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 September 27, 2008






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





For
      the
      transition period from to ****




Commission
      File 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.
                EmployerIncorporation
                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 Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No
o





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





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


Yes o No
x





As
      of
      November 17, 2008, there were 2,951,324 shares of Common Stock, par value $.01
      per share, outstanding.







MERRIMAC
      INDUSTRIES, INC.


41
      Fairfield Place


West
      Caldwell, NJ 07006





INDEX








PagePART
                I. FINANCIAL INFORMATIONItem
                1.
            Financial
                StatementsCondensed
                Consolidated Statements of Operationsfor
                the Quarters and Nine Months Ended September 27, 2008and
                September 29, 2007 (Unaudited)
            1Condensed
                Consolidated Balance Sheets-September 27, 2008 (Unaudited)
                andDecember
                29, 2007
            2Condensed
                Consolidated Statement of Stockholders’ Equity for the Nine MonthsEnded
                September 27, 2008 (Unaudited)
            3Condensed
                Consolidated Statements of Cash Flows for the Nine MonthsEnded
                September 27, 2008 and September 29, 2007 (Unaudited)
            4Notes
                to Condensed Consolidated Financial Statements
            5Item
                2.
            Management's
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            15Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            25Item
                4.
            Controls
                and Procedures
            25PART
                II. OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            26Item
                1A.
            Risk
                Factors
            26Item
                5.
            Other
                Information
            27Item
                6.
            Exhibits
            28Signatures
            
            29









PART
      I.
      FINANCIAL INFORMATION





ITEM
      1.
      FINANCIAL STATEMENTS





MERRIMAC
      INDUSTRIES, INC.


CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS




(UNAUDITED)





Quarters
                Ended
            
            Nine
                Months EndedSeptember
                27,
            
            September
                29,
            
            September
                27,
            
            September
                29,2008
            
            2007
            
            2008
            
            2007CONTINUING
                OPERATIONSNet
                sales
            
            $
            8,327,790
            
            $
            6,612,494
            
            $
            21,575,742
            
            $
            16,495,411Costs
                and expenses:Cost
                of sales
            
            
            5,578,779
            
            
            3,796,384
            
            
            13,128,049
            
            
            9,615,265Selling,
                general and administrative
            
            
            2,423,472
            
            
            2,099,038
            
            
            7,021,437
            
            
            6,292,769Research
                and development
            
            
            105,114
            
            
            399,980
            
            
            852,513
            
            
            1,219,4878,107,365
            
            
            6,295,402
            
            
            21,001,999
            
            
            17,127,521Operating
                income (loss)
            
            
            220,425
            
            
            317,092
            
            
            573,743
            
            
            (632,110
            )Interest
                and other expense, net
            
            
            (17,336
            )
            
            (72,196
            )
            
            (126,516
            )
            
            (55,795
            )Income
                (loss) from continuing operations beforeincome
                taxes
            
            
            203,089
            
            
            244,896
            
            
            447,227
            
            
            (687,905
            )Provision
                for income taxes
            
            
            10,000
            
            
            -
            
            
            10,000
            
            
            -Income
                (loss) from continuing operations
            
            
            193,089
            
            
            244,896
            
            
            437,227
            
            
            (687,905
            )DISCONTINUED
                OPERATIONSLoss
                from discontinued operations, afterincome
                taxes
            
            
            (10,956
            )
            
            (2,058,341
            )
            
            (65,992
            )
            
            (5,858,265
            )Net
                income (loss
            
            $
            182,133
            
            $
            (1,813,445
            )
            $
            371,235
            
            $
            (6,546,170
            )Income
                (loss) per common share from continuingoperations-basic
            
            $
            .06
            
            $
            .08
            
            $
            .15
            
            $
            (.23
            )Loss
                per common share from discontinuedoperations-basic
            
            $
            -
            
            $
            (.70
            )
            $
            (.02
            )
            $
            (1.97
            )Net
                income (loss) per common share-basic
            
            $
            .06
            
            $
            (.62
            )
            $
            .13
            
            $
            (2.20
            )Income
                (loss) per common share from continuingoperations-diluted
            
            $
            .06
            
            $
            .08
            
            $
            .15
            
            $
            (.23
            )Loss
                per common share from discontinuedoperations-diluted
            
            $
            -
            
            $
            (.69
            )
            $
            (.02
            )
            $
            (1.97
            )Net
                income (loss) per common share-diluted
            
            $
            .06
            
            $
            (.61
            )
            $
            .13
            
            $
            (2.20
            )Weighted
                average number of sharesoutstanding-basic
            
            
            2,948,037
            
            
            2,917,245
            
            
            2,940,112
            
            
            2,974,757Weighted
                average number of sharesoutstanding-diluted
            
            
            2,965,537
            
            
            2,960,187
            
            
            2,965,366
            
            
            2,974,757




1


MERRIMAC
      INDUSTRIES, INC.


CONDENSED
      CONSOLIDATED BALANCE SHEETS





September
                27,
              2008
            
            December
                29,
              2007ASSETS
            
            (UNAUDITED)
            
            (Note
                1)Current
                assets:Cash
                and cash equivalents
            
            $
            1,922,987
            
            $
            2,004,471Accounts
                receivable, net
            
            
            6,892,601
            
            
            5,299,753Inventories,
                net
            
            
            5,885,741
            
            
            5,039,770Other
                current assets
            
            
            620,195
            
            
            774,007Revenue
                in excess of billing
            
            
            1,185,909
            
            
            -Due
                from Canadian assets sale contract
            
            
            -
            
            
            664,282Total
                current assets
            
            
            16,507,433
            
            
            13,782,283Property,
                plant and equipment
            
            
            37,886,003
            
            
            37,556,672Less
                accumulated depreciation and amortization
            
            
            28,165,460
            
            
            26,600,240Property,
                plant and equipment, net
            
            
            9,720,543
            
            
            10,956,432Restricted
                cash
            
            
            -
            
            
            250,000Other
                assets
            
            
            509,628
            
            
            531,633Deferred
                tax assets
            
            
            52,000
            
            
            52,000Total
                Assets
            
            $
            26,789,604
            
            $
            25,572,348LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities:Current
                portion of long-term debt
            
            $
            1,550,000
            
            $
            550,000Accounts
                payable
            
            
            905,045
            
            
            943,481Accrued
                liabilities
            
            
            1,833,644
            
            
            1,965,403Customer
                deposits
            
            
            520,361
            
            
            363,296Deferred
                income taxes
            
            
            52,000
            
            
            52,000Income
                taxes payable
            
            
            10,000
            
            
            -Total
                current liabilities
            
            
            4,871,050
            
            
            3,874,180Long-term
                debt, net of current portion
            
            
            3,145,833
            
            
            3,762,500Deferred
                liabilities
            
            
            63,515
            
            
            61,300Total
                liabilities
            
            
            8,080,398
            
            
            7,697,980Commitments
                and contingenciesStockholders'
                equity:Preferred
                stock, par value $.01 per share:Authorized:
                1,000,000 sharesNo
                shares issued or outstandingCommon
                stock, par value $.01 per share:20,000,000
                shares authorized; 3,310,942 and 3,289,103 shares issued;
              and
                2,948,037 and 2,926,198 shares outstanding, respectively
            
            
            33,110
            
            
            32,891Additional
                paid-in capital
            
            
            20,253,101
            
            
            19,789,717Retained
                earnings
            
            
            1,545,159
            
            
            1,173,92421,831,370
            
            
            20,996,532Less
                treasury stock, at cost - 362,905 shares of common stock at September
                27,
                2008 and December 29, 2007
            
            
            (3,122,164
            )
            
            (3,122,164
            )Total
                stockholders' equity
            
            
            18,709,206
            
            
            17,874,368Total
                Liabilities and Stockholders' Equity
            
            $
            26,789,604
            
            $
            25,572,348




See
                accompanying notes.




2





MERRIMAC
      INDUSTRIES, INC.


CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


NINE
      MONTHS ENDED SEPTEMBER 27, 2008


(UNAUDITED)







AdditionalCommon
                Stock
            
            Paid-in
            
            Retained
            
            Treasury
                StockShares
            
            Amount
            
            Capital
            
            Earnings
            
            Shares
            
            Amount
            
            TotalBalance,
                December 29, 2007
            
            
            3,289,103
            
            $
            32,891
            
            $
            19,789,717
            
            $
            1,173,924
            
            
            362,905
            
            $
            (3,122,164
            )
            $
            17,874,368Net
                income
            
            
            
            
            
            
            
            
            
            
            
            371,235
            
            
            
            
            
            
            
            
            371,235Share-based
                compensation
            
            
            
            
            
            
            
            
            375,757
            
            
            
            
            
            
            
            
            
            
            
            375,757Stock
                Purchase Plan sales
            
            
            9,757
            
            
            98
            
            
            59,337
            
            
            
            
            
            
            
            
            
            
            
            59,435Exercise
                of stock options
            
            
            4,082
            
            
            41
            
            
            28,290
            
            
            
            
            
            
            
            
            
            
            
            28,331Vesting
                of restricted stock
            
            
            8,000
            
            
            80
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            80Balance,
                September 27, 2008
            
            
            .3,310,942
            
            $
            33,110
            
            $
            20,253,101
            
            $
            1,545,159
            
            
            362,905
            
            $
            (3,122,164
            )
            $
            18,709,206





See
      accompanying notes.







3




MERRIMAC
      INDUSTRIES, INC.


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)




Nine
                Months EndedSeptember
                27,
              2008
            
            September
                29,
              2007Cash
                flows from operating activities:Net
                income (loss)
            
            $
            371,235
            
            $
            (6,546,170
            )Loss
                from discontinued operations
            
            
            (65,992
            )
            
            (5,858,265
            )Income
                (loss) from continuing operations
            
            
            437,227
            
            
            (687,905
            )Adjustments
                to reconcile net income (loss) from continuing operations to net
                cash used
                in operating activities:Depreciation
                and amortization
            
            
            1,907,668
            
            
            1,756,945Amortization
                of deferred financing costs
            
            
            24,120
            
            
            22,755Share-based
                compensation
            
            
            375,837
            
            
            223,037Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (1,592,848
            )
            
            (1,385,254
            )Inventories
            
            
            (845,971
            )
            
            (741,534
            )Revenue
                in excess of billing
            
            
            (1,185,909
            )
            
            -Other
                current assets
            
            
            48,944
            
            
            57,061Other
                assets
            
            
            69,311
            
            
            (30,464
            )Accounts
                payable
            
            
            (38,436
            )
            
            (76,272
            )Accrued
                liabilities
            
            
            (98,316
            )
            
            169,503Income
                taxes payable
            
            
            10,000
            
            
            -Customer
                deposits
            
            
            157,065
            
            
            152,261Deferred
                liabilities
            
            
            2,215
            
            
            17,595Net
                cash used in operating activities of continuing operations
            
            
            (729,093
            )
            
            (522,272
            )Net
                cash used in operating activities of discontinued
                operations
            
            
            (65,992
            )
            
            (363,141
            )Net
                cash used in operating activities
            
            
            (795,085
            )
            
            (885,413
            )Cash
                flows from investing activities:Purchases
                of capital assets
            
            
            (671,780
            )
            
            (1,070,450
            )Cash
                proceeds from sale of discontinued operations
            
            
            664,282
            
            
            -Net
                cash used in investing activities of continuing operations
            
            
            (7,498
            )
            
            (1,070,450
            )Net
                cash used in investing activities of discontinued
                operations
            
            
            -
            
            
            (180,136
            )Net
                cash used in investing activities
            
            
            (7,498
            )
            
            (1,250,586
            )Cash
                flows from financing activities:Repurchase
                of common stock for the treasury
            
            
            -
            
            
            (2,148,300
            )Borrowings
                under revolving credit facility
            
            
            1,000,000
            
            
            -Repayment
                of long-term debt
            
            
            (616,667
            )
            
            (412,500
            )Restricted
                cash returned (deposited)
            
            
            250,000
            
            
            (250,000
            )Proceeds
                from the exercise of stock options
            
            
            28,331
            
            
            73,800Proceeds
                from Stock Purchase Plan sales
            
            
            59,435
            
            
            78,649Net
                cash provided by (used in) financing activities of continuing
                operations
            
            
            721,099
            
            
            (2,658,351
            )Net
                cash used in financing activities of discontinued
                operations
            
            
            -
            
            
            (51,783
            )Net
                cash provided by (used in) financing activities
            
            
            721,099
            
            
            (2,710,134
            )Effect
                of exchange rate changes
            
            
            -
            
            
            32,856Net
                decrease in cash and cash equivalents
            
            
            (81,484
            )
            
            (4,813,277
            )Cash
                and cash equivalents at beginning of period, including $0 and $562,205
                reported under assets held for sale
            
            
            2,004,471
            
            
            5,961,537Cash
                and cash equivalents at end of period including $0 and $42,905 reported
                under assets held for sale
            
            $
            1,922,987
            
            $
            1,148,260Supplemental
                disclosures of cash flow information:Cash
                paid during the period for-Interest
                on credit facilities
            
            $
            173,762
            
            $
            272,644





See
      accompanying notes.




4




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.
      BASIS
      OF PRESENTATION





The
      accompanying unaudited condensed 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
      accounting principles generally accepted in the United States of America for
      a
      full fiscal year. The financial statements do, however, reflect all adjustments
      of a normal recurring nature which are, in the opinion of management, necessary
      for a fair presentation of the financial position of Merrimac Industries, Inc.
      (“Merrimac” or the “Company”) as of September 27, 2008 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.





In
      accordance with the provisions of Statement of Financial Accounting Standards
      (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets” (“SFAS No. 144”), the results of operations related to Filtran
      Microcircuits Inc. (“FMI”) for the third quarter of 2007 and 2008, and and the
      first nine months of 2007 and 2008 have been reported as discontinued
      operations.





The
      condensed consolidated balance sheet at December 29, 2007 has been derived
      from
      the audited financial statements at that date but does not include all the
      information required by accounting principles generally accepted in the United
      States of America for complete financial statements. For further information,
      refer to the consolidated financial statements and footnotes thereto included
      in
      the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
      Commission on March 28, 2008 for the year ended December 29, 2007. See summary
      of Significant Accounting Policies in the Company’s 2007 Annual Report on Form
      10-K for a discussion of the accounting policies utilized by the
      Company.





2.
      DISCONTINUED OPERATIONS





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





On
      December 28, 2007, the Company sold substantially all of the assets of its
      wholly-owned subsidiary, FMI, to Firan Technology Group Corporation (“FTG”), a
      manufacturer of high technology/high reliability printed circuit boards, that
      has operations in Toronto, Ontario, Canada and Chatsworth, California. The
      transaction was effected pursuant to an asset purchase agreement entered into
      between Merrimac, FMI and FTG. The total consideration payable by FTG was
      $1,482,000 (Canadian $1,450,000) plus the assumption of certain liabilities
      of
      approximately $368,000 (Canadian $360,000). FTG paid $818,000 (Canadian
      $800,000) of the purchase price at closing and the balance of $664,282 was
      paid
      on February 21, 2008 following the conclusion of a transitional period.





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





Quarter
                Ended
            
            Nine
                Months EndedSeptember
                27,
              2008
            
            September
                29,
              2007
            
            September
                27,
              2008
            
            September
                29,
              2007Net
                sales
            
            $
            -
            
            $
            1,003,000
            
            $
            -
            
            $
            2,824,000Loss
                before provision for income taxes
            
            $
            (11,000
            )
            
            (2,058,000
            )
            $
            (66,000
            )
            
            (5,352,000
            )Provision
                for income taxes
            
            
            ----
            
            
            ----
            
            
            ----
            
            
            506,000Net
                loss
            
            $
            (11,000
            )
            $
            (2,058,000
            )
            $
            (66,000
            )
            $
            (5,858,000
            )








5




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





3.
      REVENUE RECOGNITION





The
      Company derives its revenues from sales of the following: customized products,
      which include amounts billable for non-recurring engineering services and in
      some instances the production and delivery of prototypes, ** and
      the
      subsequent production and delivery of units under short-term, firm-fixed price
      contracts; the design, documentation, production and delivery of a series of
      complex components under long-term firm-fixed price contracts; and the delivery
      of off-the-shelf standard products.





The
      Company accounts for all contracts, except those for the sale of off-the-shelf
      standard products, in accordance with AICPA Statement of Position No. 81-1,
      “Accounting for Performance of Construction-Type and Certain Production-Type
      Contracts” (“SOP 81-1”).





The
      Company recognizes all amounts billable under short-term contracts involving
      non-recurring engineering (“NRE”) services for customization of products in net
      sales and all related costs in cost of sales under the completed-contract method
      when the customized units are delivered. The Company periodically enters into
      contracts with customers for the development and delivery of a prototype prior
      to the shipment of units. Under those circumstances, the Company recognizes
      all
      amounts billable for NRE services in net sales and all related costs in cost
      of
      sales when the prototype is delivered and recognizes all of the remaining
      amounts billable and the related costs when the units are delivered.





Increasingly,
      the Company has complex, long-term contracts for the engineering design,
      development and production of space electronics products for which revenue
      is
      recognized under the percentage-of-completion method. Sales and related contract
      costs for design and documentation services under this type of contract are
      recognized based on the cost-to-cost method. Sales and related contract costs
      for products delivered under these contracts are recognized on the
      units-of-delivery method. The Company has one contract which is primarily
      related to the design and development (and to a lesser extent, the production
      of
      space electronics) for which revenue under the entire contract is recognized
      under the percentage of completion method using the cost-to-cost method. For
      such contract the Company has recognized revenues in excess of billings of
      approximately $1,186,000 at September 27, 2008.





Pursuant
      to SOP 81-1, anticipated losses on all contracts are charged to operations
      in
      the period when the losses become known.





Sales
      of
      off-the-shelf standard products and related costs of sales are recorded when
      title transfers to the customer, which is generally on the date of shipment,
      provided persuasive evidence of an arrangement exists, the sales price is fixed
      or determinable and collection of the related receivable is
      probable.





4.
      ACCOUNTING PERIOD





The
      Company's fiscal year is the 52-53 week period ending on the Saturday closest
      to
      December 31. The Company has quarterly dates that correspond with the Saturday
      closest to the last day of each calendar quarter and each quarter consists
      of 13
      weeks in a 52-week year. Periodically, the additional
      week to make a 53-week year (fiscal year 2008 will be the next) is added to
      the
      fourth quarter, making such quarter consist of 14 weeks.





5.
      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 September 29, 2007 was attributable
      solely to the effects of foreign currency translation.  Following
      the sale of the Company’s discontinued operations in December 2007, there is no
      foreign currency translation adjustment at September 27, 2008. There were no
      differences between net income (loss) and comprehensive income (loss) for any
      period presented except for the nine months ended September 29, 2007 summarized
      as follows:








COMPREHENSIVE
      LOSS




Net
                  loss
              
              $
              (6,546,170
              )Comprehensive
                  income:Foreign
                  currency translation adjustment
              
              
              456,693Comprehensive
                  loss
              
              $
              (6,089,477
              )


6




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





6.
      RECENT
      ACCOUNTING PRONOUNCEMENTS





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 157 “Fair Value Measurements”.
      SFAS No. 157 establishes a single authoritative definition of fair value, sets
      out a framework for measuring fair value and requires additional disclosures
      about fair-value measurements. SFAS No. 157 applies only to fair-value
      measurements that are already required or permitted by other accounting
      standards and is expected to increase the consistency of those measurements.
      It
      will also affect current practices by nullifying Emerging Issues Task Force
      guidance that prohibited recognition of gains or losses at the inception of
      derivative transactions whose fair value is estimated by applying a model and
      by
      eliminating the use of “blockage” factors by brokers, dealers and investment
      companies that have been applying
      AICPA Guides. The Company adopted SFAS No. 157 on December 30, 2007. The
      adoption of SFAS No. 157 did not have an impact on its financial position and
      results of operations.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS
      No. 159 permits entities to choose to measure many financial assets and
      financial liabilities at fair value. Unrealized gains and losses on items for
      which the fair value option has been elected are reported in net income. The
      Company adopted SFAS No. 159 on December 30, 2007. The adoption of SFAS No.
      159
      did not have an impact on its financial position and results of operations,
      since the Company did not elect the fair value option for any assets or
      liabilities.





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





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





7.
      SHARE-BASED COMPENSATION





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





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





The
      components of share-based compensation expense in the statements ofoperations
      are as follows:





7





MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








Quarters
                Ended
            
            Nine
                Months EndedSeptember
                27,
              2008
            
            September
                29,
              2007
            
            September
                27,
              2008
            
            September
                29,
              2007Stock
                options
            
            $
            95,000
            
            $
            61,000
            
            $
            293,000
            
            $
            147,000Restricted
                stock
            
            
            17,000
            
            
            16,000
            
            
            64,000
            
            
            33,000Employee
                stock purchase plan
            
            
            6,000
            
            
            14,000
            
            
            19,000
            
            
            43,000Total
                share-based compensation
            
            $
            118,000
            
            $
            91,000
            
            $
            376,000
            
            $
            223,000





For
      the
      quarters and nine months ended September 27, 2008 and September 29, 2007,
      share-based compensation expense was allocated as follows:




Quarters
                Ended
            
            Nine
                Months EndedSeptember
                27,
              2008
            
            September
                29,
              2007
            
            September
                27,
              2008
            
            September
                29,
              2007Cost
                of sales
            
            $
            45,000
            
            $
            25,000
            
            $
            135,000
            
            $
            54,000Selling,
                general and administrative
            
            
            73,000
            
            
            66,000
            
            
            241,000
            
            
            169,000Total
                share-based compensation
            
            $
            118,000
            
            $
            91,000
            
            $
            376,000
            
            $
            223,000







The
      fair
      value of the options granted was estimated on the date of grant using the
      Black-Scholes option valuation model.





The
      following weighted average assumptions for options granted in the quarter and
      nine months ended September 27, 2008 and September 29, 2007 were
      utilized:





2008
            
            2007Expected
                option life (years)
            
            
            6.0
            
            
            5.8Expected
                volatility
            
            
            37.56
            %
            
            33.51
            %Risk-free
                interest rate
            
            
            3.14
            %
            
            4.53
            %Expected
                dividend yield
            
            
            0.00
            %
            
            0.00
            %







The
      Black-Scholes option valuation model was developed for use in estimating the
      fair value of traded
      options, which have no vesting restrictions and are fully transferable. Option
      valuation models require the input of highly subjective assumptions including
      the expected stock price volatility.





Share-Based
      Compensation Plans:





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





The
      2006
      Stock Option Plan authorizes the grant of an aggregate of 500,000 shares of
      Common Stock to employees, directors and consultants of the Company. Under
      the
      2006 Stock Option Plan, the
      Company may grant to eligible individuals incentive stock options, as defined
      in
      Section 422 of the Internal Revenue Code of 1986 (the “Code”), and/or
      non-qualified stock options. The purposes of the 2006 Stock Option Plan are
      to
      attract, retain and motivate employees, compensate consultants, and to enable
      employees, consultants and directors, including non-employee directors,
      to participate in the long-term growth of the Company by providing for or
      increasing the proprietary interests of such persons in the Company, thereby
      assisting the Company to achieve its long-range goals. At September 27, 2008,
      there were 318,800 options outstanding under the 2006 Stock Option Plan of
      which
      124,600 were exercisable. Options are granted at the closing price of the
      Company’s shares on the American Stock Exchange on the date immediately prior to
      grant, pursuant to the 2006 Stock Option Plan. Options available for grant
      under
      the 2006 Stock Option Plan were 181,200 at September 27, 2008.





At
      September 27, 2008, the Company also maintains share-based compensation
      arrangements under the following plans: (i) 1997 Long-Term Incentive Plan;
      and
      (ii) 2001 Stock Option Plan.


8


MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





At
      September 27, 2008, there were 141,600 options outstanding under the 1997 Long
      Term Incentive Plan and the 2001 Stock Option Plan, of which all were
      exercisable. No options are available for future grant under the 1997 Long
      Term
      Incentive Plan or the 2001 Stock Option Plan.





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





Weighted-Average
            
            Average
            
            AggregateNumber
                of
            
            Exercise
            
            Contractual
            
            IntrinsicShares
            
            Price
            
            Term
                (Years)
            
            ValueOutstanding
                atDecember
                29, 2007
            
            
            594,747
            
            $
            9.30Granted
            
            
            17,500
            
            
            5.15Exercised
            
            
            (4,082
            )
            
            6.94Expired
            
            
            (74,665
            )
            
            10.13Forfeited
            
            
            (73,100
            )
            
            8.62Outstanding
                atSeptember
                27, 2008
            
            
            460,400
            
            $
            9.13
            
            
            6.9
            
            
            2,000Exercisable
                atSeptember
                27, 2008
            
            
            266,200
            
            $
            9.22
            
            
            5.6
            
            
            -





The
      weighted-average grant-date fair value of options granted during the nine months
      ended September 27, 2008 and September 29, 2007 was $2.14 and $3.77,
      respectively. The total intrinsic value of options exercised during the nine
      months ended September 27, 2008 was approximately $9,000. No options were
      exercised during the quarters ended September 27, 2008 and September 29, 2007.
      The total intrinsic value of options exercised for the nine months ended
      September 29, 2007 was approximately $1,000 and $16,000, respectively.




As
      As of
      September 27, 2008, the total future compensation cost related to nonvested
      stock options and the employee stock purchase plan not yet recognized in the
      statement of operations was $577,000. Of that total, $100,000, $344,000,
      $128,000 and $5,000 are expected to be recognized in 2008, 2009, 2010 and 2011,
      respectively. The fair value of options vested during the quarter and nine
      months ended September 27, 2008 was $14,000 and $357,000, respectively. The
      fair
      value of options vested during the nine months ended September 29, 2007 was
      $71,000. There were no options vested during the quarter ended September 27,
      2007.





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





On
      June
      26, 2008, the Company issued a grant of 9,000 shares of restricted stock to
      six
      of its non-employee directors. The per share price of the grant was $5.15 (the
      closing price of the Company’s shares on The American Stock Exchange on the date
      immediately prior to the grant, pursuant to the terms of the plan). One third
      of
      such restricted stock vests on each anniversary of the grant date over a
      three-year period. Share-based compensation expense for the quarter and nine
      months ended September 27, 2008 related to the grants of restricted stock was
      approximately $17,000 and $64,000, respectively, which was based on a
      straight-line amortization of the fair value of the awards over the expected
      service period of three years. Share-based compensation expense for the quarter
      and nine months ended September 29, 2007 related to the grants of restricted
      stock was approximately $16,000 and $33,000, respectively. Restricted shares
      of
      common stock available for grant under the 2006 Non-Employee Directors’ Stock
      Plan were 71,500 at September 27, 2008.





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




Weighted-AverageGrant-DayFair
                Value
            
            SharesUnvested
                at December 29, 2007
            
            $
            9.69
            
            
            16,500Granted
            
            
            5.15
            
            
            9,000Vested
            
            
            9.67
            
            
            (8,000
            )Unvested
                at September 27, 2008
            
            $
            7.36
            
            
            17,500




9





MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





As
      of
      September 27, 2008, the total future compensation cost related to the 2006
      Non-Employee Directors’ Stock Plan not yet recognized in the statement of
      operations was $108,000. Of that total, $19,000, $55,000, $28,000 and $6,000
      are
      expected to be recognized in 2008, 2009, 2010 and 2011, respectively.





8.
      INVENTORIES





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





Inventories
      consist of the following:




September
                27,
              2008
            
            December
                29,
              2007Finished
                goods
            
            $
            442,822
            
            $
            239,503Work
                in process
            
            
            2,919,172
            
            
            2,979,632Raw
                materials and purchased parts
            
            
            2,523,747
            
            
            1,820,635Total
            
            $
            5,885,741
            
            $
            5,039,770




9.
      LONG-LIVED ASSETS





The
      Company accounts for long-lived assets under SFAS 144, “Accounting for the
      impairment or disposal of long-lived assets” (“SFAS NO. 144”). Management
      assesses the recoverability of its long-lived assets, which consist primarily
      of
      fixed assets and intangible assets with finite useful lives, whenever events
      or
      changes in circumstances as described in SFAS No. 144 indicate that the carrying
      value may not be recoverable. Impairment charges would be included with costs
      and expenses in the Company's consolidated statements of operations, and would
      result in reduced carrying amounts of the related assets on the Company's
      consolidated balance sheets.





Fixed
      assets and intangible assets have been tested for recoverability at least
      annually since 2002 following the guidance of SFAS No. 144. Based on the results
      of this testing, we have concluded that the undiscounted cash flows expected
      to
      result from the use of these assets exceeds its carrying amount and, therefore,
      there is no impairment loss.





10.
      CURRENT AND LONG-TERM DEBT





The
      Company was obligated under the following debt instruments at September 27,
      2008
      and December 29, 2007:




2008
            
            2007Capital
                One, N.A. (formerly North Fork Bank):Revolving
                line of credit, 2.00% above LIBOR or 0.50% below prime
            
            $
            1,000,000
            
            $
            -Term
                loan, due October 1, 2011, 2.25% above LIBOR or 0.50%below
                prime
            
            
            1,233,333
            
            
            1,500,000Mortgage
                loan, due October 1, 2016, 2.25% above LIBOR or 0.50%below
                prime
            
            
            2,462,500
            
            
            2,812,5004,695,833
            
            
            4,312,500Less
                current portion
            
            
            1,550,000
            
            
            550,000Long-term
                portion
            
            $
            3,145,833
            
            $
            3,762,500





Facility
      in effect at September 27, 2008 - repaid September 30, 2008


On
      October 18, 2006, the Company entered into a financing agreement with Capital
      One, N.A. (formerly North Fork Bank) consisting of a two-year $5,000,000
      revolving line of credit, a five-year $2,000,000 machinery and equipment term
      loan due October 1, 2011 (“Term Loan”) and a ten-year $3,000,000 real estate
      term loan due October 1, 2016 (“Mortgage Loan”). The revolving line of credit is
      subject to an availability limit under a borrowing base calculation (85% of
      eligible accounts receivable plus up to 50% of eligible raw materials inventory
      plus up to 25% of eligible electronic components, with an inventory advance
      sublimit not to exceed $1,500,000, as defined in the financing agreement).





10




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





The
      Company borrowed $500,000 under the revolving line of credit on May 1, 2008.
      On
      July 1, 2008, the Company borrowed an additional $500,000 under the revolving
      line of credit. The revolving line of credit bears interest at the prime rate
      less 0.50% (4.50% at September 27, 2008) or LIBOR plus 2.00%. The principal
      amount of the Term Loan is payable in 59 equal monthly installments of $33,333
      and one final payment of the remaining principal balance. The Term Loan bears
      interest at the prime rate less 0.50% (4.50% at September 27, 2008) or LIBOR
      plus 2.25%. The principal amount of the Mortgage Loan is payable in 119 equal
      monthly installments of $12,500 and one final payment of the remaining principal
      balance. The Mortgage Loan bears interest at the prime rate less 0.50% (4.50%
      at
      September 27, 2008 and currently 4.50%) or LIBOR plus 2.25%. At September 27,
      2008, the Company had no portion of its borrowings under LIBOR-based interest
      rates. The revolving line of credit, the Term Loan and the Mortgage Loan are
      collateralized by substantially all assets located within the United States
      and
      the pledge of 65% of the stock of the Company's subsidiaries located in Costa
      Rica and Canada.





Capital
      One, N.A. and the Company amended the financing agreement, as of May 15, 2007,
      which (i) eliminated the fixed charge coverage ratio covenant for the quarter
      ended September 29, 2007, (ii) added a covenant related to earnings before
      interest, taxes, depreciation and amortization (“EBITDA”) for the four quarters
      ended September 29, 2007 to require the Company to achieve a minimum level
      of
      EBITDA, and (iii) modified the fixed charge coverage ratio covenant for periods
      after the quarter ending September 29, 2007. The Company was in compliance
      with
      these amended covenants at September 27, 2008.





New
      Credit facility - effective September 29, 2008


On
      September 29, 2008, the company entered into a credit facility with Wells Fargo
      Bank, N.A. (WFB)(the “Wells Fargo Credit Facility”) which replaced the Company’s
      credit facility with Capital One, N.A. On September 30, 2008, the Company repaid
      all outstanding amounts under the credit facility with Capital One, N.A. with
      the proceeds of the Wells Fargo Credit Facility. The Wells Fargo Credit Facility
      consists of a three-year $5,000,000 collateralized revolving credit facility,
      a
      three-year $500,000 equipment term loan and a three-year $2,500,000 real estate
      term loan. The revolving line of credit is subject to an availability limit
      under a borrowing base calculation of 85% of eligible domestic accounts
      receivable, 75% of eligible foreign accounts receivable, and 30% of eligible
      inventory with an inventory sublimit of $400,000. The revolving line of credit
      expires September 29, 2011. The revolving line of credit bears interest at
      the
      prime rate plus one percent, with the prime rate having a floor limit of 5%
      for
      loan purposes. The Company may request a LIBOR quote for an initial minimum
      of
      $1,000,000 with subsequent requests at a minimum of $500,000. No more than
      three
      such requests may be active at any point in time. LIBOR advances bear interest
      at the LIBOR rate plus 3.25% for a credit advance, or 3.50% for a term loan.
      The
      equipment loan is required to be repaid in equal monthly installments of $13,900
      based on a four year amortization. The real estate loan is required to be paid
      in equal monthly installments amortized over a 180 month time period, with
      any
      unpaid principal and interest due and payable on the termination date of
      September 29, 2011. The two term loans require mandatory prepayment under
      certain circumstances subject to a prepayment fee of 1%-2% of the outstanding
      balance.





The
      equipment term loan bears interest at the prime (with a floor of 5%) rate plus
      1%. The real estate term loan bears interest at the prime rate (with a floor
      of
      5%) plus 1.50% or LIBOR plus 3.50%.





The
      Wells
      Fargo Credit Facility contains several financial and non-financial covenants
      and
      is collateralized by substantially all assets of the Company.





On
      September 29, 2008, under the Wells Fargo Credit Facility, the Company borrowed
      approximately $1.7 million under the revolving credit facility, $500,000 under
      the equipment term loan and $2.5 million under the real estate term
      loan.





At
      September 27, 2008 and December 29, 2007, the fair value of the Company's debt
      approximates carrying value. The fair value of the Company's long-term debt
      is
      estimated based on current interest rates.





11.
      WARRANTIES





The
      Company's products sold under contracts have warranty obligations. Estimated
      warranty costs for each contract are determined based on the contract terms
      and
      technology specific issues. The Company accrues estimated warranty costs at
      the
      time of sale and any additional amounts are recorded when such costs are
      probable and can be reasonably estimated. Warranty expense was approximately
      $12,000 and $57,000 for the quarters ended September 27, 2008 and September
      29,
      2007, respectively, and $77,000 and $136,000 for the nine months ended September
      27, 2008 and September 29, 2007, respectively. The warranty reserve at September
      27, 2008 and December 29, 2007 was approximately $200,000.





11


MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





12.
      INCOME TAXES





As
      of
      September 27, 2008, the Company has significant deferred tax assets resulting
      from net operating loss carryforwards, tax credit carryforwards, and deductible
      temporary differences, which
      may
      reduce taxable income in future periods. A valuation allowance is required
      when
      management assesses that it is more likely than not that all or a portion of
      a
      deferred tax asset will not be realized. The Company's 2002, 2003, 2006 and
      2007
      net losses have weighed heavily in the Company's overall assessments. The
      Company established a full valuation allowance for its remaining U.S. net
      deferred tax assets as a result of its assessment at December 28, 2002. This
      assessment continued unchanged from 2003 through the third quarter of 2008.
      For
      the period ended September 27, 2008, the Company provided for Alternative
      Minimum Tax and certain state taxes, based upon the estimated annualized tax
      provision.





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
      may
      become subject to these limitations in 2008 depending on the extent of the
      changes in its ownership.





On
      December 31, 2006, the Company adopted FIN 48, which clarifies the accounting
      for uncertainty in tax positions. As of that date, the Company had no uncertain
      tax positions and did not record any additional benefits or liabilities. At
      September 27, 2008 and December 29, 2007, the Company had no uncertain tax
      positions and did not record any additional benefits or liabilities. The Company
      will recognize any accrued interest or penalties related to unrecognized tax
      benefits or liabilities within the provision for income taxes.





13.
      BUSINESS SEGMENT DATA





The
      Company's continuing operations are conducted through one business segment,
      electronic components and subsystems. This segment involves the 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, 85% are located
      in the United States and 15% are located in Costa Rica.




14.
      NET
      INCOME (LOSS) PER COMMON SHARE





Basic
      net
      income (loss) per common share is calculated by dividing net income (loss)
      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 (loss) per common share, except that the denominator is increased
      to
      include the number of additional common shares that would have been outstanding
      if all potentially dilutive common shares, principally those issuable under
      stock options, were issued during the reporting period to the extent they are
      not anti-dilutive, using the treasury stock method.




12








MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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





Quarters
                Ended
            
            Nine
                Months EndedSeptember
                27,
            
            September
                29,
            
            September
                27,
            
            September
                29,2008
            
            2007
            
            2008
            
            2007Net
                income (loss)
            
            $
            182,133
            
            $
            (1,813,445
            )
            $
            371,235
            
            $
            (6,546,170
            )Basic
                net income (loss) per shareWeighted
                average number of shares outstanding forbasic
                net income (loss) per share-Common
                stock
            
            
            2,948,037
            
            
            2,917,245
            
            
            2,940,112
            
            
            2,974,757Net
                income (loss) per common share - basic
            
            
            $
                .06
            
            $
            (.62
            )
            $
            .13
            
            $
            (2.20
            )Diluted
                net income (loss) per shareWeighted
                average number of shares outstanding fordiluted
                net income (loss) per share:Common
                stock
            
            
            2,948,037
            
            
            2,917,245
            
            
            2,940,112
            
            
            2,974,757Effect
                of dilutive securities:Stock
                options (1)
            
            
            17,500
            
            
            42,942
            
            
            25,254
            
            
            -Weighted
                average number of shares outstanding fordiluted
                net income (loss) per share
            
            
            2,965,537
            
            
            2,960,187
            
            
            2,965,366
            
            
            2,974,757Net
                income (loss) per common share - diluted
            
            $
            .06
            
            $
            (.61
            )
            $
            .13
            
            $
            (2.20
            )








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





Diluted
      net income (loss) per share excludes 460,000 and 84,000 shares underlying stock
      options for
      the
      quarters ended September 27, 2008 and September 29, 2007, respectively, as
      the
      exercise price of these options was greater than the average market value of
      the
      common shares. Diluted net income per share excludes 430,000 shares underlying
      stock options for the nine-month period ended September 27, 2008, as the
      exercise price of these options was greater than the average market value of
      the
      common shares. Due to the net loss for nine months ended September 29, 2007,
      approximately 606,000 shares underlying stock options were excluded from the
      calculation of diluted net loss per share as the effect would be
      anti-dilutive.





15.
      RELATED PARTY TRANSACTIONS





During
      the third quarter and first nine months of 2008, the Company's outside general
      counsel Katten Muchin Rosenman LLP was paid $73,000 and $242,000, respectively,
      for providing legal services to the Company. During the third quarter and first
      nine months of 2007, Katten Muchin Rosenman LLP was paid $78,000 and $274,000,
      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
      2008 and 2007 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 $4,000 to these companies during the
      second quarter and first nine months of 2008, respectively. The Company paid
      an
      aggregate of $11,000 and $32,000 to these companies during the second quarter
      and first nine months of 2007, respectively. A director of the Company is the
      chairman and chief executive officer of these companies.





During
      the third quarter and first nine months of 2008 and 2007, a director of the
      Company was paid $9,000 and $27,000, respectively, for providing
      technology-related consulting services to the Company.





The
      Company has an agreement with DuPont Electronic Technologies (“DuPont”), a
      stockholder and the employer of a director, for providing technological and
      marketing-related personnel and services on a cost-sharing basis to the Company
      under the Technology Agreement dated February 28, 2002. No payments were made
      to
      DuPont during the third quarter and first nine months of 2008 or 2007. A
      director of the Company is an officer of DuPont, but would not share in these
      payments, if any.





On
      December 13, 2004, Infineon Technologies AG (“Infineon”), at such time the
      beneficial owner of a portion 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





13




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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





DuPont
      and two of the purchasers above hold registration rights, which currently give
      them the right in perpetuity to register an aggregate of 828,413 shares of
      Common Stock of the Company. There are no settlement alternatives and the
      registration of the shares of Common Stock would be on a “best efforts” basis.





16.
      REPURCHASE OF COMMON STOCK





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





17.
      LEGAL
      PROCEEDINGS





On
      February 22, 2008, a statement of claim in Ontario Superior Court of Justice
      was
      filed by a former FMI employee against FMI seeking damages for approximately
      $77,000 ($75,000 Canadian) for wrongful dismissal following the sale of FMI’s
      assets to FTG. The Company settled this claim in May 2008 for a minimal
      amount.





On
      March
      10, 2008, a statement of claim in Ontario Superior Court of Justice was filed
      by
      nineteen (19) former FMI employees against Merrimac, FMI and FTG seeking damages
      for wrongful dismissal for approximately $1,000,000 (Canadian $977,000)
      following the sale of FMI’s assets to
      FTG.
      The former FMI employees are alleging that an employment contract existed
      between FMI and the plaintiffs and are seeking additional damages for
      termination of the alleged contract. Merrimac
      believes it has been improperly named in this claim and is petitioning the
      Court
      to be removed as a defendant.





Merrimac
      has an Employment Practices Liability insurance policy that extends coverage
      to
      its subsidiaries. The insurance carrier agreed to provide a defense in this
      matter on April 24, 2008
      and
      they retained Canadian counsel to defend this claim. Merrimac made provision
      for
      the deductible
      amount of the insurance policy. Merrimac and its insurance carrier intend to
      defend these claims vigorously.





On
      July
      23, 2008, a Statement of Claim was filed in Ontario Superior Court of Justice
      by
      the lessor of the premises formerly occupied by FMI in Ontario, Canada, against
      FMI, Merrimac, and FTG.
      The
      Statement of Claim seeks damages of $150,612 in respect of the period from
      and
      after which FTG, which purchased the assets of FMI, removed operations from
      the
      premises through the term of the lease. In addition, the Statement of Claim
      seeks damages for $110,319 for repairs to the premises, and seeks to set aside
      the transfer of assets from FMI to FTG for the failure to comply with the Bulk
      Sales Act Ontario. The Company intends to defend this claim
      vigorously.





After
      discussions with counsel, Merrimac believes any loss under such matters will
      not
      have a material effect on its financial condition.





14




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
      Merrimac (including certain projections and business trends) that are
      "forward-looking statements" as defined in the Private Securities Litigation
      Reform Act of 1995. In this report, the words “we”, “us” and “our” refer to
      Merrimac and its subsidiaries. Actual results may differ materially from those
      projected as a result of certain risks and uncertainties. These risks and
      uncertainties include, but are not limited to: risks associated with demand
      for
      and market acceptance of existing and newly developed products as to which
      the
      Company has made significant investments, particularly its Multi-Mix® products;
      the possibilities of impairment charges to the carrying value of our Multi-Mix®
assets, thereby resulting in charges to our earnings; risks associated with
      adequate capacity to obtain raw materials and reduced control over delivery
      schedules and costs due to reliance on sole source or limited suppliers; slower
      than anticipated penetration into the satellite communications, defense and
      wireless markets; failure of our Original Equipment Manufacturer, or OEM,
      customers to successfully incorporate our products into their systems; changes
      in product mix resulting in unexpected engineering and research and development
      costs; delays and increased costs in product development, engineering and
      production; reliance on a small number of significant customers; the emergence
      of new or stronger competitors as a result of consolidation movements in the
      market; the timing and market acceptance of our or our OEM customers’ new or
      enhanced products; general economic and industry conditions; the ability to
      protect proprietary information and technology; competitive products and pricing
      pressures; our ability and the ability of our OEM customers to keep pace with
      the rapid technological changes and short product life cycles in our industry
      and gain market acceptance for new products and technologies; risks relating
      to
      governmental regulatory actions in communications and defense programs; and
      inventory risks due to technological innovation and product obsolescence, as
      well as other risks and uncertainties as are detailed from time to time in
      the
      Company's Securities and Exchange Commission filings. These forward-looking
      statements are made only as of the date of the filing of this 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





Continuing
      operations.





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





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




For
      the
      third quarter and first nine months of 2008, the Company realized profitable
      results from continuing operations. Previously, the Company had experienced
      losses from continuing operations in the first quarter of 2008 and prior
      quarters. Improved orders and the increased opening backlog from 2007 enabled
      the Company to increase sales for the third quarter of 2008 by $1,716,000 or
      26.0% and $5,081,000 or 30.8% for the first nine months of 2008 compared to
      2007. Gross profit as a percentage of sales dropped from 42.6% in the third
      quarter of 2007 to 33.0% for the third quarter of 2008. Year to date gross
      profit for the first nine months of 2007 was 41.7% and year to date for the
      first nine months of 2008 was 39.2%. The Company pursued a strategy of
      aggressively seeking revenue opportunities throughout 2007 and early 2008.
      This
      strategy has resulted in an increase in revenues with the expected decline
      in
      gross profit percentage, but an increase in gross profit dollars. Backlog
      increased by $3,112,000 or 17.3% to $21,103,000 at the end of the third quarter
      of 2008 from the end of 2007. The Company markets and sells its products
      domestically and internationally through a direct sales force and manufacturers’
representatives. Merrimac has traditionally developed andoffered for sale
      products built to specific customer needs, as well as standard catalog items.




15


Strategically,
      our Multi-Mix® product development is focused on the military and space market
      segments which is resulting in orders. While we will opportunistically monitor
      and be alert to commercial opportunities for Multi-Mix®, where the customer is
      willing to compensate us for our design work, we will not continue to
      speculatively fund this commercial segment. The self-funded investment that
      we
      have previously made has created a library of pre-engineered designs, especially
      in RF Module Amplifiers, which provide platform families for both commercial
      and
      military final customization.




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
      its
      revised capital expenditures for fiscal year 2008 by approximately $1,600,000.
      The Company intends to reduce its commitments to purchase capital equipment
      from
      various vendors to an amount of approximately $300,000 for the fourth quarter
      of
      2008. The Company anticipates that such equipment will be purchased and become
      operational during the remainder of 2008. The Company’s planned equipment
      purchases and other commitments are expected to be funded through cash resources
      and cash flows expected to be generated from operations, and supplemented by
      the
      Company’s $5,000,000 revolving credit facility.





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





Research
      and development expenses consist of materials, salaries and related expenses
      of
      certain engineering personnel, and outside services related to product
      development projects. The Company charges all research and development expenses
      to operations as incurred. The Company believes that continued investment in
      research and development is critical to the Company’s long-term business
      success. The Company intends to continue to invest in research and development
      programs in future periods. The Company will focus its research and development
      efforts on military and space applications and reduce investment in select
      commercial opportunities. Military and space applications are areas in which
      the
      Company has a significant core competency that the Company believes will result
      in a greater return on a reduced level of development spending.





The
      Company anticipates 2008 orders from its defense and satellite customers will
      be
      comparable to fiscal year 2007 levels. 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.





Discontinued
      operations.





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





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





16


On
      December 28, 2007, the Company sold substantially all of the assets of its
      wholly-owned subsidiary, FMI, to Firan Technology Group Corporation (“FTG”), a
      manufacturer of high technology/high reliability printed circuit boards, that
      has operations in Toronto, Ontario, Canada and Chatsworth, California. The
      transaction was effected pursuant to an asset purchase agreement entered into
      between Merrimac, FMI and FTG. The total consideration payable by FTG was
      $1,482,000 (Canadian $1,450,000) plus the assumption of certain liabilities
      of
      approximately





$368,000
      (Canadian $360,000). FTG paid $818,000 (Canadian $800,000) of the purchase
      price
      at closing and the balance was paid on February 21, 2008 following the
      conclusion of a transitional period.





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





Quarter
                Ended
            
            Nine
                Months EndedSeptember
                27,
              2008
            
            September
                29,
              2007
            
            September
                27,
              2008
            
            September
                29,
              2007Net
                sales
            
            $
            -
            
            $
            1,003,000
            
            $
            -
            
            $
            2,824,000Loss
                before provision for income taxes
            
            $
            (11,000
            )
            
            (2,058,000
            )
            $
            (66,000
            )
            
            (5,352,000
            )Provision
                for income taxes
            
            
            -----
            
            
            -----
            
            
            -----
            
            
            506,000Net
                loss
            
            $
            (11,000
            )
            $
            (2,058,000
            )
            $
            (66,000
            )
            $
            (5,858,000
            )








CRITICAL
      ACCOUNTING ESTIMATES AND POLICIES





The
      Company's management makes certain assumptions and estimates that impact the
      reported amounts of assets, liabilities and stockholders' equity, and 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®
Microtechnology, contract revenue recognition, inventory valuation and valuation
      of deferred tax assets.





Contract
      Revenue Recognition





The
      Company derives its revenues from sales of the following: customized products,
      which include amounts billable for non-recurring engineering (“NRE”) services
      and in some instances the production and delivery of prototypes, ** and
      the
      subsequent production and delivery of units under short-term, firm-fixed price
      contracts; the design, documentation, production and delivery of a series of
      complex components under long-term firm-fixed price contracts; and the delivery
      of off-the-shelf standard products.





The
      Company accounts for all contracts, except those for the sale of off-the-shelf
      standard products, in accordance with AICPA Statement of Position No. 81-1,
      “Accounting for Performance of Construction-Type and Certain Production-Type
      Contracts” (“SOP 81-1”).





The
      Company recognizes all amounts billable under short-term contracts involving
      non-recurring engineering services for customization of products in net sales
      and all related costs in cost of sales under the completed-contract method
      when
      the customized units are delivered. The Company periodically enters into
      contracts with customers for the development and delivery of a prototype prior
      to the shipment of units. Under those circumstances, the Company recognizes
      all
      amounts billable for NRE services in net sales and all related costs in cost
      of
      sales when the prototype is delivered and recognizes all of the remaining
      amounts billable and the related costs when the units are delivered.





Increasingly,
      the Company has complex, long-term contracts for the engineering design,
      development and production of space electronics products for which revenue
      is
      recognized under the percentage-of-completion method. Sales and related contract
      costs for design and documentation services under this type of contract are
      recognized based on the cost-to-cost method. Sales and related contract costs
      for products delivered under these contracts are recognized on the
      units-of-delivery method. The Company has one contract which is primarily
      related to design and development for which revenue under the entire contract
      is
      recognized under the percentage of completion method using the cost-to-cost
      method. For such contract the Company has recognized revenues in excess of
      billings of approximately $1,186,000 at September 27, 2008.





17


Pursuant
      to SOP 81-1, anticipated losses on all contracts are charged to operations
      in
      the period when the losses become known.





Sales
      of
      off-the-shelf standard products and related costs of sales are recorded when
      title transfers to the customer, which is generally on the date of shipment,
      provided persuasive evidence of an arrangement exists, the sales price is fixed
      or determinable and collection of the related receivable is
      probable.











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.





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.





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
  ·
              purchases
                  of inventory beyond customer needs that result in excess quantities
                  on
                  hand that may not be returned to the vendor or charged back to
                  the
                  customer.




Valuation
      of Deferred Tax Assets





As
      of
      September 27, 2008, the Company 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 management assesses that it is more likely than not that all
      or a
      portion of a deferred tax asset will not be realized. The Company's 2002, 2003,
      2006 and 2007 net losses have weighed heavily in the Company's overall
      assessments. The Company established a full valuation allowance for its
      remaining U.S. net deferred tax assets as a result of its assessment at December
      28, 2002. This assessment continued unchanged from 2003 through the first nine
      months of 2008.




18


MERRIMAC
      INDUSTRIES, INC.


CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS SUMMARY


(UNAUDITED)





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





Percentage
                of Net Sales
            
            Percentage
                of Net SalesQuarters
                Ended
            
            Nine
                Months EndedSeptember
                27,
            
            September
                29,
            
            September
                27,
            
            September
                29,CONTINUING
                OPERATIONS
            
            2008
            
            2007
            
            2008
            
            2007Net
                sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Costs
                and expenses:Cost
                of sales
            
            
            67.0
            
            
            57.4
            
            
            60.8
            
            
            58.3Selling,
                general and administrative
            
            
            29.1
            
            
            31.7
            
            
            32.5
            
            
            38.1Research
                and development
            
            
            1.3
            
            
            6.1
            
            
            4.0
            
            
            7.497.4
            
            
            95.2
            
            
            97.3
            
            
            103.8Operating
                income (loss
            
            
            2.6
            
            
            4.8
            
            
            2.7
            
            
            (3.8
            )Interest
                and other expense, net
            
            
            (0.2
            )
            
            (1.1
            )
            
            (0.6
            )
            
            (0.4
            )Income
                (loss) from continuing operationsbefore
                income taxes
            
            
            2.4
            
            
            3.7
            
            
            2.1
            
            
            (4.2
            )Provision
                for income taxes
            
            
            (0.1
            )
            
            -
            
            
            (0.1
            )
            
            -Income
                (loss) from continuing operations
            
            
            2.3
            
            
            3.7
            
            
            2.0
            
            
            (4.2
            )DISCONTINUED
                OPERATIONSLoss
                from discontinued operations afterincome
                taxes
            
            
            (0.1
            )
            
            (31.1
            )
            
            (0.3
            )
            
            (35.5
            )Net
                income (loss)
            
            
            2.2
            %
            
            (27.4
            )%
            
            1.7
            %
            
            (39.7
            )%






THIRD
      QUARTER AND FIRST NINE MONTHS OF 2008 COMPARED TO THE THIRD QUARTER AND FIRST
      NINE MONTHS OF 2007-CONTINUING OPERATIONS





*Net
      sales.*





Net
      sales
      from continuing operations for the third quarter of 2008 were $8,328,000, an
      increase of $1,716,000 or 26.0 percent compared to the third quarter of 2007
      net
      sales of $6,612,000. Net sales from continuing operations increased due to
      a
      higher level of orders received throughout fiscal year 2007, which resulted
      in a
      higher opening backlog at the beginning of the 2008 fiscal year, including
      higher sales of Multi-Mix® products to defense industry-related customers, as
      well as a continuation of the favorable trend in orders received during the
      current year that have positively impacted backlog during 2008.





Net
      sales
      from continuing operations for the first nine months of 2008 were $21,576,000,
      an increase of $5,081,000 or 30.8 percent compared to net sales of $16,495,000
      for the first nine months of 2007. The increase in net sales for the first
      nine
      months of 2008 is primarily due to the same reasons that benefited the third
      quarter of 2008 increase in net sales.





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 to 1, 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 nine months ended September 27, 2008 and September
      29,
      2007:





2008
            
            2007Beginning
                backlog
            
            $
            17,991,000
            
            $
            11,490,000Plus
                bookings
            
            
            24,688,000
            
            
            21,767,000Less
                net sales
            
            
            21,576,000
            
            
            16,495,000Ending
                backlog
            
            $
            21,103,000
            
            $
            16,762,000Book-to-bill
                ratio
            
            
            1.14
            
            
            1.32





Orders
      of
      $9,295,000 were received during the third quarter of 2008, an increase of
      $2,266,000 or 32.2 percent compared to $7,029,000 in orders received during
      the
      third quarter of 2007. Orders of $24,688,000 were received during the first
      nine
      months of 2008, an increase of $2,921,000 or 13.4 percent compared to
      $21,767,000 in orders received during the first nine months
      of
      2007. Backlog increased by $3,112,000 or 17.3 percent to $21,103,000 at the
      end
      of the third quarter of 2008 compared to $17,991,000 at year-end 2007, due
      to
      the increased orders received during the first nine months of 2008, including
      orders from defense industry-related customers that are scheduled for shipment
      later in 2008 and 2009. The book-to-bill ratio for the third quarter of 2008
      was
      1.12 to 1 and for the third quarter of 2007 was 1.06 to 1. The book-to-bill
      ratio for the first nine months of 2008 was 1.14 to 1 and for the first nine
      months of 2007 was 1.32 to 1. The orders, backlog and book-to-bill data exclude
      FMI information for 2007.


19


The
      backlog of unfilled orders includes amounts based on signed contracts as well
      as
      agreed letters of intent, which we have determined are legally binding and
      likely to proceed. Although backlog represents only business that is considered
      likely to be performed, cancellations or scope adjustments may and do occur.
      The
      elapsed time from the award of a contract to completion of performance may
      be up
      to approximately four years. The dollar amount of backlog is not necessarily
      indicative of our future earnings related to the performance of such work due
      to
      factors outside our control, such as changes in project schedules, scope
      adjustments or project cancellations. We cannot predict with certainty the
      portion of backlog to be performed in a given year. Backlog is adjusted
      quarterly to reflect project cancellations, deferrals, revised project scope
      and
      cost, and sales of subsidiaries, if any.




*Cost
      of sales and gross profit.*





The
      following table provides comparative gross profit information for the quarters
      and nine months ended September 27, 2008 and September 29, 2007.




Quarter
                ended September 27, 2008
            
            
            Quarter
                ended September 29, 2007$Increase/
              (Decrease)from
                priorperiod
            
            %
                of
              Net
                Sales
            
            
            
            
            $Increase/
              (Decrease)
                from priorperiod
            
            %
                of
              Net
                SalesConsolidated
              gross
                profit
            
            $
            2,749,000
            
            $
            (67,000
            )
            
            33.0
            %
            
            $
            2,816,000
            
            $
            532,000
            
            
            42.6
            %











Nine
                Months ended September 27, 2008
            
            
            Nine
                Months ended September 29, 2007$Increase/
              (Decrease)from
                priorperiod
            
            %
                of
              Net
                Sales
            
            
            
            
            $Increase/
              (Decrease)
                from priorperiod
            
            %
                of
              Net
                SalesConsolidated
              gross
                profit
            
            $
            8,448,000
            
            $
            1,568,000
            
            
            39.2
            %
            
            $
            6,880,000
            
            $
            (782,000
            )
            
            41.7
            %





The
      decrease in consolidated gross profit for the third quarter of 2008 was due
      to
      the impact of an aggressive pricing strategy in prior quarters when the
      Company’s backlog was not as high as the most recent quarters.





The
      increase in consolidated gross profit and consolidated gross profit percentage
      for the nine months of 2008 was due to the impact of the higher level of sales
      allowing for a better absorption of fixed manufacturing costs.





Depreciation
      expense included in consolidated cost of sales for the third quarter of 2008
      was
      $637,000, an increase of $83,000 compared to the third quarter of 2007.
      Depreciation expense included in consolidated cost of sales for the first nine
      months of 2008 was $1,908,000, an increase of $285,000 compared to the first
      nine months of 2007. For the third quarter and first nine months of 2008,
      approximately $391,000 and $1,203,000, respectively, of depreciation expense
      was
      associated with Multi-Mix® Microtechnology capital assets. For the third quarter
      and first nine months of 2007, approximately $393,000 and $1,150,000,
      respectively, of depreciation expense was associated with Multi-Mix®
Microtechnology capital assets.





*Selling,
      general and administrative expenses.*





Selling,
      general and administrative expenses of $2,424,000 for the third quarter of
      2008
      increased by $325,000 or 15.4%, and when expressed as a percentage of net sales,
      decreased by 2.5 percentage points to 29.2% compared to the third quarter of
      2007. The increase in such expenses for the third quarter of 2008 was due to
      higher sales commissions, increased selling costs from recent sales personnel
      hired to meet the demand of increased sales and higher professional fee costs.
      Selling, general and administrative expenses of $7,022,000 for the first nine
      months of 2008 increased by $729,000 or 11.6%, and when expressed as a
      percentage of net sales, decreased by 5.6 percentage points to 32.5% compared
      to
      the first nine months of 2007. The increase in such expenses for the first
      nine
      months of 2008 was due to higher commissions
      on the increased sales level and higher selling and administrative
      costs.





20


*Research
      and development expenses.*





Research
      and development expenses for new products were $105,000 for the third quarter
      of
      2008, a decrease of $295,000 or 73.7%, and when expressed as a percentage of
      net
      sales, decreased by 4.8 percentage points to 1.3% compared to the third quarter
      of 2007. Substantially all of the research and development expenses were related
      to Multi-Mix® Microtechnology products. Research and development expenses for
      new products were $853,000 for the first nine months of 2008, a decrease of
      $367,000 or 30.1%, and when expressed as a percentage of net sales, decreased
      by
      3.4 percentage points to 4.0% compared to the first nine months of 2007.
      Substantially all of the research and development expenses were related to
      Multi-Mix® Microtechnology products. The Company will focus its research and
      development efforts on military and space applications and reduce investment
      in
      select commercial opportunities. Military and space applications are areas
      in
      which the Company has a significant core competency that the Company believes
      will result in a greater return on a reduced level of development
      spending.





*Operating
      income (loss) from continuing operations.*





Operating
      income from continuing operations for the third quarter of 2008 was $220,000,
      compared to operating income from continuing operations of $317,000 for the
      third quarter of 2007. T he
      decrease in operating income from continuing operations for the third quarter
      of
      2008 as compared to the third quarter of 2007 was due to the lower gross profit
      margins and increased selling, general and administrative expenses.





Operating
      income from continuing operations for the first nine months of 2008 was $573,000
      compared to an operating loss from continuing operations for the first nine
      months of 2007 of $(632,000). T he
      increase in operating income from continuing operations for the first nine
      months of 2008 as compared to the first nine months of 2007 was due to the
      increase in sales, and the decrease in research and development spending,
      partially offset by higher sales commissions and increased selling, general
      and
      administrative expenses.





*Interest
      and other expense, net.*





Interest
      and other expense, net was $(17,000) for the third quarter of 2008 compared
      to
      interest and other expense income, net of $(72,000) for the third quarter of
      2007. Interest and other expense, net was $(127,000) for the first nine months
      of 2008 compared to interest and other expense, net of $(56,000) for the first
      nine months of 2007. Interest expense for the third quarter and first nine
      months of 2008 and 2007 was principally incurred on borrowings under the
      Company’s Credit Facility with Capital One, N.A., which was replaced by a credit
      facility with Wells Fargo Bank, N.A. (the “Wells Fargo Credit Facility”)
      subsequent to the end of the third quarter (see “Liquidity and Capital
      Resources” below).





*Income
      (loss) from continuing operations.*





For
      the
      reasons set forth above, income from continuing operations for the third quarter
      of 2008 was $193,000 compared to income from continuing operations of $245,000
      for the third quarter of 2007. Income per diluted share from continuing
      operations for the third quarter of 2008 was $.06 compared to income from
      continuing operations of $.08 per diluted share for the second quarter of
      2007.





For
      the
      reasons set forth above, income from continuing operations for the first nine
      months of 2008 was $437,000 compared to a loss from continuing operations of
      $(688,000) for the first nine months of 2007. Income from continuing operations
      per diluted share for the first nine months of 2008 was $.15 compared to a
      loss
      from continuing operations of $(.23) per share for the first nine months of
      2007.





*Income
      taxes.*





As
      of
      September 27, 2008, the Company 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 management assesses that it is more likely than not that all
      or a
      portion of a deferred tax asset will not be realized. The Company's 2002, 2003,
      2006 and 2007 net losses have weighed heavily in the Company's overall
      assessments. The Company established a full valuation allowance for its
      remaining U.S. net deferred tax assets as a result of its assessment at December
      28, 2002. This assessment continued unchanged from 2003 through the first nine
      months of 2008.





21


On
      December 31, 2006, the Company adopted FIN 48, which clarifies the accounting
      for uncertainty in tax positions. As of that date, the Company had no uncertain
      tax positions and did not record any additional benefits or liabilities. At
      September 27, 2008 and December 29, 2007, the Company had no uncertain tax
      positions and did not record any additional benefits or liabilities. The Company
      will recognize any accrued interest or penalties related to unrecognized tax
      benefits or liabilities
      within the provision for income taxes.





Internal
      Revenue Service Code Section 382 places a limitation on the utilization of
      net
      operating loss carryforwards when an ownership change, as defined in the tax
      law, occurs. Generally, an ownership change occurs when there is a greater
      than
      50 percent change in ownership. Should such a change 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. For the period ended September 27, 2008, the Company
      provided for Alternative Minimum Tax and certain state taxes, based upon the
      estimated annualized tax provision.





*Discontinued
      operations* .





Loss
      from
      discontinued operations for the third quarter was $11,000 and the first nine
      months of 2008 was $66,000 or $.02 per share, which consisted of certain ongoing
      professional fees, claim defense deductibles and certain other expenses. There
      was no loss from discontinued operations in the first quarter of 2008. Loss
      from
      discontinued operations for the third quarter of 2007 was $2,058,000 and for
      the
      first nine months of 2007 was $5,858,000. Loss from discontinued operations
      in
      2007 includes a partial goodwill impairment charge of $2,630,000 and a charge
      of
      $506,000 to provide a full valuation allowance for a Canadian net deferred
      tax
      asset, for a total of $3,136,000 of non-cash charges.





*Net
      income (loss).*





For
      the
      reasons set forth above, net income for the third quarter of 2008 was $182,000
      compared to a net loss of $(1,813,000) for the third quarter of 2007. Net income
      per diluted share for the third quarter of 2008 was $.06 compared to a net
      loss
      of $(.61) per diluted share for the third quarter of 2007.





For
      the
      reasons set forth above, net income for the first nine months of 2008 was
      $371,000 compared to a net loss of $(6,546,000) for the first nine months of
      2007. Net income per diluted share for the first nine months of 2008 was $.13
      compared to a net loss of $(2.20) per share for the first nine months of
      2007.





LIQUIDITY
      AND CAPITAL RESOURCES





The
      Company had liquid resources comprised of cash and cash equivalents totaling
      approximately $1,923,000 at September 27, 2008 compared to approximately
      $2,000,000 at the end of 2007. The main reason for the use of cash at September
      27, 2008 were capital expenditures of $672,000. The Company's working capital
      was approximately $11,600,000 and its current ratio was 3.4 to 1 at September
      27, 2008 compared to $9,900,000 and 3.5 to 1, respectively, at the end of 2007.
      At September 27, 2008, the Company had available borrowing capacity under its
      revolving line of credit of $4,000,000, net of the $1,000,000 outstanding
      revolving credit borrowings. This facility was paid off on September 30, 2008
      with the proceeds of the Wells Fargo Credit Facility (see below).





The
      Company's activities from continuing operations used operating cash flows of
      $795,000 during the first nine months of 2008 compared to using $523,000 of
      operating cash flows during the first nine months of 2007. The primary uses
      of
      operating cash flows from continuing operations for the first nine months of
      2008 were an increase in accounts receivable of $1,593,000 from the higher
      first
      nine months sales level, an increase in inventories of $846,000 to meet the
      production needs of the increased backlog, and an aggregate increase in revenues
      in excess of billings of $1,186,000. These uses of operating cash flows were
      partly offset by income from continuing operations for the first nine months
      of
      2008 of $437,000 plus depreciation and amortization of $1,908,000 incurred
      in
      the first nine months of 2008 and share-based compensation of $375,000, coupled
      with an aggregate reduction in other current assets and other assets of
      $152,000.





The
      Company made net cash investments in property, plant and equipment of $672,000
      during the first nine months of 2008 compared to net cash investments made
      in
      property, plant and equipment of $1,070,000 during the first nine months of
      2007. The depreciated cost of capital equipment associated with Multi-Mix®
Microtechnology was $4,445,000 at the end of the first nine months of 2008,
      a
      decrease of $1,036,000 compared to $5,481,000 at the end of fiscal year 2007.





The
      primary uses of cash flows from financing activities during the first nine
      months of 2007 were the repurchase, in a private transaction on March 14, 2007,
      of 238,700 shares of common stock for the treasury at $9.00 per share for an
      aggregate total of $2,148,000 and the repayments of $275,000 of term loan
      borrowings.





22


The
      Company’s remaining planned equipment purchases for the last quarter of 2008
      have been reduced to approximately $300,000. The reduced capital expenditures
      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.





On
      October 18, 2006, the Company entered into a financing agreement with Capital
      One, N.A. (formerly North Fork Bank) consisting of a two-year $5,000,000
      revolving line of credit, a five-year $2,000,000 machinery and equipment term
      loan due October 1, 2011 (“Term Loan”) and a ten-year $3,000,000 real estate
      term loan due October 1, 2016 (“Mortgage Loan”). The revolving line of credit is
      subject to an availability limit under a borrowing base calculation (85% of
      eligible accounts receivable plus up to 50% of eligible raw materials inventory
      plus up to 25% of eligible electronic components, with an inventory advance
      sublimit not to exceed $1,500,000, as defined in the financing agreement).





The
      Company borrowed $500,000 under the revolving line of credit on May 1, 2008.
      On
      July 1, 2008, the Company borrowed an additional $500,000 under the revolving
      line of credit. The revolving line of credit bears interest at the prime rate
      less 0.50% (4.50% at September 27, 2008) or LIBOR plus 2.00%. The principal
      amount of the Term Loan is payable in 59 equal monthly installments of $33,333
      and one final payment of the remaining principal balance. The Term Loan bears
      interest at the prime rate less 0.50% (4.50% at September 27, 2008) or LIBOR
      plus 2.25%. The principal amount of the Mortgage Loan is payable in 119 equal
      monthly installments of $12,500 and one final payment of the remaining principal
      balance. The Mortgage Loan bears interest at the prime rate less 0.50% (4.50%
      at
      September 27, 2008 and currently 4.50%) or LIBOR plus 2.25%. At September 27,
      2008, the Company had no portion of its borrowings under LIBOR-based interest
      rates. The revolving line of credit, the Term Loan and the Mortgage Loan are
      collateralized by substantially all assets located within the United States
      and
      the pledge of 65% of the stock of the Company's subsidiaries located in Costa
      Rica and Canada.





Capital
      One, N.A. and the Company amended the financing agreement, as of May 15, 2007,
      which (i) eliminated the fixed charge coverage ratio covenant for the quarter
      ended September 29, 2007, (ii) added a covenant related to earnings before
      interest, taxes, depreciation and amortization (“EBITDA”) for the four quarters
      ended September 29, 2007 to require the Company to achieve a minimum level
      of
      EBITDA, and (iii) modified the fixed charge coverage ratio covenant for periods
      after the quarter ended September 29, 2007. The Company was in compliance with
      these amended covenants at September 27, 2008.





New
      Credit facility - effective September 29, 2008


On
      September 29, 2008, the Company entered into the Wells Fargo Credit Facility
      which replaced the Company’s credit facility with Capital One, N.A. On September
      30, 2008, the Company repaid all outstanding amounts under the credit facility
      with Capital One, N.A. with the proceeds of the Wells Fargo Credit Facility.
      The
      Wells Fargo Credit Facility consists of a three-year $5,000,000 collateralized
      revolving credit facility, a three-year $500,000 equipment term loan and a
      three-year $2,500,000 real estate term loan. The revolving line of credit is
      subject to an availability limit under a borrowing base calculation of 85%
      of
      eligible domestic accounts receivable, 75% of eligible foreign accounts
      receivable, and 30% of eligible inventory with an inventory sublimit of
      $400,000. The revolving line of credit expires September 29, 2011. The revolving
      line of credit bears interest at the prime rate plus one percent, with the
      prime
      rate having a floor limit of 5% for loan purposes. The Company may request
      a
      LIBOR quote for an initial minimum of $1,000,000 with subsequent requests at
      a
      minimum of $500,000. No more than three such requests may be active at any
      point
      in time. LIBOR advances bear interest at the LIBOR rate plus 3.25% for a credit
      advance, or 3.50% for a term loan. The equipment loan is required to be repaid
      in equal monthly installments of $13,900 based on a four year amortization.
      The
      real estate loan is required to be paid in equal monthly installments amortized
      over a 180 month time period, with any unpaid principal and interest due and
      payable on the termination date of September 29, 2011. The two term loans
      require mandatory prepayment under certain circumstances subject to a prepayment
      fee of 1%-2% of the outstanding balance.





The
      equipment term loan bears interest at the prime (with a floor of 5%) rate plus
      1%. The real estate term loan bears interest at the prime rate (with a floor
      of
      5%) plus 1.50% or LIBOR plus 3.50%.





The
      Wells
      Fargo Credit Facility contains several financial and non-financial covenants
      and
      is collateralized by substantially all assets of the Company.





On
      September 30, 2008, under the Wells Fargo Credit Facility, the Company borrowed
      approximately $1.7 million under the revolving credit facility, $500,000 under
      the equipment term loan and $2.5 million under the real estate term
      loan.





23


At
      September 27, 2008 and December 29, 2007, the fair value of the Company's debt
      approximates carrying value. The fair value of the Company's long-term debt
      is
      estimated based on current interest rates.





Depreciation
      and amortization expenses exceeded capital expenditures for production equipment
      during the first nine months of 2008 by approximately $1,236,000, and the
      Company anticipates that depreciation and amortization expenses will exceed
      capital expenditures in fiscal year 2008 by approximately $1,600,000. The
      Company intends to issue commitments to purchase up to $300,000 of capital
      equipment from various vendors during the last quarter of 2008. The Company





anticipates
      that such equipment will be purchased and become operational during 2008.





Related
      to the discontinued operations of FMI, there is a remaining lease commitment
      on
      its leased facility of approximately $160,000 which has been accrued as of
      September 27, 2008, however, the Company anticipates settling the remaining
      lease commitment for a reduced amount.





The
      functional currency for the Company’s Costa Rica operations is the United States
      dollar. The functional currency for the Company’s previously wholly-owned
      subsidiary FMI was the Canadian dollar. The change in accumulated other
      comprehensive income for 2007 reflects the changes in the exchange rates between
      the Canadian dollar and the United States dollar for those respective periods.
      Following the sale of the Company’s discontinued operations in December 2007,
      there is no foreign currency translation adjustment at September 27, 2008.





RECENT
      ACCOUNTING PRONOUNCEMENTS





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157 “Fair Value Measurements”. SFAS No. 157 establishes a single authoritative
      definition of fair value, sets out a framework for measuring fair value and
      requires additional disclosures about fair-value measurements. SFAS No. 157
      applies only to fair-value measurements that are already required or permitted
      by other accounting standards and is expected to increase the consistency of
      those measurements. It will also affect current practices by nullifying Emerging
      Issues Task Force guidance that prohibited recognition of gains or losses at
      the
      inception of derivative transactions whose fair value is estimated by applying
      a
      model and by eliminating the use of “blockage” factors by brokers, dealers and
      investment companies that have been applying
      AICPA Guides. The Company adopted SFAS No. 157 on December 30, 2007. The
      adoption of SFAS No. 157 did not have an impact on its financial position and
      results of operations.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS
      No. 159 permits entities to choose to measure many financial assets and
      financial liabilities at fair value. Unrealized gains and losses on items for
      which the fair value option has been elected are reported in net income. The
      Company adopted SFAS No. 159 on December 30, 2007. The adoption of SFAS No.
      159
      did not have an impact on its financial position and results of operations,
      since the Company did not elect the fair value option for any assets or
      liabilities.





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





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





In
      February 2008, the FASB issued FASB Staff Position ("FSP") No. 157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and its Related
      Interpretive Accounting Pronouncements that Address Leasing Transactions”, which
      became effective for the Company on December 30, 2007. This FSP excludes FASB
      Statement No. 13, “Accounting for Leases”, and its related interpretive
      accounting pronouncements from the provisions of SFAS No. 157. Implementation
      of
      this standard did not have a material effect on the Company's financial
      statements.





24


In
      February 2008, the FASB issued FSP No. 157-2, “Effective Date of FASB Statement
      No. 157”, which delays the Company's January 1, 2008 effective date of SFAS No.
      157 for all nonfinancial assets and nonfinancial liabilities, except those
      recognized or disclosed at fair value in the financial statements on a recurring
      basis (at least annually), until January 1, 2009. Implementation of this
      standard is not expected to have a material effect on the Company's financial
      statements.





In
      March
      2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
      and Hedging Activities - An Amendment of FASB Statement No. 133" ("SFAS No.
      161"), which amends and expands
      the disclosure requirements of SFAS No. 133, "Accounting for Derivative
      Instruments and Hedging Activities" to require qualitative disclosure about
      objectives and strategies in using derivatives, quantitative disclosures about
      fair value amounts of gains and losses on derivative instruments, and
      disclosures about the underlying credit-risk-related contingent features in
      derivative agreements. SFAS No. 161 is intended to improve financial reporting
      by requiring transparency about the location and amounts of derivative
      instruments in an entity's financial statements; how derivative instruments
      and
      related hedged items are accounted for under SFAS No. 133; and how derivative
      instruments and related hedged items affect its financial position, financial
      performance and cash flows. SFAS No. 161 is effective for financial statements
      issued for fiscal years beginning after November 15, 2008. Implementation of
      this standard is not expected to have a material effect on the Company's
      financial statements.





ITEM
      3.
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





For
      quantitative and qualitative disclosures about the market risks affecting
      Merrimac, see “Quantitative and Qualitative Disclosures about Market Risk” in
      Item 7A of Part II of the Company’s Annual Report on Form 10-K for the fiscal
      year ended December 29, 2007, which is incorporated herein by reference. Our
      exposure to market risk has not changed materially since December 29, 2007.





ITEM
      4.
      CONTROLS AND PROCEDURES





(a) Evaluation
      of Disclosure Controls and Procedures .
      Based
      on the material weaknesses in internal control identified below, as of September
      27, 2008 (the end of the period covered by this report), the Company's
      management evaluated, with the participation of the Company's Chief Executive
      Officer and Principal Financial Officer, the effectiveness of the Company's
      disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)
      of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief
      Executive Officer and Principal Financial Officer concluded that, as of
      September 27, 2008, the Company's disclosure controls and procedures were not
      effective.





(b) Material
      Weakness in Internal Control Over Financial Reporting .
      A
      material weakness is a control deficiency, or combination of control
      deficiencies, that results in a reasonably possible likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected. Management identified the following material weaknesses in its
      internal control over financial reporting as of September 27, 2008:





*Personnel*





Management
      identified changes in financial personnel that led to a lack of sufficient
      financial reporting experience to prepare accurate financial statements in
      a
      timely manner.





*New
      Financial Reporting System*





Management
      identified the failure to accurately implement the Company’s new financial
      accounting system which has led to errors in preliminary financial reports
      requiring additional resources and time to correct.





*Potential
      Problem Areas*





Management
      was unable to identify potential problem areas in financial reporting that
      required immediate attention by operational and financial personnel that were
      not identified on a timely basis.





*Remediation*





(a)
      The
      Company is currently seeking to hire an experienced chief financial officer
      and
      an experienced cost accountant. Until such personnel can be hired, the Company
      will be utilizing an accounting consulting firm to oversee, test and support
      procedures and processes for financial reporting for the fourth quarter of
      2008
      and for year end 2008.





25


(b)
      Management has identified procedures to enable the Company to better close
      work
      orders in the new financial reporting system, including the deployment of
      additional personnel to ensure that work orders are properly closed out.





(c)
      Personnel will be trained as to the importance of timely and accurate reporting
      to the labor system. Exception reports will be generated that provide operations
      and finance information regarding any discrepancies to the procedures on a
      daily
      basis.





Apart
      from the implementation of a new financial accounting system and changes in
      financial personel, there were no changes that occurred during the quarter
      ended
      June 28, 2008 that materially affected, or are reasonably likely to materially
      affect, the Company’s internal controls over financial reporting.








PART
      II
      OTHER INFORMATION





ITEM
      1.
      LEGAL PROCEEDINGS.





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





On
      February 22, 2008, a statement of claim in Ontario Superior Court of Justice
      was
      filed by a former FMI employee against FMI seeking damages for approximately
      $77,000 ($75,000 Canadian) for wrongful dismissal following the sale of FMI’s
      assets to FTG. The Company settled this claim in May 2008 for a minimal
      amount.





On
      March
      10, 2008, a statement of claim in Ontario Superior Court of Justice was filed
      by
      nineteen (19) former FMI employees against Merrimac, FMI and FTG seeking damages
      for wrongful dismissal for approximately $1,000,000 (Canadian $977,000)
      following the sale of FMI’s assets to FTG. The former FMI employees are alleging
      that an employment contract existed between FMI and the plaintiffs and are
      seeking additional damages for termination of the alleged contract.





Merrimac
      believes it has been improperly named in this claim and is petitioning the
      Court
      to be removed as a defendant.





Merrimac
      has an Employment Practices Liability insurance policy that extends coverage
      to
      its subsidiaries. The insurance carrier agreed to provide a defense in this
      matter on April 24, 2008 and they retained Canadian counsel to defend this
      claim. Merrimac made provision for the deductible amount of the insurance policy
      which is $25,000. In accordance with the requirements of SFAS No. 5, after
      discussions with counsel, Merrimac cannot presently determine if the likelihood
      of an unfavorable outcome is probable, reasonably possible or remote. In
      addition, Merrimac cannot reasonably estimate the amount of a probable loss,
      other than the minimal deductible amount under the insurance policy. Merrimac
      and its insurance carrier intend to defend these claims vigorously.





On
      July
      23, 2008, a Statement of Claim was filed in Ontario Superior Court of Justice
      by
      the lessor of the premises formerly occupied by FMI in Ontario, Canada, against
      FMI, Merrimac, and FTG. The Statement of Claim seeks damages of $150,612 in
      respect of the period from and after which FTG, which purchased the assets
      of
      FMI, removed operations from the premises through the term of the lease. In
      addition, the Statement of Claim seeks damages for $110,319 for repairs to
      the
      premises, and seeks to set aside the transfer of assets from FMI to FTG for
      the
      failure to comply with the Bulk Sales Act Ontario.





In
      accordance with the requirements of SFAS No. 5, after discussions with counsel,
      Merrimac cannot presently determine if the likelihood of an unfavorable outcome
      is probable, reasonably possible or remote. In addition, Merrimac cannot
      reasonably estimate the amount of a probable loss. The Company intends to defend
      this claim vigorously.








ITEM
      1A.
      RISK FACTORS.





There
      have been no material changes to our Risk Factors from those presented in our
      Form 10-K for fiscal year 2007, as modified by our Form 10-Q for the quarter
      ended June 28, 2008, except that the Risk Factor captioned “Our revolving line
      of credit expires in October 2008 and the failure to renew the revolving line
      of
      credit or a renewal on less favorable terms could have a material adverse effect
      on our business operations” has been deleted and the following risk factor has
      been added:





26


Management
      identified material weaknesses in our internal control over financial reporting
      in the quarters ending June 28, 2008 and September 27, 2008. Failure
      to maintain effective internal control over financial reporting could result
      in
      our failure to accurately report our financial results.





In
      the
      quarters ending June 28, 2008 and September 27, 2008, management
      identified several significant deficiencies in our internal control over
      financial reporting that collectively constitute material weaknesses in internal
      control over financial reporting. Management plans to implement new controls
      and
      procedures designed to remediate these significant deficiencies. If we are
      unable to remediate these significant deficiencies or if we experience
      additional significant deficiencies or material weaknesses in the future, we
      may
      be required to record material audit adjustments. As a result, investors may
      lose confidence in our ability to operate our business, any of which could
      materially affect our stock price.




ITEM
      5.
      OTHER INFORMATION.





On
      November 17, 2008, the Audit Committee of Merrimac Industries, Inc. determined
      that reissuing the previously filed financial statements for the Company’s
      fiscal 2008 second quarter was appropriate to correct certain accounting errors.
      These errors arose from control deficiencies created by changes of accounting
      personnel and failure to properly implement a new financial accounting system.
      The second quarter errors include a $33,937 overstatement of net sales and
      corresponding $33,937 understatement of customer deposits; a $211,603
      understatement of inventory and corresponding $211,603 overstatement of cost
      of
      sales; and a $177,666 understatement of net income.





The
      Audit
      Committee concluded that the aggregate impact of these errors is material to
      the
      fiscal 2008 second quarter financial statements. Therefore, the Company is
      restating the previously filed financial statements and the Company’s financial
      statements for its fiscal 2008 second quarter included in its Form 10-Q filed
      on
      August 18, 2008 should no longer be relied upon.





The
      Company with its Audit Committee has discussed the matter described above with
      J.H. Cohn LLP, its independent registered public accounting firm.





As
      a
      result of the adjustments, the fiscal 2008 second quarter is restated as
      follows:




**Consolidated
                Statement of Operations**
            
            **Three
                Months Ended**
              **June
                28, 2008 ($)**
            
            **Six
                Months Ended**
              **June
                28, 2008 ($)****and
                Comprehensive
                Income**
            
            **Previously
                Reported**
            
            **Restated**
            
            **Previously
                Reported**
            
            **Restated**Net
                Sales
            
            
            7,524,203
            
            
            7,490,266
            
            
            13,281,889
            
            
            13,247,952Cost
                of Sales
            
            
            4,308,912
            
            
            4,097,309
            
            
            7,760,872
            
            
            7,549,269Net
                Income
            
            
            383,672
            
            
            561,338
            
            
            11,437
            
            
            189,103Net
                Income per Common Share - Basic
            
            
            .13
            
            
            .19
            
            
            0
            
            
            .06Net
                Income per Common Share - Diluted
            
            
            .13
            
            
            .19
            
            
            0
            
            
            .06




**As
                Of**
              **June
                28, 2008 ($)****Consolidated
                Balance Sheet**
            
            **Previously
                Reported**
            
            **Restated**Inventories,
                Net
            
            
            6,462,065
            
            
            6,673,668Total
                Current Assets
            
            
            15,023,672
            
            
            15,235,275Total
                Assets
            
            
            25,845,158
            
            
            26,056,761Customer
                Deposits
            
            
            483,393
            
            
            517,330Total
                Current Liabilities
            
            
            4,315,747
            
            
            4,349,684Total
                Liabilities
            
            
            7,616,025
            
            
            7,649,962Retained
                Earnings
            
            
            1,185,361
            
            
            1,363,027Total
                Stockholders’ Equity
            
            
            18,229,133
            
            
            18,406,799Total
                Liabilities and Stockholders’ Equity
            
            
            25,845,158
            
            
            26,056,761








27





ITEM
      6.
      EXHIBITS





Exhibits:





EXHIBIT
              NUMBER
            DESCRIPTION
                OF EXHIBIT31.1+
            Certificate
                of Chief Executive Officer and Principal Financial Officer, pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002.32.1+
            Certificate
                of Chief Executive Officer and Principal Financial Officer, 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 filed as an exhibit hereto.





28


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:
                November 17, 2008
            By:
                /s/ Mason N. CarterMason
                N. CarterChairman,
                President andChief
                Executive Officer and Principal Financial Officer










29