on surface mounted devices, multilayer, and
      micro-electronic assemblies are directed toward development of more circuitry
      in
      smaller, lower cost, and more reliable packaging that is easier for customers
      to
      integrate into their products. Merrimac continues to expand its use of
      computer-aided design and manufacturing (CAD/CAM) in order to reduce design
      and
      manufacturing costs as well as development time.


8


*Strengthen
      Customer Relationships and Attract New Customers.*




Merrimac's
      customers are primarily major industrial corporations that integrate Merrimac's
      products into a wide variety of defense and commercial systems. Merrimac's
      customers include BAE Systems, The Boeing Company, Celestica, Inc., EADS
      Astrium, General Dynamics Corporation, ITT, Lockheed Martin Corporation, L-3
      Communications Corporation, Northrop Grumman Corporation, Raytheon Company
      and
      Space Systems Loral.




Merrimac’s
      customers desire smaller, lighter, more cost-effective, and highly integrated
      components, systems, and subsystems for future applications. Merrimac design
      engineers work to develop solutions to customer requirements that are unique
      or
      require special performance. Merrimac is committed to continuously enhancing
      its
      leading position in high-performance electronic signal processing components
      for
      communications, defense and satellite applications, thereby attracting new
      customers and increasing the reliance of current customers on the
      Company.




For
      most
      customers, Merrimac must be a “qualified” supplier, continually demonstrating
      our ability to meet their demanding design and manufacturing standards. For
      defense contractors, we are a mission-critical supplier. For Aerospace
      companies, our products meet the high reliability standards of space. In
      wireless communications, our Multi-Mix® products are being “qualified” and are
      supplying solutions to an ever-increasing number of major OEMs.




The
      qualification process brings with it subtle, yet very important differences.
      In
      defense and satellite communications, we must have the technology and process
      excellence to support custom applications in design, manufacturing and testing.
      In wireless communications, we must have the technology and process excellence
      to support large volume production requirements.




*Focus
      on efficiency and value.*




Improved
      production efficiencies coupled with the capacity of the Company's low-cost
      manufacturing facility in Costa Rica and more extensive use of automated test
      equipment such as Agilent network analyzers have resulted in a considerable
      reduction of the set-up time to take measurements, calibrate test equipment
      and
      provide data electronically. In addition, computerized cost controls such as
      closed job history and up-to-date work in process costs are also enhancing
      Merrimac's competitive position. Merrimac is continuing to invest in
      manufacturing capital equipment in all three of our facilities to provide
      greater capacity and flexibility and reduce operating costs.




*Defense
      and Satellite Communications.*




In
      the
      defense and satellite communications markets, Merrimac’s components are found in
      a diverse array of applications ranging from national missile defense systems
      to
      fighter jets, electronic warfare, shipboard radar communications and other
      mission-critical applications. Almost all satellites in orbit today carry aboard
      some Merrimac technology.




For
      our
      prime contractor customers in defense and satellite communications, we deliver
      highly customized solutions that are designed for specific applications under
      very specific design criteria and rigid requirements. Today defense and
      satellite communications customers seek components and subsystems that meet
      higher integration and performance standards in smaller, lighter and less costly
      to produce integrated modules. These products must have exceptional shielding
      properties and must be able to function without failure in environments with
      wide temperature changes and high levels of shock and vibration.




The
      cost
      rates utilized for cost-reimbursement contracts are subject to review by third
      parties and can be revised, which can result in additions to or reductions
      from
      revenue. Revisions which result in reductions to revenue are recognized in
      the
      period that the rates are reviewed and finalized; additions to revenue are
      recognized in the period that the rates are reviewed, finalized, accepted by
      the
      customer, and collectability from the customer is assured. The Company submits
      financial information regarding the cost rates on cost-reimbursement contracts
      for each fiscal year in which the Company performed work on cost-reimbursement
      contracts. The Company does not record any estimates on a regular basis for
      potential revenue adjustments,  as
      there
      currently is no reasonable basis on which to estimate such adjustments given
      the
      Company’s very limited experience with these contracts.


9


*Wireless.*




For
      original equipment manufacturing customers in the wireless communications
      market, we provide Total Integrated Packaging Solutions® to customers who prefer
      our value-added Multi-Mix® solutions to conventional approaches because it
      enables them to:




·
            Minimize
                considerable costs of design, test and measurement, packaging, and
                manufacturing, as well as the unpredictable follow-on costs typically
                associated with factory tuning and
                optimization;




·
            Utilize
                modules that integrate functionality. We dramatically reduce size,
                weight,
                cost, component count and optimize thermal management by providing
                leading-edge multifunction modules;




·
            Reduce
                the time and costs it takes to implement manufacturable and repeatable
                products; and




·
            Outsource
                functions that are not considered their own core competencies, which
                in
                turn allow them to maintain focus on their core business
                competencies.




*Pursue
      New and Existing Markets* .




We
      intend
      to use our core competencies and market position to pursue other wireless
      opportunities using the component and integration capabilities of our Multi-Mix®
technology. We plan to offer both custom components and higher orders of
      integrated assemblies for existing and developing space and defense requirements
      through the RF Microwave and Multi-Mix® technologies.




MARKETING





Merrimac
      markets its products in the United States directly to customers through a sales
      and marketing staff comprised of 14 employees and through 5 independent domestic
      sales organizations. Merrimac relies on 18 independent sales organizations
      to
      market its products elsewhere in the world. Merrimac's marketing program focuses
      on identifying new programs and applications for which Merrimac can develop
      prototypes leading to volume production orders.





Improved
      production efficiencies coupled with the capacity of the Company's low-cost
      manufacturing facility in Costa Rica and more extensive use of automated test
      equipment such as network analyzers from Agilent Technologies have resulted
      in a
      considerable reduction of the set-up time to take measurements, calibrate test
      equipment, and provide data electronically. In addition, computerized cost
      controls such as closed job history and up-to-date work in process costs are
      also enhancing Merrimac's competitive position. We are continuing to invest
      in
      capital manufacturing equipment in both of our facilities to provide greater
      capacity and flexibility and reduce operating costs.





Merrimac's
      customers are primarily major industrial corporations that integrate Merrimac's
      products into a wide variety of defense and commercial systems.





Merrimac's
      customers include:





·
            BAE
                Systems


·
            The
                Boeing Company


·
            Celestica,
                Inc.


·
            EADS
                Astrium


·
            General
                Dynamics Corporation


·
            ITT


·
            L-3
                Communications Corporation


·
            Lockheed
                Martin Corporation


·
            Northrop
                Grumman Corporation


·
            Raytheon
                Company


·
            Space
                Systems Loral


10


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




2007
            
            2006Raytheon
                Company
            
            
            16.6
            %
            
            12.6
            %Lockheed
                Martin Corporation
            
            
            11.3
            %
            
            10.5
            %Space
                Systems Loral
            
            
            9.8
            %
            
            7.9
            %Northrop
                Grumman Corporation
            
            
            7.0
            %
            
            7.1
            %The
                Boeing Company
            
            
            6.7
            %
            
            10.2
            %




Sales
      to
      the foreign geographic area of Europe were 7.8% and 5.2% of net sales in fiscal
      years 2007 and 2006, respectively.





Merrimac
      has internet addresses (www.merrimacind.com or www.multi-mix.com). Merrimac's
      product catalog is available on its websites.





EXPORT
      CONTROLS





Our
      products are subject to the Export Administration Regulations ("EAR")
      administered by the U.S. Department of Commerce and may, in certain instances,
      be subject to the International Traffic in Arms Regulations ("ITAR")
      administered by the U.S. Department of State. EAR restricts the export of
      dual-use products and technical data to certain countries, while ITAR restricts
      the export of defense products, technical data and defense services. We believe
      that we have implemented internal export procedures and controls in order to
      achieve compliance with the applicable U.S. export control regulations. The
      U.S.
      government agencies responsible for administering EAR and ITAR have significant
      discretion in the interpretation and enforcement of these regulations, and
      it is
      possible that these regulations could adversely affect our ability to sell
      our
      products to non-U.S. customers.




RESEARCH
      AND DEVELOPMENT





During
      2007, and 2006 research and development expenditures amounted to approximately
      $1,579,000 and $1,910,000, respectively. Substantially all of the research
      and
      development funds in fiscal 2007 were expended for new Multi-Mix®
Microtechnology products. Merrimac plans to commit research and development
      funds at similar levels in fiscal 2008, and will focus its efforts on new
      product development for specific customer applications requiring integration
      of
      circuitry and further miniaturization, precision and volume applications.





Merrimac's
      research and development activities include the development of prototypes for
      new programs and applications and the implementation of new technologies to
      enhance Merrimac's competitive position. Projects focusing on surface mounted
      devices, multilayer, and micro-electronic assemblies are directed toward
      development of more circuitry in smaller, lower cost, and more reliable
      packaging that is easier for customers to integrate into their products.
      Merrimac continues to expand its use of computer aided design and manufacturing
      (CAD/CAM) in order to reduce design and manufacturing costs as well as
      development time.





ENVIRONMENTAL
      REGULATION





Federal,
      state and local requirements relating to the discharge of substances into the
      environment, the disposal of hazardous waste and other activities affecting
      the
      environment have had and will continue to have an impact on Merrimac's
      manufacturing operations. Thus far, compliance with current environmental
      requirements has been accomplished without material effect on Merrimac's
      liquidity and capital resources, competitive position or financial statements,
      and management believes that such compliance will not have a material adverse
      effect on Merrimac's liquidity and capital resources, competitive position
      or
      financial statements in the future. Management cannot assess the possible effect
      of compliance with future requirements.





BACKLOG





Merrimac
      manufactures specialized components and subsystems pursuant to firm orders
      from
      customers and standard components for inventory. As of December 29, 2007,
      Merrimac had a firm backlog of orders of approximately $18.0 million. Merrimac
      estimates that approximately 85% of the orders in its backlog as of December
      29,
      2007 will be shipped within one year. Merrimac does not consider its business
      to
      be seasonal.


11





COMPETITION





Merrimac
      encounters competition in all aspects of its business. Merrimac competes both
      domestically and internationally in the military and commercial markets,
      specifically within the aerospace and telecommunications areas. Merrimac's
      competitors consist of entities of all sizes. Occasionally, smaller companies
      offer lower prices due to lower overhead expenses, and generally, larger
      companies have greater financial and operating resources than Merrimac, in
      addition to well-recognized brand names. Merrimac competes on the basis of
      technological performance, quality, reliability and dependability in meeting
      shipping schedules as well as on the basis of price. Merrimac believes that
      its
      performance with respect to the above factors have served it well in earning
      the
      respect and loyalty of many customers in the industry. These factors have
      enabled Merrimac over the years to successfully maintain a stable customer
      base
      and have directly contributed to Merrimac's ability to attract new
      customers.





MANUFACTURING,
      ASSEMBLY AND SOURCE OF SUPPLY





Manufacturing
      operations consist principally of design, assembly and testing of components
      and
      subsystems built from purchased electronic materials and components, fabricated
      parts, and printed circuits. Manual and semi-automatic methods are utilized
      depending principally upon production volumes. Merrimac has its own machine
      shop
      employing CAD/CAM techniques and etching facilities to handle soft and hard
      substrate materials. In addition, Merrimac maintains testing and inspection
      procedures intended to monitor production controls and enhance product
      reliability.





Merrimac
      began manufacturing in Costa Rica in the second half of 1996. In February 2001,
      the Company entered into a five-year lease in Costa Rica for a 36,200
      square-foot facility for manufacturing Multi-Mix® Microtechnology products. The
      lease was renewed for an additional five years in 2006. The leasehold
      improvements and capital equipment for this manufacturing facility were
      completed at a cost of approximately $5,600,000 and this facility was opened
      for
      production in August 2002.





Merrimac
      has developed and implemented a quality system to satisfy the needs of its
      customers and provide adequate assurance that its products will meet or exceed
      specified requirements. Merrimac continues to establish and refine procedures
      and supporting documentation to enable the fast transition from prototype
      engineering to operational manufacturing of products.





In
      October 2002, the Multi-Mix® operations in West Caldwell, New Jersey achieved
      certification to ISO 9001:2000. In December 2002, the Multi-Mix® facility in
      Costa Rica achieved certification to ISO 9001:2000. In August 2003, Merrimac’s
      quality system was revised to incorporate the Costa Rica facility with the
      West
      Caldwell facility. During 2003, FM Approvals performed required audits and
      issued certificates of Registration to ISO 9001:2000 covering both facilities.
      In June 2004, the West Caldwell facility was surveyed for compliance to the
      Aerospace standard AS9100. In December 2004, RW TUV (now TUV USA) issued a
      certificate of registration to the West Caldwell facility for ISO 9001:2000
      and
      AS9100. FM Approvals in Costa Rica and TUV USA in West Caldwell have maintained
      these registrations via periodic audits through March 2006. In October 2006,
      the
      Costa Rica facility successfully completed RW USA’s audit for AS9100 and ISO
      9001:2000. In January 2007 the West Caldwell facility successfully completed
      RW
      USA’s audit for AS9100 and ISO 9001:2000. In October/November 2007, both
      Merrimac’s West Caldwell and Costa Rica facilities were audited for
      re-certification to ISO 9001:2000 and AS9100. The recertification was completed
      in December 2007 and will remain in effect until December 2010, pending
      successful completion of the required periodic third party audits.





Electronic
      components and raw materials used in Merrimac's products are generally available
      from a sufficient number of qualified suppliers. Some materials are standard
      items. Subcontractors manufacture certain materials to Merrimac's
      specifications. Merrimac is dependent on single suppliers for certain of its
      components or materials.





EMPLOYEE
      RELATIONS





As
      of
      December 29, 2007, Merrimac employed approximately 180 full time employees,
      including 60 employees at Merrimac's Costa Rica facility. None of Merrimac's
      employees are represented by a labor organization. Management believes that
      relations with its employees are satisfactory.





At
      December 28, 2007, the date of the sale of its FMI discontinued operations,
      the
      Company employed approximately 50 full time employees. These employees worked
      through a transitional period with the acquiring company and then were provided
      termination payments in accordance with the Canadian Employment Standards Act
      in
      March 2008. Also see Item 3.


12


PATENTS





As
      of
      March 25, 2008, Merrimac owns 15 active patents with respect to certain
      inventions it developed and has received a Notice of Allowance from the U.S.
      Patent and Trademark Office for a new patent that is expected to be issued
      shortly. No assurance can be given that the protection that Merrimac has
      acquired through patents is sufficient to deter others, legally or otherwise,
      from developing or marketing competitive products. There can be no assurance
      that any of the patents will be found valid, if validity is challenged. Although
      Merrimac has from time to time filed patent applications in connection with
      the
      inventions which it believes are patentable, there can be no assurance that
      these applications will receive patents.


13


**ITEM
      1A. RISK FACTORS**




You
      should carefully consider the matters described below before making an
      investment decision.




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




*The
      market for our products, in particular our Multi-Mix® products, is new and
      rapidly evolving. If we are not able to develop or enhance our products, or
      to
      respond to customer needs, our net sales will suffer.*




Our
      future success depends in large part on our ability to develop and market our
      new line of Multi-Mix® modules, filters, couplers and delay lines products,
      particularly to the wireless base station and defense sectors. We will also
      need
      to continually enhance our existing core products (passive RF and microwave
      component assemblies, power dividers and other products), lower product cost
      and
      develop new products that maintain technological competitiveness. Our core
      products must meet changing customer, regulatory and particular technological
      requirements and standards, and our Multi-Mix® products especially must respond
      to the changing needs of our customers, particularly our OEM customers. These
      customer requirements might or might not be compatible with our current or
      future product offerings. We might not be successful in modifying our products
      and services to address these requirements and standards and our business could
      suffer.




*We
      have incurred losses each of the past two fiscal years and may incur losses
      in
      the future.*




We
      recorded a net loss of $5,426,000 for the year ended December 29, 2007, of
      which
      $4,387,000 was related to our discontinued operations. We recorded a net loss
      of
      $2,225,000 for the year ended December 30, 2006, of which $682,000 was related
      to our discontinued operations. The Company experienced a declining level of
      sales for 2007, primarily resulting from materially decreased bookings in 2006
      and resulting lower backlog of the Company's traditional products. We may incur
      losses in any of our future periods. Even if we do achieve profitability in
      future periods, we may not be able to sustain or increase our profitability
      in
      the short-term or long-term, on a quarterly or an annual basis, in subsequent
      periods. If our financial results fall below the expectations of investors,
      the
      price of our common stock may suffer.




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




Since
      1998, we have made capital investments of approximately $15.2 million in our
      proprietary line of Multi-Mix® Microtechnology products.




While
      we
      have generated sales and developed a customer base for our Multi-Mix® products,
      if a competitive product or decreased consumer demand for our Multi-Mix®
products resulted in significant decrease in those sales, our ability to recover
      our investment in our Multi-Mix® Microtechnology product assets could be
      negatively impacted and result in a write off of the carrying value of these
      assets and an impairment charge to our earnings.




In
      addition, we have invested significant engineering, research and development,
      personnel and other resources in developing our Multi-Mix Zapper® product line,
      introduced in June 2004. While sales to date have not been material, we intend
      to incur significant additional expenses, including sales and marketing costs,
      in implementing our strategic plan to commercialize various applications of
      our
      Multi-Mix® technologies. These products are direct drop-in replacements for
      competing technologies used in virtually all wireless base stations. There
      are
      competing technologies already in the marketplace, and in order to obtain market
      share we will have to convince customers to convert to our products from those
      that are already in use.




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




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


14




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




Sales
      to
      our five largest customers accounted for 51.4% of our net sales in the fiscal
      year ended December 29, 2007 and our largest customer, Raytheon Company,
      accounted for 16.6% of our 2007 net sales and Lockheed Martin Corporation
      accounted for 11.3% of our 2007 net sales. We depend on the continued growth,
      viability and financial stability of our customers, substantially all of which
      operate in an environment characterized by rapid technological change, short
      product life cycle, consolidation, and pricing and margin pressures. We expect
      to continue to depend upon a relatively small number of customers for a
      significant percentage of our revenue. Consolidation among our customers may
      further concentrate our business in a limited number of customers and expose
      us
      to increased risks relating to dependence on a small number of customers. In
      addition, a significant reduction in sales to any of our large customers or
      significant pricing and margin pressures exerted by a key customer would
      adversely affect our operating results. In the past, some of our large customers
      have significantly reduced or delayed the volume of products ordered from us
      as
      a result of changes in their business, consolidation or divestitures or for
      other reasons. We cannot be certain that present or future large customers
      will
      not terminate their arrangements with us or significantly change, reduce or
      delay the amount of products ordered from us, any of which would adversely
      affect our operating results.




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




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




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




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


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


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


15


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




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




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




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




Write
      offs or write downs of inventory generally arise from:




-
            declines
                in the market value of inventory;




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




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




Our
      products and therefore our inventories are subject to technological risk. At
      any
      time either new products may enter the market or prices of competitive products
      may be introduced with more attractive features or at lower prices than ours.
      There is a risk we may be unable to sell our inventory in a timely manner and
      avoid it becoming obsolete. As of December 29, 2007, our inventories including
      raw materials, work-in-process and finished goods, were valued at $5.0 million
      reflecting reductions due to valuation allowances for obsolescence and cost
      overruns of approximately $1.6 million against these inventories. In the event
      we are required to substantially discount our inventory or are unable to sell
      our inventory in a timely manner, we would be required to increase our valuation
      allowances and our operating results could be substantially adversely
      affected.




*We
      depend on a limited number of suppliers.*




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




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




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


16




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




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




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




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


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


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




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




We
      manufacture products to our customers’ specifications that are highly complex
      and may at times contain design or manufacturing defects. Defects have been
      discovered in products we manufactured in the past and despite our quality
      control and quality assurance efforts, defects may occur in the future. Defects
      in the products we manufacture, whether caused by design, manufacturing or
      component defects, may result in delayed shipments to customers or reduced
      or
      cancelled customer orders. Should these defects occur in large quantities or
      frequently, our business reputation may also be tarnished. In addition, these
      defects may result in liability claims against us. Even if customers are
      responsible for the defects, we may assume responsibility for any costs or
      payments.




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




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




-
            customer
                decisions to defer, accelerate or cancel
                orders;


-
            timing
                of shipments of orders for our
                products;


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


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


-
            announcements
                or introductions of new products by our
                competitors;


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


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


17




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




On
      December 16, 2004, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 123 (Revised 2004),
“ *Share-Based
      Payment* ”
(“SFAS
      123R”). SFAS 123R is a revision of Statement of Financial Accounting Standards
      No. 123, as amended, “ *Accounting
      for Stock-Based Compensation* ”
(“SFAS
      123”) and supercedes Accounting Principles Board Opinion No. 25,
“ *Accounting
      for Stock Issued to Employees”* .
      SFAS
      123R eliminates the alternative to use the intrinsic value method of accounting
      that was provided in SFAS 123, which generally resulted in no compensation
      expense being recorded in the financial statements related to the issuance
      of
      equity awards to employees. SFAS 123R requires us to measure all employee
      share-based compensation awards using a fair value method and to record such
      expense in the consolidated financial statements, as opposed to the pro forma
      note presentation previously used. We adopted SFAS 123R at the beginning of
      the first quarter in fiscal 2006, and will apply the provisions of the statement
      prospectively for any newly issued, modified or settled award after the date
      of
      initial adoption, as well as for any awards that were granted prior to the
      adoption date for which the requisite service period has not been provided
      as of
      the adoption date. We continue to use the Black-Scholes option pricing model
      to
      calculate total stock compensation expense. Stock compensation for 2007
      recognized under this SFAS NO. 123R resulted in a non-cash charge of $394,000
      to
      our operations and $189,000 in 2006. As of December 29, 2007 the total future
      compensation cost related to non-vested stock options and the employee stock
      purchase plan not yet recognized in the statement of operations was $827,000.
      Of
      that total, $395,000, $324,000 and $108,000 are expected to be recognized in
      2008, 2009 and 2010, respectively.





*Our
      revolving line of credit expires in October 2008 and the failure to renew the
      revolving line of credit or a renewal or refinancing on less favorable terms
      could have a material adverse effect on our business
      operations.*




The
      Company’s revolving line of credit with North Fork Bank (now Capital One, N.A.)
      expires in October 2008. We have complied with our financial covenants and
      anticipate the revolving line of credit will be renewed. In the event Capital
      One, N.A. does not renew the line of credit, we will attempt to refinance the
      revolving line of credit with another financial institution. In the event we
      are
      unable to renew our revolving line of credit or if we are required to renew
      or
      refinance our line of credit on less favorable terms, our business operations
      could suffer a material adverse effect.




*We
      have significant competition in our industry.*




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





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




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




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


18




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




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




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




Infringement
      suits are time consuming, complex, and expensive to litigate. Such litigation
      could cause a delay in the introduction of new products, require us to develop
      non-infringing technology, require us to enter into royalty or license
      agreements, if available, or require us to pay substantial damages. We have
      agreed to indemnify certain customers for infringement of third-party
      intellectual property rights. We could incur substantial expenses and costs
      in
      case of a successful indemnification claim. A significant negative impact would
      result if a successful claim of infringement were made against us and we could
      not develop non-infringing technology or license the infringed or similar
      technology on a timely and cost-effective basis.




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




We
      currently have 15 active patents. We plan to pursue intellectual property
      protection in foreign countries, primarily in the form of international patents,
      in instances where the technology covered is considered important enough to
      justify the added expense. By agreement, our employees who initiate or
      contribute to a patentable design or process are obligated to assign their
      interest in any potential patent to us.




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




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




*Our
      industry is subject to numerous government regulations.*




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


19




*Export
      controls.*




Our
      products are subject to the Export Administration Regulations ("EAR")
      administered by the U.S. Department of Commerce and may, in certain instances,
      be subject to the International Traffic in Arms Regulations ("ITAR")
      administered by the U.S. Department of State. EAR restricts the export of
      dual-use products and technical data to certain countries, while ITAR restricts
      the export of defense products, technical data and defense services. We believe
      that it has implemented internal export procedures and controls in order to
      achieve compliance with the applicable U.S. export control regulations. The
      U.S.
      government agencies responsible for administering EAR and ITAR have significant
      discretion in the interpretation and enforcement of these regulations, and
      it is
      possible that these regulations could adversely affect the Company's ability
      to
      sell its products to non-U.S. customers.




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




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




While
      we
      believe that current political and economic conditions in Costa Rica are
      relatively stable, such conditions may adversely change so as to affect
      underlying business assumptions about the current opportunities which exist
      for
      doing business in this country. In particular, the government in Costa Rica
      could change or the cost of labor and/or goods and services necessary to our
      operations may increase. We are also dependent on the availability of adequate
      air transportation to and from Costa Rica to send and to receive product from
      our factory.




*If
      we
      receive other than an unqualified opinion on the adequacy of our internal
      control over financial reporting as of January 3, 2009 (or January 2, 2010
      if
      proposed SEC rules delaying such requirement are adopted) and future
      year-ends as required by Section 404 of the Sarbanes-Oxley Act, investors could
      lose confidence in the reliability of our financial statements, which could
      result in a decrease in the value of our common stock.*




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




We
      are
      currently undergoing a comprehensive effort to comply with Section 404 of the
      Sarbanes-Oxley Act. As of the end of our 2007 fiscal year, we provided the
      report of management on the Company's internal control over financial reporting
      in our annual report containing the assessment by management of the
      effectiveness of our internal control over financial reporting. If, at the
      end
      of fiscal year 2008 (or fiscal year 2009 if proposed SEC rules delaying such
      requirement are adopted), management is unable to conclude that our
      internal controls over financial reporting are effective and if our independent
      auditors issue other than an unqualified opinion on the design, operating
      effectiveness or management’s assessment of internal control over financial
      reporting for fiscal year 2008, this could result in an adverse reaction in
      the
      financial markets due to a loss of confidence in the reliability of our
      financial statements, which could cause the market price of our shares to
      decline.




**ITEM 1B.**  **UNRESOLVED
      STAFF COMMENTS.**




None.


20


**ITEM 2.**  **PROPERTIES.**




**United
      States**





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





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





**Costa
      Rica**





The
      Company currently leases a 36,200 square-foot facility in San Jose, Costa Rica
      under a five-year lease which expired in February 2006 (with a five-year renewal
      option). The renewal option was exercised in February 2006 and the lease will
      continue through February 2011. This facility, which opened for production
      in
      August 2002, is used for manufacturing the Company's products.




**ITEM 3.**  **LEGAL
      PROCEEDINGS.**




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





On
      February 22, 2008, a statement of claim in Ontario Superior Court of Justice
      was
      filed by a former FMI employee against FMI seeking damages for approximately
      $77,000 ($75,000 Canadian) for wrongful dismissal following the sale of FMI’s
      assets to Firan Technology Group Corporation (“FTG”). On March 10, 2008, a
      statement of claim in Ontario Superior Court of Justice was filed by nineteen
      (19) former FMI employees against Merrimac, FMI and FTG seeking damages for
      wrongful dismissal for approximately $1,000,000 (Canadian $977,000) following
      the sale of FMI’s assets to FTG. The Company intends to defend these claims
      vigorously.





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




No
      matters were submitted to a vote of Merrimac's stockholders during the fourth
      quarter of fiscal 2007.


21


**PART II**




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




Merrimac's
      Common Stock has been listed and traded on The American Stock Exchange since
      July 11, 1988, under the symbol MRM. As of March 25, 2008 Merrimac had
      approximately 200 holders of record. Merrimac believes there are approximately
      800 additional holders in "street name" through broker nominees.





The
      following table sets forth the range of the high and low trading prices as
      reported by the AMEX for the period from January 1, 2006 to December 29, 2007.





Fiscal
                Year Ended December 29, 2007High
            
            LowFirst
                Quarter
            
            $
            10.10
            
            $
            8.65Second
                Quarter
            
            $
            10.50
            
            $
            8.86Third
                Quarter
            
            $
            10.45
            
            $
            9.50Fourth
                Quarter
            
            $
            10.15
            
            $
            8.64Fiscal
                Year Ended December 30, 2006High
            
            
            LowFirst
                Quarter
            
            $
            10.20
            
            $
            8.81Second
                Quarter
            
            $
            9.90
            
            $
            8.70Third
                Quarter
            
            $
            10.40
            
            $
            9.75Fourth
                Quarter
            
            $
            10.40
            
            $
            9.75





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





Stock
      Performance Chart: The following performance graph is a line graph comparing
      the
      yearly change in the cumulative total stockholder return on the Common Stock
      against the cumulative return of the AMEX Stock Market (U.S. Companies), and
      a
      line of business index comprised of the AMEX Technologies Index for the five
      fiscal years ended December 29, 2007.








22




**12/28/02**
            
            **1/3/04**
            
            **1/1/05**
            
            **12/31/05**
            
            **12/30/06**
            
            **12/29/07****Merrimac
                Industries, Inc.**
            
            
            **100.00**
            
            
            **143.16**
            
            
            **190.32**
            
            
            **189.47**
            
            
            **210.53**
            
            
            **213.68****AMEX
                Composite**
            
            
            **100.00**
            
            
            **146.44**
            
            
            **174.44**
            
            
            **215.26**
            
            
            **257.04**
            
            
            **299.37****AMEX
                Technology**
            
            
            **100.00**
            
            
            **156.38**
            
            
            **178.16**
            
            
            **165.29**
            
            
            **213.06**
            
            
            **231.42**




*The
      stock price performance included in this graph is not necessarily indicative
      of
      future stock price performance.*




**Equity
      Compensation Plan Information**




The
      following table gives information as of December 29, 2007, about the Company’s
      common stock that may be issued upon the exercise of options, warrants and
      rights under the Company’s existing equity compensation plans:




(a)
            
            (b)
            
            (c)Plan
                category
            
            Number of securitiesto
                be issued upon exercise of outstanding options, warrants
                and rights
            
            Weighted-average
              exercise price of
                outstanding options, warrants and rights
            
            Number of securities remaining
                available for future issuance
                under equity compensation plans (excluding securities
                reflected
              in
                column (a))Equity
                compensation plans approved by security holders
            
            
            594,747
            
            $
            9.30
            
            
            164,100Equity
                compensation plans not approved by security holders
            
            
            -
            
            
            -
            
            
            -Total
            
            
            594,747
            
            $
            9.30
            
            
            164,100


23


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




**OVERVIEW**





**CONTINUING
      OPERATIONS**





Merrimac
      Industries, Inc. is involved in the design, manufacture and sale of electronic
      component devices offering extremely broad frequency coverage and high
      performance characteristics, and microstrip, bonded stripline and thick
      metal-backed Teflon® (PTFE) and mixed dielectric multilayer circuits for
      communications, defense and aerospace applications. The Company's operations
      are
      conducted primarily through one business segment, electronic components and
      subsystems.





Merrimac
      is a versatile technologically oriented company specializing in radio frequency
      Multi-Mix®, stripline, microstrip and discreet element technologies. Of special
      significance has been the combination of two or more of these technologies
      into
      single components and integrated multifunction subassemblies to achieve superior
      performance and reliability while minimizing package size and weight. Merrimac
      components and integrated assemblies are found in applications as diverse as
      satellites, military and commercial aircraft, radar, cellular radio systems,
      medical and dental diagnostic instruments, personal communications systems
      and
      wireless connectivity. Merrimac maintains ISO 9001:2000 and AS 9100 registered
      quality assurance programs. Merrimac's components range in price from $0.50
      to
      more than $10,000 and its subsystems range from $500 to more than
      $1,500,000.





In
      accordance with the provisions of Statement of Financial Accounting Standards
      No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS
      No. 144), the assets and liabilities relating to FMI that were sold have been
      reclassified as held for sale in the consolidated balance sheets for 2006 and
      the results of operations of FMI for the current and prior periods are reported
      as discontinued operations and not included in the continuing operations
      figures.





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




2007
            
            2006Raytheon
                Company
            
            
            16.6
            %
            
            12.6
            %Lockheed
                Martin Corporation
            
            
            11.3
            %
            
            10.5
            %Space
                Systems Loral
            
            
            9.8
            %
            
            7.9
            %Northrop
                Grumman Corporation
            
            
            7.0
            %
            
            7.1
            %The
                Boeing Company
            
            
            6.7
            %
            
            10.2
            %




Sales
      to
      the foreign geographic area of Europe were 7.8% and 5.2% of net sales in fiscal
      years 2007 and 2006, respectively.





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




2007
            
            
            2006North
                America
            
            
            Rest
                of World
            
            
            North
                America
            
            
            Rest
                of World$
            
            %
            
            
            $
            
            %
            
            
            $
            
            %
            
            
            $
            
            %Military
                and commercial satellites
            
            $
            6,205,000
            
            
            28.4%
            
            
            $
            577,000
            
            
            2.6%
            
            
            $
            9,389,000
            
            
            41.6%
            
            
            $
            602,000
            
            
            2.7%Defense
            
            $
            5,092,000
            
            
            23.3%
            
            
            $
            853,000
            
            
            3.9%
            
            
            $
            5,016,000
            
            
            22.3%
            
            
            $
            517,000
            
            
            2.3%Commercial
            
            $
            8,371,000
            
            
            38.2%
            
            
            $
            789,000
            
            
            3.6%
            
            
            $
            6,468,000
            
            
            28.7%
            
            
            $
            539,000
            
            
            2.4%





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





2007
            
            2006Initial
                design orders
            
            
            24
            %
            
            23
            %Repeat
                design orders
            
            
            62
            %
            
            63
            %Catalog
                sale orders
            
            
            14
            %
            
            14
            %





The
      Company orders from its defense and satellite customers were higher during
      fiscal year 2007 as compared to fiscal year 2006. Nevertheless, in times of
      armed conflict or war, military spending is concentrated on armaments build
      up,
      maintenance and troop support, and not on the research and development and
      specialty applications that are the Company’s core strengths and revenue
      generators. The Company’s orders during fiscal year 2007 for its Multi-Mix®
Microtechnology products exceeded 2006 levels. The Company anticipates orders
      to
      increase in the first quarter of 2008 as compared to the first quarter of 2007,
      based on inquiries from existing customers, requests to quote from prospective
      and existing customers and market research. The Company also expects improved
      first quarter 2008 sales, as compared to the first quarter of 2007, due to
      the
      higher backlog that resulted from the increase in orders for 2007.





The
      Company continued to experience losses from continuing operations in 2007 due
      to
      lower gross profit from the impact of a lower sales level during the first
      half
      of 2007 having to absorb fixed manufacturing costs. The lower sales levels
      of
      the first half of 2007 were due to reduced orders from delays in space and
      defense programs that lowered available backlog. While the Company reduced
      its
      cost structure during the beginning of 2007, the increased orders and backlog
      during 2007 required additional hiring and their associated personnel costs.
      Sales increased during the second half of 2007 as compared to the second half
      of
      2006, due to the increased defense and satellite orders that were received
      starting in the first quarter of 2007, but were not sufficient to restore
      annual profitability.


24





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





Depreciation
      and amortization expenses exceeded capital expenditures for new projects and
      production equipment during 2007 by approximately $800,000, and the Company
      anticipates that depreciation and amortization expenses will exceed capital
      expenditures in fiscal year 2008 by approximately $900,000. The Company intends
      to issue up to $1,700,000 of purchase order commitments for capital equipment
      from various vendors. The Company anticipates that such equipment will be
      purchased and become operational during fiscal year 2008. The Company’s planned
      equipment purchases and other commitments are expected to be funded through
      cash
      resources and cash flows expected to be generated from operations, and
      supplemented by the Company’s $5,000,000 revolving credit facility, which
      expires October 18, 2008. The Company anticipates the revolving credit facility
      will be renewed.





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





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





**DISCONTINUED
      OPERATIONS**





Filtran
      Microcircuits Inc. (“FMI”) was established in 1983, and was acquired by Merrimac
      in February 1999. FMI is a manufacturer of microwave micro-circuitry for the
      high frequency communications industry. FMI has been engaged in the production
      of microstrip, bonded stripline, and thick metal-backed Teflon® (PTFE)
      microcircuits for RF applications including satellite, aerospace, PCS, fiber
      optic telecommunications, automotive, navigational and defense applications
      worldwide. FMI has supplied mixed dielectric multilayer and high speed
      interconnect circuitry to meet customer demand for high performance and
      cost-effective packaging.





Merrimac
      management determined, and the Board of Directors approved on August 9, 2007,
      that the Company should divest its FMI operations with the view to enable
      Merrimac to concentrate its resources on RF Microwave and Multi-Mix®
Microtechnology product lines to generate sustainable, profitable growth.
      Beginning with the third quarter of 2007, the Company reflected FMI as a
      discontinued operation and the Company reclassified prior financial statements
      to reflect the results of operations, financial position and cash flows of
      FMI
      as discontinued operations.





On
      December 28, 2007, the Company sold substantially all of the assets of FMI
      to
      Firan Technology Group Corporation, a manufacturer of high technology/high
      reliability printed circuit boards, that has operations in Toronto, Ontario,
      Canada and Chatsworth, California. The transaction was effected pursuant to
      an
      asset purchase agreement entered into between Merrimac, FMI and FTG. The total
      consideration payable by FTG was $1,482,000 (Canadian $1,450,000) plus the
      assumption of certain liabilities of approximately $368,000 (Canadian $360,000).
      FTG paid $818,000 (Canadian $800,000) of the purchase price at the closing
      on
      December 28, 2007 and the balance was paid on February 21, 2008 following the
      conclusion of a transitional period.


25


Operating
      results of FMI, which were formerly represented as Merrimac’s microwave
      micro-circuitry segment, are summarized as follows:





Years
                EndedDecember
                29,
              2007
            
            December
                30,
              2006Net
                sales
            
            $
            3,628,000
            
            $
            5,045,000Loss
                before provision (benefit) for income taxes
            
            
            (5,877,000
            )
            
            (751,000
            )Gain
                on sale of assets of discontinued operation
            
            
            1,936,000
            
            
            -Provision
                (benefit) for income taxes
            
            
            446,000
            
            
            (69,000
            )Net
                loss
            
            $
            (4,387,000
            )
            $
            (682,000
            )





**CRITICAL
      ACCOUNTING ESTIMATES AND POLICIES**





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





**Impairment
      of long-lived assets**





The
      following is a summary of the carrying amounts of the Multi-Mix® Microtechnology
      net assets included in the Company's consolidated financial statements at
      December 29, 2007 and the related future planned purchases and lease obligation
      commitments through January 2011.





Net
                assets:Property,
                plant and equipment, at cost
            
            $
            14,789,000Less
                accumulated depreciation and amortization
            
            
            9,308,000Property,
                plant and equipment, net
            
            
            5,481,000Inventories
            
            
            707,000Other
                assets, net
            
            
            159,000Total
                net assets at December 29, 2007
            
            $
            6,347,000Commitments:Planned
                equipment purchases for 2008
            
            $
            680,000Lease
                obligations through January 2011
            
            
            575,000Total
                commitments
            
            $
            1,255,000Total
                net assets and commitments
            
            $
            7,602,000





Approximately
      34% of the property, plant and equipment may be utilized in other areas of
      our
      electronic components and subsystems operations.





The
      Company anticipates receiving additional orders during 2008 for its Multi-Mix®
Microtechnology products,  based
      on
      inquiries from existing customers, requests to quote from new and existing
      customers and market research, for which substantial research and development
      costs have also been incurred. Any future demand for Multi-Mix® for the wireless
      market is dependent on various third-party programs and is directly related
      to
      the timing of our customers’ and potential customers’ phase-out of existing
      programs and their migration, which is not assured and has not yet commenced
      commercially, toward new programs to meet their customers’ new requirements.
      While these circumstances have resulted in the delay or cancellation of
      Multi-Mix® Microtechnology product purchases that had been anticipated from
      certain specific customers or programs, the Company has implemented a strategic
      plan utilizing product knowledge and customer focus to expand specific sales
      opportunities. However, continued extended delay or reduction from planned
      levels in new orders expected from customers for these products could require
      the Company to pursue alternatives related to the utilization or realization
      of
      these assets and commitments, the net result of which could be materially
      adverse to the financial results and position of the Company. In accordance
      with
      the Company’s evaluation of Multi-Mix® under SFAS No. 144, the Company has
      determined no provision for impairment is required at this time. Management
      will
      continue to monitor the recoverability of the Multi-Mix®
assets.


26


**Contract
      Revenue Recognition**





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





The
      cost
      rates utilized for cost-reimbursement contracts are subject to review by third
      parties and can be revised, which can result in additions to or reductions
      from
      revenue. Revisions which result in reductions to revenue are recognized in
      the
      period that the rates are reviewed and finalized; additions to revenue are
      recognized in the period that the rates are reviewed, finalized, accepted by
      the
      customer, and collectability from the customer is assured. The Company submits
      financial information regarding the cost rates on cost-reimbursement contracts
      for each fiscal year in which the Company performed work on cost-reimbursement
      contracts. The Company does not record any estimates on a regular basis for
      potential revenue adjustments, as there currently is no reasonable basis on
      which to estimate such adjustments given the Company’s very limited experience
      with these contracts. No revenue was recognized related to cost-reimbursement
      contracts during 2007. The Company recognized revenue of $715,000 related to
      cost-reimbursement contracts in 2006.





**Inventory
      Valuation**





Inventories
      are valued at the lower of average cost or market. Inventories are periodically
      reviewed for their projected manufacturing usage utilization and, when
      slow-moving or obsolete inventories are identified, a provision for a potential
      loss is made and charged to operations. Total inventories are net of valuation
      allowances for obsolescence and cost overruns of $1,623,000 at December 29,
      2007
      and $1,172,000 at December 30, 2006, of which $202,000 and $85,000,
      respectively, represented cost overruns.





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




Write
      offs or write downs of inventory generally arise from:




-
            declines
                in the market value of inventory;
                and




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




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




**Valuation
      of Deferred Tax Assets**





The
      Company currently has significant deferred tax assets resulting from net
      operating loss carryforwards, tax credit carryforwards and deductible temporary
      differences, which should reduce taxable income in future periods. A valuation
      allowance is required when it is more likely than not that all or a portion
      of a
      deferred tax asset will not be realized. The Company's 2002, 2003, 2006 and
      2007
      net losses weighed heavily in the Company's overall assessment. As a result
      of
      the assessment, the Company established a full valuation allowance for its
      remaining net domestic deferred tax assets at December 28, 2002. This assessment
      continued unchanged from 2003 through 2007.


27


CONSOLIDATED
      STATEMENTS OF OPERATIONS SUMMARY





The
      following table reflects the percentage relationships of items from the
      Consolidated Statements of Operations as a percentage of net sales.





Percentage
                of Net SalesYears
                Ended(Unaudited)December
                29,
              2007
            
            December
                30,
              2006Net
                sales
            
            
            100.0
            %
            
            100.0
            %Costs
                and expenses:Cost
                of sales
            
            
            58.4
            
            
            59.3Selling,
                general and administrative
            
            
            38.6
            
            
            38.1Research
                and development
            
            
            7.2
            
            
            8.5Restructuring
                charge
            
            
            -
            
            
            .9104.2
            
            
            106.8Operating
                loss
            
            
            (4.2
            )
            
            (6.8
            )Interest
                and other expense, net
            
            
            (.6
            )
            
            (.1
            )Loss
                  from continuing operationsbefore
                  income taxes
            
            
            (4.8
            )
            
            (6.9
            )Provision
                (benefit) for income taxes
            
            
            -
            
            
            -Loss
                from continuing operations
            
            
            (4.8
            )
            
            (6.9
            )Loss
                  from discontinued operations, net ofincome
                  taxes
            
            
            (20.0
            )
            
            (3.0
            )Net
                loss
            
            
            (24.8
            )%
            
            (9.9
            )%





**2007
      COMPARED TO 2006**





*Net
      sales.*





Consolidated
      results of operations for 2007 reflect a decrease in net sales from 2006 of
      $644,000 or 2.9% to $21,887,000. Sales for 2006 included $1,200,000 of revenue
      recognized in connection with the early close out of a fixed price customer
      contract during the second quarter  which
      contract did not recur in 2007. Sales increased during the second half of 2007
      as compared to the second half of 2006, due to the increased defense and
      satellite orders that were received starting in the first quarter of
      2007.





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





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





2007
            
            2006Beginning
                Backlog
            
            $
            11,490,000
            
            $
            12,050,000Plus
                Bookings
            
            $
            28,388,000
            
            $
            21,972,000Less
                Net Sales
            
            $
            21,887,000
            
            $
            22,532,000Ending
                Backlog
            
            $
            17,991,000
            
            $
            11,490,000Book-to-Bill
                Ratio
            
            
            1.30
            
            
            0.98





Orders
      of
      $28,388,000, a new Merrimac record for a fiscal year, were received during
      fiscal year 2007, an increase of $6,416,000 or 29.2 percent compared to
      $21,972,000 in orders received during fiscal year 2006. Backlog increased by
      $6,501,000 or 56.6 percent to $17,991,000 at the end of fiscal year 2007
      compared to $11,490,000 at year-end 2006, due to the increased orders received
      during 2007. The book-to-bill ratio for fiscal year 2007 was 1.30 to 1 and
      for
      fiscal year 2006 was 0.98 to 1. The orders, backlog and book-to-bill information
      for the current and prior periods exclude discontinued operations
      information.





*Cost
      of sales and gross profit.*





The
      following table provides comparative gross profit information for the past
      two
      years:




2007
            
            
            
            
            
            2006$
            
            Increase/
                (Decrease)
              From
              Prior
                Year
            
            %
                of
              Net
              Sales
            
            $
            
            Increase/
                (Decrease)
              From
              Prior
                Year
            
            %
                of
              Net
              SalesGross
                profit
            
            $
            9,099,000
            
            $
            (76,000
            )
            
            41.6%
            
            $
            9,175,000
            
            $
            (1,107,000
            )
            
            40.7%


28





Gross
      profit for fiscal year 2007 was $9,099,000, a decrease of $76,000 or 0.8
      percent, and was 41.6 percent of sales as compared to gross profit of $9,175,000
      or 40.7 percent of sales for fiscal year 2006. Gross profit for fiscal year
      2006
      also included $1,060,000 from the early close out of a fixed price customer
      contract. Gross profit percentage increased during 2007 due to an improved
      product mix of higher margin items.





Depreciation
      and amortization expense included in 2007 consolidated cost of sales was
      $2,185,000, an increase of $33,000 compared to 2006. The increase in
      depreciation and amortization expense was due to the addition of certain
      production and testing equipment 2007. For 2007, approximately $1,545,000 of
      depreciation and amortization expense was associated with Multi-Mix®
Microtechnology capital assets as compared to $1,490,000 in 2006.





*Selling,
      general and administrative expenses.*





Selling,
      general and administrative expenses of $8,435,000 for 2007 decreased by $156,000
      or 1.8%, and when expressed as a percentage of net sales, increased by 0.4
      percentage points to 38.5% compared to 2006. The 2007 selling, general and
      administrative expenses decreased due to lower commissions on the lower
      sales  level
      and
      lower administrative expenses.





*Research
      and development expenses.*





Research
      and development expenses for new products were $1,579,000 for 2007, a decrease
      of $331,000 or 17.3% and when expressed as a percentage of net sales, a decrease
      of 1.3 percentage points to 7.2% compared to 2006. Substantially all of the
      research and development expenses were related to Multi-Mix® Microtechnology,
      power amplifier products. The Company anticipates that these expenses will
      increase in future periods in connection with further implementation of our
      strategic plan for Multi-Mix®.





*Operating
      loss from continuing operations.*





Consolidated
      operating loss from continuing operations for 2007 was $916,000 compared to
      consolidated operating loss from continuing operations of $1,526,000 for 2006.





The
      lower
      operating loss for 2007 was due to the lower research and development costs
      and
      selling, general and administrative costs compared to 2006 and restructuring
      charges that did not recur in 2007.





*Interest
      and other expense, net.*





Interest
      and other expense, net was $123,000 for 2007 compared to interest and other
      expense, net of $18,000 for 2006. Interest expense for 2006 includes the
      write-off of $167,000 of unamortized deferred debt costs related to our prior
      financing agreement. Interest expense for 2007 and 2006 was principally incurred
      on borrowings under the term loans which the Company consummated during the
      fourth quarter of 2003 and refinanced in October 2006. The lower cash balances
      during 2007, due mainly to the March 2007 repurchase, in a private transaction,
      of 238,700 shares of its Common Stock for the treasury at $9.00 per share for
      an
      aggregate total of $2,148,300 from a group of investors, generated less interest
      income on the Company’s free cash balances during 2007 as compared to
      2006.





*Income
      taxes.*





On
      December 31, 2006, Merrimac adopted FIN 48, which clarifies the accounting
      for
      uncertainty in tax positions. As of that date Merrimac had no uncertain tax
      positions and did not record any additional benefits or liabilities. At December
      29, 2007, Merrimac had no uncertain tax positions and did not record any
      additional benefits or liabilities. Merrimac will recognize any accrued interest
      or penalties related to unrecognized tax benefits within the provision for
      income taxes.





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





*Loss
      from continuing operations.*





For
      the
      reasons set forth above, loss from continuing operations for 2007 was $1,039,000
      compared to a loss from continuing operations of $1,544,000 for 2006. Loss
      from
      continuing operations for 2007 was $.35 per share compared to a loss from
      continuing operations of $.49 per share for 2006.





*Discontinued
      operations* .





Loss
      from
      discontinued operations for 2007 was $4,387,000 compared to a loss from
      discontinued operations of $682,000 for 2006. Loss per share from discontinued
      operations for 2007 was $1.48 compared to a loss from discontinued operations
      of
      $.22 per share for 2006.





The
      increase in loss from discontinued operations was attributable to a $1,417,000
      decrease in net sales of microwave micro-circuitry products. The decrease in
      sales of the microwave micro-circuitry products for 2007 was due to declines
      in
      the segment’s defense orders that had been expected to renew in 2006 and 2007.
      FMI sales includes sales to Merrimac of $225,000 and $155,000 in 2007 and 2006,
      respectively. The decrease in gross margin percent for 2007 is due to higher
      material and overhead costs and lower production yields.


29





Research
      and development costs for 2007 were $121,000 at FMI, an increase of $9,000
      from
      such FMI expenses in 2006.





Loss
      from
      discontinued operations includes goodwill impairment charges of $3,756,000
      and a
      third quarter 2007 charge of $586,000 to write down the net assets held for
      sale
      of FMI to estimated fair value.





For
      2007,
      operating loss for FMI was $5,743,000 compared to an operating loss of $511,000
      for 2006 due to the reasons listed above.





As
      a
      result of the sale of the Company’s discontinued operations in the fourth
      quarter of 2007, the Company recorded a gain from the disposal of discontinued
      operations of $1,936,000, which primarily consists of the non-cash realization
      of foreign currency translation adjustment of $2,025,000.





The
      2007
      deferred tax provision was due to a charge of $506,000 to provide a full
      valuation allowance for a Canadian net deferred tax asset. The current foreign
      tax benefits for the years ended December 29, 2007 and December 30, 2006 of
      $60,000 and $69,000, respectively, represent refundable Canadian provincial
      tax
      credits for which FMI, as a technology company, has qualified.





*Net
      loss.*





Net
      loss
      for 2007 was $5,426,000 compared to a net loss of $2,225,000 for 2006 for the
      reasons described above. Net loss per share for 2007 was $1.83 compared to
      a net
      loss of $.71 per share for 2006.





**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      Company had liquid resources comprised of cash and cash equivalents totaling
      approximately $2,000,000 at December 29, 2007 compared to approximately
      $5,400,000 at December, 30, 2006. The Company's working capital was
      approximately $9,900,000 and its current ratio was 3.5 to 1 at December 29,
      2007
      compared to $13,300,000 and 4.9 to 1, respectively, at December 30, 2006. At
      December 29, 2007 the Company had available borrowing capacity under its
      revolving line of credit of $3,200,000. Included in cash and cash equivalents
      at
      December 29, 2007 was $427,000 that was held in escrow by our Canadian counsel
      that was awaiting wire transfer to our operating account on the next available
      banking day.





The
      Company’s liquidity needs for the next year plus its planned equipment purchases
      and other commitments are expected to be funded through cash resources and
      cash
      flows expected to be generated from operations, and supplemented, if necessary,
      by the Company’s $5,000,000 revolving credit facility, which expires October 18,
      2008. The Company anticipates the revolving credit facility will be
      renewed.





The
      Company's activities from continuing operations provided operating cash flows
      of
      $881,000 during 2007 compared to using $659,000 of operating cash flows during
      2006. The primary sources of operating cash flows from continuing operations
      for
      2007 were the loss from continuing operations of $1,039,000 which was reduced
      by
      depreciation and amortization of $2,365,000 and share-based compensation of
      $394,000, a decrease in other current assets of $184,000, aggregate increase
      in
      accounts payable, customer deposits and accrued liabilities of $420,000 offset
      by an increase in accounts receivable of $167,000 and an increase in inventories
      of $1,260,000. The primary uses of operating cash flows from continuing
      operations for 2006 were the loss from continuing operations of $1,543,000
      which
      was reduced by depreciation and amortization of $2,333,000, amortization of
      deferred financing costs of $211,000 and share-based compensation of $189,000,
      increases in accounts receivable of $1,057,000, inventory of $120,000,
      reductions of other current assets of $45,000 and other assets of $66,000,
      and
      an aggregate decrease in accounts payable, customer deposits and accrued
      liabilities of $575,000.





The
      Company made net capital investments in property, plant and equipment of
      $1,546,000 during 2007, compared to net capital investments made in property,
      plant and equipment of $1,597,000 during 2006. 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® Microtechnology
      was $6,347,000 at the end of 2007, a decrease of $400,000 compared to $6,747,000
      at the end of fiscal year 2006.





The
      major
      uses of cash flows from financing activities were the repurchase, in a private
      transaction, of 238,700 shares of its Common Stock for the treasury at $9.00
      per
      share for an aggregate total of $2,148,300 from a group of investors on March
      14, 2007 and the contractual repayment of $550,000 of the Company’s term
      loans.




On
      October 18, 2006, the Company entered into a financing agreement with North
      Fork
      Bank (now Capital One, N.A.) which consists of a two-year $5,000,000 revolving
      line of credit, a five-year $2,000,000 machinery and equipment term loan due
      October 1, 2011 (“Term Loan”) and a ten-year $3,000,000 real estate term loan
      due October 1, 2016 (“Mortgage Loan”). This financing agreement replaced the
      prior financing agreement with CIT. Completion of the new financing agreement
      resulted in additional cash loan proceeds of approximately $2,900,000 plus
      the
      release of previously restricted cash of $1,500,000. The revolving line of
      credit is subject to an availability limit under a borrowing base calculation
      (85% of eligible accounts receivable plus up to 50% of eligible raw materials
      inventory plus up to 25% of eligible electronic components, with an inventory
      advance sublimit not to exceed $1,500,000, as defined in the financing
      agreement). The revolving line of credit expires October 18, 2008. The Company
      anticipates the revolving credit facility will be renewed. At December 29,
      2007,
      the Company had available borrowing capacity under its revolving line of credit
      of $3,200,000. The revolving line of credit bears interest at the prime rate
      less 0.50% (6.75% at December 29, 2007 and currently 5.50%) or LIBOR plus 2.00%.
      The principal amount of the Term Loan is payable in 59 equal monthly
      installments of $33,333 and one final payment of the remaining principal
      balance. The Term Loan bears interest at the prime rate less 0.50% (6.75% at
      December 29, 2007 and currently 5.50%) or LIBOR plus 2.25%. The principal amount
      of the Mortgage Loan is payable in 119 equal monthly installments of $12,500
      and
      one final payment of the remaining principal balance. The Mortgage Loan bears
      interest at the prime rate less 0.50% (6.75% at December 29, 2007 and currently
      5.50%) or LIBOR plus 2.25%. At December 29, 2007, the Company, under the terms
      of its agreement with North Fork Bank, elected to convert $1,500,000 of the
      Term
      Loan and $2,800,000 of the Mortgage Loan from their prime rate base to
      LIBOR-based interest rate loans for six months at an interest rate of 7.6325%,
      which expired January 18, 2008. The revolving line of credit, the Term Loan
      and
      the Mortgage Loan are secured by substantially all assets located within the
      United States and the pledge of 65% of the stock of the Company's subsidiaries
      located in Costa Rica and Canada. The provisions of the financing agreement
      require the Company to maintain certain financial covenants. The Company was
      in
      compliance with these covenants at December 29, 2007. In connection with the
      new
      financing agreement with North Fork Bank, the Company took a charge to interest
      expense of approximately $167,000 in the fourth quarter of 2006 related to
      the
      write-off of the unamortized loan costs related to the prior financing
      agreement.


30





North
      Fork Bank and the Company amended the financing agreement, as of May 15, 2007,
      which (i) eliminated the fixed charge coverage ratio covenant for the quarter
      ended June 30, 2007, (ii) added a covenant related to earnings before interest,
      taxes, depreciation and amortization (“EBITDA”) for the four quarters ended June
      30, 2007 to require the Company to achieve a minimum level of EBITDA, and (iii)
      modified the fixed charge coverage ratio covenant for periods after the quarter
      ending September 29, 2007. The Company was in compliance with these amended
      covenants at December 29, 2007.





On
      August
      9, 2007, North Fork Bank and Merrimac entered into a Pledge and Security
      Agreement, under which North Fork Bank consented to the guaranty by Merrimac
      of
      FMI's borrowings under the revolving credit agreement with The Bank of Nova
      Scotia in the amount of up to $250,000 (Canadian). In consideration for North
      Fork Bank providing such consent, Merrimac deposited $250,000 into a controlled
      collateral account with North Fork Bank and also agreed to prepay the mortgage
      loan portion of the credit facility with North Fork Bank with fifty percent
      of
      the net proceeds from a sale of FMI, up to a maximum amount of $500,000. This
      agreement terminated in November 2007 when The Bank of Nova Scotia terminated
      FMI’s revolving credit agreement. Upon the termination of such agreement, the
      Company agreed to repay a portion of its Mortgage Loan with the funds in the
      controlled collateral account upon the expiration of the LIBOR contracts in
      January 2008. On January 18, 2008, Merrimac paid $250,000 of the Mortgage Loan
      using the funds previously deposited into the controlled collateral
      account.





The
      Company’s contractual obligations as of December 29, 2007 are as
      follows:





Payment
                due by period (in thousands)Contractual
                Obligations
            
            Total
            
            Less
                than
              1
                year
            
            1-3
                years
            
            3-5
                years
            
            More
                than
              5
                yearsLong-Term
                Debt Obligations
            
            $
            4,313
            
            $
            550
            
            $
            1,100
            
            $
            600
            
            $
            2,063Operating
                Lease Obligations
            
            
            1,194
            
            
            399
            
            
            765
            
            
            30
            
            
            -Total
            
            $
            5,507
            
            $
            949
            
            $
            1,865
            
            $
            630
            
            $
            2,063





Depreciation
      and amortization expenses exceeded capital expenditures for new projects and
      production equipment during 2007 by approximately $800,000, and the Company
      anticipates that depreciation and amortization expenses will exceed capital
      expenditures in fiscal year 2008 by approximately $900,000. The Company intends
      to issue up to $1,700,000 of purchase order commitments for capital equipment
      from various vendors. The Company anticipates that such equipment will be
      purchased and become operational during fiscal year 2008.





Related
      to the discontinued operations of FMI, there is a remaining lease commitment
      on
      its leased facility of approximately $200,000, however, the Company anticipates
      settling the remaining lease commitment for a reduced amount.





The
      functional currency for the Company’s Costa Rica operations is the United States
      dollar. The functional currency for the Company’s previously wholly-owned
      subsidiary FMI is the Canadian dollar. The change in accumulated other
      comprehensive income for 2007 and 2006 reflect the changes in the exchange
      rates
      between the Canadian dollar and the United States dollar for those respective
      periods. Following the sale of the Company’s discontinued operations, there is
      no foreign currency translation adjustment at December 29, 2007.





**RELATED
      PARTY TRANSACTIONS**





In
      May
      1998, the Company sold 22,000 shares of Common Stock to Mason N. Carter,
      Chairman, President and Chief Executive Officer of the Company, at a price
      of
      $11.60 per share, which approximated the average closing price of the Company's
      Common Stock during the first quarter of 1998. The Company lent Mr. Carter
      $255,000 in connection with the purchase of these shares and combined that
      loan
      with a prior loan to Mr. Carter in the amount of $105,000. The resulting total
      principal amount of $360,000 was payable May 4, 2003 and bore interest at a
      variable interest rate based on the prime rate. This loan was further amended
      on
      July 29, 2002. Accrued interest of $40,000 was added to the principal, bringing
      the new principal amount of the loan to $400,000, the due date was extended
      to
      May 4, 2006, and interest (at the same rate as was previously applicable) was
      payable monthly. Mr. Carter pledged 33,000 shares of Common Stock as security
      for this loan, which was a full-recourse loan.





On
      March
      29, 2006, the Company entered into an agreement with Mr. Carter to purchase
      42,105 shares of the Company's common stock owned by Mr. Carter at a purchase
      price of $9.50 per share (the closing price of the common stock on March 29,
      2006) resulting in a total purchase price for the shares of $399,998. As a
      condition to the Company’s obligation to purchase the shares, concurrent with
      the Company’s payment of the purchase price Mr. Carter paid to the Company
      $400,000 (plus any accrued and unpaid interest) in full satisfaction of Mr.
      Carter’s promissory note in favor of the Company dated July 29, 2002. This
      transaction was closed on April 24, 2006.


31





During
      fiscal years 2007 and 2006, respectively, the Company's General Counsel, Katten
      Muchin Rosenman LLP, was paid $350,000 and $402,000 for providing legal services
      to the Company. A director of the Company is Counsel to the firm of Katten
      Muchin Rosenman LLP but does not share in any fees paid by the Company to the
      law firm.




During
      fiscal years 2007 and 2006, the Company retained Career Consultants, Inc. and
      SK
      Associates to perform executive searches and to provide other services to the
      Company. The Company paid an aggregate of $32,000 and $10,000 to these companies
      during 2007 and 2006, respectively. A director of the Company is the Chairman
      and Chief Executive Officer of each of these companies. ****





During
      each of fiscal years 2007 and 2006, a director of the Company was paid $36,000
      for providing technology-related consulting services to the
      Company.





During
      fiscal year 2006 DuPont Electronic Technologies (“DuPont”), a stockholder, was
      paid $32,000 for providing technological and marketing-related personnel and
      services on a cost-sharing basis to the Company under the Technology Agreement
      dated February 28, 2002. No payments were made to DuPont during 2007. A director
      of the Company is an officer of DuPont, but did not share in any of these
      payments.




Each
      director who is not an employee of the Company receives a monthly director's
      fee
      of $1,500, plus an additional $500 for each meeting of the Board and of any
      Committees of the Board attended. In addition, the Chair of the Audit Committee
      receives an annual fee of $2,500 for his services in such capacity. The
      directors are also reimbursed for reasonable travel expenses incurred in
      attending Board and Committee meetings. In addition, pursuant to the 2006 Stock
      Option Plan, each non-employee director is granted an option to purchase 2,500
      shares of the Common Stock of the Company on the date of each Annual Meeting
      of
      Stockholders. Such options have a three-year vesting period. Each such grant
      has
      an exercise price equal to the fair market value on the date of such grant
      and
      will expire on the tenth anniversary of the date of the grant. On June 20,
      2007,
      non-qualified stock options to purchase an aggregate of 20,000 shares were
      issued to eight directors at an exercise price of $9.78 per share.





Also
      on
      June 20, 2007, pursuant to the 2006 Non-Employee Directors’ Stock Plan, 10,500
      shares of restricted stock were granted to seven directors at a fair market
      value of $9.78 per share. Such restricted stock vests ratably over a three-year
      period.





On
      December 13, 2004, Infineon Technologies AG (“Infineon”), at such time the
      beneficial owner of approximately 15% of the Company’s common stock, sold
      475,000 shares of the Company’s common stock to four purchasers in a
      privately-negotiated transaction. Two purchasers in such transaction, K
      Holdings, LLC and Hampshire Investments, Limited, each of which is affiliated
      with Ludwig G. Kuttner, who was President and Chief Executive Officer of
      Hampshire Group, Limited (“Hampshire”), purchased 300,000 shares representing an
      aggregate of approximately 9.6% of the Company’s common stock. Mr. Kuttner was
      elected to the Company’s Board of Directors at its 2006 Annual Meeting of
      Stockholders. As a result of an ongoing investigation by Hampshire's audit
      committee, the Securities and Exchange Commission, and the Department of Justice
      of allegations of certain improprieties and possibly unlawful conduct involving
      Mr. Kuttner and other Hampshire executives, Mr. Kuttner's employment with
      Hampshire has been terminated and he remains as a director. Mr. Kuttner took
      a
      leave of absence from his position as a director of Merrimac. During his leave
      of absence, Mr. Kuttner was not entitled to any compensation from the Company.
      Mr. Kuttner rescinded his leave of absence from his position as a director
      of
      Merrimac as of June 20, 2007. Infineon also assigned to each purchaser certain
      registration rights to such shares under the existing registration rights
      agreements Infineon had with the Company. In connection with the transaction,
      the Company and Infineon terminated the Stock Purchase and Exclusivity Letter
      Agreement dated April 7, 2000, as amended, which provided that the Company
      would
      design, develop and produce exclusively for Infineon certain Multi-Mix® products
      that incorporate active RF power transistors for use in certain wireless base
      station applications, television transmitters and certain other applications
      that are intended for Bluetooth transceivers.





DuPont
      and the four purchasers above hold registration rights, which currently give
      them the right in perpetuity to register an aggregate of 1,003,413 shares of
      Common Stock of the Company. There are no settlement alternatives and the
      registration of the shares of Common Stock would be on a “best efforts”
basis.




**RECENT
      ACCOUNTING PRONOUNCEMENTS**





On
      November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff Position 123(R)-3 ("FSP 123R-3"), "Transition Election Related to
      Accounting for the Tax Effects of Share-based Payment Awards," that provides
      an
      elective alternative transition method of calculating the pool of excess tax
      benefits available to absorb tax deficiencies recognized subsequent to the
      adoption of SFAS 123R (the "APIC Pool") to the method otherwise required by
      paragraph 81 of SFAS 123R. The Company elected to use the regular method to
      calculate the APIC Pool. The regular method will not have an impact on the
      Company's results of operations or financial condition for the fiscal year
      ended
      December 29, 2007, due to the fact that the Company currently has prior period
      net operating losses and has not realized any tax benefits under SFAS 123R.


32





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with SFAS No. 109 “Accounting for Income Taxes”. FIN 48 prescribes a recognition
      threshold and measurement of a tax position taken or expected to be taken in
      a
      tax return. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure and
      transition. The Company adopted FIN 48 on December 31, 2006. The adoption of
      FIN
      48 did not have an impact on the opening retained earnings of the Company.




In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) to
      provide guidance on Quantifying Financial Statement Misstatements. SAB 108
      addresses how the effects of prior-year uncorrected misstatements should be
      considered when quantifying misstatements in current-year financial statements.
      SAB 108 requires registrants to quantify misstatements using both the balance
      sheet and income statement approaches and to evaluate whether either approach
      results in quantifying an error that is material in light of relevant
      quantitative and qualitative factors. SAB 108 does not change the SEC staff’s
      guidance in SAB 99 on evaluating the materiality of misstatements.





When
      the
      effect of initial adoption of SAB 108 is determined to be material, SAB 108
      allows registrants to record that effect as a cumulative effect adjustment
      to
      beginning-of-year retained earnings. SAB 108 is effective for the first fiscal
      year ending after November 15, 2006. During 2006 the Company adopted the
      provisions of SAB 108 and recorded a cumulative credit adjustment of $384,000
      to
      beginning retained earnings related to inventory reserves and year-end audit,
      tax and annual report costs.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157 “Fair Value Measurements”. SFAS No. 157 establishes a single authoritative
      definition of fair value, sets out a framework for measuring fair value and
      requires additional disclosures about fair-value measurements. SFAS No. 157
      applies only to fair-value measurements that are already required or permitted
      by other accounting standards and is expected to increase the consistency of
      those measurements. It will also affect current practices by nullifying Emerging
      Issues Task Force guidance that prohibited recognition of gains or losses at
      the
      inception of derivative transactions whose fair value is estimated by applying
      a
      model and by eliminating the use of “blockage” factors by brokers, dealers and
      investment companies that have been applying AICPA Guides. SFAS No. 157 is
      effective for fiscal years beginning after November 15, 2007. The Company is
      currently evaluating the impact that SFAS No. 157 will have on its financial
      position and results of operations.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS
      No. 159 permits entities to choose to measure many financial assets and
      financial liabilities at fair value. Unrealized gains and losses on items for
      which the fair value option has been elected are reported in net income. SFAS
      No. 159 is effective for fiscal years beginning after November 15, 2007 and
      interim periods within those fiscal years. The Company is currently evaluating
      the impact that SFAS No. 159 will have on its financial position and results
      of
      operations.





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R established
      principles and requirements for how an acquiring company recognizes and measures
      in its financial statements the identifiable assets acquired, the liabilities
      assumed, any noncontrolling interest if the acquired company and the goodwill
      acquired. SFAS 141R also established disclosure requirements to enable the
      evaluation of the nature and financial effects of the business combination.
      SFAS
      141R is effective for fiscal periods beginning after December 15, 2008. The
      Company is currently evaluating the impact that SFAS 141R will have on its
      financial position and results of operations.





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      160 “ Noncontrolling Interests in Consolidated Financial Statements-an amendment
      of Accounting Research Bulletin No. 51” (“SFAS . 160”). SFAS 160 establishes
      accounting and reporting standards of ownership interests in subsidiaries held
      by parties other than the parent, the amount of consolidated net income
      attributable to the parent and to the noncontrolling interest, changes in a
      parent’s ownership interest and the valuation of retained noncontrolling equity
      investments when a subsidiary is deconsolidated. SFAS 160 also establishes
      disclosure requirements that clearly identify and distinguish between the
      interests of the parent and the interests of the noncontrolling owners. SFAS
      160
      is effective for fiscal periods beginning after December 15, 2008. The Company
      is currently evaluating the impact that SFAS 160 will have on its financial
      position and results of operations.


33


**ITEM 7A.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**




*Interest
      Rate Risk*




Interest
      on the Company’s borrowings under its financing agreements with North Fork Bank
      fluctuates with the prime rate and LIBOR. A variation of 1% in the prime rate
      and LIBOR during the year ended December 29, 2007 would have affected the
      Company’s earnings by approximately $47,000.




*Foreign
      Currency Risk*




The
      Company had been subject to currency exchange rate risk for the assets,
      liabilities and cash flows of its subsidiary that operates in Canada. The
      Company does not utilize financial instruments such as forward exchange
      contracts or other derivatives to limit its exposure to fluctuations in the
      value of foreign currencies. There were costs associated with our discontinued
      operations in Canada which require payments in the local currency and payments
      received from customers for goods sold in Canada are typically in the local
      currency. We partially managed our foreign currency risk related to those
      payments by maintaining operating accounts in Canada.





A
      significant portion of the Company’s sales and receivables (including those of
      its former Canadian subsidiary) were denominated in U.S. dollars. A
      strengthening of the U.S. dollar could make the Company’s products less
      competitive in foreign markets. Alternatively, if the U.S. dollar were to
      weaken, it would make the Company’s products more competitive in foreign
      markets.





The
      functional currency for the Company’s Costa Rica operations is the United States
      dollar.


34


**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors and Stockholders of


Merrimac
      Industries, Inc.




We
      have
      audited the accompanying consolidated balance sheet of Merrimac Industries,
      Inc.
      as of December 29, 2007 and the related consolidated statements of operations
      and comprehensive income (loss), stockholders' equity, and cash flows for the
      year then ended. ** These
      consolidated financial statements are the responsibility of the Company's
      management. ** Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). ** Those
      standards require that we plan and perform the audit to obtain reasonable
      assurance about whether the consolidated financial statements are free of
      material misstatement. ** An
      audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated 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 audit provides 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.
      as
      of December 29, 2007 and its results of operations and cash flows for the year
      then ended in conformity with accounting principles generally accepted in the
      United States of America.





/s/
      J.H.
      COHN LLP





Roseland,
      New Jersey


March
      28,
      2008


35


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors and Stockholders of


Merrimac
      Industries, Inc.





We
      have
      audited the accompanying consolidated balance sheet of Merrimac Industries,
      Inc.
      as of December 30, 2006 and the related consolidated statements of operations
      and comprehensive income (loss), stockholders' equity, and cash flows for the
      year then ended. ** 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 audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (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. ** The
      Company is not required to have, nor were we engaged to perform an audit of
      its
      internal control over financial reporting. ** Our
      audit
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. ** Accordingly,
      we express no such opinion. ** An
      audit
      also includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. ** We
      believe that our audit provides 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.
      as
      of December 30, 2006 and the results of its operations and its cash flows for
      the year then ended in conformity with accounting principles generally accepted
      in the United States of America.





As
      discussed in Notes 1 and 16 to the consolidated financial statements, the
      Company recorded a cumulative effect adjustment as of January 1, 2006, in
      connection with the adoption of SEC Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements”. Also, as discussed in
      Note 1 to the consolidated financial statements, the Company changed its
      method of accounting for share-based compensation effective January 1, 2006
      in connection with the adoption of Financial Accounting Standards Board
      Statement No. 123(R), “Shared-Based Payments”.





/s/
      GRANT
      THORNTON LLP





Edison,
      New Jersey


April
      13,
      2007 (except


for
      Note
      2, as to which


the
      date
      is March 28, 2008)


36





**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**





Years
      Ended December 29, 2007 and December 30, 2006





2007
            
            2006CONTINUING
                OPERATIONSNet
                sales
            
            $
            21,886,946
            
            $
            22,531,360Costs
                and expenses:Cost
                of sales
            
            
            12,788,095
            
            
            13,356,415Selling,
                general and administrative
            
            
            8,435,173
            
            
            8,591,502Research
                and development
            
            
            1,579,250
            
            
            1,909,874Restructuring
                charge
            
            
            -
            
            
            199,50822,802,518
            
            
            24,057,299Operating
                loss
            
            
            (915,572
            )
            
            (1,525,939
            )Interest
                and other expense, net
            
            
            (123,492
            )
            
            (17,737
            )Loss
                from continuing operations before income taxes
            
            
            (1,039,064
            )
            
            (1,543,676
            )Provision
                for income taxes
            
            
            -
            
            
            -Loss
                from continuing operations
            
            
            (1,039,064
            )
            
            (1,543,676
            )DISCONTINUED
                OPERATIONSLoss
                from discontinued operations net of income taxes
            
            
            (4,386,829
            )
            
            (681,785
            )Net
                loss
            
            $
            (5,425,893
            )
            $
            (2,225,461
            )Loss
                per common share from continuing operations-basic and
                diluted
            
            $
            (.35
            )
            $
            (.49
            )Loss
                per common share from discontinued****operations-basic
                and diluted
            
            $
            (1.48
            )
            $
            (.22
            )Net
                loss per common share-basic and diluted
            
            $
            (1.83
            )
            $
            (.71
            )Weighted
                average number of shares outstanding-basic and diluted
            
            
            2,962,575
            
            
            3,142,154COMPREHENSIVE
                INCOME (LOSS)Net
                loss
            
            $
            (5,425,893
            )
            $
            (2,225,461
            )Comprehensive
                income (loss):Foreign
                currency translation adjustment
            
            
            (1,389,038
            )
            
            21,622Comprehensive
                loss
            
            $
            (6,814,931
            )
            $
            (2,203,839
            )




See
      accompanying notes.


37


**CONSOLIDATED
      BALANCE SHEETS**


December
      29, 2007 and December 30,2006





2007
            
            2006ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            2,004,471
            
            $
            5,399,333Accounts
                receivable, net of allowance of $30,000 and $50,000 in 2007 and 2006
            
            
            5,299,753
            
            
            5,140,454Inventories,
                net (see note 16)
            
            
            5,039,770
            
            
            3,740,317Other
                current assets
            
            
            774,007
            
            
            833,543Due
                from assets sale contract
            
            
            664,282
            
            
            -Current
                assets held for sale
            
            
            -
            
            
            1,607,679Total
                current assets
            
            
            13,782,283
            
            
            16,721,326Property,
                plant and equipment
            
            
            37,556,672
            
            
            36,626,348Less
                accumulated depreciation and amortization
            
            
            26,600,240
            
            
            24,850,616Property,
                plant and equipment, net
            
            
            10,956,432
            
            
            11,775,732Restricted
                cash
            
            
            250,000
            
            
            -Other
                assets
            
            
            531,633
            
            
            491,596Deferred
                tax assets
            
            
            52,000
            
            
            100,000Long-term
                assets held for sale
            
            
            -
            
            
            5,164,852Total
                Assets
            
            $
            25,572,348
            
            $
            34,253,506LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities:Current
                portion of long-term debt
            
            $
            550,000
            
            $
            550,000Accounts
                payable
            
            
            943,481
            
            
            767,681Accrued
                liabilities (see note 16)
            
            
            1,965,403
            
            
            1,098,976Customer
                deposits
            
            
            363,296
            
            
            203,783Deferred
                income taxes
            
            
            52,000
            
            
            100,000Current
                liabilities related to assets held for sale
            
            
            -
            
            
            646,410Total
                current liabilities
            
            
            3,874,180
            
            
            3,366,850Long-term
                debt, net of current portion
            
            
            3,762,500
            
            
            4,312,500Deferred
                liabilities
            
            
            61,300
            
            
            37,839Long-term
                liabilities related to assets held for sale
            
            
            -
            
            
            251,540Total
                liabilities
            
            
            7,697,980
            
            
            7,968,729Commitments
                and contingenciesStockholders'
                equity:Preferred
                stock, par value $.01 per share:Authorized:
                1,000,000 sharesNo
                shares issuedCommon
                stock, par value $.01 per share:20,000,000
                shares authorized; 3,289,103 and 3,265,638 shares issued;and
                2,926,198 and 3,141,433 shares outstanding, respectively
            
            
            32,891
            
            
            32,656Additional
                paid-in capital
            
            
            19,789,717
            
            
            19,237,130Retained
                earnings
            
            
            1,173,924
            
            
            6,599,817Accumulated
                other comprehensive income
            
            
            -
            
            
            1,389,03820,996,532
            
            
            27,258,641Less
                treasury stock, at cost –
                362,905
                shares at December 29, 2007 and124,205
                shares at December 30, 2006
            
            
            (3,122,164
            )
            
            (973,864
            )Total
                stockholders' equity
            
            
            17,874,368
            
            
            26,284,777Total
                Liabilities and Stockholders' Equity
            
            $
            25,572,348
            
            $
            34,253,506


See
        accompanying notes.




38


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**





Years
      Ended December 29, 2007 and December 30, 2006


Common
                  Stock
              
              Additional
                Paid-in
              
              Retained
              
              Accumulated
                Other
                Comprehensive
              
              Treasury
                  Stock
              
              Loan
                  to
                Officer-Shares
              
              Amount
              
              Capital(A)
              
              Earnings
              
              Income (Loss) (B)
              
              Shares
              
              Amount
              
              Stockholder
              
              TotalBalance,
                  December 31, 2005
              
              
              3,228,715
              
              $
              32,287
              
              $
              18,823,353
              
              $
              8,441,278
              
              $
              1,367,416
              
              
              82,100
              
              $
              (573,866
              )
              $
              (400,000
              )
              $
              27,690,468Cumulative
                  effect atJanuary
                  1, 2006, of change in method of quantifying errors (note
                  16)
              
              
              
              
              
              
              
              
              
              
              
              384,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              384,000Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              (2,225,461
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,225,461
              )Share-based
                  compensation
              
              
              
              
              
              
              
              
              188,914
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              188,914Exercise
                  of stock options
              
              
              4,200
              
              
              42
              
              
              28,758
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              28,800Stock
                  Purchase Plan sales
              
              
              32,723
              
              
              327
              
              
              196,105
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              196,432Repayment
                  of loan to officer-stockholder
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              42,105
              
              
              (399,998
              )
              
              400,000
              
              
              2Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              21,622
              
              
              
              
              
              
              
              
              
              
              
              21,622Balance,
                  December 30, 2006
              
              
              3,265,638
              
              
              32,656
              
              
              19,237,130
              
              
              6,599,817
              
              
              1,389,038
              
              
              124,205
              
              
              (973,864
              )
              
              -
              
              
              26,284,777Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              (5,425,893
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,425,893
              )Share-based
                  compensation
              
              
              
              
              
              
              
              
              394,425
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              394,425Exercise
                  of stock options
              
              
              9,465
              
              
              95
              
              
              75,168
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              75,263Stock
                  Purchase Plan sales
              
              
              11,000
              
              
              110
              
              
              82,994
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              83,104Vesting
                  of restricted stock.
              
              
              3,000
              
              
              30
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              30Repurchase
                  of common stock for the treasury
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              238,700
              
              
              (2,148,300
              )
              
              
              
              
              (2,148,300
              )Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,389,038
              )
              
              
              
              
              
              
              
              
              
              
              (1,389,038
              )Balance,
                  December 29, 2007
              
              
              3,289,103
              
              $
              32,891
              
              $
              19,789,717
              
              $
              1,173,924
              
              $
              -
              
              
              362,905
              
              $
              (3,122,164
              )
              $
              -
              
              $
              17,874,368




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




(B)
            Following
                the sale of the Company’s discontinued operations, there is no foreign
                currency translation adjustments
                and no accumulated other comprehensive income(loss) at December 29,
                2007.




See
      accompanying notes.


39


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





Years
      Ended December 29, 2007 and December 30, 2006





2007
            
            2006Cash
                flows from operating activities:Net
                loss
            
            $
            (5,425,893
            )
            $
            (2,225,461
            )Less,
                Loss from discontinued operations
            
            
            (4,386,829
            )
            
            (681,785
            )Loss
                from continuing operations
            
            
            (1,039,064
            )
            
            (1,543,676
            )Adjustments
                to reconcile net loss from continuing operations to net cash provided
                by
                (used in) operating activities:Depreciation
                and amortization
            
            
            2,365,221
            
            
            2,332,884Amortization
                of deferred financing costs
            
            
            30,795
            
            
            210,632Share-based
                compensation
            
            
            394,455
            
            
            188,914Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (167,434
            )
            
            (1,056,647
            )Inventories
            
            
            (1,299,453
            )
            
            (120,673
            )Other
                current assets
            
            
            184,247
            
            
            (44,647
            )Other
                assets
            
            
            (70,832
            )
            
            (65,963
            )Accounts
                payable
            
            
            185,137
            
            
            13,120Accrued
                liabilities
            
            
            115,438
            
            
            71,862Customer
                deposits
            
            
            159,513
            
            
            (659,799
            )Deferred
                liabilities
            
            
            23,461
            
            
            15,427Net
                cash provided by (used in) operating activities of continuing
                operations
            
            
            881,484
            
            
            (658,566
            )Net
                cash provided by (used in) operating activities of discontinued
                operations
            
            
            (776,030
            )
            
            262,967Net
                cash provided by (used in) operating activities
            
            
            105,454
            
            
            (395,599
            )Cash
                flows from investing activities:Purchases
                of capital assets
            
            
            (1,545,912
            )
            
            (1,597,129
            )Cash
                proceeds from sale of discontinued operations
            
            
            817,578
            
            
            -Net
                cash used in investing activities of continuing operations
            
            
            (728,334
            )
            
            (1,597,129
            )Net
                cash used in investing activities of discontinued
                operations
            
            
            (
                180,136
            )
            
            (78,832
            )Net
                cash used in investing activities
            
            
            (908,470
            )
            
            (1,675,961
            )Cash
                flows from financing activities:Borrowings
                under mortgage loan
            
            
            -
            
            
            3,000,000Borrowings
                under term loan
            
            
            -
            
            
            2,000,000Repurchase
                of common stock for the treasury
            
            
            (2,148,300
            )
            
            -Repayment
                of borrowings
            
            
            (550,000
            )
            
            (2,728,574
            )Restricted
                cash (deposited) returned
            
            
            (250,000
            )
            
            1,500,000Proceeds
                from the exercise of stock options
            
            
            75,263
            
            
            28,800Proceeds
                from Stock Purchase Plan sales
            
            
            83,104
            
            
            196,432Net
                cash provided by (used in) financing activities of continuing
                operations
            
            
            (2,789,933
            )
            
            3,996,658Net
                cash used in financing activities of discontinued
                operations
            
            
            (350,064
            )
            
            (44,273
            )Net
                cash provided by (used in) financing activities
            
            
            (3,139,997
            )
            
            3,952,385Effect
                of exchange rate changes
            
            
            (14,053
            )
            
            (618
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (3,957,066
            )
            
            1,880,207Cash
                and cash equivalents at beginning of year, including $562,205 and
                $422,960
                reported under assets held for sale
            
            
            5,961,537
            
            
            4,081,330Cash
                and cash equivalents at end of year including $0 and $562,205 reported
                under assets held for sale
            
            $
            2,004,471
            
            $
            5,961,537Supplemental
                disclosures of cash flow information:Cash
                paid during the year for:Interest
                on credit facilities
            
            $
            360,005
            
            $
            253,993Non
                cash activities:Repurchase
                of common stock for treasury
            
            $
            -
            
            $
            399,998Loan
                to officer-stockholder repaid through repurchase of common stock
                for
                treasury
            
            $
            -
            
            $
            400,000





See
      accompanying notes.


40




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      Ended December 29, 2007 and December 30, 2006





1.
      Nature
      of business and summary of significant accounting policies





Nature
      of
      business: Merrimac Industries, Inc. (the “Company”) is involved in the design,
      manufacture and sale of electronic component devices offering extremely broad
      frequency coverage and high performance characteristics, and microstrip, bonded
      stripline and thick metal-backed Teflon® (PTFE) and mixed dielectric multilayer
      circuits for communications, defense and aerospace applications. The Company's
      continuing operations are conducted primarily through one business segment,
      electronic components and subsystems.





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





Discontinued
      operations: In accordance with the provisions of Statement of Financial
      Accounting Standards No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets” (SFAS No. 144), the assets and liabilities relating to FMI
      that were sold have been reclassified as held for sale in the consolidated
      balance sheets for 2006 and the results of operations of FMI for the current
      and
      prior periods are reported as discontinued operations and not included in the
      continuing operations figures.





Cash
      and
      cash equivalents: The Company considers all highly liquid securities with
      maturities of less than three months when purchased 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.  The
      Company has not experienced any losses in such accounts. Included in cash and
      cash equivalents at December 29, 2007 was $427,000 that was held in escrow
      by
      our Canadian counsel that was awaiting wire transfer to our operating account
      on
      the next available banking day.





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





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





The
      cost
      rates utilized for cost-reimbursement contracts are subject to review by third
      parties and can be revised, which can result in additions to or reductions
      from
      revenue. Revisions which result in reductions to revenue are recognized in
      the
      period that the rates are reviewed and finalized; additions to revenue are
      recognized in the period that the rates are reviewed, finalized, accepted by
      the
      customer, and collectability from the customer is assured. The Company submits
      financial information regarding the cost rates on cost-reimbursement contracts
      for each fiscal year in which the Company performed work on cost-reimbursement
      contracts. The Company does not record any estimates on a regular basis for
      potential revenue adjustments, as there currently is no reasonable basis on
      which to estimate such adjustments given the Company’s very limited experience
      with these contracts. No revenue was recognized related to cost-reimbursement
      contracts during 2007. The Company recognized revenue of $715,000 related to
      cost-reimbursement contracts in 2006.




Warranties:
      The Company's products sold under contracts have warranty obligations. Estimated
      warranty costs for each contract are determined based on the contract terms
      and
      technology specific issues. The Company accrues estimated warranty costs at
      the
      time of sale and any additional amounts are recorded when such costs are
      probable and can be reasonably estimated. Warranty expense was approximately
      $171,000 and $308,000 for 2007 and 2006, respectively. The warranty reserve
      at
      December 29, 2007 and December 30, 2006 was $200,000.





Accounts
      receivable:  The
      Company’s accounts receivable are primarily from companies in the defense,
      satellite and telecommunications industries, with 30 day payment terms. Credit
      is extended based on evaluation of customer’s financial condition. Accounts
      receivable are stated in the consolidated financial statements net of an
      allowance for doubtful accounts. Accounts outstanding longer than the payment
      terms are considered past due. The Company determines its allowance by
      considering a number of factors, including the length of time trade accounts
      receivable are past due, the Company’s previous loss history, the customer’s
      current ability to pay its obligations to the Company, and the condition of
      the
      general economy and the industry as a whole. The Company writes-off accounts
      receivable when they become uncollectible.





Fair
      value of financial instruments:  The
      carrying amounts of financial instruments, including cash and cash equivalents,
      accounts receivable and accounts payable approximated fair value as of December
      29, 2007 and December 30, 2006 because of the relative short maturity of these
      instruments.  At
      December 29, 2007 and December 30, 2006, 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.





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




41





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      Ended December 29, 2007 and December 30, 2006





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





Provision
      is made for potential losses on slow moving and obsolete inventories when
      identified.





Foreign
      currency translation: The functional currency of the Company’s discontinued
      operations, FMI, was the Canadian dollar. FMI’s assets and liabilities were
      translated into U.S. dollars using exchange rates in effect at the consolidated
      balance sheet date and their operations are translated using average exchange
      rates prevailing during the year. The resulting translation adjustments were
      reported as a component of accumulated other comprehensive income. Realized
      foreign exchange transaction gains and losses, which are not material, are
      included in the consolidated statements of operations.





Comprehensive
      income (loss): Comprehensive income (loss) is defined as the change in equity
      of
      a company during a period from transactions and other events and circumstances
      from non-owner sources. At December 30, 2006 accumulated other comprehensive
      income was attributable solely to the effects of foreign currency translation.
      Following the sale of the Company’s discontinued operations, there is no foreign
      currency translation adjustment at December 29, 2007.





Property,
      plant and equipment: Property, plant and equipment are recorded at cost.
      Depreciation and amortization is computed for financial purposes on the
      straight-line method, while accelerated methods are used, where applicable,
      for
      tax purposes. The costs of additions and improvements are capitalized and
      expenditures for repairs and maintenance are expensed as incurred. The costs
      and
      accumulated depreciation applicable to assets retired or otherwise disposed
      of
      are removed from the asset accounts and any gain or loss is included in the
      consolidated statements of operations. The following estimated useful lives
      are
      used for financial income statement purposes:





Land
                improvements
            
            
            10
                yearsBuilding
            
            
            25
                yearsMachinery
                and equipment
            
            
            3 - 10 yearsOffice
                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
      29, 2007 and December 30, 2006 amounted to $15,447,000 and $15,550,000,
      respectively.





The
      Company leases various property, plant and equipment. Leased property is
      accounted for under Financial Accounting Standard No. 13 “Accounting for Leases”
(“SFAS 13”). Accordingly, leased property that meets certain criteria are
      capitalized and the present value of the related lease payments are recorded
      as
      a liability. All other leases are accounted for as operating leases and the
      related payments are expensed ratably over the rental period. Amortization
      of
      assets under capital leases is computed utilizing the straight-line method
      over
      the shorter of the remaining lease term or the estimated useful life. Company
      leases that include escalating lease payments are expensed on a straight-line
      basis over the non-cancelable base lease period in accordance with SFAS
      13.





Long-lived
      assets: The Company accounts for long-lived assets under SFAS 144, “Accounting
      for the impairment or disposal of long-lived assets”. Management assesses the
      recoverability of its long-lived assets, which consist primarily of fixed assets
      and intangible assets with finite useful lives, whenever events or changes
      in
      circumstance indicate that the carrying value may not be recoverable. The
      following factors, if present, may trigger an impairment review: (i) significant
      underperformance relative to expected historical or projected future operating
      results; (ii) significant negative industry or economic trends; (iii)
      significant decline in the Company's stock price for a sustained period; and
      (iv) a change in the Company's market capitalization relative to net book value.
      If the recoverability of these assets is unlikely because of the existence
      of
      one or more of the above-mentioned factors, an impairment analysis is performed
      using a projected discounted cash flow method. Management must make assumptions
      regarding estimated future cash flows and other factors to determine the fair
      value of these respective assets. If these estimates or related assumptions
      change in the future, the Company may be required to record an impairment
      charge. Impairment charges would be included with costs and expenses in the
      Company's consolidated statements of operations, and would result in reduced
      carrying amounts of the related assets on the Company's consolidated balance
      sheets.





Goodwill:
      Goodwill primarily includes the excess purchase price paid over the fair value
      of net assets acquired in the Company’s 1999 acquisition of FMI. When the
      Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
      and Other Intangible Assets"("SFAS 142"), the net carrying value of the FMI
      goodwill was $2,745,000, which was reduced by $435,000 of accumulated
      amortization. Under SFAS 142, the Company ceased amortization of goodwill and
      tests its goodwill on an annual basis, or whenever events or circumstances
      indicate that impairment may have occurred. Under SFAS 142 goodwill impairment
      is determined using a two-step process. The first step of the goodwill
      impairment test is to identify a potential impairment by comparing the fair
      value of a reporting unit with its carrying amount, including goodwill. If
      the
      estimated fair value of the reporting unit exceeds its carrying amount, the
      reporting unit’s goodwill is not considered to be impaired and the second step
      of the impairment test is unnecessary. If the carrying amount of the reporting
      unit exceeds its fair value, the second step of the goodwill impairment test
      is
      performed to measure the amount of impairment loss, if any. The second step
      of
      the goodwill impairment test compares the implied fair value of the reporting
      unit’s goodwill, determined in the same manner as the amount of goodwill
      recognized in a business combination, with the carrying amount of such goodwill.
      If the carrying amount of the reporting unit’s goodwill exceeds the implied fair
      value of that goodwill, an impairment loss is recognized in an amount equal
      to
      that excess.




42


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





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





During
      the quarter ended June 30, 2007, the Company initiated an interim goodwill
      impairment test of its FMI reporting unit. This occurred as a result of FMI’s
      failure to meet 2007 bookings and sales targets, which resulted in continuing
      operating losses and a reduction of its  bank
      borrowing availability. The estimates of fair value of the reporting unit were
      determined using a discounted cash flow analysis. A discounted cash flow
      analysis required the Company to make various judgmental assumptions and
      estimates, including assumptions about future cash flows, growth rates and
      discount rates. The assumptions and estimates about the future cash flows and
      growth rates were  based
      on
      the reporting unit’s budgets and business plans. Discount rate assumptions were
      based on an assessment of the risk inherent in the future cash flows of the
      reporting unit. As a result of the impairment test, the Company recorded a
      non-cash goodwill impairment charge of $2,630,000 related to the Company’s FMI
      reporting unit for the quarter ended June 30, 2007. The Company recorded a
      further impairment charge in the third quarter of 2007 of $1,126,000 for the
      remaining balance of FMI goodwill. The impairment charges are included in the
      results of operations as loss from discontinued operations. The assets related
      to these operations were sold on December 28, 2008 (see note 2). The impairment
      charges did not affect the Company’s liquidity or result in non-compliance with
      any financial debt covenants.





Advertising:
      The Company expenses the cost of advertising and promotion as incurred.
      Advertising costs charged to operations were $75,000 in 2007 and $71,000 in
      2006.





Income
      taxes: The Company uses the asset and liability method to account for income
      taxes. Under this method, deferred tax assets and liabilities are determined
      based on temporary differences between financial reporting and tax bases of
      assets and liabilities, and are measured using the enacted tax rates and laws
      that will be in effect when the differences are expected to reverse. Valuation
      allowances are established when necessary to reduce deferred tax assets to
      the
      amount expected to be realized. 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 25% of their compensation, with 50% of the first 6% of such savings
      matched by the Company. In May 2003, the Company suspended its matching
      contributions to the Plan, and, accordingly, the Company made no contributions
      to the Plan in 2007 or 2006. The Board of Directors may also authorize a
      discretionary amount to be contributed to the Plan and allocated to eligible
      employees annually. No discretionary contribution amounts were authorized for
      2007 or 2006.





Share-based
      compensation: On January 1, 2006, the start of the first quarter of fiscal
      2006,
      the Company adopted the provisions of Statement of Financial Accounting
      Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R") which
      requires that the costs resulting from all share-based payment transactions
      be
      recognized in the financial statements at their fair values. The Company adopted
      SFAS 123R using the modified prospective application method under which the
      provisions of SFAS 123R apply to new awards and to awards modified, repurchased,
      or cancelled after the adoption date. Additionally, compensation cost for the
      portion of the awards for which the requisite service has not been rendered
      that
      are outstanding as of the adoption date is recognized in the Consolidated
      Statement of Operations over the remaining service period after the adoption
      date based on the award's original estimate of fair value. Results for prior
      periods have not been restated.





Due
      to
      the Company’s net operating loss carryforwards, no tax benefits resulting from
      the exercise of stock options have been recorded, thus there was no effect
      on
      cash flows from operating or financing activities.





For
      the
      fiscal years ended December 29, 2007 and December 30, 2006, share-based
      compensation expense related to the 2001 Employee Stock Purchase Plan, the
      2006 Non-Employee
      Directors’ Stock Plan  and
      the
      various stock option plans was allocated as follows:





2007
            
            2006Cost
                of sales
            
            $
            80,000
            
            $
            31,000Selling,
                general and administrative
            
            $
            314,000
            
            $
            158,000Total
                share-based compensation
            
            $
            394,000
            
            $
            189,000


43


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





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





The
      fair
      value of each of the options and purchase plan subscription rights granted
      in
      2007 and 2006 was estimated on the date of grant using the Black-Scholes option
      valuation model. For the year ended December 29, 2007, the Company used the
      Simplified Method to estimate the expected term of the expected life of stock
      option grants as defined by SEC Accounting Staff Bulletin No. 107 for each
      award
      granted. Expected volatility for the years ended December 29, 2007 and December
      30, 2006, is based on historical volatility levels of the Company's common
      stock. The risk-free interest rate for the years ended December 29, 2007 and
      December 30, 2006 is based on the implied yield currently available on U.S.
      Treasury zero coupon issues with the remaining term equal to the expected life.





The
      following weighted average assumptions were utilized:





2007
            
            2006Expected
                option life (years)
            
            
            5.7
            
            
            2.9Expected
                volatility
            
            
            32.89
            %
            
            29.25
            %Risk-free
                interest rate
            
            
            4.53
            %
            
            5.12
            %Expected
                dividend yield
            
            
            0.00
            %
            
            0.00
            %





Research
      and development: Research and development expenses include materials, salaries
      and related expenses of certain engineering personnel, and outside
      services  associated
      with product development. Research and development expenditures of approximately
      $1,579,000 in 2007 and $1,910,000 in 2006 were expensed as incurred.





Deferred
      financing costs: During 2006, the Company capitalized $230,000 of deferred
      financing costs related to its new financing agreement with North Fork Bank
      and
      is amortizing such amount over the life of the related debt (eight years).
      In
      2006 the Company charged off approximately $167,000 of unamortized deferred
      debt
      costs to interest expense related to its prior financing agreement.





Net
      loss
      per share: Basic net loss per share is computed by dividing loss available
      to
      common shareholders by the weighted-average number of common shares outstanding
      during the period. Diluted net loss per share is computed by dividing loss
      available to common shareholders by the weighted-average number of common shares
      outstanding during the period increased to include the number of additional
      common shares that would have been outstanding if the dilutive potential common
      shares had been issued. The dilutive effect of the outstanding options would
      be
      reflected in diluted net loss per share by application of the treasury stock
      method.





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. Periodically, the additional
      week to make a 53-week year (fiscal year 2008 will be the next) is added to
      the
      fourth quarter, making such quarter consist of 14 weeks.





Recent
      Accounting Pronouncements **:** On
      November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff Position 123(R)-3 ("FSP 123R-3"), "Transition Election Related to
      Accounting for the Tax Effects of Share-based Payment Awards," that provides
      an
      elective alternative transition method of calculating the pool of excess tax
      benefits available to absorb tax deficiencies recognized subsequent to the
      adoption of SFAS 123R (the "APIC Pool") to the method otherwise required by
      paragraph 81 of SFAS 123R. The Company elected to use the regular method to
      calculate the APIC Pool. The regular method will not have an impact on the
      Company's results of operations or financial condition for the fiscal year
      ended
      December 29, 2007, due to the fact that the Company currently has prior period
      net operating losses and has not realized any tax benefits under SFAS 123R.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with SFAS No. 109 “Accounting for Income Taxes”. FIN 48 prescribes a recognition
      threshold and measurement of a tax position taken or expected to be taken in
      a
      tax return. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure and
      transition. The Company adopted FIN 48 on December 31, 2006. The adoption of
      FIN
      48 did not have an impact on the opening retained earnings of the Company.




In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”) to provide guidance on Quantifying
      Financial Statement Misstatements. SAB 108 addresses how the effects of
      prior-year uncorrected misstatements should be considered when quantifying
      misstatements in current-year financial statements. SAB 108 requires registrants
      to quantify misstatements using both the balance sheet and income statement
      approaches and to evaluate whether either approach results in quantifying an
      error that is material in light of relevant quantitative and qualitative
      factors. SAB 108 does not change the SEC staff’s guidance in SAB 99 on
      evaluating the materiality of misstatements.




44


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





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





When
      the
      effect of initial adoption of SAB 108 is determined to be material, SAB 108
      allows registrants to record that effect as a cumulative effect adjustment
      to
      beginning-of-year retained earnings. SAB 108 is effective for the first fiscal
      year ending after November 15, 2006. During 2006 the Company adopted the
      provisions of SAB 108 and recorded a cumulative credit adjustment of $384,000
      to
      beginning retained earnings related to inventory reserves and year-end audit,
      tax and annual report costs (see note 16).





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157 “Fair Value Measurements”. SFAS No. 157 establishes a single authoritative
      definition of fair value, sets out a framework for measuring fair value and
      requires additional disclosures about fair-value measurements. SFAS No. 157
      applies only to fair-value measurements that are already required or permitted
      by other accounting standards and is expected to increase the consistency of
      those measurements. It will also affect current practices by nullifying Emerging
      Issues Task Force guidance that prohibited recognition of gains or losses at
      the
      inception of derivative transactions whose fair value is estimated by applying
      a
      model and by eliminating the use of “blockage” factors by brokers, dealers and
      investment companies that have been applying AICPA Guides. SFAS No. 157 is
      effective for fiscal years beginning after November 15, 2007. The Company is
      currently evaluating the impact that SFAS No. 157 will have on its financial
      position and results of operations.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS
      No. 159 permits entities to choose to measure many financial assets and
      financial liabilities at fair value. Unrealized gains and losses on items for
      which the fair value option has been elected are reported in net income. SFAS
      No. 159 is effective for fiscal years beginning after November 15,2007 and
      interim periods within those fiscal years. The Company is currently evaluating
      the impact that SFAS No. 159 will have on its financial position and results
      of
      operations.





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R established
      principles and requirements for how an acquiring company recognizes and measures
      in its financial statements the identifiable assets acquired, the liabilities
      assumed, any noncontrolling interest if the acquired company and the goodwill
      acquired. SFAS 141R also established disclosure requirements to enable the
      evaluation of the nature and financial effects of the business combination.
      SFAS
      141R is effective for fiscal periods beginning after December 15, 2008. The
      Company is currently evaluating the impact that SFAS 141R will have on its
      financial position and results of operations.





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      160 “ Noncontrolling Interests in Consolidated Financial Statements-an amendment
      of Accounting Research Bulletin No. 51” (“SFAS . 160”). SFAS 160 establishes
      accounting and reporting standards of ownership interests in subsidiaries held
      by parties other than the parent, the amount of consolidated net income
      attributable to the parent and to the noncontrolling interest, changes in a
      parent’s ownership interest and the valuation of retained noncontrolling equity
      investments when a subsidiary is deconsolidated. SFAS 160 also establishes
      disclosure requirements that clearly identify and distinguish between the
      interests of the parent and the interests of the noncontrolling owners. SFAS
      160
      is effective for fiscal periods beginning after December 15, 2008. The Company
      is currently evaluating the impact that SFAS 160 will have on its financial
      position and results of operations.





2. Discontinued
          Operations





Company
      management determined, and the Board of Directors approved on August 9, 2007,
      that the Company should divest its FMI operations. The divestiture should enable
      Merrimac to concentrate its resources on RF Microwave and Multi-Mix®
Microtechnology product lines to generate sustainable, profitable growth.
      Beginning with the third quarter of 2007, the Company reflected FMI as a
      discontinued operation and the Company reclassified prior financial statements
      to reflect the results of operations, financial position and cash flows of
      FMI
      as discontinued operations.





On
      December 28, 2007, the Company sold substantially all of the assets of its
      wholly-owned subsidiary, FMI, to Firan Technology Group Corporation (“FTG”), a
      manufacturer of high technology/high reliability printed circuit boards, that
      has operations in Toronto, Ontario, Canada and Chatsworth, California. The
      transaction was effected pursuant to an asset purchase agreement entered into
      between Merrimac, FMI and FTG. The total consideration payable by FTG was
      $1,482,000 (Canadian $1,450,000) plus the assumption of certain liabilities
      of
      approximately $368,000 (Canadian $360,000). FTG paid $818,000 (Canadian
      $800,000) of the purchase price at closing and the balance was paid on February
      21, 2008 following the conclusion of a transitional period. Included in cash
      and
      cash equivalents at December 29, 2007 was $427,000 that was held in escrow
      by
      our Canadian counsel that was awaiting wire transfer to our operating account
      on
      the next available banking day.




45


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





2.
      Discontinued Operations (continued)





Operating
      results of FMI, which were formerly represented as the Company’s microwave
      micro-circuitry segment, are summarized as follows:





Years
                EndedDecember 29,
              2007
            
            December 30,
              2006Net
                sales
            
            $
            3,627,951
            
            $
            5,044,745Loss
                before provision (benefit) for income taxes
            
            
            (5,876,703
            )
            
            (750,785
            )Gain
                on sale of assets of discontinued operation
            
            
            1,935,874
            
            
            -Provision
                (benefit) for income taxes
            
            
            446,000
            
            
            (69,000
            )Net
                loss
            
            $
            (4,386,829
            )
            $
            (681,785
            )





At
      December 30, 2006, the assets and liabilities relating to FMI have been
      reclassified as held for sale in the accompanying consolidated balance sheet.
      Loss from discontinued operations includes goodwill impairment charges of
      $3,756,000, a third quarter 2007 charge of $586,000 to write down the net assets
      held for sale of FMI to estimated fair value and a charge of $506,000 to provide
      a full valuation allowance for a Canadian net deferred tax asset. As a result
      of
      the sale of the Company’s discontinued operations in the fourth quarter of 2007,
      the Company recorded a gain from the disposal of discontinued operations of
      $1,936,000, which primarily consists of the non-cash realization of foreign
      currency translation adjustment of $2,025,000.





The
      assets and liabilities relating to FMI at December 30, 2006 are summarized
      as
      follows:





Cash
            
            $
            562,204Accounts
                receivable
            
            
            711,163Inventories
            
            
            177,156Other
                current assets
            
            
            157,156Current
                assets held for sale
            
            
            1,607,679Property,
                plant and equipment, net
            
            
            1,209,633Goodwill
            
            
            3,503,219Deferred
                income taxes
            
            
            452,000Long-term
                assets held for sale
            
            
            5,164,852Assets
                held for sale
            
            $
            6,772,531


Current
                liabilities
            
            $
            646,410Long-term
                debt
            
            
            251,540Liabilities
                related to assets held for sale
            
            $
            897,950




46


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





3. Inventories




Inventories consist of the following:




December 29,
            
            December 30,2007
            
            2006Finished
                goods
            
            $
            239,503
            
            $
            345,519Work
                in process
            
            
            2,979,632
            
            
            1,539,645Raw
                    materials and purchased parts
            
            
            1,820,635
            
            
            1,855,153$
            5,039,770
            
            $
            3,740,317





Total
      inventories are net of valuation allowances for obsolescence and cost overruns
      of $1,623,000 at December 29, 2007 and $1,172,000 at December 30, 2006, of
      which
      $202,000 and $85,000, respectively, represented cost overruns. The Company
      disposed of $32,000 and $38,000 of obsolete inventories in 2007 and 2006,
      respectively.





4. Property,
          plant and equipment





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





December 29,
            
            December 30,2007
            
            2006Land
                and land improvements
            
            $
            647,531
            
            $
            647,531Building
                and leasehold improvements
            
            
            6,692,388
            
            
            6,541,656Machinery
                and equipment
            
            
            22,188,090
            
            
            22,022,440Office
                  equipment,furniture
                  and fixtures
            
            
            8,028,663
            
            
            7,414,721$
            37,556,672
            
            $
            36,626,348





Depreciation
      and amortization expense was approximately $2,365,000 and $2,333,000 for 2007
      and 2006, respectively.




5.
      Current and long-term debt





The
      Company was obligated under the following debt instruments at December 29,
      2007 and
      December 30, 2006:





2007
            
            2006North
                Fork Bank (A):Revolving
                line of credit, 2.00% above LIBOR or 0.50% below prime
            
            $
            -
            
            $
            -Term
                loan, due October 1, 2011, 2.25% above LIBOR or 0.50% below
                prime
            
            
            1,500,000
            
            
            1,900,000Mortgage
                loan, due October 1, 2016, 2.25% above LIBOR or 0.50% below
                prime
            
            
            2,812,500
            
            
            2,962,5004,312,500
            
            
            4,862,500Less
                current portion
            
            
            550,000
            
            
            550,000Long-term
                portion
            
            $
            3,762,500
            
            $
            4,312,500





On
      October 18, 2006, the Company entered into a financing agreement with North
      Fork
      Bank (now Capital One, N.A.) which consists of a two-year $5,000,000 revolving
      line of credit, a five-year $2,000,000 machinery and equipment term loan due
      October 1, 2011 (“Term Loan”) and a ten-year $3,000,000 real estate term loan
      due October 1, 2016 (“Mortgage Loan”). This financing agreement replaced the
      prior financing agreement with CIT. Completion of the new financing agreement
      resulted in additional cash loan proceeds of approximately $2,900,000 plus
      the
      release of previously restricted cash of $1,500,000. The revolving line of
      credit is subject to an availability limit under a borrowing base calculation
      (85% of eligible accounts receivable plus up to 50% of eligible raw materials
      inventory plus up to 25% of eligible electronic components, with an inventory
      advance sublimit not to exceed $1,500,000, as defined in the financing
      agreement). The revolving line of credit expires October 18, 2008. The Company
      anticipates the revolving credit facility will be renewed. At December 29,
      2007,
      the Company had available borrowing capacity under its revolving line of credit
      of $3,200,000. The revolving line of credit bears interest at the prime rate
      less 0.50% (6.75% at December 29, 2007 and currently 5.50%) or LIBOR plus 2.00%.
      The principal amount of the Term Loan is payable in 59 equal monthly
      installments of $33,333 and one final payment of the remaining principal
      balance. The Term Loan bears interest at the prime rate less 0.50% (6.75% at
      December 29, 2007 and currently 5.50%) or LIBOR plus 2.25%. The principal amount
      of the Mortgage Loan is payable in 119 equal monthly installments of $12,500
      and one final payment of the remaining principal balance. The Mortgage Loan
      bears interest at the prime rate less 0.50% (6.75% at December 29, 2007 and
      currently 5.50%) or LIBOR plus 2.25%. At December 29, 2007, the Company, under
      the terms of its agreement with North Fork Bank, elected to convert $1,500,000
      of the Term Loan and $2,800,000 of the Mortgage Loan from their prime rate
      base
      to LIBOR-based interest rate loans for six months at an interest rate of
      7.6325%, which expired January 18, 2008. The revolving line of credit, the
      Term
      Loan and the Mortgage Loan are secured by substantially all assets located
      within the United States and the pledge of 65% of the stock of the Company's
      subsidiaries located in Costa Rica and Canada. The provisions of the financing
      agreement require the Company to maintain certain financial covenants. The
      Company was in compliance with these covenants at December 29, 2007. In
      connection with the new financing agreement with North Fork Bank, the Company
      took a charge to interest expense of approximately $167,000 in the fourth
      quarter of 2006 related to the write-off of the unamortized loan costs related
      to the prior financing agreement.


47





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





5.
      Current and long-term debt (continued)





North
      Fork Bank and the Company amended the financing agreement, as of May 15, 2007,
      which (i) eliminated the fixed charge coverage ratio covenant for the quarter
      ended June 30, 2007, (ii) added a covenant related to earnings before interest,
      taxes, depreciation and amortization (“EBITDA”) for the four quarters ended June
      30, 2007 to require the Company to achieve a minimum level of EBITDA, and (iii)
      modified the fixed charge coverage ratio covenant for periods after the quarter
      ending September 29, 2007. The Company was in compliance with these amended
      covenants at December 29, 2007.





On
      August
      9, 2007, North Fork Bank and Merrimac entered into a Pledge and Security
      Agreement, under which North Fork Bank consented to the guaranty by Merrimac
      of
      FMI's borrowings under the revolving credit agreement with The Bank of Nova
      Scotia in the amount of up to $250,000 (Canadian). In consideration for North
      Fork Bank providing such consent, Merrimac deposited $250,000 into a controlled
      collateral account with North Fork Bank and also agreed to prepay the mortgage
      loan portion of the credit facility with North Fork Bank with fifty percent
      of
      the net proceeds from a sale of FMI, up to a maximum amount of $500,000. This
      agreement terminated in November 2007 when The Bank of Nova Scotia terminated
      FMI’s revolving credit agreement. Upon the termination of such agreement, the
      Company agreed to repay a portion of its Mortgage Loan with the funds in the
      controlled collateral account upon the expiration of the LIBOR contracts in
      January 2008. On January 18, 2008, Merrimac paid $250,000 of the Mortgage Loan
      using the funds previously deposited into the controlled collateral
      account.





At
      December 29, 2007 and December 30, 2006, 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.




The
      payments now required under the long-term obligations listed above during the
      years following December 29, 2007 are set forth below:





2008
            
            $
            550,0002009
            
            
            550,0002010
            
            
            550,0002011
            
            
            450,0002012
            
            
            150,000Thereafter
            
            
            2,062,500$
            4,312,500





6.
      Accrued liabilities





Accrued
      liabilities consist of the following:





2007
            
            2006Commissions
            
            $
            134,343
            
            $
            239,633Vacation
            
            
            396,495
            
            
            244,013Employee
                compensation
            
            
            216,029
            
            
            190,979Warranty
                reserve
            
            
            200,000
            
            
            200,000Deferred
                compensation
            
            
            7,448
            
            
            15,782Professional
                fees
            
            
            266,590
            
            
            91,545FMI
                Disposal costs, including termination costs
            
            
            580,192
            
            
            -Restructuring
            
            
            -
            
            
            67,043Other
            
            
            164,306
            
            
            49,981$
            1,965,403
            
            $
            1,098,976


48





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





7.
      Stock
      option and stock purchase plans





New
      Share-Based Compensation Plans:





On
      June
      22, 2006, the Company’s stockholders approved three new share-based compensation
      programs as follows: (i) 2006 Stock Option Plan; (ii) 2006 Key Employee
      Incentive Plan; and (iii) 2006 Non-Employee Directors’ Stock Plan.





The
      2006
      Stock Option Plan authorizes the grant of an aggregate of 500,000 shares of
      Common Stock to employees, directors and consultants of the Company. Under
      the
      2006 Stock Option Plan, the Company may grant to eligible individuals incentive
      stock options, as defined in Section 422 of the Internal Revenue Code of 1986
      (“Code”), and/or non-qualified stock options. The purposes of the 2006 Stock
      Option Plan are to  attract,
      retain and motivate employees, compensate consultants, and to enable employees,
      consultants and directors, including non-employee directors, to participate
      in
      the long-term growth of the Company by providing for or increasing the
      proprietary interests of such persons in the Company, thereby assisting the
      Company to achieve its long-range goals. The 2006 Stock Option Plan replaced
      the
      2001 Stock Option Plan, and the remaining 19,700 unissued options under the
      2001
      Stock Option Plan are no longer available for grant.





The
      2006
      Stock Option Plan may be terminated, amended, altered, or discontinued at any
      time by the Board, but no amendment may impair the rights of a participant
      without the participant’s consent, subject to the terms of the 2006 Stock Option
      Plan. In addition, the 2006 Stock Option Plan may not be amended without the
      approval of the Company’s stockholders to the extent such approval is required
      by law or the listing requirements of any exchange on which the Company’s equity
      securities are publicly traded. Options may not be
      granted under the 2006 Stock Option Plan after March 28, 2016, or earlier as
      the
      Compensation Committee may determine.





At
      December 29, 2007 there were 335,900 options outstanding under the 2006 Stock
      Option Plan of which 28,500 were exercisable. Options are granted at the closing
      price of the Company’s shares on the American Stock Exchange on the date
      immediately prior to grant, pursuant to the 2006 Stock Option Plan. Options
      available for grant under the 2006 Stock Option Plan were 164,100 at December
      29, 2007.





The
      2006
      Key Employee Incentive Plan replaces the 2001 Key Employee Incentive Plan,
      which
      terminated on April 20, 2006. The purpose of the 2006 Key Employee Incentive
      Plan is to give the Company a competitive advantage in retaining and motivating
      key officers and employees and to provide the Company and its subsidiaries
      with
      a stock plan providing incentives linked to increases in stockholder value.




The
      2006
      Key Employee Incentive Plan is substantially similar to the 2001 Key Employee
      Incentive Plan. The changes primarily relate to updating for changes in
      applicable tax law and to raise the target market capitalization levels to
      be
      achieved by the Company in order for the 2006 Key Employee Incentive Plan
      participants to receive the benefits of the 2006 Key Employee Incentive
      Plan.




The
      number of Restricted Shares issued under the 2006 Key Employee Incentive Plan
      will depend on whether the Company achieves certain target market
      capitalizations during the five-year period  beginning
      on March 29, 2006 (the “Effective Date”). If the Company attains or achieves an
      average market capitalization equal to or greater than $58,000,000 during any
      six-month period during the five-year period beginning on the Effective Date
      (the “$58,000,000 Market Capitalization”), then each participant who shall still
      be in the employ of the Company on the last day of such six-month period will
      be
      issued **** the
      number of Restricted Shares determined by multiplying (a) his or her Award
      Percentage, (b) 5% and (c) the average market capitalization during such
      six-month period and dividing the product by the average fair market value
      of
      the common Stock during such six-month period.





In
      the
      event the Company attains or achieves an average market capitalization equal
      to
      or greater than $93,000,000 over the course of any six-month period during
      the
      five-year period beginning on the  Effective
      Date (the “$93,000,000 Market Capitalization”), then each participant who shall
      still be in the employ of the Company on the last day of such six-month period
      will be awarded the number of Restricted Shares determined by multiplying (a)
      his or her Award Percentage, (b) 5% and (c) the average market capitalization
      during such six-month period and dividing the product by the average fair market
      value of the Common Stock during such six-month period. Such six-month periods
      may be, in whole or in part, coterminous with, the six-month period in which
      the
      $58,000,000 Market Capitalization is achieved. In no event can Restricted Shares
      be issued upon attainment of either the $58,000,000 Market Capitalization or
      the
      $93,000,000 Market Capitalization more than once during the five-year term
      of
      the 2006 Key Employee Incentive Plan.





For
      purposes of the 2006 Key Employee Incentive Plan, market capitalization is
      defined as the number of outstanding shares of Common Stock (excluding any
      shares of Common Stock issued subsequent to the Effective Date, other than
      shares of Common Stock issued upon the exercise of stock options granted to
      employees, directors or consultants or through the purchase of shares of Common
      Stock under any stock purchase plan) on a fully diluted basis, multiplied by
      the
      fair market value per share of the Common Stock.




49


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





7. Stock
          option and stock purchase plans (continued)





In
      the
      event of a Change in Control prior to the achievement of the $58,000,000 Market
      Capitalization, the $58,000,000 Market Capitalization will be deemed to be
      achieved if the number of outstanding shares of Common Stock (calculated on
      a
      fully diluted basis) on the date of the Change in Control multiplied by the
      fair
      market value determined as of the date of the Change of Control is equal to
      or
      greater than $58,000,000, and in the event it is achieved, each participant
      will
      be granted the number of Restricted Shares determined by multiplying (i) such
      participant’s Award Percentage, (ii) 5% and (iii) the Change in Control Market
      Capitalization and dividing the product by the Change in Control Price.
      Similarly, the $93,000,000 Market Capitalization will be deemed to be achieved
      if such number of shares on the date of the Change of Control multiplied by
      the
      fair market value as of the date of the Change of Control is equal to or greater
      than $93,000,000, and in the event it is achieved, each participant will be
      granted the number of Restricted
      Shares determined by multiplying (i) such participant’s Award Percentage, (ii)
      (A) if the $58,000,000 Market Capitalization shall have previously been
      achieved, 5% or (B) if the $58,000,000 Market Capitalization
      shall not have previously been achieved, 10% and (iii) the Change in Control
      Market Capitalization and dividing the product by the Change in Control Price.





The
      maximum value of an award of Restricted Shares which may be issued to any
      participant upon achievement (or deemed achievement) of the $58,000,000 Market
      Capitalization is $1,500,000 (based on the fair market value on the date of
      issuance of such shares). The maximum value of an award of Restricted Shares
      which may be issued to any participant upon achievement (or deemed achievement)
      of the $93,000,000 Market Capitalization is $3,500,000 (based on the fair market
      value of the Common Stock on the date of issuance of the Restricted Shares).
      In
      the event a Change in Control shall occur which results in a change of control
      market capitalization equal to or greater than $93,000,000 prior to achievement
      of the $58,000,000 Market Capitalization, the maximum award would be $5,000,000.
      The 2006 Key Employee Incentive Plan will terminate at the end of ten years
      after its Effective Date; provided that the Restricted Shares outstanding as
      of
      such date will not be affected or impaired by the termination of the 2006 Key
      Employee Incentive Plan.





As
      of
      December 29, 2007, no grants have been made under the 2006 Key Employee
      Incentive Plan.





The
      2006
      Non-Employee Directors’ Stock Plan is a new plan that authorizes the grant of an
      aggregate of 100,000 shares of Common Stock to the non-employee directors of
      the
      Company. The plan authorizes each non-employee director to receive 1,500 shares
      of restricted stock in 2006, or 1,500 shares or such other amount as the Board
      of Directors may, from time to time, decide for each year in the future
      following the Company’s Annual Meeting of Stockholders.





The
      purpose of the 2006 Non-Employee Directors’ Stock Plan is to attract, retain and
      motivate the most capable non-employee directors, to align the interests of
      the
      Company’s non-employee directors and stockholders, to compensate the
      non-employee directors in line with the Company’s competitors, and to generally
      increase the effectiveness of the Company’s non-employee director compensation
      structure, thereby assisting the Company to achieve its long-range goals. The
      2006 Non-Employee Directors’ Stock Plan may be terminated, amended, altered, or
      discontinued at any time by the Board, but no amendment may impair the rights
      of
      a participant without the participant’s consent, subject to the terms of the
      2006 Non-Employee Directors’ Stock Plan. In addition, the 2006 Non-Employee
      Directors’ Stock Plan may not be amended without the approval of the Company’s
      stockholders to the extent such approval is required by law or the listing
      requirements of any exchange on which the Company’s equity securities are
      publicly traded. Awards may not be granted under the 2006 Non-Employee
      Directors’ Stock Plan after December 31, 2015, or earlier as the Board may
      determine.





On
      June
      20, 2007, the Company issued a grant of 10,500 shares of restricted stock to
      its
      non-employee directors. The per share price of the grant was $9.78 (the closing
      price of the Company’s shares on the American Stock Exchange on the date
      immediately prior to the grant, pursuant to the terms of the plan). One third
      of
      such restricted stock vests on the anniversary of the grant date over a
      three-year period. Share-based compensation expense for the years ended December
      29, 2007 and December 30, 2006 related to the grant of restricted stock was
      approximately $49,000 and $17,000, which was based on a straight-line
      amortization. Restricted shares of common stock available for grant under the
      2006 Non-Employee Directors’ Stock Plan were 80,500 at December 29,
      2007.





A
      summary
      of unvested restricted stock activity and information related to all restricted
      stock outstanding follows:





Weighted-AverageGrant-DayFair Value
            
            SharesOutstanding
                at December 30, 2006
            
            $
            9.52
            
            
            9,000Granted
            
            
            9.78
            
            
            10,500Vested
            
            
            9.52
            
            
            (3,000
            )Outstanding
                at December 29, 2007
            
            $
            9.69
            
            
            16,500




50


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





7. Stock
          option and stock purchase plans (continued)





Existing
      Stock Option and Employee Stock Purchase Plans:





At
      December 29, 2007, the Company maintains share-based compensation arrangements
      under the following plans: (i) 1993 Stock Option Plan; (ii) 1997 Long Term
      Incentive Plan; and (iii) 2001 Stock Option Plan.





At
      December 29, 2007 there were 258,847 options outstanding under the 1993 Stock
      Option Plan, the 1997 Long Term Incentive Plan and the 2001 Stock Option Plan
      of
      which all were exercisable. No options are available for future grant under
      the
      1993 Stock Option Plan, the 1997 Long Term Incentive Plan or the 2001 Stock
      Option Plan.





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





2007
            
            2006Weighted
            
            
            
            Weightedaverage
            
            Shares
            
            average
            
            Sharesexercise
            
            or
                price
            
            exercise
            
            or
                priceprice
            
            per
                share
            
            price
            
            per
                shareOutstanding
                at beginning of year
            
            $
            9.55
            
            
            407,092
            
            $
            9.83
            
            
            430,869Granted
            
            
            9.36
            
            
            255,500
            
            
            9.54
            
            
            85,500Exercised
            
            
            7.95
            
            
            (9,465
            )
            
            6.87
            
            
            (4,200
            )Expired
            
            
            12.88
            
            
            (39,930
            )
            
            10.44
            
            
            (99,000
            )Forfeited
            
            
            10.97
            
            
            (18,450
            )
            
            11.06
            
            
            (6,077
            )Outstanding
                at end of year
            
            
            9.30
            
            
            594,747
            
            
            9.55
            
            
            407,092Exercisable
                at end of year
            
            $
            9.19
            
            
            287,347
            
            $
            9.14
            
            
            321,592Option
                price range at end of year
            
            $3.10-$17.00
            
            $3.10-$17.00Weighted
                average estimated fair value of options granted during the
                year
            
            
            
            
            $
            3.68
            
            
            
            
            $
            2.57




A
      summary
      of intrinsic and fair value stock option information follows:





Aggregate
                intrinsic value of all options at December 29, 2007
            
            $
            718,000Aggregate
                intrinsic value of exercisable options at December 29,
                2007
            
            $
            485,000Intrinsic
                value of options exercised during 2007
            
            $
            16,000Fair
                value of options vested during 2007
            
            $
            71,000





The
      aggregate intrinsic value represents the total pre-tax intrinsic value (the
      difference between the Company’s closing stock price on the last trading day of
      the year and the exercise price, multiplied by the number of in-the-money
      options) that would have been received by the option holders had all option
      holders exercised their options on December 29, 2007.





As
      of
      December 29, 2007 the total future compensation cost related to non-vested
      stock
      options and the employee stock purchase plan not yet recognized in the
      consolidated statement of operations was $827,000. Of that total, $395,000,
      $324,000 and $108,000 are expected to be recognized in 2008, 2009 and 2010,
      respectively




In
      2001,
      the Company's stockholders approved a stock purchase plan pursuant to which
      250,000 shares of the Company's common stock were initially reserved for sale
      to
      eligible employees. Under this plan, the Company may grant employees the right
      to subscribe to purchase shares of common stock from the Company at 85% of
      the
      market value on specified dates and pay for the shares through payroll
      deductions over a period of up to 27 months.




51





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 29, 2006




7. Stock
          option and stock purchase plans (continued)





A
      summary
      of stock purchase plan subscription activity follows:





2007
            
            2006Weighted
            
            
            
            Weightedaverage
            
            Shares
            
            average
            
            Sharesexercise
            
            or
                price
            
            exercise
            
            or
                priceprice
            
            per
                share
            
            price
            
            per
                shareSubscribed
                at beginning of year
            
            $
            7.87
            
            
            27,785
            
            $
            6.34
            
            
            44,047Subscribed
            
            
            -
            
            
            -
            
            
            8.10
            
            
            18,771Purchased
            
            
            7.55
            
            
            (11,000
            )
            
            6.00
            
            
            (32,723
            )Cancelled
            
            
            7.86
            
            
            (1,072
            )
            
            6.93
            
            
            (2,310
            )Subscribed
                at end of year
            
            $
            8.10
            
            
            15,713
            
            $
            7.87
            
            
            27,785Subscription
                price range end of year
            
            $8.10
            
            $7.48-$8.10Weighted
                average estimated fair value of rights granted during the year
            
            
            
            
            $
            -
            
            
            
            
            $
            2.76





As
      of
      December 29, 2007, there were 165,732 shares available for future stock purchase
      plan subscriptions.





8.
      Income
      taxes





There
      was
      no provision or benefit for income taxes from continuing operations for 2007
      or
      2006.





Temporary
      differences which gave rise to a significant portion of deferred tax assets
      and
      liabilities at December 29, 2007 and December 30, 2006 are as
      follows:





**2007**
            
            **2006**Current
                deferred tax assets:Inventory
                valuation allowance
            
            $
            595,000
            
            $
            468,000Capitalized
                inventory costs
            
            
            43,000
            
            
            33,000Warranty
                cost
            
            
            80,000
            
            
            80,000Deferred
                compensation
            
            
            3,000
            
            
            6,000Other
            
            
            152,000
            
            
            151,000873,000
            
            
            738,000Less
                valuation allowance
            
            
            (752,000
            )
            
            (643,000
            )Current
                deferred tax assets
            
            
            121,000
            
            
            95,000Current
                deferred tax liabilities- Prepaid expenses
            
            
            (173,000
            )
            
            (195,000
            )Net
                current deferred tax liabilities
            
            
            (52,000
            )
            
            (100,000
            )Non-current
                deferred tax assets:Net
                operating loss carryforwards
            
            
            1,377,000
            
            
            1,248,000Research
                and development credits and costs
            
            
            74,000
            
            
            74,000Other
            
            
            137,000
            
            
            120,0001,588,000
            
            
            1,442,000Less
                valuation allowance
            
            
            (1,368,000
            )
            
            (1,238,000
            )Non-current
                deferred tax assets
            
            
            220,000
            
            
            204,000Non-current
                deferred tax liabilities:Depreciation
                and amortization
            
            
            (190,000
            )
            
            (80,000
            )Other
            
            
            22,000
            
            
            (24,000
            )Non-current
                deferred tax liabilities
            
            
            (168,000
            )
            
            (104,000
            )Net
                non-current deferred tax assets
            
            
            52,000
            
            
            100,000Net
                deferred tax assets, long-term
            
            $
            -
            
            $
            -


52


**NOTES
      TO**  **CONSOLIDATED
      FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





8.
      Income
      taxes (continued)





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





**2007**
            
            **2006**Statutory
                Federal income tax rate
            
            
            (34.0
            )%
            
            (34.0
            )%Effect
                of:State
                income tax, net of Federal income tax effects
            
            
            -
            
            
            -Change
                in valuation allowance
            
            
            25.8
            
            
            30.4Other
            
            
            8.2
            
            
            3.6Effective
                tax benefit
            
            
            0.0
            %
            
            0.0
            %


The
        Company files a U.S. income tax return which includes its Costa Rican
        subsidiary. This subsidiary is not subject to income tax in Costa Rica as
        it
        takes advantage of that country’s Free Trade Zone Law, as the Company has met
        the necessary commitments for capital investment of $6.3 million and employment
        targets of 45 employees. The Company has 100% exemption from Costa Rica taxes
        which expires in May 2009. The Company then has a 75% exemption for the
        following two years through May 2010 and a 50% exemption for the subsequent
        two
        years through May 2012. The Company has had minimal taxable income in Costa
        Rica
        and thus had no tax benefits from the tax exemption.


As
      of
      December 29, 2007, the Company had net operating loss carryforwards of
      approximately $3,700,000 for Federal income tax purposes and $2,300,000 for
      state income tax purposes which are available to offset future taxable income
      through 2027 and 2015, respectively. Included in the net operating losses as
      of
      December 27, 2007 are approximately $760,000 of future Federal tax deductions
      related to the exercise of employee stock options. Upon the removal of the
      valuation allowance, the tax benefit of this deduction will be credited to
      additional paid-in-capital. In addition, the Company has U.S Federal income
      tax
      credit carryforwards of approximately $187,000 of which $76,000 expire through
      2015, $74,000 that expire through 2022 and $37,000 which have no expiration.





The
      Company increased its domestic deferred tax asset valuation allowance by
      $239,000 to $2,120,000, in fiscal year 2007 reflecting additional net operating
      loss carryforwards and lower deferred tax liabilities. In 2006 and 2005 the
      Company recorded additional valuation allowances for certain Canadian deferred
      tax assets of $427,000 and $270,000, respectively, because it believed that
      the
      probability of realization of such assets was uncertain. The Company increased
      its domestic deferred tax asset valuation allowance by $591,000 to $1,881,000,
      in fiscal year 2006 reflecting additional net operating loss carryforwards.
      The
      Company's domestic net deferred tax assets have been fully reserved as of
      December 29, 2007 and December 30, 2006.





On
      December 31, 2006, the Company adopted FIN 48, which clarifies the accounting
      for uncertainty in tax positions. As of that date the Company had no uncertain
      tax positions and did not record any additional benefits or liabilities. At
      December 29, 2007, the Company had no uncertain tax positions and did not record
      any additional benefits or liabilities. The Company will recognize any accrued
      interest or penalties related to unrecognized tax benefits within the provision
      for income taxes.





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





During
        the second quarter of 2007, the Company took a charge of $506,000 to provide
        a
        full valuation allowance for a Canadian net deferred tax asset related to
        its
        discontinued operations. The current foreign tax benefits for the years ended
        December 29, 2007 and December 30, 2006 of $60,000 and $69,000, respectively,
        represent refundable Canadian provincial tax credits for which FMI, as a
        technology company, has qualified.





The
      Company's operations are conducted primarily through one business segment,
      electronic components and subsystems. Of the identifiable assets of the Company,
      83% are located in the United States and 17% are located in Costa
      Rica.





Sales
      by
      geographic location are listed below.





2007
            
            2006Geographic
                areas:Sales
                to unaffiliated customers:North
                America
            
            $
            19,668
            
            $
            20,872Europe
            
            
            1,700
            
            
            1,174Far
                East
            
            
            471
            
            
            416Other
            
            
            48
            
            
            69Consolidated
            
            $
            21,887
            
            $
            22,531





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 BAE Systems, The Boeing Company, Celestica,
      Inc., EADS Astrium, General Dynamics Corporation, ITT, Lockheed Martin
      Corporation, Northrop Grumman Corporation, Raytheon Company and Space Systems
      Loral.


53





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





9.
      Concentration of risk (continued)




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




2007
            
            2006Raytheon
                Company
            
            
            16.6
            %
            
            12.6
            %Lockheed
                Martin Corporation
            
            
            11.3
            %
            
            10.5
            %Space
                Systems Loral
            
            
            9.8
            %
            
            7.9
            %Northrop
                Grumman Corporation
            
            
            7.0
            %
            
            7.1
            %The
                Boeing Company
            
            
            6.7
            %
            
            10.2
            %





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 64% and 80% of its
      receivables at December 29, 2007 and December 30, 2006, respectively, were
      from
      six 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.





The
      following table presents percentage of accounts receivable owed by our key
      customers:




2007
            
            2006Space
                Systems Loral
            
            
            23.2
            %
            
            9.3
            %Lockheed
                Martin Corporation
            
            
            12.7
            %
            
            17.6
            %Northrop
                Grumman Corporation
            
            
            12.2
            %
            
            12.4
            %Raytheon
                Company
            
            
            11.3
            %
            
            15.6
            %The
                Boeing Company
            
            
            3.7
            %
            
            12.7
            %L-3
                Communications
            
            
            0.5
            %
            
            12.0
            %




10.
      Net
      income (loss) per common share





Because
      of the net loss for the years ended December 29, 2007 and December 30, 2006
      approximately 595,000 and 407,000 shares, respectively, underlying stock options
      were excluded from the calculation of diluted net income (loss) per share as
      the
      effect would be anti-dilutive.





11.
      Commitments and contingencies





Lease
      commitments:





The
      Company leases real estate and equipment under operating leases expiring at
      various dates through January 2011, which includes a 36,200 square-foot
      manufacturing facility in Costa Rica. The leases include provisions for rent
      escalation, renewals and purchase options, and the Company is generally
      responsible for taxes, insurance, repairs and maintenance.





Total
      rent expense charged to operations amounted to $420,000 in 2007 and $427,000
      in
      2006. Future minimum lease payments under noncancellable operating leases with
      an initial term exceeding one year are as follows:





2008
            
            $
            396,0002009
            
            
            404,0002010
            
            
            422,0002011
            
            
            34,000Total
            
            $
            1,256,000





Purchase
      obligations:





The
      Company intends to issue commitments to purchase approximately $1,700,000 of
      capital equipment from various vendors. Such equipment will be purchased and
      become operational during 2008.





Consulting
      and employment agreements; deferred compensation:





On
      April
      11, 2006, Merrimac Industries, Inc. and its Chairman, President and Chief
      Executive Officer entered into an employment agreement (the Employment
      Agreement), setting forth the terms of Mr. Carter’s employment. Mr. Carter’s
      employment under the terms of the Employment Agreement will commence on April
      11, 2006 and continue until December 31, 2010, and will be renewable for
      successive twelve-month periods unless terminated earlier by either party.
      The
      Employment Agreement supersedes and replaces his previous employment agreement
      with the Company, dated as of December 19, 1996, as amended on January 1, 1998.
      Pursuant to the Employment Agreement, Mr. Carter’s annual base salary is
      $332,000. In addition, Mr. Carter will be eligible to participate in the
      Company’s medical benefits, life insurance, 401(k) and similar programs
      generally




54


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





11.
      Commitments and contingencies (continued)





available
      to employees. Mr. Carter will also be eligible to participate in the Company’s
      stock purchase, stock option, and long-term incentive plans, and to receive
      bonuses, in the sole discretion of the compensation committee of Company’s board
      of directors.





A
      subsidiary of the Company entered into an employment agreement with the Founder
      and President Emeritus of FMI that provided for a minimum annual salary of
      $150,000 (Canadian). The term of the agreement ended on August 26, 2004 and
      was
      extended through January 27, 2006. It was subsequently extended until August
      2007 at a minimum annual salary of $120,000 (Canadian). It was further extended
      until August 2008 at a minimum annual salary of $120,000
      (Canadian).





The
      Company entered into a consulting agreement on January 1, 1998 with a director
      of the Company. 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 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. This agreement terminated in December
      2006.





Litigation:





The
      Company is a party to lawsuits, 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. Also see Note 18.





12.
      Restructuring charge





During
      2006 the Company reduced its headcount by 12 persons, principally involved
      in
      production, manufacturing support, sales and administration. The Company
      recorded a personnel restructuring charge of $200,000, consisting of severance
      and certain other personnel costs, during the fourth quarter of 2006. Such
      charges increased the loss from continuing operations by $.06 per share. The
      Company paid $133,000 of these restructuring charges in 2006 and the remaining
      restructuring charge was paid in 2007.





13.
      Private placements of Common Stock





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





On
      December 13, 2004 Infineon Technologies AG (“Infineon”), at such time a 15.2%
      holder of the Company’s common stock, sold 475,000 shares of the Company’s
      common stock to four purchasers in a privately-negotiated transaction. Two
      purchasers in such transaction, K Holdings LLC and Hampshire Investments,
      Limited, each of which is affiliated with Ludwig G. Kuttner, purchased shares
      representing an aggregate of approximately 9.6% of
      the
      Company’s common stock. Infineon also assigned to each purchaser certain
      registration rights to such shares under the existing registration rights
      agreements Infineon had with the Company.





In
      connection with the transaction, the Company and Infineon terminated the Stock
      Purchase and Exclusivity Letter Agreement dated April 7, 2000, as amended,
      which
      provided that the Company would design, develop and produce exclusively for
      Infineon certain Multi-Mix® products that incorporate active RF power
      transistors for use in certain wireless base station applications,
      television ****** transmitters
      and certain other applications that are intended for Bluetooth
      transceivers.





DuPont
      and the four purchasers above hold registration rights, which currently give
      them the right in perpetuity to register an aggregate of 1,003,413 shares of
      Common Stock of the Company. There are no settlement alternatives and the
      registration of the shares of Common Stock would be on a “best efforts” basis.





14.
      Related party transactions





In
      May
      1998, the Company sold 22,000 shares of Common Stock to Mason N. Carter,
      Chairman, President and Chief Executive Officer of the Company, at a price
      of
      $11.60 per share, which approximated the average closing price of the Company's
      Common Stock during the first quarter of 1998. The Company lent Mr. Carter
      $255,000 in connection with the purchase of these shares and combined that
      loan
      with a prior loan to Mr. Carter in the amount of $105,000. The resulting total
      principal amount of $360,000 was payable May 4, 2003 and bore interest at a
      variable interest rate based on the prime rate. This loan was further amended
      on
      July 29, 2002. Accrued interest of $40,000 was added to the principal, bringing
      the new principal amount of the loan to $400,000, the due date was extended
      to
      May 4, 2006, and interest (at the same rate as was previously applicable) was
      payable monthly. Mr. Carter pledged 33,000 shares of Common Stock as security
      for this loan, which was a full-recourse loan.




55


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





14.
      Related party transactions (continued)





On
      March
      29, 2006, the Company entered into an agreement with Mr. Carter to purchase
      42,105 shares of the Company's common stock owned by Mr. Carter at a purchase
      price of $9.50 per share (the closing price of the common stock on March 29,
      2006) resulting in a total purchase price for the shares of $399,998. As a
      condition to the Company’s obligation to purchase the shares, concurrent with
      the Company’s payment of the purchase price Mr. Carter paid to the Company
      $400,000 (plus any accrued and unpaid interest) in full satisfaction of Mr.
      Carter’s promissory note in favor of the Company dated July 29, 2002. This
      transaction was closed on April 24, 2006.





During
      fiscal years 2007 and 2006, respectively, the Company's General Counsel, Katten
      Muchin Rosenman LLP, was paid $350,000 and $402,000 for providing legal services
      to the Company. A director of the Company is Counsel to the firm of Katten
      Muchin Rosenman LLP but does not share in any fees paid by the Company to the
      law firm.




During
      fiscal years 2007 and 2006, the Company retained Career Consultants, Inc. and
      SK
      Associates to perform executive searches and to provide other services to the
      Company. The Company paid an aggregate of $32,000 and $10,000 to these companies
      during 2007 and 2006, respectively. A director of the Company is the Chairman
      and Chief Executive Officer of each of these companies. ****





During
      each of fiscal years 2007 and 2006, a director of the Company was paid $36,000
      for providing technology-related consulting services to the
      Company.





During
      fiscal year 2006 DuPont Electronic Technologies (“DuPont”), a stockholder, was
      paid $32,000 for providing technological and marketing-related personnel and
      services on a cost-sharing basis to the Company under the Technology Agreement
      dated February 28, 2002. No payments were made to DuPont during 2007. A director
      of the Company is an officer of DuPont, but does not share in any of these
      payments.




Each
      director who is not an employee of the Company receives a monthly director's
      fee
      of $1,500, plus an additional $500 for each meeting of the Board and of any
      Committees of the Board attended. In addition, the Chair of the Audit Committee
      receives an annual fee of $2,500 for his services in such capacity. The
      directors are also reimbursed for reasonable travel expenses incurred in
      attending Board and Committee meetings. In addition, pursuant to the 2006 Stock
      Option Plan, each non-employee director is granted an option to purchase 2,500
      shares of the Common Stock of the Company on the date of each Annual Meeting
      of
      Stockholders. Such options have a three-year vesting period. Each such grant
      has
      an exercise price equal to the fair market value on the date of such grant
      and
      will expire on the tenth anniversary of the date of the grant. On June 20,
      2007,
      non-qualified stock options to purchase an aggregate of 20,000 shares were
      issued to eight directors at an exercise price of $9.78 per share.





Also
      on
      June 20, 2007, pursuant to the 2006 Non-Employee Directors’ Stock Plan, 10,500
      shares of restricted stock were granted to seven directors at a fair market
      value of $9.78 per share. Such restricted stock vests ratably over a three-year
      period.





On
      December 13, 2004, Infineon Technologies AG (“Infineon”), at such time the
      beneficial owner of approximately 15% of the Company’s common stock, sold
      475,000 shares of the Company’s common stock to four purchasers in a
      privately-negotiated transaction. Two purchasers in such transaction, K
      Holdings, LLC and Hampshire Investments, Limited, each of which is affiliated
      with Ludwig G. Kuttner, who was President and Chief Executive Officer of
      Hampshire Group, Limited (“Hampshire”), purchased 300,000 shares representing an
      aggregate of approximately 9.6% of the Company’s common stock. Mr. Kuttner was
      elected to the Company’s Board of Directors at its 2006 Annual Meeting of
      Stockholders. As a result of an ongoing investigation by Hampshire's audit
      committee, the Securities and Exchange Commission, and the Department of Justice
      of allegations of certain improprieties and possibly unlawful conduct involving
      Mr. Kuttner and other Hampshire executives, Mr. Kuttner's employment with
      Hampshire has been terminated and he remains as a director. Mr. Kuttner took
      a
      leave of absence from his position as a director of Merrimac. During his leave
      of absence, Mr. Kuttner was not entitled to any compensation from the Company.
      Mr. Kuttner rescinded his leave of absence from his position as a director
      of
      Merrimac as of June 20, 2007. Infineon also assigned to each purchaser certain
      registration rights to such shares under the existing registration rights
      agreements Infineon had with the Company. In connection with the transaction,
      the Company and Infineon terminated the Stock Purchase and Exclusivity Letter
      Agreement dated April 7, 2000, as amended, which provided that the Company
      would
      design, develop and produce exclusively for Infineon certain Multi-Mix® products
      that incorporate active RF power transistors for use in certain wireless base
      station applications, television transmitters and certain other applications
      that are intended for Bluetooth transceivers.




56


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Years
      ended December 29, 2007 and December 30, 2006





15.
      Stockholder Rights Plan





On
      March
      5, 1999, the Board of Directors of the Company approved a stockholder 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 stockholders 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 12.5% 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.





16.
      SAB
      108 Cumulative Effect Adjustment





In
      September 2006, the SEC issued SAB 108 in order to eliminate the diversity
      in
      practice surrounding how public companies quantify financial statement
      misstatements. Traditionally there have been two widely recognized methods
      for
      quantifying the effects of financial statement misstatements: the “roll-over”
method and the “iron curtain” method. The roll-over method focuses primarily on
      the impact of a misstatement on the income statement, including the reversing
      effect of prior-year misstatements, but its use can lead to the accumulation
      of
      misstatements in the balance sheet. The iron-curtain method focuses primarily
      on
      the effect of correcting the period-end balance sheet with less emphasis on
      the
      reversing effects of prior year errors on the income statement. Prior to the
      adoption of SAB 108, the Company used the roll-over method for quantifying
      financial statement misstatements. SAB No. 108 requires analysis of
      misstatements using both an income statement (roll-over) approach and a balance
      sheet (iron curtain) approach in assessing materiality and provides for a
      one-time cumulative effect transition adjustment. SAB No. 108 is effective
      for
      the Company’s fiscal year 2006 annual financial statements.




SAB
      108
      permits existing public companies to initially apply its provisions either
      by
      (i) restating prior financial statements as if the dual approach had always
      been
      applied or (ii) recording the cumulative effect of initially applying the “dual
      approach” as adjustments to carrying values of assets and liabilities as of
      January 1, 2006 with an offsetting adjustment recorded to the opening balance
      of
      retained earnings.





The
      Company identified the following errors through the application of its internal
      controls over financial reporting and had concluded that the individual errors
      were immaterial under the rollover method for the periods indicated. However,
      when applying the dual approach, and after considering all relevant quantitative
      and qualitative information, the Company concluded that these misstatements
      are
      material to the 2006 financial statements when considering the aggregate impact.
      The Company corrected the errors through the recording of cumulative effect
      adjustments to retained earnings as of January 1, 2006:





Inventory
                reserve (1)
            
            $
            63,000Accrued
                liabilities (2)
            
            
            321,000Impact
                retained earnings (3)
            
            $
            384,000





(1)
            The
                Company recorded a non-specific inventory reserve for book-to-physical
                adjustments of $63,000.


Upon
      adoption of SAB 108, the Company recorded a $63,000 increase in inventory with
      a
      corresponding increase in retained earnings to correct this misstatement.





(2)
            The
                Company had accrued its unbilled year-end audit, income tax preparation
                and annual report costs at the end of 2005. Under FASB Concepts Statement
                No. 6, “Elements of Financial Statements” and AICPA Technical Practice Aid
                5290, these costs are to be expensed when incurred and not accrued.
                The
                Company recorded a $321,000 reduction of accrued liabilities with
                a
                corresponding increase in retained earnings to correct these
                misstatements.





(3)
            Represents
                the net understatement of retained earnings for 2005 recorded as
                of
                January 1, 2006 for the initial application of SAB 108. Due to the
                Company’s net operating loss carry forwards, no provision for income taxes
                has been recorded.





17.
      Repurchase of Common Stock for the Treasury




On
      March
      13, 2007, the Company repurchased in a private transaction 238,700 shares of
      its
      Common Stock for the treasury at $9.00 per share for an aggregate total of
      $2,148,300 from a group of investors.


57


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




Years
      ended December 29, 2007 and December 30, 2006





18.
      Subsequent Event





On
      February 22, 2008, a statement of claim in Ontario Superior Court of Justice
      was
      filed by a former FMI employee against FMI seeking damages for approximately
      $77,000 ($75,000 Canadian) for wrongful dismissal following the sale of FMI’s
      assets to FTG. On March 10, 2008, a statement of claim in Ontario Superior
      Court
      of Justice was filed by nineteen (19) former FMI employees against Merrimac,
      FMI
      and FTG seeking damages for wrongful dismissal for approximately $1,000,000
      (Canadian $977,000) following the sale of FMI’s assets to FTG. The Company
      intends to defend these claims vigorously.




**END
      OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.**


58


**ITEM
      9** . **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND**


**FINANCIAL
      DISCLOSURE.**




None.





**ITEM
      9A CONTROLS AND PROCEDURES.**





*Disclosure
      Controls and Procedures.*





The
      Company maintains disclosure controls and procedures as required under Rule
      13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, that are
      designed to ensure that information required to be disclosed in the Company’s
      Exchange Act reports is recorded, processed, summarized and reported within
      the
      time periods specified in the SEC’s rules and forms, and that such information
      is accumulated and communicated to the Company’s management, including its Chief
      Executive Officer and Chief Financial Officer, as appropriate, to allow timely
      decisions regarding required disclosure.





As
      of
      December 29, 2007 (the end of the period covered by this report), the Company's
      management carried out an evaluation, with the participation of the Company's
      Chief Executive Officer and Chief Financial Officer, of the effectiveness of
      the
      Company's disclosure controls and procedures. Based upon that evaluation, the
      Chief Executive Officer and Chief Financial Officer concluded that, as of
      December 29, 2007, the Company's disclosure controls and procedures are
      effective.





**ITEM
      9A(T). CONTROLS AND PROCEDURES.**





*Management’s
      Annual Report on Internal Control Over Financial Reporting.*





The
      management of Merrimac Industries, Inc. is responsible for establishing and
      maintaining adequate internal control over financial reporting. The Company’s
      internal control over financial reporting is a process designed to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of the Company’s financial statements for external purposes in
      accordance with generally accepted accounting principles. Internal control
      over
      financial reporting is defined in rules 13a-15(f) and 15d-15(f) promulgated
      under the Exchange Act.





Management
      assessed the effectiveness of the Company’s internal control as of December 29,
      2007. In making this assessment, it used the criteria set forth by the Committee
      of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal
      Control-Integrated Framework* .
      Based
      on its assessment, management believes that, as of December 29, 2007, the
      Company’s internal control over financial reporting was effective, based on
      those criteria.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements under all potential conditions. Therefore,
      effective internal control over financial reporting provides only reasonable,
      and not absolute, assurance that a restatement of our financial statements
      would
      be prevented or detected.





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





This
      Annual Report does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the SEC that permit the
      Company to provide only management’s report in the Annual Report.




**ITEM
      9B. OTHER INFORMATION.**




None.


59


PART
      III





Pursuant
      to General Instruction E3 to Form 10-K, portions of information required by
      Items 10 through 12 and 14 and indicated below are hereby incorporated by
      reference to Merrimac's definitive Proxy Statement for the 2008 Annual Meeting
      of Stockholders (the "Proxy Statement") which Merrimac will file with the
      Securities and Exchange Commission not later than 120 days after the end of
      the
      fiscal year covered by this report.





**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE.**




Information
      under the caption "Election of Directors" contained in the Proxy Statement
      with
      respect to the Board of Directors is incorporated herein by reference. The
      following is a list of Merrimac's current executive officers, their ages and
      their positions. Generally, each executive officer is elected for a term of
      one
      year at the organizational meeting of the Board of Directors following the
      Annual Meeting of Stockholders.





NAME
            
            AGE
            
            POSITIONMason
                N. Carter
            
            62
            
            Chairman,
                President and Chief Executive OfficerRobert
                V. Condon
            
            61
            
            Vice
                President, Finance, Treasurer,Secretary
                and Chief Financial OfficerReynold
                K. Green
            
            49
            
            Vice
                President and Chief Operating OfficerJayson
                E. Hahn
            
            40
            
            Vice
                President, Information Technologyand
                Chief Information OfficerJames
                J. Logothetis
            
            48
            
            Vice
                President and Chief Technology OfficerAdriana
                Mazza
            
            56
            
            Vice
                President, Human ResourcesMichael
                Pelenskij
            
            47
            
            Vice
                President, Manufacturing





FAMILY
      RELATIONSHIPS





There
      are
      no family relationships among the officers listed.





BUSINESS
      EXPERIENCE OF EXECUTIVE OFFICERS DURING PAST FIVE YEARS





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





Mr.
      Condon has been Vice President, Finance and Chief Financial Officer since
      joining Merrimac in March 1996 and was appointed Secretary and Treasurer in
      January 1997.





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





Mr.
      Hahn
      was appointed Vice President, Information Technology and Chief Information
      Officer in October 2000, after serving as Director, Network Services since
      June
      1998. He served as Manager, Network Services from June 1997 to June 1998 and
      was
      Information Technology Support Specialist from December 1996 to June 1997.





Mr.
      Logothetis was appointed Vice President and Chief Technology Officer in March
      2002. Mr. Logothetis was appointed Vice President, Multi-Mix® Engineering in May
      1998, after rejoining Merrimac in January 1997 to serve as Director, Advanced
      Technology. Prior to rejoining Merrimac, he served as a director for
      Electromagnetic Technologies, Inc. in 1995 and became Vice President of
      Microwave Engineering at such corporation in 1996. From 1984 through 1994,
      Mr.
      Logothetis had various engineering positions with Merrimac including Group
      Manager, Engineering.





Mrs.
      Mazza was appointed Vice President, Human Resources in December 2005, after
      serving as Manager of Human Resources of the Company from September 2002 to
      December 2005. She joined the Company in May 2000, serving in various human
      resource capacities until September 2002. Prior to joining Merrimac, she worked
      for Monroe Systems for Business, a division of Litton Industries; Exxon Office
      System, a division of Exxon Corporation and did private consulting work in
      both
      profit and nonprofit capacities.





Mr.
      Pelenskij was appointed Vice President Manufacturing in January 2000 after
      serving as Director of Manufacturing of the Company from January 1999 to January
      2000. Prior to January 1999, Mr. Pelenskij held the positions of Manager of
      Screened Components, RF Design Engineer, and District Sales Manager at the
      Company since joining the Company in 1993.


60





Information
      under the caption "Section 16 (a) Beneficial Ownership Reporting Compliance"
      contained in the Proxy Statement relating to compliance with Section 16 of
      the
      Exchange Act is incorporated herein by reference.





The
      Company has adopted a code of ethics that applies to its chief executive officer
      and chief financial officer, its principal executive officer and principal
      financial officer, respectively, and all of the Company’s other officers,
      directors and employees. The Company makes its code of ethics available free
      of
      charge through its internet website, www.merrimacind.com. The Company will
      disclose on its web site at www.merrimacind.com amendments to or waivers from
      its code of ethics within four business days following the date of any such
      amendment or waiver.





**ITEM
      11. EXECUTIVE COMPENSATION.**




Information
      called for by Item 11 is set forth under the heading "Executive Compensation"
      in
      the Proxy Statement, which information is incorporated herein by
      reference.





**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND**


**RELATED STOCKHOLDER MATTERS.**




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




**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE.**




Information
      called for by Item 13 is set forth under the subheading "Certain relationships
      and related transactions and director independence" under the caption "Executive
      Compensation" contained in the Proxy Statement, which information is
      incorporated herein by reference.




**ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES.**




Information
      called for by Item 14 is set forth under the caption “Principal Accounting Fees
      and Services" contained in the Proxy Statement, which information is
      incorporated herein by reference.


61


**ITEM
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.**





EXHIBIT
                NUMBER
            
            DESCRIPTION
                OF EXHIBIT3(a)
            
            Certificate
                of Incorporation of Merrimac is hereby incorporated by reference
                to
                Exhibit 3(i)(b) to Post-Effective Amendment No. 2 to the Registration
                Statement on Form S-8 (No. 33-68862) of Merrimac dated February 23,
                2001.3(b)
            
            By-laws
                of Merrimac are hereby incorporated by reference to Exhibit 3.1 to
                Merrimac’s Current Report on Form 8-K filed with the Securities and
                Exchange Commission on December 14, 2007.4(a)
            
            Stockholder
                Rights Agreement dated as of March 9, 1999, between Merrimac and
                ChaseMellon Stockholder Services, L.L.C., as Rights Agent, is hereby
                incorporated by reference to Exhibit 1 to Merrimac's Current Report
                on
                Form 8-K filed with the Securities and Exchange Commission on March
                9,
                1999.4(b)
            
            Amendment
                No. 1 dated as of June 9, 1999, to the Stockholder Rights Agreement
                dated
                as of March 9, 1999, between Merrimac and ChaseMellon Stockholder
                Services, L.L.C., as Rights Agent, is hereby incorporated by reference
                to
                Exhibit 1 to Merrimac's Current Report on Form 8-K filed with the
                Securities and Exchange Commission on June 9, 1999.4(c)
            
            Amendment
                No. 2 dated as of April 7, 2000, to the Stockholder Rights Agreement
                dated
                as of March 9, 1999, between Merrimac and ChaseMellon Stockholder
                Services, L.L.C., as Rights Agent, is hereby incorporated by reference
                to
                Exhibit 1(b) to Merrimac's Current Report on Form 8-K filed with
                the
                Securities and Exchange Commission on April 10, 2000.4(d)
            
            Amendment
                No. 3 dated as of October 26, 2000, to the Stockholder Rights Agreement
                dated as of March 9, 1999, between Merrimac and ChaseMellon Stockholder
                Services, L.L.C., as Rights Agent, is hereby incorporated by reference
                to
                Exhibit 2 to Merrimac's Current Report on Form 8-K filed with the
                Securities and Exchange Commission on October 27, 2000.4(e)
            
            Amendment
                No. 4 dated as of February 21, 2001, to the Stockholder Rights Agreement
                dated as of March 9, 1999, between Merrimac and Mellon Investor Services,
                L.L.C. (formerly known as ChaseMellon Stockholder Services, L.L.C.),
                as
                Rights Agent, is hereby incorporated by reference to Exhibit 1(d)
                to
                Merrimac's Current Report on Form 8-K filed with the Securities and
                Exchange Commission on February 21, 2001.4(f)
            
            Amendment
                No. 5, dated February 28, 2002, to the Rights Agreement, between
                Merrimac
                and Mellon Investor Services LLC (f.k.a. ChaseMellon Shareholder
                Services,
                L.L.C.), as Rights Agent is hereby incorporated by reference to Exhibit
                99.4 to Merrimac's Form 8-K filed with the Securities and Exchange
                Commission on March 6, 2002.4(g)
            
            Amendment
                No. 6, dated September 18, 2002, to the Rights Agreement, between
                Merrimac
                and Mellon Investor Services LLC, as Rights Agent is hereby incorporated
                by reference to Exhibit 99.3 to Merrimac's Form 8-K filed with the
                Securities and Exchange Commission on October 10, 2002.4(h)
            
            Amendment
                No. 7, dated December 13, 2004, to the Rights Agreement, between
                Merrimac
                and Wachovia Bank, National Association, as successor Rights Agent,
                is
                hereby incorporated by reference to Exhibit 4.1 to Merrimac's Form
                8-K
                filed with the Securities and Exchange Commission on December 13,
                2004.4(i)
            
            Amendment
                No. 8, dated March 14, 2007, to the Rights Agreement, between Merrimac
                and
                American Stock Transfer & Trust Company is hereby incorporated by
                reference to Exhibit 4.1 to Merrimac’s Current Report on Form 8-K filed
                with the Securities and Exchange Commission on March 14,
                2007.10(a)
            
            Registration
                Rights Agreement dated as of April 7, 2000, between Merrimac and
                Ericsson
                Holding International, B.V. is hereby incorporated by reference to
                Exhibit
                10(b) to Merrimac's Quarterly Report on Form 10-QSB for the period
                ending
                July 1, 2000.




62





10(b)
            
            Registration
                Rights Agreement dated October 26, 2000, between Merrimac and Ericsson
                Holding International, B.V. is hereby incorporated by reference to
                Exhibit
                10(u) to Merrimac's Annual Report on Form 10-KSB dated for the year
                ending
                December 30, 2000.10(c)
            
            Registration
                Rights Agreement, dated February 28, 2002 between Merrimac and DuPont
                Chemical and Energy Operations, Inc., a subsidiary of E.I. DuPont
                de
                Nemours and Company is hereby incorporated by reference to Exhibit
                99.3 to
                Merrimac's Form 8-K filed with the Securities and Exchange Commission
                on
                March 6, 2002.10(d)
            
            Profit
                Sharing Plan of Merrimac is hereby incorporated by reference to Exhibit
                10(n) to Merrimac's Registration Statement on Form S-1 (No.
                2-79455).*10(e)
            
            1993
                Stock Option Plan of Merrimac effective March 31, 1993, is hereby
                incorporated by reference to Exhibit 4(c) to Merrimac's Registration
                Statement on Form S-8 (No. 33-68862) dated September 14,
                1993.*10(f)
            
            1997
                Long-Term Incentive Plan of Merrimac is hereby incorporated by reference
                to Exhibit A to Merrimac's Proxy Statement filed with the Securities
                and
                Exchange Commission on April 11, 1997.*10(g)
            
            Resolutions
                of the Stock Option Committee of the Board of Directors of Merrimac
                adopted June 3, 1998, amending the 1983 Key Employees Stock Option
                Plan of
                Merrimac, the 1993 Stock Option Plan of Merrimac and the 1997 Long-Term
                Incentive Plan of Merrimac and adjusting outstanding awards thereunder
                to
                give effect to Merrimac's 10% stock dividend paid June 5, 1998, are
                hereby
                incorporated by reference to Exhibit 10(f) to Merrimac's Annual Report
                on
                Form 10-KSB for the year ending March 30, 1999.*10(h)
            
            Consulting
                Agreement dated as of January 1, 1998, between Merrimac and Arthur
                A.
                Oliner is hereby incorporated by reference to Exhibit 10 to Merrimac's
                Quarterly Report on Form 10-QSB for the period ending April 4,
                1998.*10(i)
            
            Stockholder's
                Agreement dated as of October 30, 1998, between Merrimac and Charles
                F.
                Huber II is hereby incorporated by reference to Exhibit 10 to Merrimac's
                Quarterly Report on Form 10-QSB for the period ending October 3,
                1998.10(j)
            
            2001
                Stock Option Plan is hereby incorporated by reference to Exhibit
                4.01 to
                Merrimac's Form S-8 (No. 333-63436) dated June 20,
                2001.*10(k)
            
            2001
                Stock Purchase Plan is hereby incorporated by reference to Exhibit
                4.01 to
                Merrimac's Form S-8 (No. 333-63438) dated June 20,
                2001.*10(l)
            
            2001
                Amended and Restated Stock Option Plan is hereby incorporated by
                reference
                to Exhibit 4(i) to Merrimac's Quarterly Report on Form 10-QSB for
                the
                period ending June 30, 2001.*10(m)
            
            Merrimac
                Severance Plan, as adopted March 29, 2006, is hereby incorporated
                by
                reference to Exhibit 10(z) to Merrimac’s Annual Report on Form 10-K for
                the year ending December 31, 2005.10(n)
            
            Stock
                Purchase Agreement, dated March 29, 2006, between Merrimac and Mason
                N.
                Carter, is hereby incorporated by reference to Exhibit 10(aa) to
                Merrimac’s Annual Report on Form 10-K for the year ending December 31,
                2005.10(o)
            
            Employment
                Agreement, dated April 11, 2006, between Merrimac and Mason N. Carter,
                is
                hereby incorporated by reference to Exhibit 10.1 to Merrimac’s Current
                Report on Form 8-K filed with the Securities Exchange and Commission
                on
                April 14, 2006.*10(p)
            
            2006
                Stock Option Plan is hereby incorporated by reference to Exhibit
                A of
                Merrimac’s Definitive Proxy Statement filed with the Securities and
                Exchange Commission on May 1, 2006.*10(q)
            
            2006
                Key Employee Incentive Plan is hereby incorporated by reference to
                Exhibit
                B of Merrimac’s Definitive Proxy Statement filed with the Securities and
                Exchange Commission on May 1, 2006.*10(r)
            
            2006
                Non-Employee Directors’ Stock Plan is hereby incorporated by reference to
                Exhibit C of Merrimac’s Definitive Proxy Statement filed with the
                Securities and Exchange Commission on May 1,
                2006.*


63





10(s)
            
            Revolving
                Credit, Term Loan and Securities Agreement, dated October 19, 2006,
                between Merrimac and North Fork Bank, is hereby incorporated by reference
                to Exhibit 10.1 to Merrimac’s Current Report on Form 8-K filed with the
                Securities and Exchange Commission on October 20, 2006.10(t)
            
            Stock
                Purchase and Confidentiality Agreement, dated March 13, 2007, between
                and
                among Merrimac, Adam Smith Investment Partners, L.P., Adam Smith
                Capital
                Management LLC, Diamond Capital Management, Adam Smith Investments,
                Ltd.,
                Richard Grossman, Orin Hirschman, and Richard and Ana Grossman JTWROS,
                is
                hereby incorporated by reference to Exhibit 10(a) to Merrimac’s Quarterly
                Report on Form 10-Q for the period ending March 31,
                2007.10(u)
            
            First
                Amendment, dated as of May 15, 2007, to the Revolving Credit, Term
                Loan
                and Security Agreement, dated as of October 18, 2006, by and between
                Merrimac and North Fork Bank, is hereby incorporated by reference
                to
                Exhibit 10.1 to Merrimac’s Current Report on Form 8-K filed with the
                Securities and Exchange Commission on May 15, 2007.10(v)+
            
            First
                Amendment, effective as of December 13, 2007, to the 2006 Stock Option
                Plan.*10(w)+
            
            First
                Amendment, effective as of December 13, 2007, to the 2006 Key Employee
                Incentive Plan.*10(x)+
            
            First
                Amendment, effective as of December 13, 2007, to the Amended and
                Restated
                Severance Plan.*10(y)
            
            Asset
                Purchase Agreement, dated December 28, 2007, between Filtran Microcircuits
                Inc., Merrimac, and Firan Technology Group Corporation, is hereby
                incorporated by reference to Exhibit 10.1 to Merrimac’s Current Report on
                Form 8-K filed with the Securities and Exchange Commission on January
                4,
                2008.21+
            
            Subsidiaries
                of Merrimac.23.1+
            
            Consent
                of Independent Registered Public Accounting Firm J. H. Cohn
                LLP.23.2+
            
            Consent
                of Independent Registered Public Accounting Firm Grant Thornton
                LLP.31.1+
            
            Chief
                Executive Officer's Certificate, pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2+
            
            Chief
                Financial Officer's Certificate, pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1+
            
            Chief
                Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2+
            
            Chief
                Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.




*
            Indicates
                that exhibit is a management contract or compensatory plan or
                arrangement.




+
            Indicates
                that exhibit is filed as an exhibit hereto.




64





**SIGNATURES**





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




MERRIMAC
                INDUSTRIES, INC.(Registrant)Date:
                March 28, 2008
            By:
            /s/
                Mason N. CarterMason
                N. CarterChairman,
                President andChief
                Executive Officer




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


Signature
              
              Date
              
              Title/s/
                  Mason N. Carter
              
              March
                  28, 2008
              
              Chairman,
                  President andChief Executive Officer (Principal executive officer
                  and
                  Director)(Mason
                  N. Carter)/s/
                  Albert H. Cohen
              
              March
                  28, 2008
              
              Director(Albert
                  H. Cohen)/s/
                  Edward H. Cohen
              
              March
                  28, 2008
              
              Director(Edward
                  H. Cohen)/s/
                  Fernando L. Fernandez
              
              March
                  28, 2008
              
              Director(Fernando
                  L. Fernandez)/s/
                  Joel H. Goldberg
              
              March
                  28, 2008
              
              Director(Joel
                  H. Goldberg)/s/
                  Ludwig G. Kuttner
              
              March
                  28, 2008
              
              Director(Ludwig
                  G. Kuttner)/s/
                  David B. Miller
              
              March
                  28, 2008
              
              Director(David
                  B. Miller)/s/
                  Arthur A. Oliner
              
              March
                  28, 2008
              
              Director(Arthur
                  A. Oliner)/s/
                  Harold J. Raveché
              
              March
                  28, 2008
              
              Director(Harold
                  J. Raveché)


/s/
                  Robert V. Condon
              
              March
                  28, 2008
              
              Vice
                  President, Finance, Treasurer, Secretary and Chief Financial Officer
                  (principal financial and accounting officer)(Robert
                  V. Condon)




65