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


                                    FORM 10-Q


[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934


For the quarterly period ended July 2, 2005


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


For the transition period from            to


                           Commission File No. 0-11201


                            Merrimac Industries, Inc.
             (Exact Name of Registrant as Specified 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) (Zip Code)


                                 (973) 575-1300
                         (Registrant's Telephone Number)


Former name, former address and former fiscal year, if changed since
last report:   N/A
               ---


Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes X    No
                      ---     ---


Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):  Yes      No X
                                                ---     ---


As of August 12, 2005, there were 3,145,083 shares of Common Stock, par value
$0.01 per share, outstanding.








                            MERRIMAC INDUSTRIES, INC.
                               41 Fairfield Place
                             West Caldwell, NJ 07006

                                      INDEX


<TABLE>


                                                                                   Page

PART I. FINANCIAL INFORMATION

Item 1.   Financial Statements


          Consolidated Statements of Operations and Comprehensive Income
          (Loss) for the Quarters and Six Months Ended July 2, 2005
           and July 3, 2004........................................................ 1

          Consolidated Balance Sheets as of July 2, 2005
          and January 1, 2005...................................................... 2

          Consolidated Statement of Stockholders' Equity for the Six Months
          Ended July 2, 2005....................................................... 3

          Consolidated Statements of Cash Flows for the Six Months
          Ended July 2, 2005 and July 3, 2004...................................... 4

          Notes to Consolidated Financial Statements............................... 5

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations ............................................... 13

Item 3.   Quantitative and Qualitative Disclosures about Market Risk............... 30

Item 4.   Controls and Procedures ................................................. 30

PART II.  OTHER INFORMATION

Item 4.   Submission of Matters to a Vote of Security Holders...................... 31

Item 6.   Exhibits ................................................................ 31

Signatures......................................................................... 35
</TABLE>








PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                            MERRIMAC INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                         AND COMPREHENSIVE INCOME (LOSS)
                                   (UNAUDITED)

<TABLE>


                                                          Quarters Ended                    Six Months Ended
                                                      -----------------------          ------------------------
                                                        July 2,      July 3,             July 2,       July 3,
                                                         2005         2004                2005          2004
                                                      ----------   ----------          ----------     ---------

OPERATIONS

Net sales ...................................         $7,568,977   $7,896,044          $14,827,312   $15,543,872
                                                      ----------   ----------          -----------   -----------
Costs and expenses:
  Cost of sales .............................          4,300,801    4,587,619            8,524,758     8,887,550
  Selling, general and administrative .......          2,343,888    2,453,115            4,655,286     4,907,534
  Research and development ..................            508,074      396,038            1,048,670       967,623
                                                      ----------   ----------          -----------   -----------
                                                       7,152,763    7,436,772           14,228,714    14,762,707
                                                      ----------   ----------          -----------   -----------

Operating income ............................            416,214      459,272              598,598       781,165
Interest and other expense, net .............            (63,954)     (70,286)            (116,888)     (151,248)
Loss on disposition of capital assets........                  -            -              (35,868)            -
                                                      ----------   ----------          -----------   -----------
Income before income taxes...................            352,260      388,986              445,842       629,917
Provision (benefit) for income taxes.........             20,000      (55,000)              30,000       (45,000)
                                                      ----------   ----------          -----------   -----------
Net income ..................................         $  332,260   $  443,986          $   415,842   $   674,917
                                                      ==========   ==========          ===========   ===========

Net income per common share-basic............         $      .11   $      .14          $       .13   $       .22
                                                      ==========   ==========          ===========   ===========
Net income per common share-diluted..........         $      .10   $      .14          $       .13   $       .21
                                                      ==========   ==========          ===========   ===========


Weighted average number of shares outstanding:
  Basic .....................................          3,140,876    3,123,512            3,139,330     3,122,202
                                                      ==========   ==========          ===========   ===========
  Diluted....................................          3,172,577    3,163,861            3,173,549     3,146,416
                                                      ==========   ==========          ===========   ===========

COMPREHENSIVE INCOME (LOSS)

Net income ..................................         $  332,260   $  443,986          $   415,842   $   674,917
Comprehensive loss:
  Foreign currency translation adjustment....            (53,140)     (34,556)            (111,834)     (143,307)
                                                      ----------   ----------          -----------   -----------
Comprehensive income ........................         $  297,120   $  409,430          $   304,008   $   531,610
                                                      ==========   ==========          ===========   ===========
</TABLE>


See accompanying notes.




                                       1





                            MERRIMAC INDUSTRIES, INC.
                           CONSOLIDATED BALANCE SHEETS


<TABLE>


                                                                                       July 2,             January 1,
                                                                                        2005                  2005
                                                                                        ----                  ----
                                                                                     (UNAUDITED)            (AUDITED)

ASSETS

Current assets:
  Cash and cash equivalents......................................................    $ 2,720,980           $ 2,166,481
  Accounts receivable, net.......................................................      6,363,940             6,472,991
  Income tax refunds receivable..................................................              -                97,643
  Inventories, net...............................................................      3,519,780             2,931,259
  Other current assets...........................................................        703,891               583,029
  Deferred tax assets............................................................        680,000               676,000
                                                                                     -----------           -----------

    Total current assets.........................................................     13,988,591            12,927,403
                                                                                     -----------           -----------

Property, plant and equipment....................................................     37,919,924            37,988,352
  Less accumulated depreciation and amortization.................................     23,696,788            22,404,372
                                                                                     -----------           -----------
Property, plant and equipment, net...............................................     14,223,136            15,583,980

Restricted cash..................................................................      1,500,000             1,500,000
Other assets.....................................................................        677,371               746,714
Deferred tax assets..............................................................        407,000               439,000
Goodwill.........................................................................      3,309,477             3,377,913
                                                                                     -----------           -----------

    Total Assets.................................................................    $34,105,575           $34,575,010
                                                                                     ===========           ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of long-term debt..............................................    $   984,535           $   904,940
  Accounts payable...............................................................      1,364,555             1,309,132
  Accrued liabilities............................................................      1,482,060             1,930,682
  Customer deposits..............................................................        144,086               233,406
  Income taxes payable...........................................................            816                85,131
                                                                                      ----------           -----------

    Total current liabilities....................................................      3,976,052             4,463,291

Long-term debt, net of current portion...........................................      2,477,063             2,778,135
Deferred compensation............................................................         34,684                53,739
Deferred liabilities.............................................................         18,347                33,974
Deferred tax liabilities.........................................................        648,000               648,000
                                                                                     -----------           -----------

    Total liabilities............................................................      7,154,146             7,977,139
                                                                                     -----------           -----------
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; 3,225,583 and 3,215,070 shares issued;
    and 3,143,483 and 3,132,970 shares outstanding, respectively................          32,256                32,151
  Additional paid-in capital.....................................................     18,806,155            18,756,710
  Retained earnings..............................................................      8,095,837             7,679,994
  Accumulated other comprehensive income.........................................      1,047,048             1,158,882
                                                                                     -----------           -----------

                                                                                      27,981,295            27,627,737
  Less treasury stock, at cost - 82,100 shares ..................................       (573,866)             (573,866)
  Less loan to officer-stockholder...............................................       (456,000)             (456,000)
                                                                                     -----------           -----------

    Total stockholders' equity...................................................     26,951,429            26,597,871
                                                                                     -----------           -----------

    Total Liabilities and Stockholders' Equity...................................    $34,105,575           $34,575,010
                                                                                     ===========           ===========
</TABLE>



See accompanying notes.




                                       2




                            MERRIMAC INDUSTRIES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                          SIX MONTHS ENDED JULY 2, 2005
                                   (UNAUDITED)


<TABLE>

                                                                        Accumulated
                                                 Additional                Other                              Loan to
                                 Common Stock    Paid-in      Retained  Comprehensive   Treasury  Stock      Officer-
                               Shares    Amount  Capital(A)   Earnings     Income      Shares      Amount   Stockholder    Total
                             ------------------------------------------------------------------------------------------------------

Balance, January 1, 2005....  3,215,070 $32,151 $18,756,710  $7,679,994  $1,158,882    82,100    $(573,866)  $(456,000) $26,597,871

Net income..................                                    415,842                                                     415,842
Stock Purchase Plan sales...      5,513      55      29,495                                                                  29,550
Exercise of options.........      5,000      50      19,950                                                                  20,000
Foreign currency translation                                               (111,834)                                       (111,834)
                             ------------------------------------------------------------------------------------------------------
Balance, July 2, 2005.......  3,225,583 $32,256 $18,806,155  $8,095,837  $1,047,048    82,100    $(573,866)  $(456,000) $26,951,429
                             ======================================================================================================
</TABLE>


(A)  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.












                                       3



                            MERRIMAC INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>

                                                                                                  Six Months Ended
                                                                                                 ------------------
                                                                                         July 2,                     July 3,
                                                                                          2005                        2004
                                                                                          ----                        ----

Cash flows from operating activities:
  Net income ..................................................................    $      415,842             $      674,917
  Adjustments to reconcile net income to net cash provided
    by operating activities:
    Depreciation and amortization .............................................         1,564,483                  1,646,794
    Amortization of deferred financing costs...................................            24,960                     24,962
    Loss on disposition of assets..............................................            35,868                          -
    Deferred and other compensation............................................             2,858                      4,923
    Deferred tax benefit.......................................................                 -                    (75,000)


  Changes in operating assets and liabilities:
    Accounts receivable .......................................................            87,178                    412,330
    Income tax refunds receivable .............................................            94,905                      5,459
    Inventories ...............................................................          (592,998)                   178,722
    Other current assets ......................................................          (121,608)                   (23,942)
    Deferred tax assets........................................................            18,000                          -
    Other assets ..............................................................            44,383                     12,681
    Accounts payable ..........................................................            65,484                    176,570
    Accrued liabilities .......................................................          (444,502)                   216,410
    Customer deposits..........................................................           (89,320)                  (221,450)
    Income taxes payable ......................................................           (83,782)                    28,000
    Deferred compensation .....................................................           (21,913)                   (22,071)
    Other liabilities .........................................................           (15,627)                    (7,020)
                                                                                   --------------             --------------

Net cash provided by operating activities .....................................           984,211                  3,032,285
                                                                                   --------------             --------------

Cash flows from investing activities:
  Purchase of capital assets ..................................................          (559,812)                  (642,566)
  Proceeds from disposition of capital assets..................................           295,000                          -
                                                                                   --------------             --------------

Net cash used in investing activities .........................................          (264,812)                  (642,566)
                                                                                   --------------             --------------

Cash flows from financing activities:
  Borrowings under revolving credit facility...................................           161,017                          -
  Borrowings from revolving lease line.........................................           230,753                          -
  Repayment of borrowings .....................................................          (612,558)                (1,053,667)
  Proceeds from the exercise of stock options..................................            20,000                     53,950
  Proceeds from Stock Purchase Plan sales......................................            29,550                      5,107
                                                                                   --------------             --------------

Net cash used in financing activities .........................................          (171,238)                  (994,610)
                                                                                   --------------             --------------

Effect of exchange rate changes ...............................................             6,338                     (8,857)
                                                                                   --------------             --------------

Net increase in cash and cash equivalents .....................................           554,499                  1,386,252
Cash and cash equivalents at beginning of year ................................         2,166,481                    452,633
                                                                                   --------------             --------------

Cash and cash equivalents at end of period ....................................    $    2,720,980             $    1,838,885
                                                                                   ==============             ==============

Supplemental disclosures of cash flow information:

  Cash paid during the period for:

    Income taxes ..............................................................    $      210,000             $        2,000
                                                                                   ==============             ==============
    Interest on credit facilities..............................................    $      144,158             $      143,492
                                                                                   ==============             ==============
  Non-cash activities-
    Purchases of capital assets ...............................................    $            -             $      223,000
                                                                                   ==============             ==============
</TABLE>



See accompanying notes.


                                       4



                            MERRIMAC INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnote disclosures otherwise required by generally
accepted accounting principles for a full fiscal year. The financial statements
do, however, reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position of the Company as of
July 2, 2005 and its results of operations and cash flows for the periods
presented. Results of operations of interim periods are not necessarily
indicative of results for a full year. These financial statements should be read
in conjunction with the audited consolidated financial statements in the
Company's Annual Report on Form 10-KSB for the year ended January 1, 2005.

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

2. CONTRACT REVENUE RECOGNITION

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

The cost rates utilized for cost-reimbursement contracts are subject to review
by third parties and can be revised, which can result in additions to or
reductions from revenue. Revisions which result in reductions to revenue are
recognized in the period that the rates are reviewed and finalized; additions to
revenue are recognized in the period that the rates are reviewed, finalized,
accepted by the customer, and collectability from the customer is assured. The
Company submits financial information regarding the cost rates on
cost-reimbursement contracts for each fiscal year in which the Company performed
work on cost-reimbursement contracts. The Company does not record any estimates
on a regular basis for potential revenue adjustments, as there currently is no
reasonable basis on which to estimate such adjustments given the Company's very
limited experience with these contracts. During the second quarter and first six
months of 2004, the Company recognized a revenue reduction of $12,000 related to
a cost-reimbursement contract. The Company did not recognize any revenue related
to cost-reimbursement contracts in 2005.

3. 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 last and fiscal year 2008 will be
the next) is added to the fourth quarter, making such quarter consist of 14
weeks.

4. 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 July 2, 2005 and
January 1, 2005 was attributable solely to the effects of foreign currency
translation.

5. 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.




                                       5



                            MERRIMAC INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 as of the beginning of the next
fiscal year that begins after June 15, 2005. The Company expects the adoption of
this statement will have a non-cash material effect on its financial statements,
but the Company cannot reasonably estimate the amount of the effect resulting
from the adoption because certain assumptions used in the calculation of the
value of share-based payments may change in 2005.

The FASB has issued FASB Staff Position No. 109-1, "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 (the "Act") 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.

6. 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 and net income 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:














                                       6


                            MERRIMAC INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>

                                                                     Quarters Ended                     Six Months Ended
                                                               ---------------------------         --------------------------
                                                                  July 2,         July 3,             July 2,        July 3,
                                                                   2005            2004                2005           2004
                                                               ------------    -----------         ------------    ----------

   Net income - as reported ...............................    $   332,260    $   443,986          $   415,842      $674,917
     Plus: stock-based compensation
        expense included in reported net income  ..........              -              -                    -             -
     Less: Stock-based compensation expense
        determined using the fair value method ............        (36,000)       (36,000)             (69,000)      (88,000)
                                                               -----------    -----------          -----------     ---------
     Net income - pro forma ...............................    $   296,260    $   407,986          $   346,842      $586,917
                                                               ===========    ===========          ===========     =========

     Basic net income per share:
      As reported .........................................    $       .11    $       .14          $       .13    $      .22
      Pro forma ...........................................    $       .09    $       .13          $       .11    $      .19
     Diluted net income per share:
      As reported .........................................    $       .10    $       .14          $       .13    $      .21
      Pro forma ...........................................    $       .09    $       .13          $       .11    $      .19
</TABLE>


The fair value of each of the options and purchase plan subscription rights
granted in 2005 and 2004 was estimated on the date of grant using the
Black-Scholes option valuation model.

The following weighted average assumptions were utilized:

                                                        2005          2004
                                                        ----          ----
Expected option life (years).......................      2.0           2.7
Expected volatility................................    36.00%        50.00%
Risk-free interest rate............................     3.60%         1.50%
Expected dividend yield............................     0.00%         0.00%

7. GOODWILL

The changes in the carrying amount of goodwill for the six months ended July 2,
2005 and July 3, 2004 are as follows:


                                                       2005           2004
                                                       ----           ----
Balance, beginning of year.....................    $3,377,913      $3,122,563
Foreign currency adjustment....................       (68,436)        (94,486)
                                                   ----------      ----------
Balance, end of period.........................    $3,309,477      $3,028,077
                                                   ==========      ==========

8. INVENTORIES

Inventories consist of the following:


                                                      July 2,       January 1,
                                                       2005            2005
                                                       ----            ----
Finished goods.................................    $  706,429      $  263,382
Work in process................................     1,212,218       1,179,606
Raw materials and purchased parts..............     1,601,133       1,488,271
                                                   ----------      ----------
Total..........................................    $3,519,780      $2,931,259
                                                   ==========      ==========


Total inventories are net of valuation allowances for obsolescence and cost
overruns of $1,645,000 at July 2, 2005 and $1,942,000 at January 1, 2005, of
which $563,000 and $901,000, respectively, represented cost overruns.








                                       7




                            MERRIMAC INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9. CURRENT AND LONG-TERM DEBT

The Company was obligated under the following debt instruments at July 2, 2005
and January 1, 2005:

<TABLE>


                                                                                July 2,       January 1,
                                                                                 2005            2005
                                                                               -----------   -----------

The CIT Group/Business Credit, Inc. (A):
   Revolving line of credit, interest 1/2% above prime .....................           -              -
   Term loan A, due October 8, 2008, variable interest above LIBOR or prime.  $  925,000     $1,075,000
   Term loan B, due October 8, 2010, variable interest above LIBOR or prime.   2,062,502      2,258,930

The Bank of Nova Scotia (B):
   Capital leases, interest 8.7%, due June 2005 ............................           -        117,539
   Capital leases, interest 7.3%, due April 2006 ...........................      96,626        124,125
   Capital leases, interest 5.8%, due May 2006 .............................      75,753              -
   Capital leases, interest 7.9%, due June 2006 ............................      85,271        107,481
   Capital leases, interest 5.8%, due January 2010 .........................     216,446              -
                                                                              ----------     ----------
                                                                               3,461,598      3,683,075
Less current portion .......................................................     984,535        904,940
                                                                              ----------     ----------
Long-term portion ..........................................................  $2,477,063     $2,778,135
                                                                              ==========     ==========
</TABLE>


(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 collateral with CIT. The revolving
     line of credit, which expires October 8, 2006, 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 July 2, 2005, the Company had available
     borrowing capacity under its revolving line of credit of $4,600,000. The
     revolving line of credit bears interest at the prime rate plus 1/2 percent
     (currently 7.0%). 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 7.50%). 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 7.50%). As of July 2, 2005, the
     Company, under the terms of its agreement with CIT, had elected to convert
     $850,000 of Term Loan A and $1,950,000 of Term Loan B from their prime rate
     base to LIBOR-based interest rate loans. The current LIBOR interest rate
     options were renewed on April 11, 2005 for six months at an interest rate
     of 6.64% and expire October 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
     July 2, 2005.

(B)  Filtran Microcircuits Inc. ("FMI") has a revolving credit agreement in
     place with The Bank of Nova Scotia for up to $500,000 (Canadian) at the
     prime rate plus 3/4%. No borrowings were outstanding under this agreement
     at July 2, 2005.

     FMI has a $1,800,000 (Canadian) revolving lease line with the Bank of Nova
     Scotia, whereby the Company can obtain funding for previous production
     equipment purchases via a sale/leaseback transaction. As of July 2, 2005,
     $581,000 (Canadian) has been utilized under this facility. Such leases are
     payable in monthly installments for up to five years and are secured by the
     related production equipment. Interest rates (typically prime rate plus one
     percent) are set at the closing of each respective sale/leaseback
     transaction. During the first quarter of 2005, FMI obtained $231,000 (US)
     in connection with the sale/leaseback of certain production equipment. The
     related equipment was originally purchased by the Company in 2004.

     Assets securing capital leases included in property, plant and equipment,
     net, have a depreciated cost of approximately $704,000 at July 2, 2005 and
     $611,000 at January 1, 2005.


                                       8




                            MERRIMAC INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. INCOME TAXES

The Company's effective tax rate for the six months ended July 2, 2005 reflects
U.S. Federal Alternative Minimum Tax and state income taxes that are due based
on certain statutory limitations on the use of the Company's net operating loss
carryforwards. A benefit was recorded in the amount of $75,000 based on
available Canadian tax credits due during the second quarter of 2004.

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 2003, 2004 and the first six months of 2005. Management believes
that a valuation allowance is not required for FMI's deferred tax assets as they
are more likely than not to be realized.

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 a 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 does not believe that it may become subject to
these limitations in 2005.

11. BUSINESS SEGMENT DATA

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

Electronic components and sub-assemblies: 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, 82% are located in the United States
and 18% are located in Costa Rica. Included in such segment are the Multi-Mix(R)
Microtechnology net assets.

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. All
of the identifiable assets are located in Canada.

Information about the Company's operations in different areas of its business
follows. Operating income is net sales less operating expenses. Operating
expenses exclude interest expense, other income and income taxes. Corporate
assets consist principally of cash and corporate expenses are immaterial.
Intersegment sales and the resulting intersegment assets are principally due to
intercompany sales from the microwave micro-circuitry segment to the electronic
components and sub-assemblies segment.









                                       9


                            MERRIMAC INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>

                                                              Quarters Ended               Six Months Ended
                                                         ---------------------------    ---------------------------
                                                           July 2,           July 3,      July 2,          July 3,
                                                            2005              2004         2005             2004
                                                         ---------         ---------    ---------         ---------
                                                          (In thousands of dollars)      (In thousands of dollars)

Industry segments:
    Sales to unaffiliated customers:
             Electronic components and sub-assemblies    $   5,824         $   6,384     $  11,461         $  12,780
             Microwave micro-circuitry                       1,831             1,522         3,466             2,861
             Intersegment sales                                (86)              (10)         (100)              (97)
                                                         ---------         ---------     ---------         ---------
             Consolidated                                $   7,569         $   7,896     $  14,827         $  15,544
                                                         =========         =========     =========         =========
    Income before income taxes:
      Operating income:
             Electronic components and sub-assemblies    $     257         $     288     $     444         $     498
             Microwave micro-circuitry                         159               171           155               283
      Interest and other expense, net                          (64)              (70)         (117)             (151)
      Loss on disposition of assets                              -                 -           (36)                -
                                                         ---------         ---------     ---------         ---------
             Consolidated                                $     352         $     389     $     446         $     630
                                                         =========         =========     =========         =========

      Depreciation and amortization:
             Electronic components and sub-assemblies    $     736         $     769     $   1,432         $   1,528
             Microwave micro-circuitry                          64                58           133               119
                                                         ---------         ---------     ---------         ---------
             Consolidated                                $     800         $     827     $   1,565         $   1,647
                                                         =========         =========     =========         =========
      Capital expenditures:
             Electronic components and sub-assemblies    $     311         $     361     $     544         $     578
             Microwave micro-circuitry                           4                 5            16                65
                                                         ---------         ---------     ---------         ---------
             Consolidated                                $     315         $     366     $     560         $     643
                                                         =========         =========     =========         =========
</TABLE>
<TABLE>

                                                                                          July 2,           July 3,
                                                                                            2005              2004
                                                                                         ---------         ---------

      Identifiable assets:
             Electronic components and sub-assemblies                                    $  24,855         $  26,061
             Microwave micro-circuitry                                                       6,559             5,913
             Corporate                                                                       2,721             1,839
             Intersegment                                                                      (29)              (19)
                                                                                         ---------         ---------
             Consolidated                                                                $  34,106         $  33,794
                                                                                         =========         =========
</TABLE>


12. NET INCOME PER COMMON SHARE

Basic net income per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.

The calculation of diluted net income per common share is similar to that of
basic net income per common share, except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if all potentially dilutive common shares, principally those issuable under
stock options and warrants, were issued during the reporting period to the
extent they are not anti-dilutive.








                                       10




                            MERRIMAC INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following table summarizes the calculation of basic and diluted net income
per share:

<TABLE>


                                                                   Quarters Ended                     Six Months Ended
                                                             ----------------------------        ----------------------------
                                                                 July 2,         July 3,             July 2,         July 3,
                                                                  2005            2004                2005            2004
                                                             ----------------------------        ----------------------------

Net income available to common stockholders ...............  $     332,260    $  443,986         $     415,842     $  674,917
                                                             =============    ==========         =============     ==========

Basic net income per share
--------------------------------
Weighted average number of shares outstanding for
basic net income per share-
Common stock ..............................................      3,140,876      3,123,512            3,139,330      3,122,202
                                                             =============    ===========        =============    ===========

Net income per common share - basic .......................  $         .11    $       .14        $         .13    $       .22
                                                             =============    ===========        =============    ===========

Diluted net income per share
-----------------------------------
Weighted average number of shares outstanding for diluted
  net income per share:

Common stock ..............................................      3,140,876      3,123,512            3,139,330      3,122,202
Effect of dilutive securities - stock options (1) .........         31,701         40,349               34,219         24,214
                                                             -------------    -----------        -------------    -----------
Weighted average number of shares outstanding for
diluted net income per share ..............................      3,172,577      3,163,861            3,173,549      3,146,416
                                                             =============    ===========        =============    ===========

Net income per common share - diluted .....................  $         .10    $       .14        $         .13    $       .21
                                                             =============    ===========        =============    ===========
</TABLE>

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

     Diluted net income per share excludes 299,000 and 392,000 shares underlying
     stock options for the quarters ended July 2, 2005 and July 3, 2004,
     respectively, and 279,000 and 408,000 shares underlying stock options for
     the six months ended July 2, 2005 and July 3, 2004, respectively, as the
     exercise price of these options was greater than the average market value
     of the common shares, resulting in an anti-dilutive effect on earnings per
     share.

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
$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, 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. The Company estimates that $56,000 of
principal and $3,000 of accrued interest will be forgiven in 2005, after which
this loan will be fully satisfied.

During the second quarter and first six months of 2005, the Company's outside
general counsel Katten Muchin Rosenman LLP was paid $75,000 and $175,000,
respectively, for providing legal services to the Company. During the second
quarter and first six months of 2004, Katten Muchin Rosenman LLP was paid
$65,000 and $152,000, respectively. A director of the Company is counsel to
Katten Muchin Rosenman LLP but does not share in the fees that the Company pays
to such law firm and his compensation is not based on such fees.





                                       11


                            MERRIMAC INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During 2005 and 2004 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 $1,000 and $3,000 to these companies
during the second quarter and first six months of 2005. The Company paid an
aggregate of $1,000 and $17,000 to these companies during the second quarter and
first six months of 2004, respectively. A director of the Company is the
chairman and chief executive officer of these companies.

During the second quarter and first six months of 2005, a director of the
Company was paid $9,000 and $18,000, respectively, for providing
technology-related consulting services to the Company. For the second quarter
and first six months of 2004, such director was paid $9,000 and $18,000,
respectively.

During the second quarter and first six months of 2005, DuPont Electronic
Technologies ("DuPont"), a stockholder and the employer of a director, was paid
$8,000 and $25,000, respectively, for providing technological and
marketing-related personnel and services on a cost-sharing basis to the Company
under the Technology Agreement dated February 28, 2002. During the second
quarter and first six months of 2004, DuPont was paid $36,000 and $57,000,
repsectively. 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 grant has an exercise price
equal to the fair market value on the date of such grant and will expire on the
tenth anniversary of the date of the grant. On June 21, 2005, non-qualified
stock options to purchase an aggregate of 17,500 shares were issued to seven
directors at an exercise price of $8.95 per share.

On December 13, 2004 Infineon Technologies AG ("Infineon"), at such time the
beneficial owner of approximately 15% of the Company's common stock, sold
475,000 shares of the Company's common stock to four purchasers in a
privately-negotiated transaction. Two purchasers in such transaction, K Holdings
LLC and Hampshire Investments, Limited, each of which is affiliated with Ludwig
G. Kuttner, 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.
















                                       12

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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-Q, 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.

OVERVIEW

Merrimac Industries, Inc. ("Merrimac" or 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 sub-assemblies and (2) microwave micro-circuitry
(through its subsidiary, Filtran Microcircuits Inc.).

The following table provides a breakdown of our sales between these segments for
the quarters and six months ended July 2, 2005 and July 3, 2004:


                                              Quarters Ended
                                              --------------
                                    July 2, 2005           July 3, 2004
                                    ------------           ------------
                                  $      % of sales       $       % of sales
                                  -      ----------       -       ----------
Electronic components
and sub-assemblies           $ 5,824,000     76.9 %  $ 6,384,000    80.8 %
Microwave micro-circuitry(1) $ 1,831,000     24.2 %  $ 1,522,000    19.3 %
Intersegment sales           $   (86,000)    (1.1)%  $   (10,000)   (0.1)%
                             -----------    -----    -----------   -----
Consolidated                 $ 7,569,000    100.0 %  $ 7,896,000   100.0 %
                             ===========    =====    ===========   =====

                                             Six Months Ended
                                             ----------------
                                    July 2, 2005             July 3, 2004
                                    ------------             ------------
                                  $       % of sales       $       % of sales
                                  -       ----------       -       ----------
Electronic components
and sub-assemblies           $11,461,000     77.3 %  $12,780,000    82.2 %
Microwave micro-circuitry(1) $ 3,466,000     23.4 %  $ 2,861,000    18.4 %
Intersegment sales           $  (100,000)    (0.7)%  $   (97,000)   (0.6)%
                             -----------    -----    -----------   -----
Consolidated                 $14,827,000    100.0 %  $15,544,000   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, subsystem assemblies 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 and wireless Internet connectivity. Merrimac's components range in
price from $0.50 to more than


                                       13



$10,000 and its subsystem assemblies 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 experiencing 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 base station 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.

Filtran Microcircuits Inc.

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, personal communications systems, 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.

For more information regarding our electronics components and sub-assemblies
business and the microwave micro-circuitry business done by FMI, please see Note
11 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 Company believes that while its wireless subscriber base continues to grow,
the extended 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, 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 compared to 2004,
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.



                                       14





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 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.

The Company anticipates that depreciation and amortization expenses will exceed
capital expenditures in fiscal year 2005 by approximately $1,200,000. The
Company intends to issue up to $1,500,000 of purchase order commitments for
capital equipment from various vendors. The Company anticipates that such
equipment will be purchased and become operational during the third and fourth
quarters of 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. The Company intends to continue to invest in research and
development programs in future periods, and expects that these costs will
increase over time, in order to develop new products, enhance performance of
existing products and reduce the cost of current or new products.

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. 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.

IMPAIRMENT OF LONG-LIVED ASSETS

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 July 2, 2005 and the related future planned purchases and lease
obligation commitments through January 2006.


Net assets:
Property, plant and equipment, at cost......................... $13,957,000
Less accumulated depreciation and amortization.................   5,990,000
                                                                -----------
Property, plant and equipment, net.............................   7,967,000
Inventories....................................................     423,000
Other assets, net..............................................     220,000
                                                                -----------
Total net assets at July 2, 2005............................... $ 8,610,000
                                                                -----------
Commitments:
Planned equipment purchases for the remainder of 2005.......... $   500,000
Lease obligations through January 2006.........................     175,000
                                                                -----------
Total commitments.............................................. $   675,000
                                                                -----------
Total net assets and commitments............................... $ 9,285,000
                                                                ===========
Approximately 32% of the property, plant and equipment may be utilized in other
areas of our electronic components and sub-assemblies operations.




                                       15




The Company anticipates receiving additional orders during 2005 for its
Multi-Mix(R) Microtechnology products, for which substantial research and
development costs have also been incurred. Due to economic and market conditions
in the wireless industry over the past several years, telecommunications system
service providers substantially reduced their capital equipment purchases from
the Company's 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, the Company has
implemented a strategic plan utilizing product knowledge and customer focus to
expand specific sales opportunities. However, continued extended delay or
reduction from planned levels in new orders expected from customers for these
products could require the Company to pursue alternatives related to the
utilization or realization of these assets and commitments, the net result of
which could be materially adverse to the financial results and position of the
Company. In accordance with the Company's evaluation of Multi-Mix(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.

CONTRACT REVENUE RECOGNITION

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

The cost rates utilized for cost-reimbursement contracts are subject to review
by third parties and can be revised, which can result in additions to or
reductions from revenue. Revisions which result in reductions to revenue are
recognized in the period that the rates are reviewed and finalized; additions to
revenue are recognized in the period that the rates are reviewed, finalized,
accepted by the customer, and collectability from the customer is assured. The
Company submits financial information regarding the cost rates on
cost-reimbursement contracts for each fiscal year in which the Company performed
work on cost-reimbursement contracts. The Company does not record any estimates
on a regular basis for potential revenue adjustments, as there currently is no
reasonable basis on which to estimate such adjustments given the Company's very
limited experience with these contracts. During the second quarter and first six
months of 2004, the Company recognized a revenue reduction of $12,000 related to
a cost-reimbursement contract. The Company did not recognize any revenue related
to cost-reimbursement contracts in 2005.

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 $1,645,000 at July 2,
2005 and $1,942,000 at January 1, 2005, of which $563,000 and $901,000,
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 the Company may be able to use some of these excess
components and raw materials in other products it manufactures, 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. The Company also may not be able
to recover the cost of obsolete inventory from vendors or customers.



                                       16




Write offs or write downs of inventory generally arise from:

     -   declines in the market value of inventory;

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

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

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 2003 and 2004 and the first six months of 2005. Management believes
that a valuation allowance is not required for FMI's deferred tax assets as they
are more likely than not to be realized.

                  CONSOLIDATED STATEMENTS OF OPERATIONS SUMMARY
                                   (UNAUDITED)

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

<TABLE>



                                                          Percentage of Net Sales             Percentage of Net Sales
                                                         ------------------------            ------------------------
                                                              Quarters Ended                     Six Months Ended
                                                         ------------------------            ------------------------
                                                         July 2,          July 3,            July 2,          July 3,
                                                          2005             2004               2005             2004
                                                         ------           ------             ------           -------

Net sales....................................            100.0%           100.0%              100.0%           100.0%
                                                         ------           ------              ------           ------
Costs and expenses:
  Cost of sales..............................             56.8             58.1                57.5             57.2
  Selling, general and administrative........             31.0             31.1                31.4             31.5
  Research and development...................              6.7              5.0                 7.1              6.2
                                                        ------           ------              ------           ------
                                                          94.5             94.2                96.0             94.9
                                                        ------           ------              ------           ------

Operating income ............................              5.5              5.8                 4.0              5.1
Interest and other expense, net..............              (.8)             (.9)                (.8)            (1.0)
Loss on disposition of assets................                -                -                 (.2)               -
                                                        ------           ------              ------           ------

Income before income taxes...................              4.7              4.9                 3.0              4.1
Provision (benefit) for income taxes.........               .3              (.7)                 .2              (.3)
                                                        ------           ------              ------           ------
Net income ..................................              4.4%             5.6%                2.8%             4.4%
                                                        ======           ======              ======           ======
</TABLE>


SECOND QUARTER AND FIRST SIX MONTHS OF 2005 COMPARED TO THE SECOND QUARTER AND
FIRST SIX MONTHS OF 2004

Net sales.

Consolidated results of operations for the second quarter of 2005 reflect a
decrease in net sales from the second quarter of 2004 of $327,000 or 4.1% to
$7,569,000. This decrease was attributable to a $560,000 decrease in net sales
of electronic components and sub-assemblies offset by a $309,000 increase in
sales of microwave micro-circuitry products from the Company's wholly-owned
subsidiary Filtran Microcircuits Inc. ("FMI") and a $76,000 increase of
intersegment sales. Consolidated results of operations for the first six months
of 2005 reflect a decrease in net sales from the second quarter of 2004 of
$717,000 or 4.6% to $14,827,000. This decrease was attributable to a $1,319,000
decrease in net sales of electronic components and sub-assemblies offset by a
$605,000 increase in sales of microwave micro-circuitry products from the
Company's wholly-owned subsidiary Filtran Microcircuits Inc. ("FMI") and a
$3,000 increase of intersegment sales. The decrease in net sales for the
electronic components and sub-assemblies segment for second quarter and first
six months of 2005 is attributable to the timing



                                       17




of orders and their scheduled delivery dates, resulting in later shipment and
conversion of these orders into sales than in the comparable periods of 2004.

The increase in sales of the microwave micro-circuitry segment for the second
quarter and first six months of 2005 was due to new orders from existing
customers resulting from the Company's successful 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 by new orders 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 for the six months ended July 2, 2005 and July 3, 2004:


                                         2005                      2004
                                 --------------------- -------------------------

Beginning backlog                   $ 12,945,000             $  12,395,000
Plus bookings                       $ 16,335,000             $  15,522,000
Less net sales                      $ 14,827,000             $  15,544,000
Ending backlog                      $ 14,453,000             $  12,373,000
Book-to-bill ratio                      1.10                      1.00


Orders of $8,140,000 were received during the second quarter of 2005, an
increase of $1,227,000 or 17.7% compared to $6,913,000 in orders received during
the second quarter of 2004. Orders of $16,335,000 were received during the first
six months of 2005, an increase of $813,000 or 5.2% compared to $15,522,000 in
orders received during the first six months of 2004. Backlog increased by
$1,208,000 to $14,453,000 at the end of second quarter of 2005 compared to
$12,945,000 at year-end 2004.

Cost of sales and Gross profit.

The following table provides comparative gross profit information, by product
segment, between the quarters and six months ended July 2, 2005 and July 3,
2004.

<TABLE>


                                    Quarter ended July 2, 2005                         Quarter ended July 3, 2004
                         ------------------------------------------------- ----------------------------------------------------
                                            Increase/                                         Increase/
                                           (Decrease)         % of                            (Decrease)          % of
                                           from prior         Segment                         from prior         Segment
                              $              period          Net Sales           $              period          Net Sales
                        ------------         ------          ---------       ----------         ------          ---------

Electronic Components
and Sub-assemblies     $ 2,772,000        $ (39,000)          47.6%          $ 2,811,000      $ 507,000           44.0%
gross profit

Microwave
Micro-Circuitry gross  $   496,000        $  (1,000)          27.1%          $   497,000      $ 247,000           32.7%
profit

Consolidated           $ 3,268,000        $ (40,000)          43.1%          $ 3,308,000      $ 754,000           41.9%
gross profit
</TABLE>





                                       18




<TABLE>


                                  Six Months ended July 2, 2005                       Six Months ended July 3, 2004
                         ------------------------------------------------- ----------------------------------------------------
                                             Increase/                                          Increase/
                                            (Decrease)           % of                           (Decrease)         % of
                                             from prior         Segment                         from prior        Segment
                                   $           period          Net Sales            $             period         Net Sales
                               ---------       ------          ---------         --------         ------         ---------

Electronic Components
and Sub-assemblies gross     $ 5,444,000     $ (309,000)        47.5%          $ 5,753,000     $ 1,135,000         45.0%
profit

Microwave
Micro-Circuitry              $   859,000     $  (45,000)        24.8%          $   904,000     $   515,000         31.6%
gross profit

Consolidated                 $ 6,303,000     $ (354,000)        42.5%          $ 6,657,000     $ 1,650,000         42.8%
gross profit
</TABLE>


The decrease in gross profit for the second quarter of 2005 as compared to the
second quarter of 2004 for the electronic components and sub-assemblies segment
was due to the overall decrease in segment sales. The increase in gross profit
percent for the second quarter of 2005 for the electronic components and
sub-assemblies segment was due to a stronger product mix and production
efficiencies. The decrease in gross profit for the first six months of 2005 for
the electronic components and sub-assemblies segment was due to the overall
decrease in segment sales. The improvement in gross profit percent to 47.5% in
the first six months of 2005 from 45.0% in the first six months of 2004 for the
electronic components and sub-assemblies segment was due to a stronger product
mix, higher yields and lower fixed costs.

Depreciation expense included in consolidated cost of sales for the second
quarter of 2005 was $728,000, a decrease of $10,000 compared to the second
quarter of 2004. Depreciation expense included in consolidated cost of sales for
the first six months of 2005 was $1,416,000, a decrease of $51,000 compared to
the second quarter of 2004. For the second quarter and first six months of 2005,
approximately $419,000 and $796,000, respectively, of depreciation expense was
associated with Multi-Mix(R) Microtechnology capital assets. For the second
quarter and first six months of 2004, approximately $484,000 and $977,000,
respectively of depreciation expense was associated with Multi-Mix(R)
Microtechnology capital assets.

FMI sales include intersegment sales of $86,000 and $10,000 in the second
quarter of 2005 and 2004, respectively. The decrease in gross profit and gross
profit percent for the second quarter and first six months of 2005 is due to
higher direct labor and manufacturing costs, attributable to the strengthening
of the Canadian dollar, related to defense orders booked in 2004. These higher
costs for such defense orders are not expected to continue into future periods.
FMI sales include intersegment sales of $100,000 and $97,000 in the first six
months of 2005 and 2004, respectively.

Selling, general and administrative expenses.

Selling, general and administrative expenses of $2,344,000 for the second
quarter of 2005 decreased by $109,000 or 4.4%, and when expressed as a
percentage of net sales, decreased by 0.1 percentage points to 31.0% compared to
the second quarter of 2004. The decrease in such expenses for the second quarter
of 2005 was due to lower commissions related to the lower sales level in the
second quarter of 2005 and lower selling and marketing costs, offset by higher
administrative costs. Selling, general and administrative expenses of $4,655,000
for the first six months of 2005 decreased by $253,000 or 5.2%, and when
expressed as a percentage of net sales, decreased by 0.1 percentage points to
31.4% compared to the first six months of 2004. The decrease in such expenses
for the first six months of 2005 was due to lower commissions related to the
lower sales level in the first quarter of 2005 and lower administrative costs.

Research and development expenses.

Research and development expenses for new products were $508,000 for the second
quarter of 2005, an increase of $112,000 or 28.3%, and when expressed as a
percentage of net sales, an increase of 1.5 percentage points to 6.5% compared
to the second quarter of 2004. Except for $40,000 of expenses at FMI (a decrease
of $22,000 from such FMI expenses in the second quarter of 2004) substantially
all of the research and development expenses were related to Multi-Mix(R)
Microtechnology and Multi-Mix PICO(R) products. Research and development
expenses for new products were $1,049,000 for the first six months of 2005, an
increase of $81,000 or 8.4%, and when expressed as a percentage of net sales, an
increase of 0.7 percentage points to 6.9% compared to the first six months of
2004. Except for $80,000 of expenses at FMI (a decrease of $38,000 from such FMI
expenses in the first six months of 2004) 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).



                                       19




Operating income.

Consolidated operating income for the second quarter of 2005 was $416,000
compared to consolidated operating income of $459,000 for the second quarter of
2004. The decrease in consolidated operating income for the second quarter of
2005 was due to a reduction of gross profit resulting from decreased sales.

Consolidated operating income for the first six months of 2005 was $599,000
compared to consolidated operating income of $781,000 for the first six months
of 2004. The decrease in consolidated operating income for the first six months
of 2005 was due to a reduction of gross profit resulting from decreased sales,
partially offset by lower operating expenses during the first six months of 2005
compared to the first six months of 2004.

For the second quarter of 2005, the Company's operating income for its
electronic components and sub-assemblies segment was $257,000 compared to
operating income of $288,000 for the second quarter of 2004. The lower operating
income for the electronic components and sub-assemblies segment was due to a
reduction of gross profit resulting from decreased sales compared to the second
quarter of 2004. For the second quarter of 2005, operating income for the
microwave micro-circuitry segment was $159,000 compared to operating income of
$171,000 for the second quarter of 2004. The lower operating income for the
microwave micro-circuitry segment was due to the segment's higher commissions
and administrative expenses compared to the second quarter of 2004.

For the first six months quarter of 2005, the Company's operating income for its
electronic components and sub-assemblies segment was $444,000 compared to
operating income of $498,000 for the first six months of 2004. The lower
operating income for the electronic components and sub-assemblies segment was
due to the segment's lower gross profit from lower sales, partially offset by
lower operating expenses compared to the first six months of 2004. For the first
six months of 2005, operating income for the microwave micro-circuitry segment
was $155,000 compared to operating income of $283,000 for the first six months
of 2004. The lower operating income for the microwave micro-circuitry segment
was due to the segment's lower gross profit, higher commissions and higher
administrative expenses compared to the first six months of 2004.

Interest and other expense, net.

Interest and other expense, net was $64,000 for the second quarter of 2005
compared to interest and other expense, net of $70,000 for the second quarter of
2004. Interest and other expense, net was $117,000 for the first six months of
2005 compared to interest and other expense, net of $151,000 for the first
months of 2004. Interest expense for the second quarter and first six months of
2005 was principally incurred on borrowings under the term loans which the
Company consummated during the fourth quarter of 2003. Interest expense for the
second quarter and first six months of 2004 was principally incurred on
borrowings under the Company's revolving line of credit and the term loans
described above. Despite the general rise in interest rates from 2004 to 2005,
the reduction of interest and other expense was due to lower outstanding debt
balances during the first six months of 2005 as the Company repaid approximately
$1,500,000 throughout 2004.

Income taxes.

The Company's effective tax rate for the six months ended July 2, 2005 reflects
U.S. Federal Alternative Minimum Tax and State income taxes that are due based
on certain statutory limitations on the use of the Company's net operating loss
carryforwards. A benefit was recorded in the amount of $75,000 based on
available Canadian tax credits due during the second quarter of 2004.

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 a 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 does not believe that it may become subject to
these limitations in 2005.



                                       20




Net income.

Net income for the second quarter of 2005 was $332,000 compared to net income of
$444,000 for the second quarter of 2004. Net income per diluted share for the
second quarter of 2005 was $.10 compared to net income of $.14 per diluted share
for the second quarter of 2004. Net income for the second quarter and first six
months of 2004 included a tax benefit of $75,000 or $.02 per share related to
certain Canadian tax credits.

Net income for the first six months of 2005 was $416,000 compared to net income
of $675,000 for the first six months of 2004. Net income per diluted share for
the first six months of 2005 was $.13 compared to net income of $.21 per diluted
share for the six months of 2004.

LIQUIDITY AND CAPITAL RESOURCES

The Company had liquid resources comprised of cash and cash equivalents totaling
approximately $2,700,000 at the end of the first six months of 2005 compared to
approximately $2,200,000 at the end of 2004. The Company's working capital was
approximately $10,000,000 and its current ratio was 3.5 to 1 at the end of the
second quarter of 2005 compared to $8,500,000 and 2.9 to 1, respectively, at the
end of 2004. At July 2, 2005, the Company had available borrowing capacity under
its revolving line of credit of $4,600,000.

The Company's operating activities generated positive cash flows of $984,000
during the first six months of 2005 compared to $3,032,000 of positive cash
flows during the first six months of 2004. The primary sources of operating cash
flows for the first six months of 2005 were the year-to-date net income of
$416,000 which was reduced by depreciation and amortization of $1,564,000; a
decrease in accounts receivable of $87,000, offset by an increase in inventories
of $593,000 and an aggregate decrease in accounts payable, customer deposits and
accrued liabilities of $468,000. The primary sources of operating cash flows for
the first six months of 2004 were net income of $675,000 which was reduced by
depreciation and amortization of $1,647,000, a reduction of accounts receivable
of $412,000, a reduction in inventories of $179,000,and an aggregate increase in
accounts payable and accrued expenses of $421,000 partly offset by a reduction
of customer deposits.

The Company made net cash investments in property, plant and equipment of
$560,000 during the first six months of 2005 compared to net cash investments
made in property, plant and equipment of $643,000 during the first six months of
2004. 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 $7,967,000 at the end of the
second quarter of 2005, a decrease of $906,000 compared to $8,873,000 at the end
of fiscal year 2004.

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

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 collateral with CIT. The revolving line of
credit, which expires October 8, 2006, 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 July 2,
2005, the Company had available borrowing capacity under its revolving line of
credit of $4,600,000. The revolving line of credit bears interest at the prime
rate plus 1/2 percent (currently 7.0%). 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 7.50%). 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 7.50%). As of July 2, 2005, the
Company, under the terms of its agreement with CIT, had elected to convert
$850,000 of Term Loan A and $1,950,000 of Term Loan B from their prime rate base
to LIBOR-based interest rate loans. The current LIBOR interest rate options were
renewed on April 11, 2005 for six months at an interest rate of 6.64% and expire
October 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 July 2, 2005.


FMI has a revolving credit agreement in place with The Bank of Nova Scotia for
up to $500,000 (Canadian) at the prime rate plus 3/4%. No borrowings were
outstanding under this agreement at July 2, 2005.


                                       21




FMI has a $1,800,000 (Canadian) revolving lease line with the Bank of Nova
Scotia, whereby the Company can obtain funding for previous production equipment
purchases via a sale/leaseback transaction. As of July 2, 2005, $581,000
(Canadian) has been utilized under this facility. Such leases are payable in
monthly installments for up to five years and are secured by the related
production equipment. Interest rates (typically prime rate plus one percent) are
set at the closing of each respective sale/leaseback transaction. During the
first quarter of 2005, FMI obtained $231,000 (US) in connection with the
sale/leaseback of certain production equipment. The related equipment was
originally purchased by the Company in 2004.

Assets securing capital leases included in property, plant and equipment, net,
have a depreciated cost of approximately $704,000 at July 2, 2005 and $611,000
at January 1, 2005.

Depreciation and amortization expenses exceeded capital expenditures for
production equipment during the first six months of 2005 by approximately
$1,000,000, and the Company anticipates that depreciation and amortization
expenses will exceed capital expenditures in fiscal year 2005 by approximately
$1,200,000. The Company intends to issue commitments to purchase $1,500,000 of
capital equipment from various vendors. The Company anticipates that such
equipment will be purchased and become operational during the third and fourth
quarters of 2005.

The functional currency for the Company's wholly-owned subsidiary FMI is the
Canadian dollar. The change in accumulated other comprehensive income for the
first quarter of 2005 and 2004 reflect the changes in the exchange rates between
the Canadian dollar and the United States dollar for those respective periods.
The functional currency for the Company's Costa Rica operations is the United
States dollar.

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 as of the beginning of the next
fiscal year that begins after June 15, 2005. The Company expects the adoption of
this statement will have a non-cash material effect on its financial statements,
but the Company cannot reasonably estimate the impact of the adoption because
certain assumptions used in the calculation of the value of share-based payments
may change in 2005.

The FASB has issued FASB Staff Position No. 109-1, "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 (the "Act") 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.

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.




                                       22




         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) Microtechnology 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
base stations. There are competing technologies already in the marketplace, and
in order to obtain market share we will have to convince customers to convert to
our products from those that are already in use.

         We may seek to enter into joint ventures, research and development,
distribution and other arrangements with third party OEM's, defense contractors,
universities and research institutions and others in order to successfully
market our Multi-Mix(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, 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.


                                       23




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

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

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

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

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 and cost overruns. 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 profits.

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

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

         Write offs or write downs of inventory generally arise from:

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

         Our products and therefore our inventories are subject to technological
risk. At any time either new products may enter the market or prices of
competitive products may be introduced with more attractive features or at lower
prices than ours. There is a risk we may be unable to sell our inventory in a
timely manner and avoid it becoming obsolete. As of July 2, 2005, our
inventories, including raw materials, work-in-process and finished goods, were
valued at $3.4 million and we had valuation allowances for obsolescence and cost
overruns of $1.6 million against these inventories. In the event we are required
to substantially discount our inventory or are unable to sell our inventory in a
timely manner, we would be required to increase our 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 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:



                                       24



         -    adversely affect our operating results by reducing the volumes of
              products that we manufacture for our customers;
         -    delay or eliminate recoupment of our expenditures for inventory
              purchased in preparation for customer orders; and
         -    lower our asset utilization, which would result in lower gross
              margins.

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

         We manufacture products to our customers' specifications that are
highly complex and may at times contain design or manufacturing defects. Defects
have been discovered in products we manufactured in the past and despite our
quality control and quality assurance efforts, defects may occur in the future.
Defects in the products we manufacture, whether caused by design, manufacturing
or component defects, may result in delayed shipments to customers or reduced or
cancelled customer orders. 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. 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.

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



                                       25




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:

         -    changes in the mix of net revenues attributable to higher-margin
              and lower-margin products;
         -    customers' decisions to defer or accelerate orders;
         -    timing of shipments of orders for our products;
         -    changes in product mix which could cause unexpected engineering or
              research and development costs;
         -    changes in demand for our products;
         -    announcements or introductions of new products by our competitors;
         -    engineering or production delays due to product defects or quality
              problems and production yield issues; and
         -    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.

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




                                       26




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 14 active patents and has filed 3 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 N. Carter, who serves as our Chief Executive Officer, Reynold K. Green,
our Chief Operating Officer, Robert V. Condon, who serves as our Chief Financial
Officer and James J. 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. Key Man
insurance is maintained on certain executives of the Company.

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.

         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



                                       27




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.

RELATED PARTY TRANSACTIONS

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




                                       28




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, 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. The Company estimates that $56,000 of
principal and $3,000 of accrued interest will be forgiven in 2005, after which
this loan will be fully satisfied.

During the second quarter and first six months of 2005, the Company's outside
general counsel Katten Muchin Rosenman LLP was paid $75,000 and $175,000,
respectively, for providing legal services to the Company. During the second
quarter and first six months of 2004, Katten Muchin Rosenman LLP was paid
$65,000 and $152,000, respectively. A director of the Company is counsel to
Katten Muchin Rosenman LLP but does not share in the fees that the Company pays
to such law firm and his compensation is not based on such fees.

During 2005 and 2004 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 $1,000 and $3,000 to these companies
during the second quarter and first six months of 2005. The Company paid an
aggregate of $1,000 and $17,000 to these companies during the second quarter and
first six months of 2004, respectively. A director of the Company is the
chairman and chief executive officer of these companies.

During the second quarter and first six months of 2005, a director of the
Company was paid $9,000 and $18,000, respectively, for providing
technology-related consulting services to the Company. For the second quarter
and first six months of 2004, such director was paid $9,000 and $18,000,
respectively.

During the second quarter and first six months of 2005, DuPont Electronic
Technologies ("DuPont"), a stockholder and the employer of a director, was paid
$8,000 and $25,000, respectively, for providing technological and
marketing-related personnel and services on a cost-sharing basis to the Company
under the Technology Agreement dated February 28, 2002. During the second
quarter and first six months of 2004, DuPont was paid $36,000 and $57,000,
repsectively. 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 grant has an exercise price
equal to the fair market value on the date of such grant and will expire on the
tenth anniversary of the date of the grant. On June 21, 2005, non-qualified
stock options to purchase an aggregate of 17,500 shares were issued to seven
directors at an exercise price of $8.95 per share.

On December 13, 2004 Infineon Technologies AG ("Infineon"), at such time the
beneficial owner of approximately 15% of the Company's common stock, sold
475,000 shares of the Company's common stock to four purchasers in a
privately-negotiated transaction. Two purchasers in such transaction, K Holdings
LLC and Hampshire Investments, Limited, each of which is affiliated with Ludwig
G. Kuttner, 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.




                                       29




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Interest on the Company's borrowings under its financing agreement with CIT
fluctuates with the prime rate and LIBOR. A variation of 1% in the prime rate
and LIBOR during the year ended January 1, 2005 would have affected the
Company's earnings by approximately $38,000.

Foreign Currency Risk

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

A significant portion of the Company's revenues and receivables (including those
of its Canadian subsidiary) are denominated in U.S. dollars. A strengthening of
the U.S. dollar could make the Company's products less competitive in foreign
markets. Alternatively, if the U.S. dollar were to weaken, it would make the
Company's products more competitive in foreign markets, but could result in
higher costs from its Canadian operations.

ITEM 4. CONTROLS AND PROCEDURES

As of July 2, 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 July
2, 2005, the Company's disclosure controls and procedures were effective.

No change occurred in the Company's internal controls concerning financial
reporting during the Company's second quarter of 2005 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.

In designing and evaluating the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 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. At the time of our evaluation,
we believed that our disclosure controls and procedures provided such reasonable
assurance.

Subsequent to the end of the Company's second fiscal quarter and the evaluation
discussed above, two adjustments were identified in the Company's accounting for
certain contracts where specified shipment, delivery, customer inspection and
acceptance revenue recognition criteria had not been satisfied. The adjustments,
aggregating a revenue reduction of approximately $301,000, have been recorded in
the second quarter and the Company expects the sale of the products involved
(and recognition of the related revenue) to be completed in the third quarter of
2005.

After evaluating the facts and circumstances regarding the need for these
adjustments, it was determined that there exists a deficiency in the design and
operation of our controls over cut-off procedures at the end of accounting
periods and the proper application and documentation of the Company's revenue
recognition policies and related SEC and GAAP requirements (specifically SAB
104: "Revenue Recognition") to such contracts, and that this deficiency
constitutes a material weakness in the Company's internal controls over
financial reporting. To address the foregoing, the Company performed additional
analyses and other procedures to prepare the unaudited quarterly financial
statements in accordance with GAAP. The Company believes that the unaudited
quarterly financial statements are fairly stated.

A material weakness in internal control over financial reporting is a control
deficiency (within the meaning of the Public Company Accounting Oversight Board
("PCAOB") Auditing Standard No. 2), or combination of control deficiencies, that
results in there being more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.

To address such material weakness, management, with the oversight of the Audit
Committee, will implement enhanced procedures to examine each quarter all
contracts in excess of a specified dollar amount to ensure that revenue is
appropriately recognized in the proper period. This examination will include,
among other steps, a comparison of each selected sale's


                                       30


characteristics to the specific revenue recognition requirements of the
Company's accounting policy based on the SEC's SAB 101 and SAB 104 (Revenue
Recognition) and other relevant authoritative revenue recognition accounting
literature that may become available from time to time. Management is also
creating a standard documentation template to support the timing of revenue
recognition for those selected sales that meet the review criteria. In addition,
members of the Company's financial department including our Chief Financial
Officer will undertake additional training with respect to GAAP and SEC
reporting requirements for accounting matters, including regarding revenue
recognition issues and contract fulfillment administration. Management believes
that, with the addition of these enhanced procedures, the Company's internal
controls over financial reporting will be effective.


PART II OTHER INFORMATION

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

On June 21, 2005, the Company held its Annual Stockholders Meeting at which the
stockholders elected three members to the Company's Board of Directors. The
stockholders of the Company elected Mason N. Carter, Albert H. Cohen and David
B. Miller as Class III Directors whose terms expire at the 2008 Annual Meeting.

The following sets forth the number of votes cast for, against or withheld, as
well as the number of abstentions and broker non-votes, voted upon at the
Company's June 21, 2005 Annual Stockholders Meeting:

Election of Directors.

                                 For        Abstain
                              ---------     -------
Mason N. Carter               2,659,187     355,520
Albert H. Cohen               2,722,914     291,793
David B. Miller               2,730,291     284,416



Ratification of Grant Thornton LLP as the Company's independent auditors.

                               For        Against      Abstain
                            ---------     -------      -------
                            3,011,836         750        2,121

The Company's two Class I directors, Fernando L. Fernandez and Joel H. Goldberg,
and three Class II directors, Edward H. Cohen, Arthur A. Oliner and Harold J.
Raveche, continued as directors after the Annual Stockholders Meeting and are
serving terms expiring at the time of the Company's annual meetings in 2007 and
2006, respectively, and until their respective successors have been duly elected
and qualified.

ITEM 6. EXHIBITS

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.



                                       31




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.

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.*



                                       32




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.*

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



                                       33




                  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.*

31.1+             Chief Executive Officer's Certificate, pursuant to Section 302
                  of the Sarbanes-Oxley Act of 2002.

31.2+             Chief Financial Officer's Certificate, pursuant to Section 302
                  of the Sarbanes-Oxley Act of 2002.

32.1+             Chief Executive Officer's Certificate, pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.

32.2+             Chief Financial Officer's Certificate, pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.

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

+                 Indicates that exhibit is filed as an exhibit hereto.



                                       34




                                   SIGNATURES

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


                                  MERRIMAC INDUSTRIES, INC.




Date: August 16, 2005                   By: /s/ Mason N. Carter
                                            -------------------
                                        Mason N. Carter
                                        Chairman, President and
                                        Chief Executive Officer



Date: August 16, 2005                   By: /s/ Robert V. Condon
                                            --------------------
                                        Robert V. Condon
                                        Vice President, Finance and
                                        Chief Financial Officer
































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