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 29, 2007




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
              Incorporation
                or Organization)
            
            (I.R.S.
                Employer
              Identification
                No.)





41
      FAIRFIELD PLACE


WEST
      CALDWELL, NEW JERSEY 07006


(Address
      of Principal Executive Offices) (Zip Code)





(973)
      575-1300


(Registrant’s
      Telephone Number)


****


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, or a non-accelerated filer. See definition of "accelerated
      filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
      accelerated filer  ̈ Accelerated
      filer  ̈ Non-accelerated
      filer x





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


Yes  ̈ No  x





As
      of
      November 9, 2007, there were 2,926,033 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
                StatementsConsolidated
                Statements of Operations and Comprehensive Income (Loss) for the
                Quarters
                and Nine Months Ended September 29, 2007 and September 30, 2006
                (Unaudited)
            1Consolidated
                Balance Sheets-September 29, 2007 (Unaudited) and December 30,
                2006
            2Consolidated
                Statement of Stockholders’ Equity for the Nine Months Ended September 29,
                2007 (Unaudited)
            3Consolidated
                Statements of Cash Flows for the Nine Months Ended September 29,
                2007 and
                September 30, 2006 (Unaudited)
            4Notes
                to Consolidated Financial Statements
            5Item
                2.       Management's Discussion and
                Analysis of Financial Condition and Results of Operations
            14Item
                3.        Quantitative and Qualitative
                Disclosures about Market Risk
            24Item
                4T.     Controls and Procedures
            24PART
                II.    OTHER INFORMATIONItem
                1.       Legal Proceedings
            24Item
                1A.    Risk Factors
            24Item
                5.        Other
                Information
            25Item
                6.        Exhibits
            26Signatures
            27







PART
      I.
      FINANCIAL INFORMATION





ITEM
      1.
      FINANCIAL STATEMENTS





MERRIMAC
      INDUSTRIES, INC.





CONSOLIDATED
      STATEMENTS OF OPERATIONS


AND
      COMPREHENSIVE INCOME (LOSS)


(UNAUDITED)





Quarters
                Ended
            
            Nine
                Months EndedSeptember
                29,
              2007
            
            September
                30,
              2006
            
            September
                29,
              2007
            
            September
                30,
              2006CONTINUING
                OPERATIONSNet
                sales
            
            $
            6,612,494
            
            $
            5,498,645
            
            $
            16,495,411
            
            $
            17,282,913Costs
                and expenses:Cost
                of sales
            
            
            3,796,384
            
            
            3,215,008
            
            
            9,615,265
            
            
            9,620,739Selling,
                general and administrative
            
            
            2,099,038
            
            
            2,221,596
            
            
            6,292,769
            
            
            6,706,503Research
                and development
            
            
            399,980
            
            
            578,511
            
            
            1,219,487
            
            
            1,402,1416,295,402
            
            
            6,015,115
            
            
            17,127,521
            
            
            17,729,383Operating
                income (loss)
            
            
            317,092
            
            
            (516,470
            )
            
            (632,110
            )
            
            (446,470
            )Interest
                and other (expense) income, net
            
            
            (72,196
            )
            
            52,640
            
            
            (55,795
            )
            
            119,692Income
                (loss) from continuing operations before income taxes
            
            
            244,896
            
            
            (463,830
            )
            
            (687,905
            )
            
            (326,778
            )Provision
                (benefit) for income taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -Income
                (loss) from continuing operations
            
            
            244,896
            
            
            (463,830
            )
            
            (687,905
            )
            
            (326,778
            )DISCONTINUED
                OPERATIONSLoss
                from discontinued operations before income taxes
            
            
            (1,472,457
            )
            
            (147,737
            )
            
            (4,766,381
            )
            
            (243,905
            )Writedown
                of net assets held for sale to fair value
            
            
            (585,884
            )
            
            -
            
            
            (585,884
            )
            
            -Provision
                (benefit) for income taxes
            
            
            -
            
            
            (13,000
            )
            
            506,000
            
            
            (61,000
            )Loss
                from discontinued operations
            
            
            (2,058,341
            )
            
            (
                134,737
            )
            
            (5,858,265
            )
            
            (182,905
            )Net
                loss
            
            $
            (1,813,445
            )
            $
            (598,567
            )
            $
            (6,546,170
            )
            $
            (509,683
            )Income
                (loss) per common share from continuing operations - basic
            
            $
            .08
            
            $
            (.15
            )
            $
            (.23
            )
            $
            (.10
            )Loss
                per common share from discontinued operations - basic
            
            $
            (.70
            )
            $
            (.04
            )
            $
            (1.97
            )
            $
            (.06
            )Net
                loss per common share - basic
            
            $
            (.62
            )
            $
            (.19
            )
            $
            (2.20
            )
            $
            (.16
            )Income
                (loss) per common share from continuing
                operations - diluted
            
            $
            .08
            
            $
            (.15
            )
            $
            (.23
            )
            $
            (.10
            )Loss
                per common share from discontinued operations - diluted
            
            $
            (.69
            )
            $
            (.04
            )
            $
            (1.97
            )
            $
            (.06
            )Net
                loss per common share - diluted
            
            $
            (.61
            )
            $
            (.19
            )
            $
            (2.20
            )
            $
            (.16
            )Weighted
                average number of shares outstanding - basic
            
            
            2,917,245
            
            
            3,137,241
            
            
            2,974,757
            
            
            3,143,377Weighted
                average number of shares outstanding - diluted
            
            
            2,960,187
            
            
            3,137,241
            
            
            2,974,757
            
            
            3,143,377COMPREHENSIVE
                LOSSNet
                loss
            
            $
            (1,813,445
            )
            $
            (598,567
            )
            $
            (6,546,170
            )
            $
            (509,683
            )Comprehensive
                income (loss):Foreign
                currency translation adjustment
            
            
            88,179
            
            
            (2,318
            )
            
            456,693
            
            
            316,529Comprehensive
                loss
            
            $
            (1,725,266
            )
            $
            (600,885
            )
            $
            (6,089,477
            )
            $
            (193,154
            )




See
      accompanying notes.


1


MERRIMAC
      INDUSTRIES, INC.


CONSOLIDATED
      BALANCE SHEETS


September
                  29,
                2007
              
              December
                  30,
                2006(UNAUDITED)
              
              (Note
                  1)ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              1,148,260
              
              $
              5,399,333Accounts
                  receivable, net
              
              
              6,517,573
              
              
              5,132,319Inventories,
                  net
              
              
              4,481,851
              
              
              3,740,317Other
                  current assets
              
              
              776,482
              
              
              833,543Current
                  assets held for sale
              
              
              1,044,334
              
              
              1,615,814Total
                  current assets
              
              
              13,968,500
              
              
              16,721,326Property,
                  plant and equipment
              
              
              37,580,094
              
              
              36,626,348Less
                  accumulated depreciation and amortization
              
              
              26,490,857
              
              
              24,850,616Property,
                  plant and equipment, net
              
              
              11,089,237
              
              
              11,775,732Restricted
                  cash
              
              
              250,000
              
              
              -Other
                  assets
              
              
              499,305
              
              
              491,596Deferred
                  tax assets
              
              
              100,000
              
              
              100,000Long-term
                  assets held for sale
              
              
              793,192
              
              
              5,164,852Total
                  Assets
              
              $
              26,700,234
              
              $
              34,253,506LIABILITIES
                  AND STOCKHOLDERS’ EQUITYCurrent
                  liabilities:Current
                  portion of long-term debt
              
              $
              550,000
              
              $
              550,000Accounts
                  payable
              
              
              682,072
              
              
              758,344Accrued
                  liabilities
              
              
              1,246,672
              
              
              1,077,169Customer
                  deposits
              
              
              356,044
              
              
              203,783Deferred
                  income taxes
              
              
              100,000
              
              
              100,000Current
                  liabilities related to assets held for sale
              
              
              1,151,180
              
              
              677,554Total
                  current liabilities
              
              
              4,085,968
              
              
              3,366,850Long-term
                  debt, net of current portion
              
              
              3,900,000
              
              
              4,312,500Deferred
                  liabilities
              
              
              55,434
              
              
              37,839Long-term
                  liabilities related to assets held for sale
              
              
              236,346
              
              
              251,540Total
                  liabilities
              
              
              8,277,748
              
              
              7,968,729Commitments
                  and contingenciesStockholders'
                  equity:Preferred
                  stock, par value $.01 per share:Authorized:
                  1,000,000 sharesNo
                  shares issuedCommon
                  stock, par value $.01 per share:20,000,000
                  shares authorized; 3,288,388 and 3,265,638 shares issued; and 2,925,483
                  and 3,141,433 shares outstanding, respectively
              
              
              32,884
              
              
              32,656Additional
                  paid-in capital
              
              
              19,612,388
              
              
              19,237,130Retained
                  earnings
              
              
              53,647
              
              
              6,599,817Accumulated
                  other comprehensive income
              
              
              1,845,731
              
              
              1,389,03821,544,650
              
              
              27,258,641Less
                  treasury stock, at cost - 362,905 shares at September 29, 2007
                  and 124,205
                  shares at December 30, 2006
              
              
              (3,122,164
              )
              
              (973,864
              )Total
                  stockholders' equity
              
              
              18,422,486
              
              
              26,284,777Total
                  Liabilities and Stockholders' Equity
              
              $
              26,700,234
              
              $
              34,253,506





See
      accompanying notes.


2


MERRIMAC
      INDUSTRIES, INC.


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY


NINE
      MONTHS ENDED SEPTEMBER 29, 2007


(UNAUDITED)





Common
                Stock
            
            Additional
                Paid-in
            
            Retained
            
            Accumulated
                Other Comprehensive
            
            Treasury
                StockShares
            
            Amount
            
            Capital(A)
            
            Earnings
            
            Income
            
            Shares
            
            Amount
            
            TotalBalance,
                December 30, 2006
            
            
            3,265,638
            
            $
            32,656
            
            $
            19,237,130
            
            $
            6,599,817
            
            $
            1,389,038
            
            
            124,205
            
            $
            (973,864
            )
            
            26,284,777Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            (6,546,170
            )
            
            
            
            
            
            
            
            
            
            
            (6,546,170
            )Share-based
                compensation
            
            
            
            
            
            
            
            
            223,007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            223,007Stock
                Purchase Plan sales
            
            
            10,450
            
            
            105
            
            
            78,544
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            78,649Exercise
                of stock options
            
            
            9,300
            
            
            93
            
            
            73,707
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            73,800Vesting
                of restricted stock.
            
            
            3,000
            
            
            30
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            30Repurchase
                of common stockfor
                the treasury
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            238,700
            
            
            (2,148,300
            )
            
            (2,148,300
            )Foreign
                currency translation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            456,693
            
            
            
            
            
            
            
            
            456,693Balance,
                September 29, 2007
            
            
            3,288,388
            
            $
            32,884
            
            $
            19,612,388
            
            $
            53,647
            
            $
            1,845,731
            
            
            362,905
            
            $
            (3,122,164
            )
            $
            18,422,486




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





See
      accompanying notes.




3




MERRIMAC
        INDUSTRIES, INC.
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  Nine
                  Months EndedSeptember
                  29,
                2007
              
              September
                  30,
                2006Cash
                  flows from operating activities:Net
                  loss
              
              $
              (6,546,170
              )
              $
              (509,683
              )Less,
                  Loss from discontinued operations
              
              
              (5,858,265
              )
              
              (182,905
              )Loss
                  from continuing operations
              
              
              (687,905
              )
              
              (326,778
              )Adjustments
                  to reconcile net loss from continuing operations to net cash used
                  in
                  operating activities:Depreciation
                  and amortization
              
              
              1,756,945
              
              
              1,759,143Amortization
                  of deferred financing costs
              
              
              22,755
              
              
              37,440Share-based
                  compensation
              
              
              223,037
              
              
              138,461Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (1,385,254
              )
              
              (1,295,186
              )Inventories
              
              
              (741,534
              )
              
              (515,381
              )Other
                  current assets
              
              
              57,061
              
              
              (31,981
              )Other
                  assets
              
              
              (30,464
              )
              
              34,991Accounts
                  payable
              
              
              (76,272
              )
              
              (21,655
              )Accrued
                  liabilities
              
              
              169,503
              
              
              167,222Customer
                  deposits
              
              
              152,261
              
              
              (669,152
              )Deferred
                  liabilities
              
              
              17,595
              
              
              15,692Net
                  cash used in operating activities of continuing operations
              
              
              (522,272
              )
              
              (707,184
              )Net
                  cash (used in) provided by operating activities of discontinued
                  operations
              
              
              (363,141
              )
              
              276,892Net
                  cash used in operating activities
              
              
              (885,413
              )
              
              (430,292
              )Cash
                  flows from investing activities:Purchases
                  of capital assets
              
              
              (1,070,450
              )
              
              (1,202,980
              )Net
                  cash used in investing activities of continuing operations
              
              
              (1,070,450
              )
              
              (1,202,980
              )Net
                  cash used in investing activities of discontinued
                  operations
              
              
              (
                  180,136
              )
              
              (44,767
              )Net
                  cash used in investing activities
              
              
              (1,250,586
              )
              
              (1,247,747
              )Cash
                  flows from financing activities:Repurchase
                  of common stock for the treasury
              
              
              (2,148,300
              )
              
              -Repayment
                  of borrowings
              
              
              (412,500
              )
              
              (519,641
              )Restricted
                  cash deposited
              
              
              (250,000
              )
              
              -Proceeds
                  from the exercise of stock options
              
              
              73,800
              
              
              15,650Proceeds
                  from Stock Purchase Plan sales
              
              
              78,649
              
              
              184,251Net
                  cash used in financing activities of continuing operations
              
              
              (2,658,351
              )
              
              (319,740
              )Net
                  cash used in financing activities of discontinued
                  operations
              
              
              (51,783
              )
              
              (1,102
              )Net
                  cash used in financing activities
              
              
              (2,710,134
              )
              
              (320,842
              )Effect
                  of exchange rate changes
              
              
              32,856
              
              
              32,588Net
                  decrease in cash and cash equivalents
              
              
              (4,813,277
              )
              
              (1,966,293
              )Cash
                  and cash equivalents at beginning of period, including $562,205
                  and
                  $422,960 reported under assets held for sale
              
              
              5,961,537
              
              
              4,081,330Cash
                  and cash equivalents at end of period including $0 and $686,571
                  reported
                  under assets held for sale
              
              $
              1,148,260
              
              $
              2,115,037Supplemental
                  disclosures of cash flow information:Cash
                  paid during the period for:Interest
                  on credit facilities
              
              $
              272,644
              
              $
              179,702Non
                  cash activities:Repurchase
                  of common stock for treasury
              
              $
              -
              
              $
              399,998Loan
                  to officer-stockholder repaid through repurchase of common stock
                  for
                  treasury
              
              $
              -
              
              $
              400,000
 
 See
        accompanying notes .
  4




MERRIMAC
        INDUSTRIES, INC.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
        BASIS
        OF PRESENTATION
 
 The
        accompanying unaudited consolidated financial statements have been prepared
        in
        accordance with the instructions to Form 10-Q and therefore do not include
        all
        information and footnote disclosures otherwise required by 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 29, 2007 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
        No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS
        No. 144), the assets and liabilities relating to Filtran Microcircuits Inc.
        (“FMI”) currently being held for sale have been reclassified as held for sale in
        the consolidated balance sheets for all periods presented and the results
        of
        operations of FMI for the current and prior periods have been reported as
        discontinued operations.
 
 The
        consolidated balance sheet at December 30, 2006 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 April 16, 2007 for the year ended December 30, 2006.
 
 2.
        DISCONTINUED OPERATIONS
 
 Company
        management determined, and the Board of Directors approved on August 9, 2007,
        that the Company should divest its FMI operations and is in the process of
        seeking interested parties to purchase FMI. The potential 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 reflects FMI as a
        discontinued operation and the Company reclassified prior financial statements
        to reflect the results of operations, cash flows and financial position of
        FMI
        as discontinued operations.
 
 Operating
        results of FMI, which were formerly represented as Merrimac’s microwave
        micro-circuitry  segment  are
        summarized as follows:
 
 Quarters
                  Ended
              
              Nine
                  Months EndedSeptember
                  29,
                2007
              
              September
                  30,
                2006
              
              September
                  29,
                2007
              
              September
                  30,
                2006Net
                  sales
              
              $
              1,003,317
              
              $
              1,256,286
              
              $
              2,824,301
              
              $
              4,082,344Loss
                  before provision (benefit) for income taxes
              
              
              (1,472,457
              )
              
              (147,737
              )
              
              (4,766,381
              )
              
              (243,905
              )Writedown
                  of net assets held for sale to fair value
              
              
              (585,884
              )
              
              -
              
              
              (585,884
              )
              
              -Provision
                  (benefit) for income taxes
              
              
              -
              
              
              (13,000
              )
              
              506,000
              
              
              (61,000
              )Net
                  loss
              
              $
              (2,058,341
              )
              $
              (134,737
              )
              $
              (5,858,265
              )
              $
              (182,905
              )
 
 3. ASSETS
        HELD FOR SALE
 
 The
        assets and liabilities relating to FMI have been reclassified as held for
        sale
        in the accompanying consolidated balance sheets. Merrimac has estimated the
        fair
        value of the net assets of FMI to be sold to be $450,000 based upon preliminary
        sales negotiations. Loss from discontinued operations includes goodwill
        impairment charges of $3,756,000 and a charge of $506,000 to provide a full
        valuation allowance for a Canadian net deferred tax asset.
 
 5
  MERRIMAC
        INDUSTRIES, INC.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 In
        the
        event a sales agreement cannot be concluded, FMI will be in violation of
        its
        credit facility covenants and its line of credit will be terminated. If the
        line
        of credit is terminated, FMI likely will be forced to file for bankruptcy
        protection and begin liquidation proceedings.
 
 The
        assets and liabilities relating to Filtran are summarized as
        follows:
 September
                    29,
                  2007
                
                December
                    30,
                  2006Cash
                
                $
                -
                
                $
                562,204Accounts
                    receivable
                
                
                639,954
                
                
                719,298Inventories
                
                
                251,789
                
                
                177,156Other
                    current assets
                
                
                152,591
                
                
                157,156Current
                    assets held for sale
                
                
                1,044,334
                
                
                1,615,814Property,
                    plant and equipment, net
                
                
                793,192
                
                
                1,209,633Goodwill
                
                
                -
                
                
                3,503,219Deferred
                    income taxes
                
                
                -
                
                
                452,000Long-term
                    assets held for sale
                
                
                793,192
                
                
                5,164,852Assets
                    held for sale
                
                $
                1,837,526
                
                $
                6,780,666Current
                    liabilities
                
                $
                1,151,180
                
                $
                677,554Long-term
                    debt
                
                
                236,346
                
                
                251,540Liabilities
                    related to assets held for sale
                
                $
                1,387,526
                
                $
                929,094
 
 4.
        CONTRACT REVENUE RECOGNITION
 
 The
        Company recognizes revenue in accordance with the provisions of Staff Accounting
        Bulletin No. 104. Contract revenue and related costs on fixed-price and
        cost-reimbursement contracts that require customization of products to customer
        specifications are recorded when title transfers to the customer, which is
        generally on the date of shipment. Prior to shipment, manufacturing costs
        incurred on such contracts are recorded as work-in-process inventory.
        Anticipated losses on contracts are charged to operations when identified.
        Revenue related to non-recurring engineering charges is generally recognized
        upon shipment of the related initial units produced or based upon contractually
        established stages of completion.
 
 The
        cost
        rates utilized for cost-reimbursement contracts are subject to review by
        third
        parties and can be revised, which can result in additions to or reductions
        from
        revenue. Revisions which result in reductions to revenue are recognized in
        the
        period that the rates are reviewed and finalized; additions to revenue are
        recognized in the period that the rates are reviewed, finalized, accepted
        by the
        customer, and collectability from the customer is reasonably assured. The
        Company submits financial information regarding the cost rates on
        cost-reimbursement contracts for each fiscal year in which the Company performed
        work on cost-reimbursement contracts. The Company does not record any estimates
        on a regular basis for potential revenue adjustments, as there currently
        is no
        reasonable basis on which to estimate such adjustments given the Company’s very
        limited experience with these contracts. No revenue was recognized related
        to
        cost-reimbursement contracts during the third quarter and first nine months
        of
        2007. The Company recognized $482,000 and $732,000 of revenue related to
        cost
        reimbursement contracts during the third quarter and first nine months of
        2006,
        respectively.
  6
  MERRIMAC
        INDUSTRIES, INC.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 5.
        ACCOUNTING PERIOD
 
 The
        Company's fiscal year is the 52-53 week period ending on the Saturday closest
        to
        December 31. The Company has quarterly dates that correspond with the Saturday
        closest to the last day of each calendar quarter and each quarter consists
        of 13
        weeks in a 52-week year. Periodically, the additional
        week to make a 53-week year (fiscal year 2003 was the last and fiscal year
        2008
        will be the next) is added to the fourth quarter, making such quarter consist
        of
        14 weeks.
 
 6.
        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 and December
        30,
        2006 was attributable solely to the effects of foreign currency
        translation.
 
 7.
        RECENT
        ACCOUNTING PRONOUNCEMENTS
 
 On
        November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
        Staff Position 123(R)-3 ("FSP 123R-3"), "Transition Election Related to
        Accounting for the Tax Effects of Share-based Payment Awards," that provides
        an
        elective alternative transition method of calculating the pool of excess
        tax
        benefits available to absorb tax deficiencies recognized subsequent to the
        adoption of SFAS 123R (the "APIC Pool") to the method otherwise required
        by
        paragraph 81 of SFAS 123R. The Company elected to use the regular method
        to
        calculate the APIC Pool. The regular method will not have an impact on the
        Company's results of operations or financial condition for the quarter and
        nine
        months ended September 29, 2007, due to the fact that the Company currently
        has
        prior period net operating losses and has not realized any tax benefits under
        SFAS 123R.
 
 In
        June
        2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
        income taxes recognized in an enterprise’s financial statements in accordance
        with SFAS No. 109 “Accounting for Income Taxes”. FIN 48 prescribes a recognition
        threshold and measurement of a tax position taken or expected to be taken
        in a
        tax return. FIN 48 also provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods, disclosure and
        transition. The Company adopted FIN 48 on December 31, 2006. The adoption
        of FIN
        48 did not have an impact on the opening retained earnings of the Company.
 
 In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157 “Fair Value Measurements”. SFAS No. 157 establishes a single authoritative
        definition of fair value, sets out a framework for measuring fair value and
        requires additional disclosures about fair-value measurements. SFAS No. 157
        applies only to fair-value measurements that are already required or permitted
        by other accounting standards and is expected to increase the consistency
        of
        those measurements. It will also affect current practices by nullifying Emerging
        Issues Task Force guidance that prohibited recognition of gains or losses
        at the
        inception of derivative transactions whose fair value is estimated by applying
        a
        model and by eliminating the use of “blockage” factors by brokers, dealers and
        investment companies that have been applying
        AICPA Guides. SFAS No. 157 is effective for fiscal years beginning after
        November 15, 2007. The Company is currently evaluating the impact that SFAS
        No.
        157 will have on its financial position and results of operations.
 
 In
        February 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS
        No. 159 permits entities to choose to measure many financial assets and
        financial liabilities at fair value. Unrealized gains and losses on items
        for
        which the fair value option has been elected are reported in net income.
        SFAS
        No. 159 is effective for fiscal years beginning after November 15, 2007 and
        interim periods within those fiscal years. The Company is currently evaluating
        the impact that SFAS No. 159 will have on its financial position and results
        of
        operations.
 
 8.
        SHARE-BASED COMPENSATION
 
 On
        January 1, 2006, the start of the first quarter of fiscal 2006, the Company
        adopted the provisions of Statement of Financial Accounting Standards No.
        123
        (revised 2004), "Share-Based Payment" ("SFAS 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.
  7


MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





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





For
      the
      quarters and nine months ended September 29, 2007 and September 30, 2006,
      share-based compensation expense related to the 2001 Employee Stock Purchase
      Plan and the various stock option plans was allocated as follows:





Quarters
                Ended
            
            Nine
                Months EndedSeptember
                29,2007
            
            September
                30,2006
            
            September
                29,2007
            
            September
                30,2006Cost
                of sales
            
            $
            25,000
            
            $
            8,000
            
            $
            54,000
            
            $
            23,000Selling,
                general and administrative
            
            
            66,000
            
            
            49,000
            
            
            169,000
            
            
            115,000Total
                share-based compensation
            
            $
            91,000
            
            $
            57,000
            
            $
            223,000
            
            $
            138,000





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 the quarters and nine months ended
      September 29, 2007 and September 30, 2006 were utilized:





2007
            
            2006Expected
                option life (years)
            
            
            3.0
            
            
            2.9Expected
                volatility
            
            
            22.00
            %
            
            31.00
            %Risk-free
                interest rate
            
            
            4.93
            %
            
            5.15
            %Expected
                dividend yield
            
            
            0.00
            %
            
            0.00
            %Fair
                value per share of options granted
            
            $
            2.02
            
            $
            2.63





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





Share-Based
      Compensation Plans:





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





The
      2006
      Stock Option Plan authorizes the grant of an aggregate of 500,000 shares of
      common stock to employees, directors and consultants of the Company. Under
      the
      2006 Stock Option Plan, the
      Company may grant to eligible individuals incentive stock options, as defined
      in
      Section 422 of the Internal Revenue Code of 1986 (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. The 2006 Stock Option
      Plan replaced the 2001 Stock Option Plan, and the remaining 19,700 unissued
      options under the 2001 Stock Option Plan are no longer available for
      grant.





At
      September 29, 2007, there were 341,000 options outstanding under the 2006 Stock
      Option Plan of which 27,500 were exercisable. Options are granted at the closing
      price of the Company’s shares on the American Stock Exchange on the date
      immediately prior to grant, pursuant to the 2006 Stock Option Plan. Options
      available for grant under the 2006 Stock Option Plan were 159,000 at September
      29, 2007.




8




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





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





At
      September 29, 2007, there were 265,242 options outstanding under the 1993 Stock
      Option Plan, the 1997 Long Term Incentive Plan and the 2001 Stock Option Plan,
      of which all were exercisable. No options are available for future grant under
      the 1993 Stock Option Plan, the 1997 Long Term Incentive Plan or the 2001 Stock
      Option Plan.





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





Weighted-Weighted-
            
            
            
            AverageAverage
            
            
            
            Remaining
            
            AggregateExercise
            
            
            
            Contractual
            
            IntrinsicPrice
            
            Shares
            
            Term
            
            ValueOutstanding
                at December 30, 2006.
            
            $
            9.55
            
            
            407,092Granted
            
            
            9.36
            
            
            255,500Exercised
            
            
            7.94
            
            
            (9,300
            )Cancelled
            
            
            12.55
            
            
            (47,050
            )Outstanding
                at September 29, 2007.
            
            $
            9.31
            
            
            606,242
            
            
            7.0
            
            $
            597,000Exercisable
                at September 29, 2007.
            
            $
            9.22
            
            
            292,742
            
            
            4.4
            
            $
            436,000





No
      options were exercised during the quarter ended September 29, 2007. The total
      intrinsic value of options exercised for the quarter ended September 30, 2006
      was $1,000. The total intrinsic value of options exercised for the nine-month
      periods ended September 29, 2007 and September 30, 2006 was $16,000 and $5,000,
      respectively.





The
      total
      fair value of options granted for the quarter ended September 29, 2007 was
      approximately $20,000. The total fair value of options granted for the nine
      months ended September 29, 2007 was approximately $517,000. No options were
      granted for the quarter ended September 30, 2006. The total fair value of
      options granted for the nine months ended September 30, 2006 was approximately
      $212,000.




As
      of
      September 29, 2007, 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 $620,000. Of that total, $72,000, $275,000, $204,000
      and $69,000 are expected to be recognized in 2007, 2008, 2009 and 2010,
      respectively.





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
      20, 2007, the Company issued a grant of 10,500 shares of restricted stock to
      its
      non-employee directors. The per share price of the grant was $9.78 (the closing
      price of the Company’s shares on the American Stock Exchange on the date
      immediately prior to the grant, pursuant to the terms of the plan). One third
      of
      such restricted stock vests on the anniversary of the grant date over a
      three-year period. Share-based compensation expense for the quarter and nine
      months ended September 29, 2007 related to the grant of restricted stock was
      approximately $16,000 and $33,000, which was based on a straight-line
      amortization. Share-based compensation expense for the quarter and nine months
      ended September 30, 2006 related to the grant of restricted stock was
      approximately $7,000 and $10,000, respectively. Restricted shares of common
      stock available for grant under the 2006 Non-Employee Directors’ Stock Plan were
      80,500 at September 29, 2007.





9




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





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





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





9.
      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
                29,
              2007
            
            December
                30,
              2006Finished
                goods
            
            $
            40,619
            
            $
            345,519Work
                in process
            
            
            2,241,368
            
            
            1,539,645Raw
                materials and purchased parts
            
            
            2,199,864
            
            
            1,855,153Total
            
            $
            4,481,851
            
            $
            3,740,317





Total
      inventories are net of valuation allowances for obsolescence and cost overruns
      of $1,553,000 at September 29, 2007 and $1,172,000 at December 30, 2006. The
      Company recorded provisions for obsolescence and cost overruns of $47,000 and
      $30,000 for the quarters ended September 29, 2007 and September 30, 2006,
      respectively, and $223,000 and $131,000 for the nine months ended September
      29,
      2007 and September 30, 2006, respectively.





10.
      CURRENT AND LONG-TERM DEBT





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





2007
            
            2006North
                Fork Bank:Revolving
                line of credit, 2.00% above LIBOR or 0.50% below prime
            
            $
            -
            
            $
            -Term
                loan, due October 1, 2011, 2.25% above LIBOR or 0.50%below
                prime
            
            
            1,600,000
            
            
            1,900,000Mortgage
                loan, due October 1, 2016, 2.25% above LIBOR or 0.50%below
                prime
            
            
            2,850,000
            
            
            2,962,5004,450,000
            
            
            4,862,500Less
                current portion
            
            
            550,000
            
            
            550,000Long-term
                portion
            
            $
            3,900,000
            
            $
            4,312,500





On
      October 18, 2006, the Company entered into a financing agreement with North
      Fork
      Bank which consists of a two-year $5,000,000 revolving line of credit, a
      five-year $2,000,000 machinery and equipment term loan due October 1, 2011
      (“Term Loan”) and a ten-year $3,000,000 real estate term loan due October 1,
      2016 (“Mortgage Loan”). This financing agreement replaced the prior financing
      agreement with CIT. Completion of the financing agreement resulted in additional
      cash loan proceeds of approximately $2,900,000 plus the release of previously
      restricted cash of $1,500,000. The revolving line of credit is subject to an
      availability limit under a borrowing base calculation (85% of eligible accounts
      receivable plus up to 50% of eligible raw materials inventory plus up to 25%
      of
      eligible electronic components, with an inventory advance sublimit not to exceed
      $1,500,000, as defined in the financing agreement). The revolving line of credit
      expires October 18, 2008. At September 29, 2007, the Company had available
      borrowing capacity under its revolving line of credit of $4,600,000. The
      revolving line of credit bears interest at the prime rate less 0.50% (currently
      7.00%) 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 of $33,333. The Term Loan bears interest at the prime rate
      less 0.50% (currently 7.00%) 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 of $1,512,500. The Mortgage
      Loan bears interest at the prime rate less 0.50% (currently 7.00%) or LIBOR
      plus
      2.25%. At September 29, 2007, the Company, under the terms of its agreement
      with
      North Fork Bank, elected to convert $1,500,000 of the Term Loan and $2,800,000
      of the Mortgage Loan from their prime rate base to LIBOR-based interest rate
      loans for six months at an interest rate of 7.6325%, which expires January
      18,
      2008 and $100,000 of the term loan for three months at an interest rate of
      7.61%, which expired October 18, 2007. Interest expense on the above borrowings
      were $98,000 and $73,000 for the quarters ended September 29, 2007 and September
      30, 2006, respectively. Interest expense on the above borrowings were $295,000
      and $217,000 for the nine-month periods ended September 29, 2007 and September
      30, 2006, respectively. The revolving line of credit, the Term Loan and the
      Mortgage Loan are secured by substantially all assets located within the United
      States and the pledge of 65% of the stock of the Company's subsidiaries located
      in Costa Rica and Canada. The provisions of the financing agreement require
      the
      Company to maintain certain financial covenants.





10




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





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





On
      August
      9, 2007, North Fork Bank and Merrimac entered into a Pledge and Security
      Agreement, under which North Fork Bank consented to the guaranty by Merrimac
      of
      FMI's borrowings under the revolving credit agreement with The Bank of Nova
      Scotia in the amount of up to $250,000 (Canadian). In consideration for North
      Fork Bank providing such consent, Merrimac deposited $250,000 into a controlled
      collateral account with North Fork Bank and also agreed to prepay the mortgage
      loan portion of the credit facility with North Fork Bank with fifty percent
      of
      the proceeds from a sale of FMI up to a maximum amount of $500,000 (see Note
      3).





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
      $57,000 and $30,000 for the quarters ended September 29, 2007 and September
      30,
      2006, respectively, and $136,000 and $131,000 for the nine months ended
      September 29, 2007 and September 30, 2006, respectively. The warranty reserve
      at
      September 29, 2007 and December 30, 2006 was $200,000.





12.
      INCOME TAXES





As
      of
      September 29, 2007, 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 2007.





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
      2007
      depending on the extent of the changes in its ownership.





11




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





13.
      BUSINESS SEGMENT DATA





The
      Company's continuing operations are conducted primarily 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 (loss) 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.





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





Quarters
                Ended
            
            Nine
                Months EndedSeptember
                29,
            
            September
                30,
            
            September
                29,
            
            September
                30,2007
            
            2006
            
            2007
            
            2006Net
                income (loss) available to common stockholders
            
            $
            (1,813,445
            )
            $
            (598,567
            )
            $
            (6,546,170
            )
            $
            (509,683
            )Basic
                net income (loss) per shareWeighted
                average number of shares outstanding for basic net income (loss)
                per
                share-Common
                stock
            
            
            2,917,245
            
            
            3,137,241
            
            
            2,974,757
            
            
            3,143,377Net
                income (loss) per common share - basic
            
            $
            (.62
            )
            $
            (.19
            )
            $
            (2.20
            )
            $
            (.16
            )Diluted
                net income (loss) per shareWeighted
                average number of shares outstanding for diluted net income (loss)
                per
                share:Common
                stock
            
            
            2,917,245
            
            
            3,137,241
            
            
            2,974,757
            
            
            3,143,377Effect
                of dilutive securities:Stock
                options (1)
            
            
            42,942
            
            
            -
            
            
            -
            
            
            -Weighted
                average number of shares outstanding for diluted net income (loss)
                per
                share
            
            
            2,960,187
            
            
            3,137,241
            
            
            2,974,757
            
            
            3,143,377Net
                income (loss) per common share - diluted
            
            $
            (.61
            )
            $
            (.19
            )
            $
            (2.20
            )
            $
            (.16
            )








(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 84,000 shares underlying stock
              optionsfor
              the quarter ended September 29, 2007as
              the exercise price of these options was greater than the average market
              value ofthe
              common shares, resulting in an anti-dilutive effect on net income (loss)
              per share.  Because
              of the loss from continuing operations for the nine months ended September
              29, 2007 and for the quarter and nine months ended September 30, 2006,
              approximately 606,000, 464,000 and 464,000 shares underlying stock
              options, respectively, were excluded from the calculation of diluted
              net income (loss) per share as the effect would be
              anti-dilutive.




15.
      RELATED PARTY TRANSACTIONS





During
      the third quarter and first nine months of 2007, the Company's outside general
      counsel Katten Muchin Rosenman LLP was paid $78,000 and $274,000, respectively,
      for providing legal services to the Company. During the third quarter and first
      nine months of 2006, Katten Muchin Rosenman LLP was paid $130,000 and $317,000,
      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
      2007 and 2006 the Company retained Career Consultants, Inc. and SK Associates
      to
      perform executive searches and to provide other services to the Company. The
      Company paid an aggregate of $11,000 and $32,000 to these companies during
      the
      third quarter and first nine months of 2007, respectively. The Company paid
      an
      aggregate of $4,000 and $10,000 to these companies during the third quarter
      and
      first nine months of 2006, respectively. A director of the Company is the
      chairman and chief executive officer of these companies.





12




MERRIMAC
      INDUSTRIES, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





During
      the third quarter and first nine months of 2007, a director of the Company
      was
      paid $9,000 and $27,000, respectively, for providing technology-related
      consulting services to the Company. For the third quarter and first nine months
      of 2006, such director was paid $9,000 and $27,000, respectively.





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 2007. During the third
      quarter and first nine months of 2006, DuPont was paid $4,000 and $31,000,
      respectively. A director of the Company is an officer of DuPont, but does not
      share in any of these payments.





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





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





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




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





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. The Company also announced that it amended
      its 1999 Stockholder Rights Plan by increasing the defined “Acquiring Person”
threshold to 12.5 percent from 10 percent.




13


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
      is a leader in the design and manufacture of active and passive RF (Radio
      Frequency) and microwave components and integrated multifunction assemblies
      for
      industry, government, and science. 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 ("PCS") and wireless internet
      connectivity. The Company's operations are conducted primarily through a single
      business segment, electronic components and subsystems.





Merrimac
      is a versatile technologically oriented company specializing in miniature radio
      frequency lumped-element components, integrated networks, microstrip and
      stripline microwave components, subsystem assemblies and ferrite attenuators.
      Of
      special significance has been the combination of two or more of these
      technologies into single components to achieve superior performance and
      reliability while minimizing package size and weight. Merrimac's components
      range in price from $0.50 to more than $10,000 and its subsystem assemblies
      range from $500 to more than $1,500,000.





Improved
      orders from earlier in 2007 provided the increase in sales during the third
      quarter of 2007 compared to the third quarter of 2006, particularly sales of
      Multi-Mix® products to the defense industry. The increased gross profit from the
      higher sales level, along with lower operating and research and development
      expenses resulted in operating income for the third quarter of 2007. Orders
      of
      $21,768,000 received during the first nine months of 2007 were a Company record.
      Backlog increased by $5,272,000 or 45.9% to $16,762,000 at the end of the third
      quarter of 2007 from the end of 2006. The September 29, 2007 backlog is a record
      for the highest quarter-end backlog the Company has achieved.





The
      Company markets and sells its products domestically and internationally through
      a direct sales force and manufacturers’ representatives. Merrimac has
      traditionally developed and offered for sale products built to specific customer
      needs, as well as standard catalog items.





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.




14


The
      Company anticipates that depreciation and amortization expenses will exceed
      capital expenditures in fiscal year 2007 by approximately $600,000. The Company
      intends to issue commitments to purchase $700,000 of capital equipment from
      various vendors for the remainder of 2007. The Company anticipates that such
      equipment will be purchased and become operational during the fourth quarter
      of
      2007 and early 2008. The Company’s planned equipment purchases and other
      commitments are expected to be funded through cash resources and cash flows
      expected to be generated from operations, and supplemented by the Company’s
      $5,000,000 revolving credit facility, which expires October 18, 2008.





Selling,
      general and administrative expenses consist of personnel costs for
      administrative, selling and marketing groups, sales commissions to employees
      and
      manufacturing representatives, travel, product marketing and promotion costs,
      as
      well as legal, accounting, information technology and other administrative
      costs. 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, and expects that these costs will increase over
      time, in order to develop new products, enhance performance of existing products
      and reduce the cost of current or new products.





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





*Discontinued
      operations.*





Established
      in 1983, and acquired by Merrimac in February 1999, Filtran Microcircuits Inc.
      (“FMI”) is a manufacturer of microwave micro-circuitry for the high frequency
      communications industry. FMI produces 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 participates in the market
      for millimeter-wave applications. FMI also supplies mixed dielectric multilayer
      and high speed interconnect circuitry to meet customer demand for high
      performance and cost-effective packaging.





Company
      management determined, and the Board of Directors approved on August 9, 2007,
      that the Company should divest its FMI operations and is in the process of
      seeking interested parties to purchase FMI. The potential 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 reflects FMI as a
      discontinued operation and the Company reclassified prior financial statements
      to reflect the results of operations, cash flows and financial position of
      FMI
      as discontinued operations.




15


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





Quarters
                Ended
            
            Nine
                Months EndedSeptember 29,2007
            
            September
                30,2006
            
            September
                29,2007
            
            September
                30,2006Net
                sales
            
            $
            1,003,000
            
            $
            1,256,000
            
            $
            2,824,000
            
            $
            4,082,000Loss
                before provision (benefit) for income taxes
            
            
            (1,472,000
            )
            
            (148,000
            )
            
            (4,766,000
            )
            
            (244,000
            )Writedown
                of net assets held for sale to fair value
            
            
            (586,000
            )
            
            -
            
            
            (586,000
            )
            
            -Provision
                (benefit) for income taxes
            
            
            -
            
            
            (13,000
            )
            
            506,000
            
            
            (61,000
            )Net
                loss
            
            $
            (2,058,000
            )
            $
            (135,000
            )
            $
            (5,858,000
            )
            $
            (183,000
            )





The
      assets and liabilities relating to FMI to be sold have been reclassified as
      held
      for sale in the accompanying consolidated balance sheets. Merrimac has estimated
      the fair value of the net assets of FMI to be sold to be $450,000 based upon
      preliminary sales negotiations. Loss from discontinued operations includes
      goodwill impairment charges of $3,756,000 and a charge of $506,000 to provide
      a
      full valuation allowance for a Canadian net deferred tax asset.





In
      the
      event a sales agreement cannot be concluded, FMI will be in violation of its
      credit facility covenants and its line of credit will be terminated. If the
      line
      of credit is terminated, FMI likely will be forced to file for bankruptcy
      protection and begin liquidation proceedings.





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.





Impairment
      of long-lived assets





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





Net
                assets:Property,
                plant and equipment, at cost
            
            $
            14,928,000Less
                accumulated depreciation and amortization
            
            
            9,098,000Property,
                plant and equipment, net
            
            
            5,830,000Inventories
            
            
            563,000Other
                assets, net
            
            
            146,000Total
                net assets at September 29, 2007
            
            
            6,539,000Commitments:Planned
                equipment purchases for the remainder of 2007
            
            
            525,000Lease
                obligations through January 2011
            
            
            640,000Total
                commitments
            
            
            1,165,000Total
                net assets and commitments
            
            $
            7,704,000





Approximately
      36% of the property, plant and equipment may be utilized in other areas of
      our
      electronic components and subsystems operations.





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




16


Contract
      Revenue Recognition





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





The
      cost
      rates utilized for cost-reimbursement contracts are subject to review by third
      parties and can be revised, which can result in additions to or reductions
      from
      revenue. Revisions which result in reductions to revenue are recognized in
      the
      period that the rates are reviewed and finalized; additions to revenue are
      recognized in the period that the rates are reviewed, finalized, accepted by
      the
      customer, and collectability from the customer is reasonably assured. The
      Company submits financial information regarding the cost rates on
      cost-reimbursement contracts for each fiscal year in which the Company performed
      work on cost-reimbursement contracts. The Company does not record any estimates
      on a regular basis for potential revenue adjustments, as there currently is
      no
      reasonable basis on which to estimate such adjustments given the Company’s very
      limited experience with these contracts. No revenue was recognized related
      to
      cost-reimbursement contracts during the third quarter and first nine months
      of
      2007. The Company recognized $482,000 and $732,000 of revenue related to cost
      reimbursement contracts during the third quarter and first nine months of 2006,
      respectively.





Inventory
      Valuation





Inventories
      are valued at the lower of average cost or market. Inventories are periodically
      reviewed for their projected manufacturing usage utilization and, when
      slow-moving or obsolete inventories are identified, a provision for a potential
      loss is made and charged to operations. Total inventories are net of valuation
      allowances for obsolescence and cost overruns of $1,553,000 at September 29,
      2007 and $1,172,000 at December 30, 2006. The Company recorded provisions for
      obsolescence and cost overruns of $47,000 and $30,000 for the quarters ended
      September 29, 2007 and September 30, 2006, respectively, and $223,000 and
      $131,000 for the nine months ended September 29, 2007 and September 30, 2006,
      respectively.





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




·
            our
                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 29, 2007, 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 2007.




17




CONSOLIDATED
      STATEMENTS OF OPERATIONS SUMMARY  (UNAUDITED)





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





Percentage
                of Net Sales
            
            Percentage
                of Net SalesQuarters
                Ended
            
            Nine
                Months EndedSeptember
                29,
            
            September
                30,
            
            September
                29,
            
            September
                30,Continuing
                operations
            
            2007
            
            2006
            
            2007
            
            2006Net
                sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Costs
                and expenses:Cost
                of sales
            
            
            57.4
            
            
            58.5
            
            
            58.3
            
            
            55.7Selling,
                general and administrative
            
            
            31.7
            
            
            40.4
            
            
            38.1
            
            
            38.8Research
                and development
            
            
            6.1
            
            
            10.5
            
            
            7.4
            
            
            8.195.2
            
            
            109.4
            
            
            103.8
            
            
            102.6Operating
                income (loss)
            
            
            4.8
            
            
            (9.4
            )
            
            (3.8
            )
            
            (2.6
            )Interest
                and other (expense) income, net
            
            
            (1.1
            )
            
            1.0
            
            
            (0.4
            )
            
            0.7Income
                (loss) from continuing operations before income taxes
            
            
            3.7
            
            
            (8.4
            )
            
            (4.2
            )
            
            (1.9
            )Provision
                (benefit) for income taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -Income
                (loss) from continuing operations
            
            
            3.7
            
            
            (8.4
            )
            
            (4.2
            )
            
            (1.9
            )Loss
                from discontinued operations before income taxes
            
            
            (22.3
            )
            
            (2.7
            )
            
            (28.9
            )
            
            (1.4
            )Writedown
                of net assets held for sale to fair value
            
            
            (8.8
            )
            
            -
            
            
            (3.6
            )
            
            -Provision
                (benefit) for income taxes
            
            
            -
            
            
            (0.2
            )
            
            3.0
            
            
            (0.4
            )Loss
                from discontinued operations
            
            
            (31.1
            )
            
            (2.5
            )
            
            (35.5
            )
            
            (1.0
            )Net
                loss
            
            
            (27.4
            )%
            
            (10.9
            )%
            
            (39.7
            )%
            
            (2.9
            )%




**THIRD
      QUARTER AND FIRST NINE MONTHS OF 2007 COMPARED TO THE THIRD QUARTER AND FIRST
      NINE MONTHS OF 2006-CONTINUING OPERATIONS**





*Net
      sales.*





Net
      sales
      from continuing operations for the third quarter of 2007 were $6,612,000, an
      increase of $1,113,000 or 20.2 percent compared to the third quarter of 2006
      net
      sales of $5,499,000. Net sales from continuing operations increased due to
      the
      higher level of orders received earlier in 2007 including higher sales of
      Multi-Mix® products to the defense industry.





Net
      sales
      from continuing operations for the first nine months of 2007 were $16,495,000,
      a
      decrease of $788,000 or 4.6 percent compared to net sales of $17,283,000 for
      the
      first nine months of 2006. Net sales from continuing operations for the first
      nine months of 2006 included both the shipment of a $750,000 order to a
      significant military customer and $1,200,000 of revenue recognized in connection
      with the early close out of a fixed price customer contract which did not recur
      in the first nine months of 2007.





Backlog
      represents the amount of orders the Company has received that have not been
      shipped as of the end of a particular fiscal period. The orders in backlog
      are a
      measure of future sales and determine the Company’s upcoming material, labor and
      service requirements. The book-to-bill ratio for a particular period represents
      orders received for that period divided by net sales for the same period. The
      Company looks for this ratio to exceed 1.0, indicating the backlog is being
      replenished 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 29, 2007 and September
      30,
      2006:




2007
            
            2006Beginning
                backlog
            
            $
            11,490,000
            
            $
            12,049,000Plus
                orders
            
            
            21,767,000
            
            
            15,307,000Less
                net sales
            
            
            16,495,000
            
            
            17,283,000Ending
                backlog
            
            $
            16,762,000
            
            $
            10,073,000Book-to-bill
                ratio
            
            
            1.32
            
            
            0.89





Orders
      of
      $7,028,000 were received during the third quarter of 2007, an increase of
      $1,985,000 or 39.4% compared to $5,043,000 in orders received during the third
      quarter of 2006. Orders of $21,767,000 were received during the first nine
      months of 2007, an increase of $6,460,000 or 42.2% compared to $15,307,000
      in
      orders received during the first nine months of 2006. Backlog increased by
      $5,272,000 or 45.9% to $16,762,000 at the end of the third quarter of 2007
      compared to $11,490,000 at year-end 2006, due to the increased orders received
      during the first nine months. The book-to-bill ratio for the third quarter
      of
      2007 was 1.06 to 1 and for the third quarter of 2006 was 0.92 to 1. The
      book-to-bill ratio for the first nine months of 2007 was 1.32 to 1 and for
      the
      first nine months of 2006 was 0.89 to 1. The orders, backlog and book-to-bill
      information for the current and prior periods exclude FMI
      information.




18




*Cost
      of sales and Gross profit.*





The
      following table provides comparative gross profit information between the
      quarters and nine months ended September 29, 2007 and September 30,
      2006.




Quarter
                ended September 29, 2007
            
            
            Quarter
                ended September 30, 2006$
            
            Increase/(Decrease)from
                priorperiod
            
            %
                ofNet
                Sales
            
            
            $
            
            Increase/(Decrease)from
                priorperiod
            
            %
                ofNet
                SalesConsolidatedgross
                profit
            
            $
            2,816,000
            
            $
            532,000
            
            
            42.6
            %
            
            $
            2,284,000
            
            $
            (424,000
            )
            
            41.5
            %




Nine
                Months ended September 29, 2007
            
            
            Nine
                Months ended September 30, 2006$
            
            Increase/(Decrease)from
                priorperiod
            
            %
                ofNet
                Sales
            
            
            $
            
            Increase/(Decrease)from
                priorperiod
            
            %
                of
              Net
                SalesConsolidatedgross
                profit
            
            $
            6,880,000
            
            $
            (782,000
            )
            
            41.7
            %
            
            $
            7,662,000
            
            $
            (490,000
            )
            
            44.3
            %





The
      increase in consolidated gross profit and consolidated gross profit percentage
      for the third quarter of 2007 was due to the impact of the higher level of
      sales
      allowing the Company to absorb fixed manufacturing costs.





The
      decrease in consolidated gross profit and consolidated gross profit percentage
      for the first nine months of 2007 was due to the impact of the lower level
      of
      sales having to absorb fixed manufacturing costs. Consolidated gross profit
      for
      the first nine months of 2006 included $1,060,000 from the early close out
      of a
      fixed price customer contract.





Depreciation
      expense included in consolidated cost of sales for the third quarter of 2007
      was
      $554,000, an increase of $24,000 compared to the third quarter of 2006.
      Depreciation expense included in consolidated cost of sales for the first nine
      months of 2007 was $1,623,000, the same as the first nine months of 2006. 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. For the third quarter and first nine months
      of
      2006, approximately $373,000 and $1,118,000, respectively of depreciation
      expense was associated with Multi-Mix® Microtechnology capital
      assets.





*Selling,
      general and administrative expenses.*





Selling,
      general and administrative expenses of $2,099,000 for the third quarter of
      2007
      decreased by $123,000 or 5.5%, and when expressed as a percentage of net sales,
      decreased by 8.7 percentage points to 31.7% compared to the third quarter of
      2006. The decrease in such expenses for the third quarter of 2007 was due to
      lower commissions and lower marketing and administrative costs. Selling, general
      and administrative expenses of $6,293,000 for the first nine months of 2007
      decreased by $414,000 or 6.2%, and when expressed as a percentage of net sales,
      decreased 0.7 percentage points to 38.1% compared to the first nine months
      of
      2006. The decrease in such expenses for the first nine months of 2007 was due
      to
      lower commissions on the reduced sales level and lower marketing and
      administrative costs.





*Research
      and development expenses.*





Research
      and development expenses for new products were $400,000 for the third quarter
      of
      2007, a decrease of $178,000 or 30.9%, and when expressed as a percentage of
      net
      sales, decreased by 4.4 percentage points to 6.1% compared to the third quarter
      of 2006. Substantially all of the research and development expenses were related
      to Multi-Mix® Microtechnology products. Research and development expenses for
      new products were $1,219,000 for the first nine months of 2007, a decrease
      of
      $183,000 or 13.1%, and when expressed as a percentage of net sales, decreased
      by
      0.7 percentage points to 7.4% compared to the first nine months of 2006.
      Substantially all of the research and development expenses were related to
      Multi-Mix® Microtechnology products. The Company anticipates that these expenses
      will increase in future periods in connection with implementation of our
      strategic plan for Multi-Mix®.




19




*Operating
      income (loss) from continuing operations.*





Operating
      income from continuing operations for the third quarter of 2007 was $317,000,
      compared to an operating loss from continuing operations of $516,000 for the
      third quarter of 2006. T he
      increase in operating income from continuing operations for the third quarter
      of
      2007 as compared to the third quarter of 2006 was due to the improved gross
      profit caused by the increase in sales, in addition to lower commissions,
      administrative expenses and research and development costs as compared to the
      third quarter of 2006.





Operating
      loss from continuing operations for the first nine months of 2007 was $632,000
      compared to an operating loss from continuing operations for the first nine
      months of 2006 of $446,000. T he
      increase in the operating loss from continuing operations for the first nine
      months of 2007 as compared to the first nine months of 2006 was due to the
      lower
      gross profit caused by the decrease in sales, partially offset by decreased
      commissions, administrative expenses and research and development costs compared
      to the first nine months of 2006.





*Interest
      and other (expense) income, net.*





Interest
      and other (expense) income, net was $(72,000) for the third quarter of 2007
      compared to interest and other (expense) income, net of $53,000 for the third
      quarter of 2006. Interest and other (expense) income, net was $(56,000) for
      the
      first nine months of 2007 compared to interest and other (expense) income,
      net
      of $119,000 for the first nine months of 2006. Interest expense for the third
      quarter and first nine months of 2007 and 2006 was principally incurred on
      borrowings under the term loans which the Company entered into during the fourth
      quarter of 2003 and refinanced in October 2006. Interest expense for the third
      quarter and first nine months of 2007 was higher than the third quarter and
      first nine months of 2006 due to the higher debt levels following the
      refinancing of the term loans in October 2006.





*Income
      taxes.*





As
      of
      September 29, 2007, 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 2007.





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
      2007
      depending on the extent of the changes in its ownership.





*Income
      (loss) from continuing operations.*





For
      the
      reasons set forth above, income from continuing operations for the third quarter
      of 2007 was $245,000 compared to a loss from continuing operations of $464,000
      for the third quarter of 2006. Income per diluted share from continuing
      operations for the third quarter of 2007 was $.08 compared to a loss from
      continuing operations of $.15 per share for the third quarter of
      2006.





For
      the
      reasons set forth above, loss from continuing operations for the first nine
      months of 2007 was $688,000 compared to a loss from continuing operations of
      $327,000 for the first nine months of 2006. Loss from continuing operations
      per
      share for the first nine months of 2007 was $.23 compared to a loss from
      continuing operations of $.10 per share for the first nine months of 2006.




20


*Discontinued
      operations* .





In
      the
      third quarter of 2007, the Company recorded an impairment charge for the
      remaining FMI goodwill balance of $1,126,000, and wrote down the remaining
      net
      assets of FMI by $586,000 to a fair value of $450,000. Loss from discontinued
      operations for the third quarter of 2007 and 2006 includes depreciation expense
      of $73,000 and $63,000, respectively.





Loss
      from
      discontinued operations for the third quarter of 2007 was $2,058,000 compared
      to
      a loss from discontinued operations of $135,000 for the third quarter of 2006.
      Loss per basic share from discontinued operations for the third quarter of
      2007
      was $.70 and $.69 per diluted share compared to a loss from discontinued
      operations of $.04 per share for the third quarter of 2006.





Loss
      from
      discontinued operations for the first nine months of 2007 includes goodwill
      impairment charges of $3,756,000 and a charge of $506,000 to provide a full
      valuation allowance for a Canadian net deferred tax asset. Also included in
      the
      loss from discontinued operations for the first nine months of 2007 was a
      $586,000 charge for the write down of the remaining FMI net assets to an
      estimated net realizable value of $450,000. Loss from discontinued operations
      for the first nine months of 2007 and 2006 includes depreciation expense of
      $207,000 and $196,000, respectively.





Loss
      from
      discontinued operations for the first nine months of 2007 was $5,858,000
      compared to a loss from discontinued operations of $183,000 for the first nine
      months of 2006. Loss from discontinued operations per share for the first nine
      months of 2007 was $1.97 compared to a loss from discontinued operations of
      $.06 per share for the first nine months of 2006.





*Net
      income (loss).*





For
      the
      reasons set forth above, net loss for the third quarter of 2007 was $1,813,000
      compared to a net loss of $599,000 for the third quarter of 2006. Net loss
      per
      basic share for the third quarter of 2007 was $.62 and $.61 per diluted share
      compared to a net loss of $.19 per share for the third quarter of
      2006.





For
      the
      reasons set forth above, net loss for the first nine months of 2007 was
      $6,546,000 compared to a net loss of $510,000 for the first nine months of
      2006.
      Net loss per share for the first nine months of 2007 was $2.20 compared to
      a net
      loss of $.16 per share for the first nine months of 2006.





LIQUIDITY
      AND CAPITAL RESOURCES





The
      Company had liquid resources comprised of cash and cash equivalents totaling
      approximately $1,150,000 at the end of the third quarter of 2007 compared to
      approximately $5,400,000 at the end of 2006. The principal reasons for the
      reduction in cash at September 29, 2007 was the repurchase, in a private
      transaction, of 238,700 shares of its Common Stock for the treasury at $9.00
      per
      share for an aggregate total of $2,148,300 from a group of investors on March
      13, 2007, capital expenditures of $1,070,000, operating cash used of $523,000
      as
      described below, restricted cash deposited of $250,000 and repayments of
      borrowings of $413,000. The Company's working capital was approximately
      $9,900,000 and its current ratio was 3.4 to 1 at the end of the third quarter
      of
      2007 compared to $13,300,000 and 4.9 to 1, respectively, at the end of 2006.
      At
      September 29, 2007, the Company had available borrowing capacity under its
      revolving line of credit of $4,600,000.





The
      Company's activities from continuing operations used operating cash flows of
      $522,000 during the first nine months of 2007 compared to using $707,000 of
      operating cash flows during the first nine months of 2006. The primary uses
      of
      operating cash flows from continuing operations for the first nine months of
      2007 were the nine-month loss from continuing operations of $688,000 which
      was
      reduced by depreciation and amortization of $1,757,000 and share-based
      compensation of $223,000, an increase in accounts receivable of $1,385,000
      and
      an increase in inventories of $742,000 offset by an aggregate increase in
      accounts payable, customer deposits and accrued liabilities of $245,000 and
      a
      reduction of other current assets of $57,000. The primary uses of operating
      cash
      flows from continuing operations for the first nine months of 2006 were the
      loss
      from continuing operations of $327,000 which was reduced by depreciation and
      amortization of $1,759,000 and share-based compensation of $138,000, increases
      in accounts receivable of $1,295,000, inventory of $515,000 and an aggregate
      decrease in accounts payable, customer deposits and accrued liabilities of
      $524,000.





The
      Company made net cash investments in property, plant and equipment of $1,070,000
      during the first nine months of 2007 compared to net cash investments made
      in
      property, plant and equipment of $1,203,000 during the first nine months of
      2006. These capital expenditures are related to new production and test
      equipment capabilities in connection with the introduction of new products
      and
      enhancements to existing products. The depreciated cost of capital equipment
      associated with Multi-Mix® Microtechnology was $5,830,000 at the end of the
      third quarter of 2007, a decrease of $917,000 compared to $6,747,000 at the
      end
      of fiscal year 2006.




21




The
      Company’s planned equipment purchases and other commitments are expected to be
      funded through cash resources and cash flows expected to be generated from
      operations, and supplemented by the Company’s $5,000,000 revolving credit
      facility, which expires October 18, 2008.





On
      October 18, 2006, the Company entered into a financing agreement with North
      Fork
      Bank which consists of a two-year $5,000,000 revolving line of credit, a
      five-year $2,000,000 machinery and equipment term loan due October 1, 2011
      (“Term Loan”) and a ten-year $3,000,000 real estate term loan due October 1,
      2016 (“Mortgage Loan”). This financing agreement replaced the prior financing
      agreement with CIT. Completion of the financing agreement resulted in additional
      cash loan proceeds of approximately $2,900,000 plus the release of previously
      restricted cash of $1,500,000. The revolving line of credit is subject to an
      availability limit under a borrowing base calculation (85% of eligible accounts
      receivable plus up to 50% of eligible raw materials inventory plus up to 25%
      of
      eligible electronic components, with an inventory advance sublimit not to exceed
      $1,500,000, as defined in the financing agreement). The revolving line of credit
      expires October 18, 2008. At September 29, 2007, the Company had available
      borrowing capacity under its revolving line of credit of $4,600,000. The
      revolving line of credit bears interest at the prime rate less 0.50% (currently
      7.00%) 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 of $33,333. The Term Loan bears interest at the prime rate
      less 0.50% (currently 7.00%) 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 of $1,512,500. The Mortgage
      Loan bears interest at the prime rate less 0.50% (currently 7.00%) or LIBOR
      plus
      2.25%. At September 29, 2007, the Company, under the terms of its agreement
      with
      North Fork Bank, elected to convert $1,500,000 of the Term Loan and $2,800,000
      of the Mortgage Loan from their prime rate base to LIBOR-based interest rate
      loans for six months at an interest rate of 7.6325%, which expires January
      18,
      2008 and $100,000 of the term loan for three months at an interest rate of
      7.61%, which expired October 18, 2007. Interest expense on the above borrowings
      were $98,000 and $73,000 for the quarters ended September 29, 2007 and September
      30, 2006, respectively. Interest expense on the above borrowings were $295,000
      and $217,000 for the nine-month periods ended September 29, 2007 and September
      30, 2006, respectively. The revolving line of credit, the Term Loan and the
      Mortgage Loan are secured by substantially all assets located within the United
      States and the pledge of 65% of the stock of the Company's subsidiaries located
      in Costa Rica and Canada. The provisions of the financing agreement require
      the
      Company to maintain certain financial covenants.





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





On
      August
      9, 2007, North Fork Bank and Merrimac entered into a Pledge and Security
      Agreement, under which North Fork Bank consented to the guaranty by Merrimac
      of
      FMI's borrowings under the revolving credit agreement with The Bank of Nova
      Scotia in the amount of up to $250,000 (Canadian). In consideration for North
      Fork Bank providing such consent, Merrimac deposited $250,000 into a controlled
      collateral account with North Fork Bank and also agreed to prepay the mortgage
      loan portion of the credit facility with North Fork Bank with fifty percent
      of
      the proceeds from a sale of FMI up to a maximum amount of $500,000.





Depreciation
      and amortization expenses exceeded capital expenditures for production equipment
      during the first nine months of 2007 by approximately $687,000, and the Company
      anticipates that depreciation and amortization expenses will exceed capital
      expenditures in fiscal year 2007 by approximately $600,000. The Company intends
      to issue commitments to purchase $700,000 of capital equipment from various
      vendors for the remainder of 2007. The Company anticipates that such equipment
      will be purchased and become operational during the fourth quarter of 2007
      and
      early 2008.





The
      functional currency for the Company’s wholly-owned subsidiary FMI is the
      Canadian dollar. The changes in accumulated other comprehensive income for
      the
      third quarter and first nine months of 2007 and 2006 reflect the changes in
      the
      exchange rates between the Canadian dollar and the United States dollar for
      those respective periods. The functional currency for the Company’s Costa Rica
      operations is the United States dollar.




22


RECENT
      ACCOUNTING PRONOUNCEMENTS





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





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





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





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


23


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 30, 2006, which is incorporated herein by reference. Our
      exposure to market risk has not changed materially since December 30, 2006.





ITEM
      4T.
      CONTROLS AND PROCEDURES





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





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





No
      change
      occurred in the Company's internal controls concerning financial reporting
      during the Company's third quarter that has materially affected, or is
      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 Merrimac's management that the disposition of these various lawsuits
      will not individually or in the aggregate have a material adverse effect on
      the
      consolidated financial position or the results of operations of
      Merrimac.





ITEM
      1A.
      RISK FACTORS.





There
      have been no material changes to our Risk Factors from those presented in our
      Form 10-K for fiscal year 2006, except for the additional risk factor set forth
      below:




*Our
      inability to conclude an agreement to sell FMI could have a material adverse
      effect on our results of operations.*




Company
      management determined, and the Board of Directors approved on August 9, 2007,
      that the Company should divest its FMI operations and is in the process of
      seeking interested parties to purchase FMI. The potential 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 reflects FMI as a
      discontinued operation and the Company restated prior financial statements
      to
      reflect the results of operations, cash flows and financial position of FMI
      as
      discontinued operations.




The
      assets and liabilities relating to FMI to be sold have been reclassified as
      held
      for sale in the accompanying consolidated balance sheets. Merrimac has estimated
      the fair value of the net assets of FMI to be sold to be $450,000 based upon
      preliminary sales negotiations. Loss from discontinued operations for the nine
      months ended September 29, 2007 includes goodwill impairment charges of
      $3,756,000, reducing the goodwill balance to zero and a charge of $506,000
      to
      provide a full valuation allowance for a Canadian net deferred tax asset. Also
      included in the loss from discontinued operations for the first nine months
      of
      2007 was a $586,000 charge for the write down of the remaining FMI net assets
      to
      an estimated net realizable value of $450,000.




24




In
      the
      event a sales agreement cannot be concluded, FMI will be in violation of its
      credit facility covenants and its line of credit will be terminated. If the
      line
      of credit is terminated, FMI likely will be forced to file for bankruptcy
      protection and begin liquidation proceedings, which would have a material
      adverse effect on our results of operations.





ITEM
      5.
      OTHER INFORMATION.





None.




25


ITEM
      6.
      EXHIBITS





Exhibits:





EXHIBITNUMBER
            
            DESCRIPTION
                OF EXHIBIT31.1+
            
            Chief
                Executive Officer's Certificate, pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2+
            
            Chief
                Financial Officer's Certificate, pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1+
            
            Chief
                Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2+
            
            Chief
                Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





+
      Indicates that exhibit is filed as an exhibit hereto.




26


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 13, 2007
              By:
              /s/
                  Mason N. CarterMason
                  N. CarterChairman,
                  President andChief
                  Executive Officer
  Date:
                  November 13, 2007
              By:
              /s/
                  Robert V. CondonRobert
                  V. CondonVice
                  President, Finance andChief
                  Financial Officer




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