`UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                   FORM 10-KSB

ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended JANUARY 1, 2005
Commission file number 0-11201

                            MERRIMAC INDUSTRIES, INC.
                 (Name of Small Business Issuer in Its Charter)

            DELAWARE                                              22-1642321
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                               41 FAIRFIELD PLACE
                         WEST CALDWELL, NEW JERSEY 07006
                    (Address of principal executive offices)

                                  973-575-1300
                (Issuer's telephone number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

COMMON STOCK                                             AMERICAN STOCK EXCHANGE
COMMON STOCK PURCHASE RIGHTS                             AMERICAN STOCK EXCHANGE
    (Title of each Class)                              (Name of each Exchange on
                                                           which registered)

Securities registered under Section 12(g) of the Exchange Act: NONE

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

Yes [X]   No [_]

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [_]

     State registrant's revenues for its most recent fiscal year: $30,949,487

     The aggregate market value of voting stock held by non-affiliates based
upon the average price of such stock as quoted on The American Stock Exchange on
March 24, 2005, was $21,144,000.

     The number of shares of registrant's Common Stock outstanding as of March
24, 2005, was 3,138,470 shares.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of Registrant's Proxy Statement for the 2005 Annual Meeting of
Stockholders are incorporated into Part III of this Form 10-KSB.

Transitional Small Business Disclosure Format (check one): YES [_] NO [X]



                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
PART 1
Item 1.    Description of Business                                            1
Item 2.    Description of Property                                           15
Item 3.    Legal Proceedings                                                 16
Item 4.    Submission of Matters to a Vote of Security Holders               16

PART II
Item 5.    Market for Common Equity, Related Stockholder Matters and
           Small Business Issuer Purchases of Equity Securities              16
Item 6.    Management's Discussion and Analysis or Plan of Operation         18
Item 7.    Financial Statements                                              29
Item 8.    Changes In and Disagreements with Accountants on Accounting
           and Financial Disclosure                                          51
Item 8A.   Controls and Procedures                                           51
Item 8B.   Other Information                                                 51

PART III
Item 9.    Directors and Executive Officers of the Registrant                51
Item 10.   Executive Compensation                                            53
Item 11.   Security Ownership of Certain Beneficial Owners and
           Management and Related Stockholder Matters                        53
Item 12.   Certain Relationships and Related Transactions                    53
Item 13.   Exhibits                                                          54
Item 14.   Principal Accountant Fees and Services                            57



FORWARD-LOOKING STATEMENTS

          This Annual Report on Form 10-KSB contains statements relating to
future results of the Company (including certain projections and business
trends) that are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projected as a result of certain risks and uncertainties. These risks
and uncertainties include, but are not limited to: 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(R)
products; general economic and industry conditions; the possibilities of
impairment charges to the carrying value of our Multi-Mix(R) assets, thereby
resulting in charges to our earnings; slower than anticipated penetration into
the satellite communications, defense and wireless markets; the risk that the
benefits expected from the Company's acquisition of Filtran Microcircuits Inc.
are not realized; the ability to protect proprietary information and technology;
competitive products and pricing pressures; failure of our Original Equipment
Manufacturer, or OEM, customers to successfully incorporate our products into
their systems; 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; 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; 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; foreign currency fluctuations between the U.S. and
Canadian dollars; 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 Form 10-KSB, 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.



                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

          Merrimac is a leader in the design and manufacture of passive RF
(Radio Frequency) and microwave components for industry, government and science.
Merrimac components are today found in applications as diverse as satellites,
military and commercial aircraft, radar, cellular radio systems, medical and
dental diagnostic instruments, personal communications systems ("PCS") and
wireless Internet connectivity.

          Merrimac is a versatile technologically oriented company specializing
in miniature radio frequency lumped-element components, integrated networks,
microstrip and stripline microwave components, subsystems and ferrite
attenuators. Of special significance has been the combination of two or more of
these technologies into single components to achieve superior performance and
reliability while minimizing package size and weight.

          Merrimac 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 PRODUCTS

          Merrimac manufactures and sells approximately 1,500 components and
subsystems used in signal processing systems (the extraction of useable
information from radio signals) in the frequency spectrum of D.C. to 65 GHz.
Merrimac's products are designed to process signals having wide bandwidths and
are of relatively small size and lightweight. 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
$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 orders for products custom designed for specific customer
applications, repeat orders for such products and from catalog sales:

                  2004   2003   2002
                  ----   ----   ----
Initial designs    27%    35%    35%
Repeat designs     58%    48%    50%
Catalog sales      15%    17%    15%

          Merrimac maintains a current product catalog on its Internet website.
The Merrimac catalog includes hundreds of standard components, and provides a
selection of 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 for communications, defense and
aerospace applications.

          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


                                       1



manufacturing capital equipment in all three of our facilities to provide
greater capacity and flexibility and reduce operating costs.

In 1998, Merrimac introduced Multi-Mix(R) Microtechnology capabilities, an
innovative process for microwave, multilayer integrated circuits and
micro-multifunction module (MMFM(R)) 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 process provides
a homogeneous dielectric medium for superior electrical performance at microwave
frequencies. This 3-dimensional Multi-Mix(R) 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.

          In 2001, Merrimac introduced its Multi-Mix PICO(R) Microtechnology.
Through Multi-Mix PICO(R) 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
LAN (Local Area Network) modules. When compared to conventional multilayer
quadrature hybrids and directional coupler products, Multi-Mix PICO(R) 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(R) product line.

          In 2001, Merrimac received and started to ship its first 3G production
order for a Multi-Mix PICO(R) 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 basestations.

          In 2004, Merrimac introduced its new Multi-Mix Zapper(R) product line.
The Multi-Mix Zapper(R) addresses the demands of the wireless market for high
quality products manufactured in volume with continued improvement in
performance, power and cost.

          In addition to wireless basestation communications, Multi-Mix PICO(R)
products are currently under evaluation for applications in airborne electronic
countermeasures, radar systems, smart antennas, satellite communications
receiver modules, missiles, commercial Wi-Fi (Wireless Fidelity), WLANs
(Wireless Local Area Networks), WIMAX (World Interoperability for Microwave
Access), the U.S. Department of Defense's next generation fighter jet JSF (Joint
Strike Fighter), FCS (Future Combat Systems) and JTRS (Joint Tactical Radio
System).

          Merrimac customers prefer our value-added Multi-Mix PICO(R) 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 PICO(R) enables customers to gain access to integrated
solutions that simplify their internal design and manufacturing processes while
reducing the time and costs it takes to implement manufacturable and repeatable
products.

          Multi-Mix PICO(R) also enables customers to outsource functions that
are not considered their core competencies, which in turn allows them to
maintain focus on their core business competencies.

          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.

          Merrimac's major electronic components product categories are:

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

     o    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);

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

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

     o    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;


                                       2



     o    balanced mixers that convert input frequencies to another frequency;

     o    variable attenuators that serve to control or reduce power flow
          without distortion;

     o    Beamformers that permit an antenna to electronically track or transmit
          a signal; and

     o    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.

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

          Approximately 60% of Merrimac's sales in fiscal 2004 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 also used in a broad range of other defense
and commercial applications, including radar, navigation, missiles, satellites,
electronic warfare and counter-measures, 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.

FILTRAN MICROCIRCUITS INC.

GENERAL

          Established in 1983, and acquired by Merrimac in February 1999, FMI is
a leading manufacturer of microwave micro-circuitry for the high frequency
communications industry. FMI produces microstrip, bonded stripline, and thick
metal-backed Teflon(R) (PTFE) microcircuits for RF applications including
satellite, aerospace, PCS, fiber optic telecommunications, automotive,
navigational and defense applications worldwide. FMI participates in the market
for millimeter-wave applications. FMI also supplies mixed dielectric multilayer
and high speed interconnect circuitry to meet customer demand for high
performance and cost-effective packaging. The Company expects that previous
weaknesses in the telecommunications sector that FMI serves will continue to
improve in 2005.

          FMI's strong technical team, proprietary processes and equipment allow
FMI to manufacture precise circuits, with edge resolution of .0005 inch or
better. The accuracy provided by FMI is particularly valued by customers in
high-end applications who require microwave circuitry with significant
reliability.

          FMI, through its innovative processing, has developed a proprietary
sodium etch formulation for plated through hole ("PTH") and edge plating which
gives tight control of processing, thereby easing the difficult process of
achieving reliable plated through holes. FMI has also successfully pioneered
sputtering techniques for PTH applications on thick-metal backed PTFE circuitry
that offer superior reliability, performance and mechanical strength.

          FMI has also achieved significant results in the area of accuracy of
circuit board imaging. FMI employs specially developed processes using liquid
photo-resists and high-intensity, collimated UV exposure techniques in fine line
processing for single, double-sided and multilayer PTH boards.

PRODUCTS

          FMI produces precision microwave circuitry, having operating
frequencies that typically range from 500 MHz to 100 GHz, through the processing
of microstrip, bonded stripline, thick metal-backed PTFE and mixed dielectric
multilayer. FMI also produces aluminum, copper and brass backed circuits.
Although FMI generally purchases pre-bonded materials, it also has the
capability to bond substrates to thick metal carriers when requested by
customers. FMI also processes thin film circuits on hard substrates such as
ceramic, ferrite and glass.


                                       3



          FMI has developed innovative processing that provides customers with
reliable and high performance circuitry. FMI has the capability to process:

     o    1 mil lines and spaces with +/- .2 mil tolerance;

     o    embedded resistors;

     o    proprietary sodium etch formulation for reliable PTH and edge plating;

     o    proprietary sputtering techniques for blind holes in thick
          metal-backed PTFE;

     o    proprietary copper Thin Film metallization on ceramic;

     o    high purity, wire-bondable gold;

     o    plated through hole aspect ratios up to 10:1;

     o    multilayer bonding; and

     o    conductive and non-conductive filled via holes.

          FMI has machining capabilities in computer numerically controlled
routing, drilling, milling and laser machining. Machining tolerance ranges from
+/- .005 inch to +/- .001 inch.

          FMI maintains an ISO 9001:2000 registered quality assurance program.
This quality assurance program along with stringent statistical process control
and gate inspections assure that when customers request specified standards
based on certain needs, such needs are met. FMI typically works to the standard
of IPC 6018 unless otherwise indicated by the customer. FMI can also work in
full compliance to MIL-PRF-31032 (preceded by MIL-P-55110) or can adopt the
requirements of IPC-HF-318, depending on customer needs.

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

STRATEGIC OVERVIEW

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

     o    RF Microwave;

     o    Microwave micro-circuitry; and

     o    Multi-Mix(R).

          Our strategy focuses on

     o    Providing unique and cutting edge customized technology solutions;

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

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

     o    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.


                                       4



          Merrimac's research and development efforts are targeted towards
providing customers with more complex, reliable, and compact products at lower
costs.

          The Company 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 Company's strategy include the following:

Products.

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

o    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.

o    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.

o    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.

          The Company intends to use its technological expertise and leadership
in the defense, satellite and wireless markets to extend its competitive
advantage. The Company intends to continue to invest in research and development
and will focus its efforts on new product development for specific customer
applications requiring integration of circuitry and further miniaturization,
precision and volume applications. The Company will seek to advance its
leadership in wireless technology by developing next generation products for the
mobile and wireless networking markets. In addition, the Company will attempt to
build upon its 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.

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

          Merrimac's customers want 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.


                                       5



          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, we 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.

Wireless.

          For original equipment manufacturing customers in the wireless
communications market, we provide broad customers prefer our value-added
Multi-Mix(R) solutions to conventional approaches because it enables them to:

     o    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;

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

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

     o    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.

          The Company intends to use its core competencies and market position
to pursue other wireless opportunities using the component and integration
capabilities of our Multi-Mix(R) Technology. The Company plans to offer both
custom components and higher orders of integrated assemblies for existing and
developing space and defense requirements through the RF Microwave, Microwave
micro-circuitry and Multi-Mix(R) technologies.

Expand Business through Strategic Acquisitions.


                                        6



          The Company intends to pursue opportunistic acquisitions of companies,
product lines and technologies that complement its business. The Company will
focus on acquisitions that leverage its technical expertise and business
development resources and provide a competitive advantage for its targeted
markets.

MARKETING

          Merrimac markets its products in the United States and Canada directly
to customers through a sales and marketing staff comprised of 13 employees,
including four employees located at FMI in Ottawa, Canada, and through 13
independent domestic sales organizations. Merrimac relies on 15 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.

          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:

          o    The Boeing Company

          o    Raytheon Company

          o    Northrop Grumman Corporation

          o    Lockheed Martin Corporation

          o    Loral Space & Communications Ltd.

          o    Celestica, Inc.

          o    EADS Astrium

          o    BAE Systems

          o    ITT

          o    General Dynamics Corporation

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

                               2004   2003
                               ----   ----
Raytheon Company               13.9%  12.3%
Northrop Grumman Corporation   11.9%  12.4%
The Boeing Company              7.8%  16.1%

          Sales to the foreign geographic area of Europe were 8.9%, 10.3% and
11.2% of net sales in fiscal years 2004, 2003 and 2002, respectively.

          FMI's key customers include:

          o    M/A-Com, Inc.

          o    Raytheon Canada Ltd.

          o    Filtronic Broadband Ltd.

          o    Trak Microwave Corporation

          o    Endwave North East Corporation

          o    Communication Techniques Inc.

          o    Signal Technology Corporation

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

EXPORT CONTROLS

          The Company's products 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,


                                        7



while ITAR restricts the export of defense products, technical data and defense
services. Merrimac believes that it has implemented internal export procedures
and controls in order to achieve compliance with the applicable U.S. export
control regulations. However, the U.S. government agencies responsible for
administering EAR and ITAR 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.

RESEARCH AND DEVELOPMENT

          During 2004, 2003 and 2002, research and development expenditures
amounted to $1,723,000, $1,737,000 and $2,729,000, respectively. With the
exception of $198,000 of expenses at FMI, substantially all of the research and
development funds in fiscal 2004 were expended for new Multi-Mix(R)
Microtechnology products. Merrimac plans to commit research and development
funds at similar levels in fiscal 2005, 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. Current research and development programs at FMI
include: laser machining, resistors on organic materials, high-resolution
circuit techniques, resistor trimming, electroless nickel on aluminum housings,
and filled via holes.

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
January 1, 2005, Merrimac had a firm backlog of orders of approximately $12.9
million. Merrimac estimates that approximately 90% of the orders in its backlog
as of January 1, 2005 will be shipped within one year. Merrimac does not
consider its business to be seasonal.

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 and well-recognized brand names. Merrimac competes with all such
corporations on a 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


                                        8



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 new Multi-Mix(R) Microtechnology
products. 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.

          FMI's manufacturing facility consists of CAD/CAM, chemical and
mechanical processes, quality systems and R&D of bare circuit board materials
specifically selected for high frequency applications. Manual and automatic
methods are utilized depending upon the circuit volumes, complexity and existing
technologies available to the printed wiring board industry.

          Microwave materials used in FMI's products are available from Rogers
Corporation and Taconic. Laminate materials are available from a small number of
qualified suppliers. The suppliers that provide materials to FMI specialize in
the manufacture of microwave materials. Customers often direct FMI to use a
particular vendor for laminates based upon particular design specifications.

          Merrimac has developed and implemented a quality system to better
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
expedited transfer of product manufacture from prototype engineering to
operational manufacturing.

          In April 2001, Factory Mutual (now FM Approvals) awarded ISO 9002
certification to the Company's FMI manufacturing facility in Ottawa, Ontario,
Canada. In October 2002, the Multi-Mix(R) operations in West Caldwell, New
Jersey achieved certification to ISO 9001:2000. In December 2002, the
Multi-Mix(R) 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, New Jersey location. During 2003, Factory
Mutual performed auditing and issued Certificates of Registration to ISO
9001:2000, covering both locations. In September 2003 Factory Mutual issued FMI
a Certificate of Registration to ISO 9001:2000. In December 2004, FM Approvals
issued a Certificate of Registration to the West Caldwell, New Jersey location
for ISO 9001:2000 and the Aerospace Standard AS9100.

          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 not dependent upon any single supplier
for any of its components or materials.

EMPLOYEE RELATIONS

          As of January 1, 2005, Merrimac employed approximately 240 full time
employees, including 70 employees at FMI and 60 employees at Merrimac's Costa
Rica facilities. None of Merrimac's employees are represented by a labor
organization. Management believes that relations with its employees are
satisfactory.

PATENTS

          As of March 26, 2005, Merrimac owns 13 U.S. patents with respect to
certain inventions it developed. 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.

INVESTMENT CONSIDERATIONS

          You should carefully consider the matters described below before
making an investment decision. The risks and uncertainties described below are
not the only ones facing our company. Our business operations may be impaired by
additional risks and uncertainties of which we are unaware or that we currently
consider immaterial.


                                        9



          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(R) 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 revenues will suffer.

          Our future success depends in large part on our ability to develop and
market our new line of Multi-Mix(R) 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 micro circuitry
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(R) 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.

Multi-Mix(R) Microtechnolgy and Multi-Mix PICO(R) Products.

          We have made capital investments of approximately $14 million in our
proprietary line of Multi-Mix(R) Microtechnology products.

          While we have generated revenues and developed a customer base for our
Multi-Mix(R) products, if a competitive product or decreased consumer demand for
our Multi-Mix(R) products resulted in significant decrease in those revenues,
our ability to recover our investment in our Multi-Mix(R) 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 new Multi-Mix
Zapper(R) product line, introduced in June 2004. While revenues 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(R) technologies. These products are direct
drop-in replacements for competing technologies used in virtually all wireless
basestations. 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(R) products. In fact, we may find it necessary to enter
into such arrangements if our own resources are inadequate to develop recurring
revenues 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 revenues from our
Multi-Mix(R) 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 purchasers from our
customers. While these circumstances have resulted in the delay or cancellation
of Multi-Mix(R) 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. 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. If we are unable to generate significant future
revenues from these Multi-Mix(R) 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.

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.


                                       10



          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:

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

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

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

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

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

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

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

          Write offs or write downs of inventory generally arise from:

          o    declines in the market value of inventory;

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

          o    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 January 1,
2005, our inventories including raw materials, work-in-process and finished
goods, were valued at $2.9 million and we had valuation allowances for
obsolescence and cost overruns of $1.9 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
reserves and our operating results could be substantially harmed.

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


                                       11



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:

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

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

          o    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. If 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, they may or may not be able to assume
responsibility for any costs or payments.

We are subject to risks of currency fluctuations.

          A portion of our business is conducted in currencies other than the
U.S. dollar. Changes in exchange rates among other currencies and the U.S.
dollar will affect our cost of sales, operating margins and revenues. Our
Canadian operations were adversely impacted in fiscal 2004 as a result of
changes in the Canadian and U.S. Dollar exchange rates. We cannot predict the
impact of future exchange rate fluctuations. In addition, certain of our
subsidiaries that have non-U.S. dollar functional currencies transact business
in U.S. dollars.

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 45.6% of our net
sales in the fiscal year ended January 1, 2005 and our two largest customers,
Raytheon Company and Northrop Grumman Corporation, accounted for 13.9%, and
11.9%, respectively, of our net sales for that period. For 2003, Raytheon
Company, Northrop Grumman Corporation and the Boeing Company accounted for
approximately 12.3%, 12.4% and 16.1%, respectively, of our 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 revenues 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 revenues may decrease, and should not be expected
to increase, at times of armed conflicts or war.


                                       12



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 revenues.

          Our quarterly net revenues, 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 revenues. If we were to experience a reduction
in net revenues 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:

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

          o    customers' decisions to defer or accelerate orders;

          o    timing of shipments of orders for our products;

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

          o    changes in demand for our products;

          o    announcements or introductions of new products by our
               competitors;

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

          o    defense budgets are very dynamic which could cause military
               program delays or cancellations.

Competition.

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

          In the wireless market, increased price pressure from the Company's
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, the Company believes that it competes favorably in its markets.
The Company believes that it is particularly strong in the areas of technical
performance and on-time delivery in the wireless marketplace. The Company
believes that it competes favorably on price as well.

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

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


                                       13



Intellectual Property.

          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. 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 business could be significantly negatively
impacted.

          The Company's success depends to a significant degree upon the
preservation and protection of its product and manufacturing process designs and
other proprietary technology. To protect, its proprietary technology, the
Company generally limits access to its technology, treats portions of such
technology as trade secrets, and obtains confidentiality or non-disclosure
agreements from persons with access to the technology. The Company's agreements
with its employees prohibits employees from disclosing any confidential
information, technology developments and business practices, and from disclosing
any confidential information entrusted to the Company by other parties.
Consultants engaged by the Company who have access to confidential information
generally sign an agreement requiring them to keep confidential and not disclose
any non-public confidential information.

          The Company currently has 13 active patents and has filed 2 other
patent applications that are currently pending before the United States Patent
and Trademark Office to protect both the design and manufacture of its products.
The Company plans 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, Company employees who initiate or contribute to a
patentable design or process are obligated to assign their interest in any
potential patent to the Company.

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 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.

Government Regulation.

          The Company's 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 its
participation in the satellite and defense industry, the Company is subject to
audit from time to time for compliance with government regulations by various
governmental agencies. The Company is 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 the Company's
products. The Company believes that it operates its 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 effect
on the Company's business, financial condition and results of operations.

Export controls.


                                       14



          The Company's 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.
The Company believes that it has implemented internal export procedures and
controls in order to achieve compliance with the applicable U.S. export control
regulations. However, the U.S. government agencies responsible for administering
EAR and ITAR 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.

Risks of International Operations.

          A significant percentage of the Company's revenues is derived from the
operations of its wholly-owned subsidiaries in Costa Rica and Canada. These
revenues 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 the Company believes that current political and economic
conditions in Canada and Costa Rica are relatively stable, such conditions may
adversely change so as to effect underlying business assumptions about the
current opportunities which exist for doing business in those countries. In
particular, the government in Costa Rica could change, the currency exchange
rate between the U.S. and Canadian dollars may change adversely (as occurred in
2004), or the cost of labor and/or goods and services necessary to the
operations of the Company may increase.

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

          The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") has required
changes in some of our corporate governance, securities disclosure and
compliance practice. In response to the requirements of the Sarbanes-Oxley Act,
the SEC and the American Stock Exchange have promulgated new rules in a variety
of subjects. Compliance with these new rules has increased our legal and
accounting costs, and we expect these increased costs to continue indefinitely.
These developments may also make it more difficult for us to attract and retain
qualified members of our board of directors or qualified executive officers.

If we receive other than an unqualified opinion on the adequacy of our internal
control over financial reporting as of December 30, 2006 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 on
Form 10-K or 10-KSB that contains an assessment by management of the
effectiveness of the Company's 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. If we are unable to complete our
assessment in a timely manner or 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, 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 2. DESCRIPTION OF PROPERTY

UNITED STATES

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


                                       15



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

CANADA

          In February 1999, Merrimac entered into a seven-year lease for a
20,000 square-foot manufacturing facility in Ottawa, Ontario, Canada in
connection with Merrimac's acquisition of FMI. Merrimac has the option to extend
the lease for an additional three-year term, and intends to exercise such option
in July 2005.

COSTA RICA

          The Company currently leases a 36,200 square-foot facility in San
Jose, Costa Rica under a five-year lease which expires February 2006 (with a
five-year renewal option). 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, both as a plaintiff and a defendant,
arising in the normal course of business. It is the opinion of Merrimac's
management that the disposition of these various lawsuits will not individually
or in the aggregate have a material adverse effect on the consolidated financial
position or the results of operations of Merrimac.

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

          No matters were submitted to a vote of Merrimac's stockholders during
the fourth quarter of fiscal 2004.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
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 26, 2005,
Merrimac had approximately 200 holders of record. Merrimac believes there are
approximately 1,200 additional holders in "street name"


                                       16



through broker nominees.

The following table sets forth the range of the high and low sales prices as
reported by the AMEX for the period from December 29, 2002 to January 1, 2005.

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

Fiscal Year Ended January 3, 2004                                  High     Low
---------------------------------                                 ------   -----
First Quarter..................................................    $5.10   $4.43
Second Quarter.................................................    $4.65   $2.70
Third Quarter..................................................    $5.28   $3.20
Fourth Quarter.................................................    $7.00   $4.12

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


                                       17


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

OVERVIEW

Merrimac Industies, 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(R) (PTFE) and mixed dielectric multilayer circuits for
communications, defense and aerospace applications. The Company's operations are
conducted primarily through two business segments: (1) electronic components and
(2) microwave micro-circuitry (its subsidiary, Filtran Microcircuits Inc.).

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



                                         2004                       2003
                               ------------------------   ------------------------
                                    $        % of sales        $        % of sales
                               -----------   ----------   -----------   ----------

Electronic components          $25,141,000      81.2%     $23,962,000      87.7%
Microwave micro-circuitry(1)   $ 5,956,000      19.2%     $ 3,709,000      13.6%
Less intersegment sales        $  (148,000)     (0.4)%    $  (349,000)     (1.3)%
                               -----------     -----      -----------     -----
Consolidated                   $30,949,000     100.0%     $27,322,000     100.0%
                               ===========     =====      ===========     =====


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

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

Multi-Mix(R)

In 1998, Merrimac introduced Multi-Mix(R) Microtechnology capabilities, an
innovative process for microwave, multilayer integrated circuits and
micro-multifunction module (MMFM)(R) 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 process provides
a homogeneous dielectric medium for superior electrical performance at microwave
frequencies. This 3-dimensional Multi-Mix(R) 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.

Multi-Mix PICO(R)

In July 2001, Merrimac introduced its Multi-Mix PICO(R) Microtechnology. Through
Multi-Mix PICO(R) 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 LAN (Local
Area Network) modules. When compared to conventional multilayer quadrature
hybrids and directional coupler products, Multi-Mix PICO(R) is more than 84%
smaller in size, without the loss of power or performance. Merrimac has
completed the development of integrated inline multi-couplers and is supplying
these Multi-Mix PICO(R) products to major basestation customers.

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.

          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:

          o    The Boeing Company

          o    Raytheon Company

          o    Northrop Grumman Corporation

          o    Lockheed Martin Corporation

          o    Loral Space & Communications Ltd.

          o    Celestica, Inc.

          o    EADS Astrium

          o    BAE Systems

          o    ITT

          o    General Dynamics Corporation

                                       18

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

                               2004   2003
                               ----   ----
Raytheon Company               13.9%  12.3%
Northrop Grumman Corporation   11.9%  12.4%
The Boeing Company              7.8%  16.1%

Sales to the foreign geographic area of Europe were 8.9%, 10.3% and 11.2% of net
sales in fiscal years 2004, 2003 and 2002, respectively.

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



                                                     2004                                   2003
                                     ------------------------------------   ------------------------------------
                                       North America       Rest of World      North America       Rest of World
                                     -----------------   ----------------   -----------------   ----------------
                                          $         %        $         %        $          %        $         %
                                     ----------   ----   ----------   ---   ----------   ----   ----------   ---

Military and commercial satellites   $6,947,000   22.4%  $  459,000   1.5%  $6,442,000   23.6%  $1,067,000   3.9%
Defense                              $9,993,000   32.3%  $2,134,000   6.9%  $7,436,000   27.2%  $1,620,000   5.9%
Commercial                           $9,818,000   31.7%  $1,598,000   5.2%  $8,511,000   31.2%  $2,246,000   8.2%


          Acquired by Merrimac in February 1999, Filtran Microcircuits Inc.
("FMI") is a leading manufacturer of microwave micro-circuitry for the high
frequency communications industry. FMI produces microstrip, bonded stripline,
and thick metal-backed Teflon(R) (PTFE) microcircuits for RF applications
including satellite, aerospace, PCS, fiber optic telecommunications, automotive,
navigational and defense applications worldwide. FMI participates in the market
for millimeter-wave applications. FMI also supplies mixed dielectric multilayer
and high speed interconnect circuitry to meet customer demand for high
performance and cost-effective packaging. FMI's key customers include:

          o    M/A-Com, Inc.

          o    Raytheon Canada Ltd.

          o    Filtronic Broadband Ltd.

          o    Trak Microwave Corporation

          o    Endwave North East Corporation

          o    Communication Techniques Inc.

          o    Signal Technology Corporation

For more information regarding our electronics components business and the
microwave micro-circuitry business done by FMI, please see Note 8 of the Notes
to Consolidated Financial Statements.

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

                 2004   2003   2002
                 ----   ----   ----
Initial designs   27%    35%    35%
Repeat designs    58%    48%    50%
Catalog sales     15%    17%    15%

The Company believes that while its wireless subscriber base continues to grow,
the recent economic downturn, resulting in reduced spending by wireless
telecommunications service providers, has caused many wireless
telecommunications equipment manufacturers to delay or forego purchases of the
Company's products. However, the Company expects that its defense and satellite
customers should continue to maintain their approximate current levels of orders
during fiscal year 2005, though there are no assurances they will do so.
Nevertheless, in times of armed conflict or war, military spending is
concentrated on armaments build up, maintenance and troop support, and not on
the research and development and specialty applications that are the Company's
core strengths and revenue generators. Accordingly, our defense and military
product revenues may decrease and should not be expected to increase, at times
of armed conflicts or war. The Company also anticipates increased levels of
orders during fiscal year 2005 for its Multi-Mix(R) Microtechnology products,
based on inquiries from existing customers, requests to quote from new and
existing customers and market research. The improved telecommunications sector
and the continued efforts to diversify FMI into wireless base stations,
automotive and defense applications has resulted in additional orders for FMI,
which the Company anticipates will continue.

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 revenues. Should the Company experience a reduction
in net revenues 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

                                       19

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 2004 by approximately $1,500,000, and
the Company anticipates that depreciation and amortization expenses will exceed
capital expenditures in fiscal year 2005 by approximately $800,000. The Company
intends to issue up to $1,900,000 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 2005.

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(R) 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 the cost of current or new products.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The Company's management makes certain assumptions and estimates that impact the
reported amounts of assets, liabilities and stockholders' equity, and revenues
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(R) Microtechnology,
contract revenue recognition, inventory valuation, valuation of goodwill and
valuation of deferred tax assets. Below we describe these policies further as
well as the estimates and policies involved.

IMPAIRMENT OF LONG-LIVED ASSETS

The following is a summary of the carrying amounts of the Multi-Mix(R)
Microtechnology net assets included in the Company's consolidated financial
statements at January 1, 2005 and the related future planned purchases and lease
obligation commitments through January 2006.

Net assets:
   Property, plant and equipment, at cost           $14,265,000
   Less accumulated depreciation and amortization     5,392,000
                                                    -----------
   Property, plant and equipment, net                 8,873,000
   Inventories                                          585,000
   Other assets, net                                    263,000
                                                    -----------
   Total net assets at January 1, 2005              $ 9,721,000
                                                    -----------

   Commitments:
   Planned equipment purchases for 2005             $   700,000
   Lease obligations through January 2006               325,000
                                                    -----------
   Total commitments                                $ 1,025,000
                                                    -----------
   Total net assets and commitments                 $10,746,000
                                                    ===========

Approximately 32% of the property, plant and equipment may be utilized in other
areas of our electronic components operations.

The Company anticipates receiving additional orders during 2005 for its
Multi-Mix(R) Microtechnology products, based on inquiries from existing
customers, requests to quote from new and existing customers and market
research, for which substantial research and development costs have also been
incurred. Due to economic and market conditions in the wireless industry since
2000, wireless telecommunications system service providers substantially reduced
their capital equipment purchases from our customers. While these circumstances
have resulted in the delay or cancellation of Multi-Mix(R) 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. 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.
Should these alternatives not be realized, the Company would have to write down
the value of these assets, thereby incurring an impairment charge to earnings,
the net result of which would be materially adverse to the financial results and


                                       20



condition of the Company. In accordance with the Company's evaluation of
Multi-Mix(R) 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(R) assets.

The Company's planned equipment purchases and other commitments are expected to
be funded through a $5,000,000 revolving credit facility, which expires October
8, 2006, and supplemented by cash resources and cash flows that are expected to
be provided by operations.

CONTRACT REVENUE RECOGNITION

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
recognizes revenue in accordance with the provisions of Staff Accounting
Bulletin No. 104.

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 $1,942,000 at January
1, 2005 and $1,787,000 at January 3, 2004, of which $901,000 and $747,000,
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:

     o    declines in the market value of inventory; and

     o    changes in customer demand for inventory, such as cancellation of
          orders and our purchases of inventory beyond customer needs that
          result in excess quantities on hand and that we are not able to return
          to the vendor or charge back to the customer.

VALUATION OF GOODWILL

With the adoption of SFAS No. 142 by the Company on December 30, 2001, goodwill
is no longer subject to amortization over its estimated useful life. However,
goodwill is subject to at least an annual assessment for impairment and more
frequently if circumstances indicate a possible impairment. The Company
performed the annual assessment during the fourth quarter of 2004 and determined
there was no impairment.

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 and 2003 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 in fiscal years 2003 and 2004. Management believes that a valuation
allowance is not required for FMI's deferred tax assets as their realization is
more likely than not.


                                       21



                  CONSOLIDATED STATEMENTS OF OPERATIONS SUMMARY

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



                                                       Percentage of Net Sales
                                                --------------------------------------
                                                             Years Ended
                                                --------------------------------------
                                                             (Unaudited)
                                                January 1,   January 3,   December 28,
                                                   2005         2004          2002
                                                ----------   ----------   ------------

Net sales....................................     100.0%       100.0%        100.0%
                                                  -----        -----         -----
Costs and expenses:
   Cost of sales.............................      58.3         61.3          57.4
   Selling, general and administrative.......      31.7         34.9          36.4
   Research and development..................       5.6          6.4          11.1
   Restructuring charges.....................        --           .6           2.1
                                                  -----        -----         -----
                                                   95.6        103.2         107.0
                                                  -----        -----         -----

Operating income (loss)......................       4.4         (3.2)         (7.0)
Interest and other expense, net..............      (0.8)        (1.0)          (.7)
Gain on disposition of assets................        --           .4            --
                                                  -----        -----         -----

Income (loss) before income taxes............       3.6         (3.8)         (7.7)
Provision (benefit) for income taxes.........       (.3)         (.4)          1.0
                                                  -----        -----         -----
Net income (loss)............................       3.9%        (3.4%)        (8.7%)
                                                  =====        =====         =====


2004 COMPARED TO 2003

Net sales.

Consolidated results of operations for 2004 reflect an increase in net sales
from 2003 of $3,627,000 or 13.3% to $30,949,000. This increase was attributable
to a $1,179,000 increase in net sales of electronic components and a $2,247,000
increase in sales of microwave micro-circuitry products from the Company's
wholly-owned subsidiary Filtran Microcircuits Inc. ("FMI"). The increase in net
sales for the electronic components segment for 2004 is attributable to improved
orders in 2004 from existing satellite and defense customers and a higher
backlog at the beginning of 2004 as compared to the beginning of 2003; the
higher backlog reflected new orders from existing customers in the Company's
defense business. The Company expects that its defense and satellite customers
should continue to maintain their approximate current levels of orders during
fiscal year 2005, though there are no assurances they will do so. Nevertheless,
in times of armed conflict or war, military spending is concentrated on
armaments build up, maintenance and troop support, and not on the research and
development and specialty applications that are the Company's core strengths and
revenue generators. The Company also anticipates increased levels of orders
during fiscal year 2005 for its Multi-Mix(R) Microtechnology products, based on
inquiries from existing customers, requests to quote from new and existing
customers and market research. The increase in sales of the microwave
micro-circuitry segment for 2004 was due to new orders from both existing and
new customers due to the continued efforts to diversify FMI into wireless base
stations, automotive and defense applications. FMI anticipates much of this new
order volume to renew in future periods.

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:

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


                                       22



Orders of $31,499,000 were received for 2004, an increase of $1,826,000 or 6.2%
compared to $29,673,000 in orders received for 2003. Backlog increased by
$550,000 to $12,945,000 at the end of 2004 compared to $12,395,000 at year-end
2003.

Cost of sales and Gross profit.

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



                                            2004                                   2003
                            ------------------------------------   ------------------------------------
                                           Increase/                              Increase/
                                          (Decrease)      % of                   (Decrease)      % of
                                          from prior    Segment                  from prior    Segment
                                 $           year      Net Sales        $           year      Net Sales
                            -----------   ----------   ---------   -----------   ----------   ---------

Electronic Components
   Gross Profit             $11,341,000   $1,841,000     45.1%     $ 9,500,000    $ 604,000     39.6%

Microwave Micro-Circuitry
   Gross Profit             $ 1,569,000   $  492,000     26.3%     $ 1,077,000    $(493,000)    29.0%

Consolidated Gross Profit   $12,910,000   $2,333,000     41.7%     $10,577,000    $ 111,000     38.7%


The increases in gross profit for 2004 for the electronic components segment
were due to the overall increase in segment sales along with savings resulting
from the increased utilization of the Company's West Caldwell, New Jersey and
Costa Rica manufacturing production facilities, better product mix and the
benefits of the cost containment and restructuring programs instituted during
2003. Cost of sales for the electronic components segment also reflects
increased staffing to meet production requirements and a reduction of
intersegment purchases from FMI of $201,000 for 2004.

Depreciation expense included in 2004 consolidated cost of sales was $2,965,000,
an increase of $187,000 compared to 2003. For 2004, approximately $1,593,000 of
depreciation expense was associated with Multi-Mix(R) Microtechnology capital
assets. Increases in depreciation expense were a result of capital equipment
purchases in the current and prior years.

FMI sales include intersegment sales of $148,000 and $349,000 in 2004 and 2003,
respectively. The decrease in gross margin percent for 2004 is due to higher
material and overhead costs, including additional overtime, related to the new
defense orders booked in 2004. During the second half of 2004, gross profit
margin at FMI was negatively impacted by the weakness of the U.S. dollar against
the Canadian dollar. The higher material and overtime costs for such defense
orders are not expected to continue into future periods, but certain additional
overhead costs may affect future results.

Selling, general and administrative expenses.

Selling, general and administrative expenses of $9,820,000 for 2004 increased by
$284,000 or 3.0%, and when expressed as a percentage of net sales, decreased by
3.2 percentage points to 31.7% compared to 2003. 2003 selling, general and
administrative expenses included expenses associated with bank modification
agreements entered into during the second quarter and additional professional
fees that were incurred totaling approximately $400,000. The 2004 selling,
general and administrative expenses increased due to higher marketing and
administrative costs, including higher professional fees for Sarbanes-Oxley
assessments.

Research and development expenses.

Research and development expenses for new products were $1,723,000 for 2004, a
decrease of $14,000 or 0.9% and when expressed as a percentage of net sales, a
decrease of 0.8 percentage points to 5.6% compared to 2003. Except for $198,000
of expenses at FMI (an increase of $36,000 from such FMI expenses in 2003)
substantially all of the research and development expenses were related to
Multi-Mix(R) Microtechnology and Multi-Mix PICO(R) products. The Company
anticipates that these expenses will increase in future periods in connection
with implementation of our strategic plan for Multi-Mix(R).

Operating income.

Consolidated operating income for 2004 was $1,367,000 compared to a consolidated
operating loss of $856,000 for 2003. Operating income for 2004 was reduced by
$150,000 for employee incentive compensation payments and by $75,000 for a
profit-sharing contribution to the Company's 401(k) Plan. During 2003 the
Company reduced its head count by 14 persons, principally involved in
production, manufacturing support, sales and administration. The Company
recorded personnel restructuring charges of $160,000, consisting of severance
and certain other personnel costs during 2003.

For 2004, the Company's operating income for its electronic component segment
was $1,178,000 compared to an operating loss of $860,000 for 2003. For 2004,
operating income for the microwave micro-circuitry segment was $189,000 compared
to operating income of $4,000 for 2003.


                                       23

Interest and other expense, net.

Interest and other expense, net was $265,000 for 2004 compared to interest and
other expense, net of $271,000 for 2003. Interest expense for 2004 was
principally incurred on borrowings under the revolving line of credit and term
loans which the Company consummated during the fourth quarter of 2003 at higher
interest rates than the previous facility. Interest expense for 2003 was
principally incurred on borrowings under the mortgage loan and the term loan
facility with its prior bank that was entered into during fiscal year 2002. The
reduction of interest and other expense was due to lower outstanding debt
balances during 2004 as the Company repaid $1,491,000 throughout 2004.

Income taxes.

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

Internal Revenue Service Code Section 382 places a limitation on the utilization
of net operating loss carryforwards when an ownership change, as defined in the
tax law, occurs. Generally, an ownership change occurs when there is a greater
than 50 percent change in ownership. If such change should occur, the actual
utilization of net operating loss carryforwards, for tax purposes, would be
limited annually to a percentage of the fair market value of the Company at the
time of such change. Although management believes these limitations did not
impact 2004, the limitation could be triggered during 2005.

Net income.

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

2003 COMPARED TO 2002

Net sales.

Consolidated results of operations for 2003 reflect an increase in net sales
from the prior year of $2,752,000 or 11.2% to $27,322,000. This increase was
primarily attributable to a $2,548,000 increase in the electronic components
segment attributable to improved orders in the Company's defense and satellite
business offset by a decrease in net sales of microwave micro-circuitry products
of $257,000 of the Company's wholly-owned subsidiary Filtran Microcircuits Inc.
("FMI"). The decrease in 2003 FMI sales was due to continued softness in the
telecommunications sector that FMI serves, principally millimeter-wave
applications for wireless broadband solutions.

Orders of $29,673,000 were received during 2003, an increase of $6,916,000 or
30.4%, compared to $22,757,000 in orders received during 2002. As a result,
backlog increased by $2,351,000 or 23.4% to $12,395,000 at the end of 2003,
compared to $10,044,000 at year-end 2002.

The Company believes that the current economic downturn, resulting in reduced
spending by wireless service providers, has caused many wireless companies to
delay or forego certain purchases of the Company's products and this trend is
expected to continue in the near term. However, the Company expects that its
satellite and defense customers should continue to maintain their approximate
current levels of orders during 2004, although there are no assurances they will
do so. The Company also anticipates increasing levels of orders during 2004 and
for fiscal year 2005 for its Multi-Mix(R) Microtechnology products, for which
the Company has made a significant capital investment and incurred substantial
research and development costs. The Company expects that previous weaknesses in
the telecommunications sector that FMI serves will improve in 2004.

Cost of sales and Gross profit.

Consolidated cost of sales increased $2,641,000 or 18.7%, and as a percentage of
net sales increased 3.9 percentage points to 61.3%, for 2003. Cost of sales
increased $1,943,000 (which includes lower intersegment purchases from FMI of
$461,000) for 2003 in the electronic components segment, resulting from
additional production costs above anticipated costs, competitive pricing, and
higher manufacturing costs that were attributable to increases in depreciation
and other occupancy expenses related to the expansion of the Company's West
Caldwell, New Jersey and Costa Rica manufacturing production facilities. Cost of
sales increased $237,000 during 2003 in the microwave micro-circuitry segment,
due to higher material and labor costs.

Depreciation expense included in 2003 consolidated cost of sales was $2,778,000,
an increase of $531,000 compared to 2002. For 2003, approximately $1,650,000 of
depreciation expense was associated with Multi-Mix(R) Microtechnology capital
assets. Other increases in depreciation expense were a result of capital
equipment purchases in the current and prior years and the commencement of
depreciation expense associated with the West Caldwell, New Jersey 19,200
square-foot building expansion, which was placed into service during the first
quarter of 2002. During the third quarter of 2002, depreciation and amortization
expense commenced on the recently completed 36,200 square-foot Multi-Mix(R)
manufacturing facility in San Jose, Costa Rica.

Consolidated gross profit for 2003 was impacted by the items referred to in the
above discussion of consolidated cost of sales and depreciation expense.
Consolidated gross profit for 2003 was $10,577,000 or 38.7% of net sales
compared to consolidated gross profit of $10,466,000 or 42.6% of net sales for
2002.

                                       24

Gross profit for 2003 for the electronic components segment increased by
$604,000 or 6.8% to $9,500,000, which represented 39.6% of segment net sales of
$23,962,000, compared to a gross profit of $8,896,000 or 41.5% of segment net
sales of $21,415,000 in 2002. Gross profit for 2003 included revenue of $226,000
related to the settlement of rate increases on prior year contract costs. Gross
profit for 2003 for the microwave micro-circuitry segment decreased by $494,000
to $1,076,000 which represented 29.0% of segment net sales of $3,709,000,
compared to $1,570,000 or 39.6% of segment net sales of $3,966,000 in 2002. FMI
sales include intersegment sales of $349,000 and $810,000 in 2003 and 2002,
respectively.

Selling general and administrative expenses.

Consolidated selling, general and administrative expenses of $9,536,000 for 2003
increased by $586,000 or 6.6%, and when expressed as a percentage of net sales,
decreased by 1.5 percentage points to 34.9% compared to 2002. The dollar
increases were primarily due to the $400,000 of additional fees and costs
(including accelerated amortization of deferred financing costs) incurred
related to the amendment of the Company's prior bank facilities incurred in the
second quarter of 2003, and the higher commissions, selling and other
professional fee costs incurred throughout 2003.

Research and development expenses.

Research and development expenses for new products were $1,737,000 for 2003, a
planned decrease of $992,000 or 36.4% compared to 2002. Except for $163,000 of
research and development expenses at FMI, a decrease of $325,000 from 2002
levels, substantially all of the research and development expenses were related
to Multi-Mix(R) Microtechnology and Multi-Mix PICO(R) products.

Restructuring charges.

During 2003 the Company reduced its headcount by 14 persons, principally
involved in production, manufacturing support, sales and administration. The
Company recorded personnel restructuring charges aggregating $160,000,
consisting of severance and certain other personnel costs during the last three
quarters of 2003. As a result of a decline in orders received from its customers
during 2002, the Company reduced head count by 28 persons, principally involved
in production, manufacturing support and sales. The Company recorded personnel
restructuring charges of $240,000 and $270,000 consisting of severance and
certain other personnel costs, during the second and fourth quarters of 2002
which increased the Company's net loss by $510,000.

Operating loss.

Consolidated operating loss for 2003 was $856,000. Operating loss for the
electronic components segment for 2003 was $860,000, which included the effect
of charges associated with the personnel restructuring charges of $160,000 in
the last three quarters of 2003. In the fourth quarter of 2003, $210,000 of
income resulted from revenue related to the settlement of rate increases on
prior year contract costs. Operating loss for the electronic components segment
for 2002 was $1,792,000 after the $468,000 personnel restructuring charges in
the second and fourth quarters of 2002. Operating income for the microwave
micro-circuitry segment was $4,000 in 2003 compared to operating income of
$70,000 for 2002, after inclusion of the $42,000 second quarter personnel
restructuring charge.

Interest and other expense, net.

Net interest expense was $271,000 for 2003, which compares to net interest
expense of $176,000 for 2002. Interest expense for 2003 was principally incurred
on borrowings under mortgage and term loans taken out during fiscal year 2002
and the revolving line of credit, and term loans which the Company refinanced
during the fourth quarter of 2003 at higher interest rates. Interest expense for
2002 was principally incurred on borrowings under a revolving credit facility
and mortgage loan in connection with capital equipment purchases and the
building expansion constructed during fiscal year 2001.

Income taxes.

An income tax benefit of $109,000 was recorded for 2003, with an effective tax
rate of (10.7%), compared to an income tax provision of $237,000 that was
recorded for 2002 related to recording a partial income tax benefit of $282,000
on the 2002 operating loss and tax credits of $132,000 associated with research
and development expenditures offset by the impact of providing a $645,000 net
valuation allowance against domestic net deferred tax assets. The 2003 tax
benefit recorded represents deferred tax benefits associated with FMI's research
and development expenses incurred in Canada. No domestic tax benefits have been
recorded in 2003.

Due to the uncertainties related to, among other things, the extent and timing
of its future taxable income, the Company increased its domestic deferred tax
asset valuation allowance by $1,050,000 to $1,350,000 in fiscal year 2002. The
Company increased its domestic deferred tax asset valuation allowance by
$496,000 to $1,846,000 in fiscal year 2003. The Company's domestic net deferred
tax assets have been fully reserved as of January 3, 2004.

Goodwill

During the year ended December 28, 2002, the Company completed the first of the
impairment tests of goodwill required under SFAS No. 142, which was adopted
effective December 30, 2001. Under these rules, goodwill is no longer subject to
amortization but is reviewed for potential impairment annually or upon the
occurrence of an impairment indicator. Goodwill of approximately $3,100,000,
which arose from the acquisition of FMI in 1999, was previously being amortized
on a straight-line basis over twenty years.

                                       25

Net income

The Company recorded a net loss for 2003 of $914,000 compared to a net loss of
$2,135,000 for 2002. On a per share basis, the Company recorded a net loss of
$.29 per share for 2003 compared to a net loss of $.69 per share for 2002.

The weighted average number of basic shares outstanding increased by
approximately 47,000 shares or 1.5% for 2003 compared to 2002. The increase in
shares outstanding was primarily due to the issuance of 528,413 shares to DuPont
Electronic Technologies during the first quarter of 2002 partly offset by the
repurchase of 82,100 shares of stock during the second half of 2002.

LIQUIDITY AND CAPITAL RESOURCES

The Company had liquid resources comprised of cash and cash equivalents totaling
approximately $2,100,000 at the end of 2004 compared to approximately $450,000
at the end of 2003. The Company's working capital was approximately $8,500,000
and its current ratio was 2.9 to 1 at the end of 2004 compared to $6,800,000 and
2.6 to 1, respectively, at the end of 2003. At January 1, 2005 the Company had
available borrowing capacity under its revolving line of credit of $4,200,000.

The Company's planned equipment purchases and other commitments are expected to
be funded through cash resources and cash flows that are expected to be provided
by operations, and supplemented by a $5,000,000 revolving credit facility, which
expires October 8, 2006.

The Company's operating activities provided net positive cash flows of
$4,788,000 during 2004 compared to positive cash flows of $1,093,000 during
2003. The primary sources of operating cash flows were net income of $1,198,000
which was reduced by depreciation and amortization of $3,210,000, a reduction in
inventories of $268,000,and an aggregate increase in accounts payable and
accrued liabilities of $479,000 partly offset by a reduction of customer
deposits of $156,000 and an increase in accounts receivable of $118,000 and
other current assets of $96,000.

The Company made net capital investments in property, plant and equipment of
$1,715,000 during 2004, compared to net capital investments made in property,
plant and equipment of $1,097,000 during 2003. These capital expenditures are
related to new production and test equipment capabilities in connection with the
introduction of new products and enhancements to existing products. The
depreciated cost of capital equipment associated with Multi-Mix(R)
Microtechnology was $8,873,000 at the end of 2004, a decrease of $1,191,000
compared to $10,064,000 at the end of fiscal year 2003.

On April 17, 2003, the Company and its prior bank entered into bank modification
agreements, that waived compliance with certain covenants and further amended
the applicable terms of the agreements and covenants to reduce total
availability and change maturity dates of the facility. The loan agreements
contained a material adverse change clause, under which its prior Bank, in its
good faith opinion, could determine that the Company was in default under the
agreements. The Company believed that this clause was a Subjective Acceleration
Clause as indicated in EITF 95-22, and, based upon the Company's assessment
under those guidelines, among other factors, had classified the amounts as a
current liability at December 28, 2002.

On October 8, 2003, the Company completed the refinancing of its revolving
credit and term loan obligations with a new credit facility provided by The CIT
Group/Business Credit, Inc. ("CIT") that provides for a three-year secured
revolving credit, term loan and letter of credit facility for $9,250,000. All
obligations due to its prior bank were repaid from the proceeds of such
refinancing. The new revolving credit facility combined with the expected cash
flows from operations should be sufficient to meet the Company's current
obligations and to fund its currently contemplated operations during the next
twelve months.

The financing agreement with CIT consists of a $5,000,000 revolving line of
credit, that is temporarily reduced by $250,000 until certain conditions are
met; a $1,500,000 machinery and equipment term loan ("Term Loan A") and a
$2,750,000 real estate term loan ("Term Loan B"). In connection with this
financing agreement, the Company was required to place, over the life of the
loan, $1,500,000 as restricted cash with CIT. The revolving line of credit is
subject to an availability limit under a borrowing base calculation (85% of
eligible accounts receivable as defined in the financing agreement plus 100% of
the $1,500,000 restricted cash). At January 1, 2005, the Company had available
borrowing capacity under its revolving line of credit of $4,200,000. The
revolving line of credit bears interest at the prime rate plus 1/2 percent
(currently 6.25%). The principal amount of Term Loan A is payable in 60 equal
monthly installments of $25,000 and bears interest at the prime rate plus one
percent (currently 6.75%). The principal amount of Term Loan B is payable in 84
equal monthly installments of $32,738 and bears interest at the prime rate plus
one percent (currently 6.75%). At January 1, 2005, the Company, under the terms
of its agreement with CIT, elected to convert $900,000 of Term Loan A and
$2,100,000 of Term Loan B from their prime rate base to LIBOR-based interest
rate loans. The current LIBOR interest rate options were renewed on October 12,
2004 for six months at an interest rate of 5.49%. The current LIBOR interest
rate options will expire April 11, 2005. The revolving line of credit and the
term loans are secured by substantially all of the Company's 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 and other covenants.
The Company was in compliance with these covenants at January 1, 2005.


                                       26


The Company's contractual obligations as of January 1, 2005 are as follows:



                                        Payment due by period (in thousands)
                              ------------------------------------------------------
                                       Less than                           More than
Contractual Obligations        Total     1 year    1-3 years   3-5 years    5 years
------------------------      ------   ---------   ---------   ---------   ---------

Long-Term Debt Obligations    $3,683     $  905      $1,523       $961        $294
Operating Lease Obligations      554        445          98         11          --
                              ------     ------      ------       ----        ----
Total                         $4,237     $1,350      $1,621       $972        $294
                              ======     ======      ======       ====        ====


Depreciation and amortization expenses exceeded capital expenditures for new
projects and production equipment during 2004 by approximately $1,500,000, and
the Company anticipates that depreciation and amortization expenses will exceed
capital expenditures in fiscal year 2005 by approximately $800,000. The Company
intends to issue up to $1,900,000 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 2005.

On March 31, 2003, the Company relinquished the balance of the space in its
previous Costa Rica facility to its customer. The completion of this
transactions resulted in a gain of $71,000 during the second quarter of 2003.
The Company reduced its facility occupancy expenses by approximately $22,000 and
$87,000 in 2003 and 2002, respectively.

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 of the Company's lending bank.
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) is now payable monthly. Mr. Carter has
pledged 33,000 shares of Common Stock as security for this loan, which is a
full-recourse loan.

On August 31, 2000, in connection with an amendment of Mr. Carter's employment
agreement, the Company loaned Mr. Carter an additional $280,000. Interest on the
loan varies and is based on the prime rate of the Company's lending bank,
payable in accordance with Mr. Carter's employment agreement. Each year the
Company is required to forgive 20% of the amount due under this loan and the
accrued interest thereon. During 2004, the Company forgave $56,000 of principal
and $4,500 of accrued interest and paid a tax gross-up benefit of $6,100. During
2003, the Company forgave $56,000 of principal and $7,000 of accrued interest
and paid $8,300 for a tax gross-up benefit. During 2002, the Company forgave
$56,000 of principal and $12,000 of accrued interest and paid a tax gross-up
benefit of $10,700. The Company estimates that $56,000 of principal and $3,000
of accrued interest will be forgiven in 2005.

During fiscal years 2004, 2003 and 2002, respectively, the Company's General
Counsel, KMZ Rosenman, was paid $288,000, $359,000 and $372,000 for providing
legal services to the Company. A director of the Company is Counsel to the firm
of KMZ Rosenman but does not share in any fees paid by the Company to the law
firm.

During fiscal years 2004, 2003 and 2002, 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 $8,000, $40,000
and $24,000 to these companies during 2004, 2003 and 2002, respectively. A
director of the Company is the Chairman and Chief Executive Officer of each of
these companies.

During fiscal years 2003 and 2002, respectively, a director of the Company was
paid $12,000 and $36,000 for providing financial-related consulting services to
the Company. This agreement terminated in April 2003.

During each of fiscal years 2004, 2003 and 2002, a director of the Company was
paid $36,000 for providing technology-related consulting services to the
Company.

During fiscal years 2004, 2003 and 2002, respectively, DuPont Electronic
Technologies ("DuPont"), a stockholder, was paid $84,000, $109,000 and $36,000
for providing technological and marketing related personnel and services on a
cost-sharing basis to the Company. 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 2001 Stock
Option Plan, each non-employee director is granted an immediately exercisable
option to purchase 2,500 shares of the Common Stock of the Company on the date
of each Annual Meeting of Stockholders. Each such option 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 17, 2004, non-qualified
stock options to purchase an aggregate of 20,000 shares were issued to eight
directors at an exercise price of $9.01 per share.

                                       27


On February 28, 2002, the Company sold to DuPont 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 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, 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(R) 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 tranceivers.

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

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, SFAS No. 151, "Inventory Costs (An amendment of ARB No. 43,
Chapter 4)," was issued. SFAS No. 151 amends Accounting Research Bulletin
("ARB") No. 43, Chapter 4, to clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current-period charges. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to inventory be based on normal capacity
of the production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company is
currently evaluating the impact that SFAS No. 151 will have on its financial
position and results of operations.

In December 2004, SFAS No. 123R, "Share-Based Payment," a revision of SFAS No.
123, "Accounting for Stock-Based Compensation", was issued. SFAS No. 123R
replaces existing requirements of SFAS No. 123 and APB Opinion No. 25
"Accounting for Stock-Based Compensation", and requires public companies to
recognize the cost of employee services received in exchange for equity
instruments, with limited exceptions. SFAS No. 123R also affects the pattern in
which compensation cost is recognized, the accounting for employee share
purchase plans, and the accounting for income tax effects of share-based payment
transactions. SFAS No. 123R will be effective for interim periods beginning
after June 15, 2005. The Company is currently evaluating the effect that SFAS
No. 123R will have on its financial position and results of operations, but does
not believe that the adoption of SFAS No. 123R will have a material impact on
its financial position and results of operations.

The FASB has proposed FASB Staff Position No. 109-a, "Application of FASB
Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided
to U.S. Based Manufacturers by the American Jobs Creation Act of 2004." On
October 22, 2004, the American Jobs Creation Act of 2004 was signed into law by
the President. This Act includes tax relief for domestic manufacturers by
providing a tax deduction for up to 9 percent (when fully phased in) of the
lesser of (a) "qualified production activities income," or (b) taxable income
(after the deduction for the utilization of any net operating loss
carryforwards). As a result of this Act, an issue has arisen as to whether this
deduction should be accounted for as a special deduction or a tax rate reduction
under SFAS No. 109. The FASB staff believes that the domestic manufacturing
deduction is based on the future performance of specific activities, including
the level of wages. Accordingly, the FASB staff believes that the deduction
provided for under the Act should be accounted for as a special deduction in
accordance with SFAS No. 109 and not as a tax rate reduction. The Company is
currently evaluating the impact that this provision will have on its financial
position and results of operations.


                                       28



ITEM 7. FINANCIAL STATEMENTS

             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 January 1, 2005 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 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 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 consolidated financial position of
Merrimac Industries, Inc. as of January 1, 2005, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.


/s/ Grant Thornton LLP

Edison, New Jersey
March 29, 2005


                                       29



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Merrimac Industries, Inc.

We have audited the accompanying consolidated balance sheet of Merrimac
Industries, Inc. as of January 3, 2004 and the related consolidated statements
of operations and comprehensive income (loss), stockholders' equity and cash
flows for the years ended January 3, 2004 and December 28, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Merrimac Industries, Inc. at January 3, 2004, and the results of their
operations and their cash flows for the years ended January 3, 2004 and December
28, 2002, in conformity with U.S. generally accepted accounting principles.


                                        /s/ Ernst & Young LLP

MetroPark, New Jersey
March 29, 2004


                                       30



CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002



                                                               2004          2003          2002
                                                           -----------   -----------   -----------

OPERATIONS

Net sales ..............................................   $30,949,487   $27,322,096   $24,570,332
                                                           -----------   -----------   -----------
Costs and expenses:
   Cost of sales .......................................    18,039,975    16,745,329    14,104,256
   Selling, general and administrative .................     9,819,800     9,536,144     8,950,284
   Research and development ............................     1,722,741     1,736,649     2,728,556
   Restructuring charges................................            --       160,000       510,000
                                                           -----------   -----------   -----------
                                                            29,582,516    28,178,122    26,293,096
                                                           -----------   -----------   -----------
Operating income (loss).................................     1,366,971      (856,026)   (1,722,764)
Interest and other expense, net ........................      (264,482)     (271,471)     (175,703)
Gain on disposition of assets...........................            --       104,024            --
                                                           -----------   -----------   -----------
Income (loss) before income taxes ......................     1,102,489    (1,023,473)   (1,898,467)
(Benefit) provision for income taxes ...................       (96,000)     (109,000)      237,000
                                                           -----------   -----------   -----------
Net income (loss).......................................   $ 1,198,489   $  (914,473)  $(2,135,467)
                                                           ===========   ===========   ===========

Net income (loss) per common share-basic................   $       .38   $      (.29)  $      (.69)
Net income (loss) per common share-diluted..............   $       .38   $      (.29)  $      (.69)
                                                           -----------   -----------   -----------
Weighted average number of shares outstanding-basic.....     3,127,070     3,120,557     3,073,703
Weighted average number of shares outstanding-diluted...     3,153,854     3,120,557     3,073,703
                                                           -----------   -----------   -----------

COMPREHENSIVE INCOME (LOSS)

Net income (loss).......................................   $ 1,198,489   $  (914,473)  $(2,135,467)
Comprehensive income (loss):
   Foreign currency translation adjustment..............       435,724       986,351        63,873
                                                           -----------   -----------   -----------
Comprehensive income (loss).............................   $ 1,634,213   $    71,878   $(2,071,594)
                                                           ===========   ===========   ===========


See accompanying notes.


                                       31



CONSOLIDATED BALANCE SHEETS

January 1, 2005 and January 3, 2004



                                                                                     2004          2003
                                                                                 -----------   -----------

Assets

Current assets:
   Cash and cash equivalents .................................................   $ 2,166,481   $   452,633
   Accounts receivable, net of allowance of $59,000 and $50,000,
      respectively ...........................................................     6,472,991     6,299,258
   Income tax refunds receivable .............................................        97,643       135,520
   Inventories, net ..........................................................     2,931,259     3,187,946
   Other current assets ......................................................       583,029       482,633
   Deferred tax assets .......................................................       676,000       542,000
                                                                                 -----------   -----------
         Total current assets ................................................    12,927,403    11,099,990
                                                                                 -----------   -----------
Property, plant and equipment ................................................    37,988,352    37,203,977
   Less accumulated depreciation and amortization ............................    22,404,372    19,982,378
                                                                                 -----------   -----------
Property, plant and equipment, net ...........................................    15,583,980    17,221,599
Restricted cash ..............................................................     1,500,000     1,500,000
Other assets .................................................................       746,714       854,487
Deferred tax assets ..........................................................       439,000       221,000
Goodwill .....................................................................     3,377,913     3,122,563
                                                                                 -----------   -----------
         Total Assets ........................................................   $34,575,010   $34,019,639
                                                                                 ===========   ===========

Liabilities and Stockholders' Equity

Current liabilities:
   Current portion of long-term debt .........................................   $   904,940   $   954,405
   Accounts payable ..........................................................     1,309,132     1,239,925
   Accrued liabilities .......................................................     1,930,682     1,711,875
   Customer deposits .........................................................       233,406       389,211
   Income taxes payable ......................................................        85,131            --
                                                                                 -----------   -----------
         Total current liabilities ...........................................     4,463,291     4,295,416
Long-term debt, net of current portion .......................................     2,778,135     4,208,106
Deferred compensation ........................................................        53,739        88,362
Deferred liabilities .........................................................        33,974        48,014
Deferred tax liabilities .....................................................       648,000       542,000
                                                                                 -----------   -----------
         Total liabilities ...................................................     7,977,139     9,181,898
                                                                                 -----------   -----------

Commitments and contingencies

Stockholders' equity:
   Preferred stock, par value $.01 per share:
      Authorized: 1,000,000 shares
      No shares issued
   Common stock, par value $.01 per share:
      20,000,000 shares authorized; 3,215,070 and 3,202,991 shares issued;
      and 3,132,970 and 3,120,891 shares outstanding, respectively ...........        32,151        32,030
   Additional paid-in capital ................................................    18,756,710    18,686,914
   Retained earnings .........................................................     7,679,994     6,481,505
   Accumulated other comprehensive income ....................................     1,158,882       723,158
                                                                                 -----------   -----------
                                                                                  27,627,737    25,923,607
   Less treasury stock, at cost - 82,100 shares ..............................      (573,866)     (573,866)
   Less loan to officer-stockholder ..........................................      (456,000)     (512,000)
                                                                                 -----------   -----------
         Total stockholders' equity ..........................................    26,597,871    24,837,741
                                                                                 -----------   -----------
         Total Liabilities and Stockholders' Equity ..........................   $34,575,010   $34,019,639
                                                                                 ===========   ===========


See accompanying notes.


                                       32



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002



                                     Common Stock        Common       Additional
                                 -------------------      Stock        Paid-in       Retained
                                   Shares     Amount   Warrants(A)    Capital(B)     Earnings
                                 ----------------------------------------------------------------

Balance, December 29, 2001....   2,859,249   $28,593    $ 837,200    $14,327,586    $9,531,445
                                 ----------------------------------------------------------------
Net loss......................                                                      (2,135,467)
Exercise of options...........      10,975       110                     105,440
Stock Purchase Plan sales.....      11,336       113                      61,923
Sale of common stock .........     319,509     3,195                   3,347,021
Purchase of common stock .....
Loan to officer-stockholder...
Forgiveness of loan to
   officer-stockholder........
Foreign currency translation..
                                 ----------------------------------------------------------------
Balance, December 28, 2002....   3,201,069    32,011      837,200     17,841,970     7,395,978
                                 ----------------------------------------------------------------
Net loss......................                                                        (914,473)
Stock Purchase Plan sales.....       1,922        19                       7,744
Expiration of warrants........                           (837,200)       837,200
Forgiveness of loan to
   officer-stockholder........
Foreign currency translation..
                                 ----------------------------------------------------------------
Balance, January 3, 2004......   3,202,991    32,030           --     18,686,914     6,481,505
                                 ----------------------------------------------------------------
Net income....................                                                       1,198,489
Exercise of options...........       9,100        91                      53,859
Stock Purchase Plan sales.....       2,979        30                      15,937
Forgiveness of loan to
   officer-stockholder........
Foreign currency translation..
                                 ----------------------------------------------------------------
Balance, January 1, 2005......   3,215,070   $32,151    $      --    $18,756,710    $7,679,994
                                 ================================================================


                                  Accumulated
                                     Other           Treasury Stock         Loan to
                                 Comprehensive   ----------------------     Officer-
                                  Income(Loss)    Shares       Amount     Stockholder       Total
                                 ------------------------------------------------------------------

Balance, December 29, 2001....    $ (327,066)     208,904   $(1,760,131)   $(584,000)   $22,053,627
                                 ------------------------------------------------------------------
Net loss......................                                                           (2,135,467)
Exercise of options...........                                                              105,550
Stock Purchase Plan sales.....                                                               62,036
Sale of common stock .........                   (208,904)    1,760,131                   5,110,347
Purchase of common stock .....                     82,100      (573,866)                   (573,866)
Loan to officer-stockholder...                                               (40,000)       (40,000)
Forgiveness of loan to
   officer-stockholder........                                                56,000         56,000
Foreign currency translation..        63,873                                                 63,873
                                 ------------------------------------------------------------------
Balance, December 28, 2002....      (263,193)      82,100     (573,866)     (568,000)    24,702,100
                                 ------------------------------------------------------------------
Net loss......................                                                             (914,473)
Stock Purchase Plan sales.....                                                                7,763
Expiration of warrants........                                                                   --
Forgiveness of loan to
   officer-stockholder........                                                56,000         56,000
Foreign currency translation..       986,351                                                986,351
                                 ------------------------------------------------------------------
Balance, January 3, 2004......       723,158       82,100      (573,866)    (512,000)    24,837,741
                                 ------------------------------------------------------------------
Net income....................                                                            1,198,489
Exercise of options...........                                                               53,950
Stock Purchase Plan sales.....                                                               15,967
Forgiveness of loan to
   officer-stockholder........                                                56,000         56,000
Foreign currency translation..       435,724                                                435,724
                                 ------------------------------------------------------------------
Balance, January 1, 2005......    $1,158,882       82,100    $(573,866)    $(456,000)   $26,597,871
                                 ==================================================================


(A)  Common stock warrants expired October 26, 2003.

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

See accompanying notes.


                                       33



CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002



                                                                    2004          2003          2002
                                                                -----------   -----------   -----------

Cash flows from operating activities:
   Net income (loss) ........................................   $ 1,198,489   $  (914,473)  $(2,135,467)
   Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
         Depreciation and amortization ......................     3,209,631     3,191,654     2,909,363
         Amortization of deferred financing costs ...........        49,922       211,661            --
         Amortization of deferred income ....................            --       (21,822)      (87,288)
         Gain on disposition of assets ......................            --      (104,024)           --
         Deferred and other compensation ....................        69,305        72,414        64,934
         Deferred income taxes (benefit) ....................      (218,000)      (42,000)      507,000
         Changes in operating assets and liabilities:
            Accounts receivable .............................      (117,940)   (2,365,009)    1,830,810
            Income tax refunds receivable ...................        44,209       169,083      (105,591)
            Inventories .....................................       267,991       846,726       781,874
            Other current assets ............................       (96,028)       31,219       333,571
            Deferred tax assets .............................       (28,000)      (32,000)      130,000
            Other assets ....................................        57,851      (248,842)     (141,232)
            Accounts payable ................................       276,182       176,432    (2,377,474)
            Accrued liabilities .............................       202,561      (126,553)      (16,524)
            Customer deposits ...............................      (155,805)      263,355       (62,472)
            Income taxes payable ............................        84,819       (38,356)     (230,417)
            Deferred compensation ...........................       (43,428)      (43,504)      (41,250)
            Other liabilities ...............................       (14,040)       67,107       124,174
                                                                -----------   -----------   -----------
Net cash provided by operating activities ...................     4,787,719     1,093,068     1,484,011
                                                                -----------   -----------   -----------
Cash flows from investing activities:
   Purchases of capital assets ..............................    (1,714,951)   (1,265,888)   (2,857,664)
   Proceeds from sales of capital assets ....................            --       168,558            --
                                                                -----------   -----------   -----------
Net cash used in investing activities .......................    (1,714,951)   (1,097,330)   (2,857,664)
                                                                -----------   -----------   -----------
Cash flows from financing activities:
   Borrowings under revolving credit facility ...............            --     1,634,337       500,000
   Borrowings under mortgage loan ...........................            --     2,750,000     3,500,000
   Borrowings under term loan ...............................            --     1,500,000     2,720,000
   Restricted cash ..........................................            --    (1,500,000)           --
   Repayment of borrowings ..................................    (1,502,231)   (7,695,717)   (8,301,073)
   Proceeds from the issuance of common stock and
      common stock warrants, net ............................            --            --     5,110,347
   Proceeds from Stock Purchase Plan sales ..................        15,967         7,763        62,037
   Proceeds from the exercise of stock options ..............        53,950            --       105,550
   Repurchase of common stock ...............................            --            --      (573,866)
                                                                -----------   -----------   -----------
Net cash (used in) provided by financing activities .........    (1,432,314)   (3,303,617)    3,122,995
                                                                -----------   -----------   -----------
Effect of exchange rate changes .............................        73,394       149,714        17,022
                                                                -----------   -----------   -----------
Net increase (decrease) in cash and cash equivalents ........     1,713,848    (3,158,165)    1,766,364
Cash and cash equivalents at beginning of year ..............       452,633     3,610,798     1,844,434
                                                                -----------   -----------   -----------
Cash and cash equivalents at end of year ....................   $ 2,166,481   $   452,633   $ 3,610,798
                                                                ===========   ===========   ===========
Supplemental disclosures of cash flow information:
   Cash paid during the year for:
   Income taxes .............................................   $    37,500   $     6,500   $    45,000
   Loan interest ............................................   $   279,000   $   285,000   $   269,000
                                                                ===========   ===========   ===========
Non-cash activities:
   Unpaid purchases of capital assets .......................   $        --   $   224,000   $   354,000
   Addition to loan to officer-stockholder ..................   $        --   $        --   $    40,000
   Note payable for insurance premiums ......................   $        --   $   192,396   $        --
                                                                ===========   ===========   ===========


See accompanying notes.


                                       34



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

1. Nature of business and summary of significant accounting policies

Nature of business: 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(R) (PTFE) and mixed dielectric multilayer circuits for
communications, defense and aerospace applications.

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

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

Cash and cash equivalents: The Company considers all highly liquid securities
with an original maturity of less than three months to be cash equivalents. The
Company maintains cash deposits with banks that at times exceed applicable
insurance limits. The Company reduces its exposure to credit risk by maintaining
such deposits with high quality financial institutions. The Company has not
experienced any losses in such accounts.

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: 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, which amounted to $226,000 in 2003, are
recognized in the period that the rates are reviewed, finalized, accepted by the
customer, and collectability from the customer is assured. The Company
recognizes revenue in accordance with the provisions of Staff Accounting
Bulletin No. 104.

Warranties: Certain of the Company's long-term 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 $167,000, $162,000 and $77,000 for 2004, 2003 and 2002,
respectively. The warranty reserve at January 1, 2005 and January 3, 2004 was
$178,000 and $150,000, respectively.

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 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 January 1, 2005 and January 3,
2004 because of the relative short maturity of these instruments.

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.

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

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


                                       35



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2004, January 3, 2004 and December 28, 2002

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

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. Accumulated other comprehensive income
at January 1, 2005 and January 3, 2004 was attributable solely to the effects of
foreign currency translation.

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

Assets under construction are not depreciated until the assets are placed into
service. Fully depreciated assets included in property, plant and equipment at
January 1, 2005 and January 3, 2004 amounted to $11,899,000 and $11,222,000,
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 straight-lined 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 statements of operations, and would result in reduced carrying amounts
of the related assets on the Company's balance sheets.

Goodwill: Goodwill primarily includes the excess purchase price paid over the
fair value of net assets acquired. Effective December 30, 2001, the Company
adopted Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill
and Other Intangible Assets". Under SFAS 142, the Company ceased amortization of
goodwill and tests its goodwill on an annual basis using a two-step fair value
based test.

The first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the carrying amount of the reporting unit exceeds
its fair value, the second step of the goodwill impairment test must be
performed to measure the amount of the impairment loss, if any. If impairment is
determined, the Company will recognize additional charges to operating expenses
in the period in which they are identified, which would result in a reduction of
operating results and a reduction in the amount of goodwill.

The changes in the carrying amount of goodwill for the fiscal years ended
January 1, 2005 and January 3, 2004 are as follows:

                                                2004         2003
                                             ----------   ----------
Balance, beginning of year ...............   $3,122,563   $2,491,146
Foreign currency adjustment ..............      255,350      631,417
                                             ----------   ----------
Balance, end of year .....................   $3,377,913   $3,122,563
                                             ==========   ==========


                                       36



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

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

Advertising: The Company expenses the cost of advertising and promotion as
incurred. Advertising costs charged to operations were $123,000 in 2004,
$102,000 in 2003 and $175,000 in 2002.

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

Savings and Investment Plan: The Company's Savings and Investment Plan is a
401(k) plan (the "Plan") that provides eligible employees with the option to
defer and invest up to 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 2004. The Company's contributions to the Plan were
$60,000 in 2003 and $182,000 in 2002. The Board of Directors may also authorize
a discretionary amount to be contributed to the Plan and allocated to eligible
employees annually. A discretionary contribution amount of $75,000 was
authorized for 2004. No discretionary contribution amounts were authorized for
2003 and 2002.

Stock-based compensation: The Company accounts for stock options in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"),
which allows companies an option to either record compensation expense based on
the fair value of stock options granted, as determined by using an option
valuation model, or to continue following the accounting guidance of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for its stock options and other stock-based employee awards. Because
the Company has elected this treatment, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")
and Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure," ("SFAS No. 148") require
disclosure of pro forma information which provides the effects on net income
(loss) and net income (loss) per share as if the Company had accounted for its
employee stock awards under the fair value method prescribed by SFAS 123. Under
APB No. 25, compensation cost for stock options is measured as the excess, if
any, of the market price of the Company's stock at the date of the grant over
the amount an employee must pay to acquire the stock. No stock-based employee
compensation cost is reflected in net income (loss) at the date of grant, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.

In accordance with SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," the effect on net income (loss) and net income
(loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation, and the related assumptions described below,
is as follows:



                                                  2004          2003          2002
                                               ----------   -----------   -----------

Net income (loss) - as reported ............   $1,198,489   $  (914,473)  $(2,135,467)
Plus: Stock-based compensation expense
   included in reported net income (loss),
   net of tax ..............................           --            --            --
Less: Stock-based compensation expense
   determined using the fair value method,
   net of tax ..............................     (167,000)     (289,000)     (366,000)
                                               ----------   -----------   -----------
Net income (loss) - pro forma ..............   $1,031,489   $(1,203,473)  $(2,501,467)
                                               ==========   ===========   ===========
Basic earnings (loss) per share:
   As reported .............................   $      .38   $      (.29)  $      (.69)
   Pro forma ...............................   $      .33   $      (.39)  $      (.81)
Diluted earnings (loss) per share:
   As reported .............................   $      .38   $      (.29)  $      (.69)
   Pro forma ...............................   $      .33   $      (.39)  $      (.81)
                                               ==========   ===========   ===========


The fair value of each of the options and purchase plan subscription rights
granted in 2004, 2003, and 2002 was estimated on the date of grant using the
Black-Scholes option valuation model.


                                       37



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

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

The following weighted average assumptions were utilized:

                                                2004    2003    2002
                                               -----   -----   -----
Expected option life (years)................     2.5     2.6     2.4
Expected volatility.........................   45.00%  50.00%  45.00%
Risk-free interest rate.....................    2.00%   3.00%   3.50%
Expected dividend yield.....................    0.00%   0.00%   0.00%

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options and subscription rights have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options and subscription rights.

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 $1,723,000 in 2004, $1,737,000 in 2003 and
$2,729,000 in 2002 were expensed as incurred.

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

Net income (loss) per share: Basic net income (loss) per share are computed by
dividing income (loss) available to common shareholders by the weighted-average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed by dividing income (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
income (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 2003 was the latest and
fiscal year 2008 will be the next) is added to the fourth quarter, making such
quarter consist of 14 weeks.

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

Recent Accounting Pronouncements: In November 2004, SFAS No. 151, "Inventory
Costs (An amendment of ARB No. 43, Chapter 4)," was issued. SFAS No. 151 amends
Accounting Research Bulletin ("ARB") No. 43, Chapter 4, to clarify that abnormal
amounts of idle facility expense, freight, handling costs and wasted materials
(spoilage) should be recognized as current-period charges. In addition, SFAS No.
151 requires that allocation of fixed production overhead to inventory be based
on normal capacity of the production facilities. SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after June 15,2005. The
Company is currently evaluating the impact that SFAS No. 151 will have on its
financial position and results of operations.

In December 2004, SFAS No. 123R, "Share-Based Payment," a revision of SFAS No.
123, "Accounting for Stock-Based Compensation", was issued. SFAS No. 123R
replaces existing requirements of SFAS No. 123 and APB Opinion No. 25
"Accounting for Stock-Based Compensation", and requires public companies to
recognize the cost of employee services received in exchange for equity
instruments, with limited exceptions. SFAS No. 123R also affects the pattern in
which compensation cost is recognized, the accounting for employee share
purchase plans, and the accounting for income tax effects of share-based payment
transactions. SFAS No. 123R will be effective for interim periods beginning
after June 15, 2005. The Company is currently evaluating the impact that SFAS
No. 123R will have on its financial position and results of operations, but does
not believe that the adoption of SFAS No. 123R will have a material impact on
its financial position and results of operations.


                                       38



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

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

The FASB has proposed FASB Staff Position No. 109-a, "Application of FASB
Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided
to U.S. Based Manufacturers by the American Jobs Creation Act of 2004." On
October 22, 2004, the American Jobs Creation Act of 2004 was signed into law by
the President. This Act includes tax relief for domestic manufacturers by
providing a tax deduction for up to 9 percent (when fully phased in) of the
lesser of (a) "qualified production activities income," or (b) taxable income
(after the deduction for the utilization of any net operating loss
carryforwards). As a result of this Act, an issue has arisen as to whether this
deduction should be accounted for as a special deduction or a tax rate reduction
under SFAS No. 109. The FASB staff believes that the domestic manufacturing
deduction is based on the future performance of specific activities, including
the level of wages. Accordingly, the FASB staff believes that the deduction
provided for under the Act should be accounted for as a special deduction in
accordance with SFAS No. 109 and not as a tax rate reduction. The Company is
currently evaluating the impact that this provision will have on its financial
position and results of operations.

2. Inventories

Inventories consist of the following:

                                                            2004         2003
                                                         ----------   ----------
Finished goods .......................................   $  263,382   $  121,613
Work in process ......................................    1,179,606    1,806,000
Raw materials and purchased parts ....................    1,488,271    1,260,333
                                                         ----------   ----------
                                                         $2,931,259   $3,187,946
                                                         ==========   ==========

Total inventories are net of valuation allowances for obsolescence and cost
overruns of $1,942,000 in 2004 and $1,787,000 in 2003, of which $901,000 and
$747,000, respectively, represented cost overruns. The Company disposed of
$26,000 and $49,000 of obsolete inventories in 2004 and 2003, respectively.

3. Property, plant and equipment

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

                                                           2004          2003
                                                       -----------   -----------
Land and land improvements .........................   $   670,724   $   668,085
Building ...........................................     6,581,867     6,547,065
Machinery and equipment ............................    22,864,570    22,185,711
Office equipment, furniture and fixtures ...........     7,871,191     7,803,116
                                                       -----------   -----------
                                                       $37,988,352   $37,203,977
                                                       ===========   ===========

Depreciation expense was approximately $3,210,000, $3,191,000 and $2,909,000 for
2004, 2003 and 2002, respectively.

4. Current and long-term debt

The Company was obligated under the following debt instruments at January 1,
2005 and January 3, 2004:



                                                                                         2004         2003
                                                                                      ----------   ----------

The CIT Group/Business Credit, Inc. (A):
      Revolving line of credit, interest 1/2% above prime .........................   $       --   $  498,416
      Term loan A, due October 8, 2008, variable interest above LIBOR or prime ....    1,075,000    1,425,000
      Term loan B, due October 8, 2010, variable interest above LIBOR or prime ....    2,258,930    2,651,786

The Bank of Nova Scotia (B):
      Capital leases, interest 6.7%, due October 2004 .............................           --       43,339
      Capital leases, interest 8.7%, due June 2005 ................................      117,539      180,841
      Capital leases, interest 7.3%, due April 2006 ...............................      124,125      161,287
      Capital leases, interest 7.9%, due June 2006 ................................      107,481      136,628

First Insurance Funding Corp.-
   Note payable, insurance premiums, interest 6.75% due April 2004 ................           --       65,214
                                                                                      ----------   ----------
                                                                                       3,683,075    5,162,511
Less current portion ..............................................................      904,940      954,405
                                                                                      ----------   ----------
Long-term portion .................................................................   $2,778,135   $4,208,106
                                                                                      ==========   ==========



                                       39



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

4. Current and long-term debt (continued)

(A)  The financing agreement with CIT consists of a $5,000,000 revolving line of
     credit, that is temporarily reduced by $250,000 until certain conditions
     are met; a $1,500,000 machinery and equipment term loan ("Term Loan A") and
     a $2,750,000 real estate term loan ("Term Loan B"). In connection with this
     financing agreement, the Company was required to place, over the life of
     the loan, $1,500,000 as restricted cash with CIT. The revolving line of
     credit is subject to an availability limit under a borrowing base
     calculation (85% of eligible accounts receivable as defined in the
     financing agreement plus 100% of the $1,500,000 restricted cash). At
     January 1, 2005, the Company had available borrowing capacity under its
     revolving line of credit of $4,200,000. The revolving line of credit bears
     interest at the prime rate plus 1/2 percent (currently 6.25%). The
     principal amount of Term Loan A is payable in 60 equal monthly installments
     of $25,000 and bears interest at the prime rate plus one percent (currently
     6.75%). The principal amount of Term Loan B is payable in 84 equal monthly
     installments of $32,738 and bears interest at the prime rate plus one
     percent (currently 6.75%). At January 1, 2005, the Company, under the terms
     of its agreement with CIT, elected to convert $900,000 of Term Loan A and
     $2,100,000 of Term Loan B from their prime rate base to LIBOR-based
     interest rate loans. The current LIBOR interest rate options were renewed
     on October 12, 2004 for six months at an interest rate of 5.49%. The
     current LIBOR interest rate options will expire April 11, 2005. The
     revolving line of credit and the term loans are secured by substantially
     all of the Company's 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 and other covenants. The Company was in
     compliance with these covenants at January 1, 2005.

(B)  Capital leases included in property, plant and equipment, net, have a
     depreciated cost of approximately $611,000 at January 1, 2005 and $590,000
     at January 3, 2004.

At January 1, 2005 and January 3, 2004, 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 January 1, 2005 are set forth below:

2005 ................................   $  904,940
2006 ................................      829,917
2007 ................................      692,856
2008 ................................      567,856
2009 ................................      392,856
Thereafter ..........................      294,650
                                        ----------
                                        $3,683,075
                                        ==========

5. Accrued liabilities

Accrued liabilities consist of the following:

                                                2004         2003
                                             ----------   ----------
Commissions ..............................   $  275,857   $  458,282
Vacation .................................      302,446      195,351
Employee compensation ....................      473,796      216,808
Warranty reserve .........................      177,833      150,000
Deferred compensation ....................       39,000       39,000
Professional fees ........................      500,078      316,957
Restructuring ............................       10,200      102,984
Other ....................................      151,472      232,493
                                             ----------   ----------
                                             $1,930,682   $1,711,875
                                             ==========   ==========

6. Stock option and stock purchase plans

Under the Company's 1993 Stock Option Plan, 324,210 shares of common stock were
initially reserved for issuance. The 1993 Option Plan provides for issuance of
incentive and non-qualified stock options. The incentive options may not be
issued at less than 100% of the fair market value of the shares on the date of
grant and they may be exercised at any time between one and ten years from the
date of grant. The non-qualified options may be granted to employees at an
exercise price determined by the Stock Option Committee of the Board of
Directors which may not be less than fair value. Such options may become
exercisable immediately after the grant and/or at any time before the tenth
anniversary of the grant. As of January 1, 2005, options for the purchase of a
total of 132,580 shares remained outstanding of which 127,080 are exercisable
under the 1993 Option Plan, and options for 63,665 shares were available for
future grant.


                                       40



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

6. Stock option and stock purchase plans (continued)

The non-qualified options under the 1993 Stock Option Plan may also be granted
to non-employee directors, provided the option price is at least equal to the
closing price on the date the option is granted. Such options are exercisable
after the grant or at any time before the fifth anniversary of the grant.

In 1997, the Company's stockholders approved a Long Term Incentive Plan ("LTIP")
pursuant to which 275,000 shares of the Company's common stock were initially
reserved for grant to eligible employees. The LTIP provides for issuance of
Incentive Stock Options, Non-qualified Stock Options, Bonus Stock and Discounted
Stock Options. Under this Plan, the Company may grant to employees who hold
positions no more senior than mid-level management, discounted stock options for
up to 110,000 shares of common stock, with the option price per share of common
stock to be at least greater than or equal to 50% of the fair market value of
the common stock on the date of grant. As of January 1, 2005, options for the
purchase of 152,686 shares remain outstanding of which 145,186 are exercisable
under the LTIP. Options for 66,238 shares were available for future grant under
the LTIP.

In 2001, the Company's stockholders approved the 2001 Stock Option Plan pursuant
to which 175,000 shares of the Company's common stock were reserved for issuance
of incentive and non-qualified stock options. The options may not be issued at
less than 100% of the fair market value of the shares on the date of grant and
they may be exercised at any time between one and ten years from the date of
grant. Such options may become exercisable immediately after the grant and/or at
any time before the tenth anniversary of the grant. As of January 1, 2005,
options for the purchase of a total of 113,500 shares remained outstanding of
which 108,500 are exercisable under the 2001 Stock Option Plan, and options for
59,000 shares were available for future grant.

The non-qualified options under the 2001 Stock Option Plan may also be granted
to non-employee directors, provided the option price is at least equal to the
fair market value on the date the option is granted. Annual options granted to
non-employee directors are exercisable after the grant or at any time before the
tenth anniversary of the grant.

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

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



                                                   2004                   2003                   2002
                                           --------------------   --------------------   --------------------
                                           Weighted               Weighted               Weighted
                                            average     Shares     average     Shares     average     Shares
                                           exercise   or price    exercise   or price    exercise    or price
                                             price    per share     price    per share     price    per share
                                           --------------------   --------------------   --------------------

Outstanding at
   beginning of year ...................     $9.76     426,116     $10.29     446,331     $10.11     454,834
Granted ................................      8.40      32,500       3.46      25,000      11.86      76,500
Exercised ..............................      5.93      (9,100)        --          --       9.62     (10,975)
Cancelled ..............................      8.09     (17,750)     11.34     (45,215)     11.17     (74,028)
                                           --------------------   --------------------   --------------------
Outstanding at end of year .............      9.81     431,766       9.76     426,116      10.29     446,331
                                           --------------------   --------------------   --------------------
Exercisable at end of year .............     $9.83     413,766     $ 9.77     415,616     $ 9.90     377,431
                                           --------------------   --------------------   --------------------
Option price range at end of year ......          $3.10-$17.00           $3.10-$17.00           $4.90-$17.00
                                           --------------------   --------------------   --------------------
Weighted average estimated fair
   value of options granted during
   the year ............................                 $2.49                  $1.88                  $3.10
                                           --------------------   --------------------   --------------------


The following table sets forth information as of January 1, 2005 regarding
weighted average exercise prices, weighted average remaining contractual lives
and remaining outstanding options under the various stock option plans sorted by
range of exercise price:



                      Options Outstanding                              Options Exercisable
---------------------------------------------------------------   ----------------------------
                                 Weighted      Weighted Average                    Weighted
   Options         Number         Average          Remaining         Number         Average
 Price Range    Outstanding   Exercise Price   Contractual Life   Exercisable   Exercise Price
-------------   -----------   --------------   ----------------   -----------   --------------

$3.10-$7.00       103,400          $ 5.97          6.1 years         95,900         $ 5.92
$7.01-$10.00      144,751          $ 9.23          4.1 years        139,751         $ 9.25
$10.01-$13.00      94,115          $11.04          2.9 years         94,115         $11.04
$13.01-$17.00      89,500          $13.88          4.9 years         84,000         $13.90



                                       41



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

6. Stock option and stock purchase plans (continued)

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.

A summary of stock purchase plan subscription activity follows:



                                          2004                   2003                   2002
                                  --------------------   --------------------   --------------------
                                  Weighted               Weighted               Weighted
                                   average     Shares     average     Shares     average     Shares
                                  exercise    or price   exercise    or price   exercise    or price
                                    price    per share     price    per share     price    per share
                                  --------   ---------   --------   ---------   --------   ---------

Subscribed at beginning of
  year ........................     $  --          --     $12.50       3,838     $12.50      19,339
Subscribed ....................      5.36      36,155         --          --         --          --
Purchased .....................      5.36      (2,979)      4.04      (1,922)      5.47     (11,336)
Cancelled .....................        --          --      12.50      (1,916)     12.50      (4,165)
                                    -----     -------     ------     -------     ------    --------
Subscribed at end of year .....     $5.36      33,176     $   --          --     $12.50       3,838
                                    -----     -------     ------     -------     ------    --------
Subscription price range end of
   year .......................               $  5.36                $    --               $  12.50
                                    -----     -------     ------     -------     ------    --------
Weighted average estimated
   fair value of rights granted
   during the year ............               $  2.30                $    --               $     --
                                    -----     -------     ------     -------     ------    --------


As of January 1, 2005, there were 200,337 shares available for future stock
purchase plan subscriptions.

2001 Key Employee Incentive Plan:

In June 2001, the stockholders of the Company approved the 2001 Key Employee
Incentive Plan, which provides for an award consisting of restricted stock of
approximately five percent of the average number of outstanding shares of
Company Common Stock during a six-month period upon the attainment of an average
market capitalization during the same six-month period of $50,000,000, and an
additional award of approximately five percent of the average number of
outstanding shares upon the attainment of an average market capitalization
during a subsequent six-month period of $80,000,000. Any shares of restricted
stock awarded vest annually over a three-year period. Approximately 256,000
shares were reserved for issuance under the 2001 Key Employee Incentive Plan at
January 1, 2005. No awards have been made under this plan.

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

As explained in Note 1, the Company has adopted the disclosure-only provisions
of Statement No. 148. Accordingly, no earned or unearned compensation cost was
recognized in the accompanying consolidated financial statements for stock
options and stock purchase plan subscription rights granted in 2004, 2003 and
2002.


                                       42



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

7. Income taxes

The (benefit) provision for income taxes consists of the following components:

                                              2004        2003        2002
                                           ---------   ---------   ---------
Current tax (benefit) provision:
   Federal .............................   $  38,000   $      --   $(282,000)
   Foreign .............................          --     (67,000)    (10,000)
   State ...............................      84,000          --      22,000
                                           ---------   ---------   ---------
                                             122,000     (67,000)   (270,000)
                                           ---------   ---------   ---------
Deferred tax (benefit) provision:
   Federal .............................          --          --     645,000
   Foreign .............................    (218,000)    (42,000)   (138,000)
   State ...............................          --          --          --
                                           ---------   ---------   ---------
                                            (218,000)    (42,000)    507,000
                                           ---------   ---------   ---------
(Benefit) provision for income taxes ...   $ (96,000)  $(109,000)  $ 237,000
                                           =========   =========   =========

Temporary differences which gave rise to a significant portion of deferred tax
assets and liabilities at January 1, 2005 and January 3, 2004 are as follows:

                                                     2004          2003
                                                 -----------   -----------
Current deferred tax assets:
   Inventory valuation allowance .............   $   797,000   $   676,000
   Capitalized inventory costs ...............        31,000        33,000
   Warranty cost .............................        60,000        60,000
   Deferred compensation .....................        16,000        16,000
   Net operating loss carryforwards ..........       440,000       440,000
   Other .....................................       314,000       193,000
                                                 -----------   -----------
                                                   1,658,000     1,418,000

   Less valuation allowance ..................      (940,000)     (876,000)
                                                 -----------   -----------
   Current deferred tax assets ...............       718,000       542,000
                                                 -----------   -----------
Current deferred tax liabilities-Research and
   development credits and costs .............       (42,000)           --
                                                 -----------   -----------
Net current deferred tax assets ..............       676,000       542,000
                                                 -----------   -----------
Non-current deferred tax assets:
   Deferred compensation .....................        21,000        36,000
   Net operating loss carryforwards ..........       603,000     1,311,000
   Capitalized leases ........................        51,000       171,000
   Research and development credits and costs.       674,000       352,000
   Other .....................................       174,000        32,000
                                                 -----------   -----------
                                                   1,523,000     1,902,000

   Less valuation allowance ..................      (515,000)     (970,000)
                                                 -----------   -----------
   Non-current deferred tax assets ...........     1,008,000       932,000
                                                 -----------   -----------
Non-current deferred tax liabilities:
   Depreciation and amortization .............    (1,191,000)   (1,235,000)
   Research and development credits ..........            --       (18,000)
   Other .....................................       (26,000)           --
                                                 -----------   -----------
   Non-current deferred tax liabilities ......    (1,217,000)   (1,253,000)
                                                 -----------   -----------
   Net non-current deferred tax liabilities ..      (209,000)     (321,000)
                                                 -----------   -----------
Net deferred tax assets ......................   $   467,000   $   221,000
                                                 ===========   ===========


                                       43


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

7. Income taxes (continued)

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



                                                              2004     2003     2002
                                                             -----    -----    -----

Statutory Federal income tax rate ........................    34.0%   (34.0)%  (34.0)%
Effect of:
   State income tax, net of Federal income tax effects ...     7.6       --      0.8
   Research and development credits ......................      --     (4.7)    (7.0)
   Change in valuation allowance .........................   (35.5)    19.5     55.3
   Tax effect of foreign operations ......................   (19.8)     6.0       --
   Other .................................................     5.0      2.5     (2.6)
                                                             -----    -----    -----
Effective tax rate (benefit) .............................    (8.7)%  (10.7)%   12.5%
                                                             =====    =====    =====


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 of January 1, 2005, the Company had net operating loss carryforwards of
approximately $2,700,000 for Federal income tax purposes and $1,800,000 for
state income tax purposes which are available to offset future taxable income
through 2023 and 2012, respectively. The Company utilized approximately
$2,000,000 and $1,000,000 of net operating loss carryforwards for Federal and
state income tax purposes, respectively, for 2004. Included in the net operating
losses as of January 1, 2005 are approximately $730,000 of future federal tax
deductions related to the exercise of employee stock options. In addition, the
Company has U.S Federal income tax credit carryforwards of approximately
$190,000 of which $54,000 expire through 2008, $74,000 that expire through 2022
and $62,000 which have no expiration. The Canadian research and development
benefits of $555,000 include $95,000 of investment tax credits that expire
through 2014, and the remaining benefits can be carried forward indefinitely.

Due to the uncertainties related to, among other things, the extent and timing
of its future taxable income, the Company increased its domestic deferred tax
asset valuation allowance by $496,000 to $1,846,000, in fiscal year 2003. The
Company reduced its domestic deferred tax asset valuation allowance by $391,000
to $1,455,000 in fiscal year 2004 reflecting utilization of net operating loss
carryforwards. The Company's domestic net deferred tax assets have been fully
reserved as of January 1, 2005 and January 3, 2004.

The provision (benefit) for foreign income taxes is based upon foreign income
(losses) before income taxes as follows: $5,000 for 2004, $(158,000) for 2003
and $(117,000) for 2002. Deferred Federal and state income taxes are not
provided on the undistributed cumulative earnings of foreign subsidiaries
because such earnings are considered to be invested permanently in those
operations. At January 1, 2005, the cumulative earnings of foreign subsidiaries
were approximately $930,000. The amount of unrecognized deferred tax liability
on the undistributed cumulative earnings was approximately $140,000.

The American Jobs Creation Act of 2004 (the Act) allows U.S. companies a
one-time opportunity to repatriate non-U.S. earnings through 2005 at a 5.25%
rate of tax rather than the normal U.S. tax rate of 34%, provided that certain
criteria, including qualified U.S. reinvestment, are met. Available tax credits
related to the repatriation would be reduced under provisions of the Act. While
the Company continues to evaluate the Act, because the vast majority of our
premanently reinvested non-U.S. earnings have been deployed in active business
operations, and it is therefore unlikely that the Company will repatriate any
material portion of its permanently reinvested non-U.S. earnings, no incremental
tax provision effect has been recorded through January 1, 2005.

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 in
2005 depending on change in ownership.

8. Business segment and geographic data

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

Electronic components: Design, manufacture and sale of electronic component
devices offering extremely broad frequency coverage and high performance
characteristics for communications, defense and aerospace applications. Of the
identifiable assets, 81% are located in the United States and 19% are located in
Costa Rica.

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

                                       44



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

8. Business segment and geographic data (continued)

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

                                                      2004      2003      2002
                                                    -------   -------   -------
                                                     (In thousands of dollars)

Industry segments:
   Sales to unaffiliated customers:
         Electronic components                      $25,141   $23,962   $21,414
         Microwave micro-circuitry                    5,956     3,709     3,966
         Intersegment sales                            (148)     (349)     (810)
                                                    -------   -------   -------
         Consolidated                               $30,949   $27,322   $24,570
                                                    =======   =======   =======
   Income (loss) before (benefit) provision
      for income taxes:
      Operating income (loss):
         Electronic components                      $ 1,178   $  (860)  $(1,792)
         Microwave micro-circuitry                      189         4        70
      Interest and other expense, net                  (265)     (167)     (176)
                                                    -------   -------   -------
         Consolidated                               $ 1,102   $(1,023)  $(1,898)
                                                    =======   =======   =======
      Identifiable assets:
         Electronic components                      $25,593   $28,063   $28,211
         Microwave micro-circuitry                    6,849     5,550     4,767
         Corporate                                    2,166       453     3,611
         Intersegment assets                            (33)      (46)     (102)
                                                    -------   -------   -------
         Consolidated                               $34,575   $34,020   $36,487
                                                    =======   =======   =======
      Depreciation and amortization:
         Electronic components                      $ 2,965   $ 2,964   $ 2,681
         Microwave micro-circuitry                      245       228       228
                                                    -------   -------   -------
         Consolidated                               $ 3,210   $ 3,192   $ 2,909
                                                    =======   =======   =======
      Capital expenditures:
         Electronic components                      $ 1,419   $ 1,195   $ 2,732
         Microwave micro-circuitry                      296        71       126
                                                    -------   -------   -------
         Consolidated                               $ 1,715   $ 1,266   $ 2,858
                                                    =======   =======   =======
Geographic areas:
      Sales to unaffiliated customers:
         North America                              $26,757   $22,389   $20,352
         Europe                                       2,748     2,802     2,742
         Far East                                     1,271     1,616     1,279
         Other                                          173       515       197
                                                    -------   -------   -------
         Consolidated                               $30,949   $27,322   $24,570
                                                    =======   =======   =======

The Company's customers are primarily major industrial corporations that
integrate the Company's products into a wide variety of defense and commercial
systems. The Company's customers include The Boeing Company, Raytheon Company,
Northrop Grumman Corporation, Lockheed Martin Corporation, and General Dynamics
Corporation. Sales to the foreign geographic area of Europe were 8.9%, 10.3% and
11.2% of net sales in 2004, 2003 and 2002, respectively

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

                                                             2004   2003   2002
                                                             ----   ----   ----
Raytheon Company                                             13.9%  12.3%   8.6%
Northrop Grumman Corporation                                 11.9%  12.4%   9.5%
The Boeing Company                                            7.8%  16.1%  11.0%
Lockheed Martin Corporation                                   6.6%   7.8%  14.7%


                                       45



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

8. Business segment and geographic data (continued)

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
48% of its receivables at January 1, 2005 and January 3, 2004, respectively,
were from six and four customers, respectively. 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.

9. Net income per common share

The following table summarizes the calculation of basic and diluted net income
(loss) per common share for 2004, 2003 and 2002:



                                                                                    2004         2003          2002
                                                                                 ----------   ----------   -----------

Numerator:
Net income (loss) available to common stockholders ...........................   $1,198,489    $(914,473)  $(2,135,457)
                                                                                 ----------   ----------   -----------
Denominator:
Weighted average shares outstanding for basic net income (loss) per share ....    3,127,070    3,120,557     3,073,703
Effect of dilutive securities - stock options (1) ............................       26,784           --            --
                                                                                 ----------   ----------   -----------
Weighted average shares outstanding for diluted net income (loss) per share...    3,153,854    3,120,557     3,073,703
                                                                                 ----------   ----------   -----------
Net income (loss) per share - basic ..........................................   $      .38   $     (.29)  $      (.69)
Net income (loss) per share - diluted ........................................   $      .38   $     (.29)  $      (.69)
                                                                                 ----------   ----------   -----------


(1)  Represents additional shares resulting from assumed conversion of stock
     options less shares purchased with the proceeds therefrom.

     Diluted earnings per share excludes 322,000 shares underlying stock options
     for the year ended January 1, 2005. Because of the net loss for the years
     ended January 3, 2004 and December 28, 2002, approximately 426,000 and
     446,000 shares, respectively, underlying stock options were excluded from
     the calculation of diluted earnings per share as the effect would be
     anti-dilutive. For the year ended December 28, 2002, 429,775 common stock
     warrants outstanding were excluded from the calculation of dilutive
     securities because of the net loss during the period, and, therefore, the
     effect would be anti-dilutive. The common stock warrants expired October
     26, 2003.

10. Commitments and contingencies

Lease commitments:

The Company leases real estate and equipment under operating leases expiring at
various dates through December 2008, 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 $438,000 in 2004, $498,000
in 2003 and $471,000 in 2002. Future minimum lease payments under noncancellable
operating leases with an initial term exceeding one year are as follows:

2005.................................................................   $445,000
2006.................................................................     74,000
2007.................................................................     24,000
2008.................................................................     11,000

Lease modification and facility sharing agreement:

The Company entered into an agreement effective January 2001, with a customer to
relinquish to this customer approximately half of the Company's 17,000
square-foot leased manufacturing facility in Costa Rica. Associated with the
transaction, the Company entered into a new four-year lease agreement with a
five-year renewal option with its Costa Rica landlord for the reduced space. In
addition, the Company transferred certain employees to its customer, agreed to
share certain personnel resources and common costs, and committed to provide
certain management, administrative and other services to its customer. On March
31, 2003, the Company relinquished the balance of the space to its customer. The
completion of these transactions resulted in a gain of $71,000 during the second
quarter of 2003. In connection with the 2001 agreement, the Company received
$450,000 from its customer. The Company reduced its facility occupancy expenses
by approximately $22,000 and $87,000 in 2003 and 2002, respectively.


                                       46



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

10. Commitments and contingencies (continued)

Capital leases included in property, plant and equipment at January 1, 2005 are
approximately as follows:

Machinery and equipment............................................   $1,179,000
Less accumulated depreciation and amortization.....................      568,000
                                                                      ----------
Total..............................................................   $  611,000
                                                                      ==========

Future minimum lease payments under capital leases and the present value of such
payments as of January 1, 2005 are approximately as follows (see Note 4):

2005.................................................................   $231,000
2006.................................................................    141,000
                                                                        --------
Total minimum lease payments.........................................    372,000
Less amount representing interest....................................     23,000
                                                                        --------
Present value of total minimum lease payments........................   $349,000
                                                                        ========
Purchase obligations:

The Company intends to issue commitments to purchase $1,900,000 of capital
equipment from various vendors. Such equipment will be purchased and become
operational during 2005.

Consulting and employment agreements; deferred compensation:

The Company has been a party to an employment agreement with its Chairman,
President and Chief Executive Officer that provides him with a minimum annual
salary of $240,000 for an initial term and automatically renews for successive
twelve-month periods thereafter unless terminated pursuant to the terms of the
agreement. On August 31, 2000, in connection with an amendment of Mr. Carter's
employment agreement, the Company loaned Mr. Carter $280,000. Interest on the
loan will be calculated at a variable interest rate based on the prime rate of
the Company's lending bank, payable in accordance with Mr. Carter's employment
agreement. Each year the Company will forgive 20% of the amount due under this
loan and the accrued interest thereon. During 2004, the amount of $56,000
principal and $4,500 of accrued interest was forgiven. During 2003, the amount
of $56,000 principal and $7,000 of accrued interest was forgiven. During 2002,
the amount of $56,000 principal and $12,000 of accrued interest was forgiven.

A subsidiary of the Company entered into an employment agreement with the
Founder and President Emeritus of FMI that provides for a minimum annual salary
of $150,000 (Canadian). The term of the agreement ended on August 26, 2004 and
was extended for one year.

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

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 a party to a severance arrangement and consulting agreement
effective October 2002, with a former Vice President, that provides for
aggregate payments of approximately $10,000 through March 2005.

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.


                                       47



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

10. Commitments and contingencies (continued)

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

2005                        $ 49,000
2006                          39,000
2007                           9,000
2008                           9,000
2009                           9,000
                            --------
Total estimated future
   deferred compensation     115,000
Less amount representing
   interest                   12,000
                            --------
Present value of deferred
   compensation             $103,000
                            ========

Litigation:

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

11. Restructurings and related charges

During 2003 the Company reduced its headcount by 14 persons, principally
involved in production, manufacturing support, sales and administration. The
Company recorded personnel restructuring charges of $160,000, consisting of
severance and certain other personnel costs, during the last three quarters of
2003. Such charges increased the net loss by $.05 per share. The Company paid
$129,000 of these restructuring charges in 2003. Substantially all of the
remaining 2003 restructuring charges were paid in 2004.

As a result of a decline in orders received from its customers during 2002, the
Company reduced head count by 17 persons, principally involved in production,
manufacturing support and sales during the second quarter of 2002. The Company
recorded a personnel restructuring charge of $240,000, which increased the net
loss by $150,000 or $.05 per share.

In November 2002, the Company reorganized its operations to reflect a more
market-driven focus and to better support its customer base by combining all of
its technologies into a single cohesive unit. This reorganization allowed the
Company to increase the breadth of its product offerings and to offer more
integrated solutions. The Company relinquished 8,200 square feet of space to a
co-tenant on April 1, 2003 and moved its operations into another facility it was
occupying. This restructuring reduced the Company's head count by 11 persons in
the management, engineering, production, manufacturing support and sales
functions. The Company's net loss for the fourth quarter increased by $270,000
or $.09 per share. The combined restructuring charges increased the net loss for
2002 by $510,000 or $.17 per share. Approximately $107,000 of the 2002
restructuring charges were paid in 2003 and substantially all of the remaining
2002 restructuring charges were be paid in 2004.

12. Private placements of Common Stock and Warrants to purchase 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. Pursuant
to such transaction, shares representing an aggregate of approximately 9.6% of
the shares of the Company's common stock were purchased by Hampshire
Investments, Limited and K Holdings, LLC,

13. 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


                                       48



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 1, 2005, January 3, 2004 and December 28, 2002

13. Related party transactions (continued)

$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) is now
payable monthly. Mr. Carter has pledged 33,000 shares of Common Stock as
security for this loan, which is a full-recourse loan.

On August 31, 2000, in connection with an amendment of Mr. Carter's employment
agreement, the Company loaned Mr. Carter an additional $280,000. Interest on the
loan varies and is based on the prime rate of the Company's lending bank,
payable in accordance with Mr. Carter's employment agreement. Each year the
Company is required to forgive 20% of the amount due under this loan and the
accrued interest thereon. During 2004, the Company forgave $56,000 of principal
and $4,500 of accrued interest and paid a tax gross-up benefit of $6,100. During
2003, the Company forgave $56,000 of principal and $7,000 of accrued interest
and paid $8,300 for a tax gross-up benefit. During 2002, the Company forgave
$56,000 of principal and $12,000 of accrued interest and paid a tax gross-up
benefit of $10,700.

During fiscal years 2004, 2003 and 2002, respectively, the Company's General
Counsel, KMZ Rosenman, was paid $288,000, $359,000 and $372,000 for providing
legal services to the Company. A director of the Company is Counsel to the firm
of KMZ Rosenman but does not share in any fees paid by the Company to the law
firm.

During fiscal years 2004, 2003 and 2002, 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 $8,000, $40,000
and $24,000 to these companies during 2004, 2003 and 2002, respectively. A
director of the Company is the Chairman and Chief Executive Officer of each of
these companies.

During fiscal years 2003 and 2002, respectively, a director of the Company was
paid $12,000 and $36,000 for providing financial-related consulting services to
the Company. This agreement terminated in April 2003.

During each of fiscal years 2004, 2003 and 2002, a director of the Company was
paid $36,000 for providing technology-related consulting services to the
Company.

During fiscal years 2004, 2003 and 2002, respectively, DuPont Electronic
Technologies, a stockholder, was paid $84,000, $109,000 and $36,000 for
providing technological and marketing related personnel and services on a
cost-sharing basis to the Company. 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. Beginning in fiscal year 2004, 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 2001 Stock Option Plan, each non-employee director is granted an
immediately exercisable option to purchase 2,500 shares of the Common Stock of
the Company on the date of each Annual Meeting of Stockholders. Each such grant
is at 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 17, 2004, non-qualified
stock options to purchase an aggregate of 20,000 shares were issued to eight
directors at an exercise price of $9.01 per share.

14. 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 10% or more
of the Company's outstanding Common Stock, each Right (other than Rights held by
such acquiring person or group) will be exercisable, at the $25.00 purchase
price, for a number of shares of Common Stock having a market value of $50.00.
Upon an acquisition of the Company, each Right (other than Rights held by the
acquiror) will generally be exercisable, at the $25.00 purchase price, for a
number of shares of common stock of the acquiror having a market value of
$50.00. In certain circumstances, each Right may be exchanged by the Company for
one share of Common Stock. The Rights will expire on March 19, 2009, unless
earlier exchanged or redeemed at $0.01 per Right.

END OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       49



QUARTERLY FINANCIAL INFORMATION

Summarized quarterly unaudited financial data reported for 2004 and 2003
follows:



2004                                          April 3      July 3      October 2    January 1
----                                        ----------   ----------   ----------   ----------

Net sales ...............................   $7,647,829   $7,896,044   $7,619,848   $7,785,766
Gross profit ............................    3,347,897    3,308,425    3,162,076    3,091,114
Net income ..............................      230,931      443,986      314,828      208,744
                                            ----------   ----------   ----------   ----------
Net income  per share - basic ...........   $      .07   $      .14   $      .10   $      .07
Net income  per share - diluted .........   $      .07   $      .14   $      .10   $      .07
                                            ----------   ----------   ----------   ----------




2003                                         March 29      June 28    September 27    January 3
----                                        ----------   ----------   ------------   ----------

Net sales ...............................   $6,511,644   $6,612,597    $6,356,685    $7,841,170
Gross profit ............................    2,451,941    2,554,080     2,201,162     3,369,584
Net income (loss) .......................     (455,385)    (474,970)     (484,396)      500,278
                                            ----------   ----------    ----------    ----------
Net income (loss) per share - basic .....   $     (.15)  $     (.15)   $     (.16)   $      .16
Net income (loss) per share - diluted ...   $     (.15)  $     (.15)   $     (.16)   $      .16
                                            ----------   ----------    ----------    ----------


QUARTERLY COMMON STOCK DATA



                                        2004                             2003
                          -------------------------------   -----------------------------
Quarter                     1st      2nd     3rd     4th     1st     2nd     3rd     4th
                          ------   ------   -----   -----   -----   -----   -----   -----

Market price per share:
   High ...............   $10.59   $10.69   $9.35   $9.50   $5.10   $4.65   $5.28   $7.00
   Low ................   $ 5.75   $ 6.91   $6.35   $8.50   $4.43   $2.70   $3.20   $4.12
                          ------   ------   -----   -----   -----   -----   -----   -----


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

The market price per share information is provided with regard to the high and
low trading prices of the Common Stock of the Company on The American Stock
Exchange during the periods indicated.


                                       50



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

          As previously reported in the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 17, 2004, which is
incorporated herein by reference, Ernst & Young LLP was dismissed as the
Company's independent accountants and Grant Thornton LLP was engaged as the
Company's independent accountants.

ITEM 8A. CONTROLS AND PROCEDURES

          As of January 1, 2005 (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 January 1, 2005, the Company's disclosure controls and
procedures are effective.

          In designing and evaluating the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities
Exchange Act of 1934), management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurances
of achieving the desired control objectives, as ours are designed to do, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. We believe that
our disclosure controls and procedures provide such reasonable assurance.

          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.

ITEM 8B. OTHER INFORMATION

None.

                                    PART III

          Pursuant to General Instruction E3 to Form 10-KSB, portions of
information required by Items 9 through 12 and 14 and indicated below are hereby
incorporated by reference to Merrimac's definitive Proxy Statement for the 2005
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 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          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   POSITION
----                   ---   ---------------------------------------------------
Mason N. Carter         59   Chairman, President and Chief Executive Officer
Robert V. Condon        58   Vice President, Finance, Treasurer,
                             Secretary and Chief Financial Officer
Richard E. Dec          62   Vice President, Corporate Relations
Rocco A. DeLillo        37   Vice President, Research and Development
Michael M. Ghadaksaz    50   Vice President, Market Development
Reynold K. Green        46   Vice President and Chief Operating Officer
Jayson E. Hahn          37   Vice President, Information Technology
                             and Chief Information Officer
James J. Logothetis     45   Vice President and Chief Technology Officer
Michael Pelenskij       44   Vice President, Manufacturing

FAMILY RELATIONSHIPS

There are no family relationships among the officers listed.


                                       51



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. From 1994 to
1996, he was President of the Products and Systems Group of Datatec Industries,
Inc., Fairfield, New Jersey, a leading provider of data network implementation
services.

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. Prior to joining Merrimac, he was with Berkeley Educational
Services as Vice President, Finance, Treasurer and CFO from 1995 to February
1996.

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

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

Mr. Ghadaksaz was appointed Vice President of Marketing Development in September
2003, after serving as Director of Market Development since February 2003. Prior
to joining Merrimac, he served as a consultant for wireless telecommunications
equipment and device manufacturers, U.S. and Canadian venture capital firms and
their portfolio companies. Mr. Ghadaksaz also served on the Advisory Board of
Radical Horizon, an innovative software defined radio solution provider. From
1999 to 2002, he served as Director of Technology Strategy for the Strategy
Sector at Motorola. From 1995 to 1999, Mr. Ghadaksaz held the positions of
Senior Scientist, Applications and Business Development Manager for Hughes
Communications Products Division of Hughes Aircraft Company.

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(R)
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.

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.

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.


                                       52



ITEM 10. EXECUTIVE COMPENSATION

          Information called for by Item 10 is set forth under the heading
"Executive Compensation" in the Proxy Statement, which information is
incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
     RELATED STOCKHOLDER MATTERS

          Information called for by Item 11 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.

EQUITY COMPENSATION PLAN INFORMATION

          The following table gives information as of January 1, 2005, 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)
----------------------------------------------------------------------------------------------------
                                                                     Number of securities remaining
                    Number of securities to   Weighted-average       available for future issuance
                    be issued upon exercise   exercise of price      under equity compensation plans
                    of outstanding options,   outstanding options,   (excluding securities reflected
Plan category       warrants and rights       warrants and rights    in column (a))
----------------------------------------------------------------------------------------------------

Equity                     398,766                   $ 9.79                      188,903
compensation
plans approved by
security holders
----------------------------------------------------------------------------------------------------
Equity                     33,000 (1)                $10.00                            0
compensation
plans not
approved by
security holders
----------------------------------------------------------------------------------------------------
Total                      431,766                   $ 9.81                      188,903
----------------------------------------------------------------------------------------------------


(1) Pursuant to the Company's 1996 Stock Option Plan for Non-Employee Directors,
the chairman of the board of directors was granted 20,000 options and each of
the two then non-employee directors was granted 15,000 options. Each option had
an exercise price of $11.00 and was exercisable for ten years from the date of
grant. 33,000 of such options remain outstanding. All of the outstanding options
under such plan expire September 1, 2006.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          Information called for by Item 12 is set forth under the subheading
"Certain relationships and related transactions" under the caption "Executive
Compensation" contained in the Proxy Statement, which information is
incorporated herein by reference.


                                       53



ITEM 13. EXHIBITS

EXHIBIT
NUMBER    DESCRIPTION OF EXHIBIT
-------   ----------------------
3(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(ii)(b) to Post-Effective Amendment No. 2 to the Registration
          Statement on Form S-8 (No. 33-68862) of Merrimac dated February 23,
          2001.

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.

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.

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.


                                       54



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)     Modification Agreement, dated as of September 27, 2002, between
          Merrimac and Infineon Technologies AG is hereby incorporated by
          reference to Exhibit 99.2 to Merrimac's Form 8-K filed with the
          Securities and Exchange Commission on October 10, 2002.

10(e)     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(f)     1983 Key Employees Stock Option Plan of Merrimac effective March 21,
          1983, is hereby incorporated by reference to Exhibit 10(m) to
          Merrimac's Annual Report on Form 10-KSB for the year ending March 31,
          1983.*

10(g)     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(h)     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(i)     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(j)     1995 Stock Purchase Plan of Merrimac is hereby incorporated by
          reference to Exhibit A to Merrimac's Proxy Statement filed with the
          Securities and Exchange Commission on March 27, 1995.*

10(k)     Resolutions of the Stock Purchase Plan Committee of the Board of
          Directors of Merrimac adopted June 3, 1998, amending the 1995 Stock
          Purchase 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(g)(2) to Merrimac's
          Annual Report on Form 10-KSB for the year ending January 2, 1999.*

10(l)     1996 Stock Option Plan for Non-Employee Directors of Merrimac is
          hereby incorporated by reference to Exhibit 10(d) to Merrimac's Annual
          Report on Form 10-KSB dated for the year ending December 28, 1996.*

10(m)     Resolutions of the Board of Directors of Merrimac, adopted June 3,
          1998, amending the 1996 Stock Option Plan for Non-Employee Directors
          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(h)(2)to Merrimac's Annual
          Report on Form 10-KSB for the year ending January 2, 1999.*

10(n)     Amended and Restated Employment Agreement dated as of January 1, 1998,
          between Merrimac and Mason N. Carter is hereby incorporated by
          reference to Exhibit 10(a) to Merrimac's Quarterly Report on Form
          10-QSB for the period ending July 4, 1998.*

10(o)     Amendment dated August 31, 2000 to the Amended and Restated Employment
          Agreement dated January 1, 1998, between Merrimac and Mason N. Carter
          is hereby incorporated by reference to Exhibit 10(a) to Merrimac's
          Quarterly Report on Form 10-QSB for the period ending September 30,
          2000.*

10(p)     Amended and Restated Pledge Agreement dated as of May 4, 1998, between
          Merrimac and Mason N. Carter is hereby incorporated by reference to
          Exhibit 10(c) to Merrimac's Quarterly Report on Form 10-QSB for the
          period ending July 4, 1998.*


                                       55



10(q)     Amended Promissory Note dated as of May 4, 1998, executed by Mason N.
          Carter in favor of Merrimac is hereby incorporated by reference to
          Exhibit 10(l) to Merrimac's Annual Report on Form 10-KSB for the year
          ending January 2, 1999.*

10(r)     Registration Rights Agreement dated as of May 4, 1998, between
          Merrimac and Mason N. Carter is hereby incorporated by reference to
          Exhibit 10(e) to Merrimac's Quarterly Report on Form 10-QSB for the
          period ending July 4, 1998.*

10(s)     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(t)    Separation Agreement dated as of December 31, 1998, between Merrimac
          and Eugene W. Niemiec is hereby incorporated by reference to Exhibit
          10(p) to Merrimac's Annual Report on Form 10-KSB for the year ending
          January 2, 1999.*]

10(u)     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(v)     Shareholder's Agreement dated as of June 3, 1999, among Merrimac,
          William D. Witter, Inc. and William D. Witter is hereby incorporated
          by reference to Exhibit 10 to Merrimac's Quarterly Report on Form
          10-QSB for the period ending July 3, 1999.

10(w)     2001 Key Employee Incentive Plan is hereby incorporated by reference
          to Exhibit 4.01 to Merrimac's Form S-8 (No. 333-63434) dated June 20,
          2001.*

10(x)     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(y)     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(z)     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(aa)    Financing Agreement, dated October 8, 2003, between Merrimac and The
          CIT Group/Business Credit, Inc. is hereby incorporated by reference to
          Exhibit 10(qq) to Merrimac's Form 10-QSB for the period ending
          September 27, 2003.

10(bb)    Trademark and Patent Security Agreement, dated October 8, 2003,
          between Merrimac and The CIT Group/Business Credit, Inc. is hereby
          incorporated by reference to Exhibit 10(rr) to Merrimac's Form 10-QSB
          for the period ending September 27, 2003.

10(cc)    Mortgage and Security Agreement, dated October 8, 2003, by Merrimac in
          favor of The CIT Group/Business Credit, Inc. is hereby incorporated by
          reference to Exhibit 10(ss) to Merrimac's Form 10-QSB for the period
          ending September 27, 2003.

10(dd)    Merrimac Severance Plan, as adopted September 17, 2003, is hereby
          incorporated by reference to Exhibit 10(tt) to Merrimac's Form 10-QSB
          for the period ending September 27, 2003.*

21+       Subsidiaries of Merrimac.

23.1+     Consent of Independent Public Accounting Firm Grant Thornton LLP.

23.2+     Consent of Independent Public Accounting Firm Ernst & Young 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.


                                       56



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.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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


                                       57



                                   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 29, 2005                    By: /s/ Mason N. Carter
                                            ------------------------------------
                                            Mason N. Carter
                                            Chairman, President and
                                            Chief 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 29, 2005    Chairman, President and
-----------------------------                     Chief Executive Officer
(Mason N. Carter)                                 (Principal executive officer
                                                  and Director)


/s/ Albert H. Cohen             March 25, 2005    Director
-----------------------------
(Albert H. Cohen)


/s/ Edward H. Cohen             March 29, 2005    Director
-----------------------------
(Edward H. Cohen)


/s/ Fernando L. Fernandez       March 25, 2005    Director
-----------------------------
(Fernando L. Fernandez)


/s/ Joel H. Goldberg            March 28, 2005    Director
-----------------------------
(Joel H. Goldberg)


/s/ David B. Miller             March 28, 2005    Director
-----------------------------
(David B. Miller)


/s/ Arthur A. Oliner            March 29, 2005    Director
-----------------------------
(Arthur A. Oliner)


/s/ Harold J. Raveche           March 28, 2005    Director
-----------------------------
(Harold J. Raveche)


/s/ Robert V. Condon            March 29, 2005    Vice President, Finance,
-----------------------------                     Treasurer, Secretary and Chief
(Robert V. Condon)                                Financial Officer (principal
                                                  financial and accounting
                                                  officer)


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