UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC  20549





FORM
10-K





(Mark
One)


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





For
the fiscal year ended December 31,
2008




OR




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





For
the transition period
from              to





Commission
file number 1-4184





Valpey-Fisher
Corporation


(Exact
name of registrant as specified in its charter)




Maryland
                06-0737363(State
      or other jurisdiction of
                (I.R.S.
      Employerincorporation
      or organization)
                Identification
      number)75
      South St., Hopkinton, Massachusetts
                01748(Address of
      principal executive offices)
                (Zip
      Code)




Registrant’s
telephone number, including area code: (508) 435-6831
 
 Securities
registered pursuant to Section 12 (b) of the Act:
  Title of each
      class:
                      Name of each exchange on which
      registered:Common
      Stock $.05 par value
                      The
      NASDAQ Stock Market
LLC




Securities
registered pursuant to Section 12 (g) of the Act:  None
 
 Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.   Yes
[  ]   No [X]
 
 Indicate
by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   Yes
[  ]   No [X]
 - 1
-


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
[  ]





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Sec.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]





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


Large
      accelerated filer [  ]
                Accelerated
      filer [  ]Non-accelerated
      filer [  ]
                Smaller
      reporting company [X](Do
      not check if a smaller reporting company)




Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act).  Yes [  ]   No
[X]
 
 The
aggregate market value of voting stock held by non-affiliates: $9,377,106
(computed by reference to the last sales price of such common stock on June 27,
2008, the last business day of the Registrant’s most recently completed second
fiscal quarter, as reported in the American Stock Exchange consolidated trading
index).
 
 Number of
shares of common stock outstanding at March 26,
2009:  4,297,898
 
 Documents
incorporated by reference:
 
 Portions
of the Registrant’s Proxy Statement for the 2009 Annual Meeting of Stockholders
are incorporated by reference into Part III of this report.
 - 2
-


Forward
Looking Statements




Information included or
incorporated by reference in this Annual Report on Form 10-K may contain
forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different than the future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,”
“intend” or “project” or the negative of these words or other variations on
these words or comparable terminology.




This
Annual Report on Form 10-K contains forward-looking statements
that  may be found under “Management’s Discussion and Analysis of
Financial Condition and Results of Operation” and “Business,” as well as in this
Annual Report generally. Actual events or results may differ materially from
those discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under “Risk Factors” and
matters described in this Annual Report generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this Annual Report will in fact be accurate.








PART
I





Item
1.  Business





General





Valpey-Fisher
Corporation is incorporated under the laws of Maryland.





Recent
Developments





On October
17, 2008, we paid a special one-time cash dividend in the amount of $1.50 per
share (total amount $6,447,000) to shareholders of record on October 6,
2008.





Financial
Information about Industry Segments





We operate
in one business segment.  Information about our export sales is set
forth in Note 11 of the Notes to Consolidated Financial Statements in Item 8 of
this Report, which Note is incorporated by reference.


- 3
-


Description
of Business





Products





We are
involved in the design, production, import, and sale of frequency control
devices and ultrasonic transducer devices.





Our
frequency control devices include quartz crystals and oscillators incorporating
these crystals and are used as integral components in electronic circuitry to
assure precise timing and frequency reference. Except for more costly atomic
standards, quartz crystals and oscillators continue to be one of the most stable
references for accurately controlling electronic frequencies and
time.





We provide
a wide-frequency range of frequency control devices including standard and
custom-designed product. Our capabilities include:


-
            high-reliability,
      precision crystals and oscillators used in sophisticated industrial,
      military and aerospace
applications.


-
            ultra-high
      frequency crystals used in crystal filters and oscillators for original
      equipment manufacturers (“OEMs”) telecommunications and microwave
      applications.


-
            highly-customized
      timing modules including jitter attenuators and frequency translators for
      microwave and wireless markets.


-
            high-volume,
      low cost crystals and oscillators for consumer and commercial
      applications.





Our
frequency control products are used by the telecommunications, computer and
computer peripheral equipment, scientific, instrumentation, industrial, and
aerospace markets.  The majority of our revenue is generated by the
telecommunications markets including the wireless, networking and optical
networking segments.  Our frequency control products are used in
telecommunications infrastructure equipment such as bandwidth multipliers,
networking switches and routers, cellular base stations, transceivers and
multiplexers.





Our
ultrasonic transducer devices are sold to the NDT (nondestructive testing),
industrial, research and bio-medical markets.  Applications include
weld testing, flaw detection, thickness gauging, and corrosion
inspection.





Raw
Materials





Quartz
crystal bases, ceramic packages and integrated circuits (“ICs”) are the
principal raw materials and are available from a number of domestic and foreign
suppliers.





We import
sub-assemblies and completed products from various Far East (including China,
Japan, South Korea, Philippines, and Taiwan) and Russian suppliers for use in
our domestically manufactured products and for resale to our
customers.


- 4
-


In order
to eliminate the effects of currency fluctuations, we currently and historically
have purchased products from our foreign suppliers in U.S. dollars. As exchange
rates fluctuate, our cost for these materials may become more expensive than our
competitors that have taken measures to protect against exchange rate
fluctuations.  In addition, we are subject to the inherent risks
involved in international trade such as political instability and restrictive
trade policies.





Marketing and
Customers





Our direct
sales personnel, independent manufacturers’ representatives and distributors
sell the frequency control products. Our ultrasonic transducer devices are sold
primarily by our direct sales personnel.





We sell
our frequency control products primarily to original equipment
manufacturers(OEMs),
electronics manufacturing services (EMS) companies, and
distributors.  Our distributors also sell to both the OEMs and EMS
companies. Ultrasonic transducer devices are sold primarily to OEMs, colleges
and universities and research facilities.





In recent
years, OEMs have outsourced a significant amount of their manufacturing
capability to EMS companies.  As a result, this has tended to increase
the concentration of sales to the EMS companies.  Sales to Flextronics
Corporation, an EMS company, accounted for approximately 17% of our net sales in
2008.  In 2007, Flextronics Corporation acquired Solectron Corporation
an EMS company.  Total sales in 2007 to both Flextronics Corporation
and Solectron Corporation amounted to approximately 16% of our net
sales.





Sales to
our five largest customers accounted for approximately 39% of our sales in 2008
compared to 30% of our sales in 2007.  Sales to EMS companies
accounted for approximately 39% of our sales in 2008 compared to 38% in
2007.





Export
sales amounted to approximately 34% of our sales in 2008 compared to 29% in
2007.  Information about export sales is set forth in Note 11 of the
Notes to Consolidated Financial Statements included in Item 8 of this Report,
which Note is incorporated by reference.  Our international sales are
transacted in U. S. dollars.





Seasonal
Fluctuations





During the
last few years, we have noticed that some of our customers, most notably the EMS
companies and the larger OEMs, have closed their manufacturing facilities during
the last two or three weeks in December.  These facility closures
reduce the number of available days to ship these customers in the 4th
quarter.


- 5
-


Research and
Development





Research
and development expenses amounted to $611,000 in 2008 and $495,000 in
2007.  During 2009, we intend to continue  our efforts to
develop new products which would leverage off our expertise in the timing
area.





Backlog





Our
backlog of firm orders was approximately $1,666,000 at December 31, 2008
compared to $2,134,000 at December 31, 2007.  We expect to ship the
entire December 31, 2008 backlog during 2009.





Competition





There are
many domestic and foreign suppliers of quartz crystals and oscillators. A number
of the competitors are larger and have greater resources than we have including
Vectron International (a division of Dover Corporation) and CTS
Corporation.   In addition, foreign competitors, particularly
from the Far East, continue to dominate the U.S. markets.  However, we
believe we can maintain a competitive position in our business based on our
quality, strong design and application engineering, responsive customer service
and a willingness to provide specialty small quantity orders.





Manufacturing





Our
manufacturing facility is located in Hopkinton, Massachusetts.  We
have been ISO-9001 certified for the design and manufacture of crystals and
crystal oscillators since 1997.





Environmental
Regulations





To the
best of our knowledge compliance with Federal, state and local provisions which
have been enacted or adopted regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment, has not
had, nor will have a material effect upon capital expenditures, earnings from
continuing operations or competitive position.





As a
result of the sale of our Bergen Cable subsidiary in 1998, we are performing
environmental clean up at that site. See Note 3 of the Notes to Consolidated
Financial Statements included in Item 8 of this Report, which Note is
incorporated by reference.


- 6
-


Employees





At
December 31, 2008, we employed 54 employees. None of our employees are
represented by a collective bargaining unit. We consider our relations with our
employees to be satisfactory.





Available
Information




Our
Internet website address is www.valpeyfisher.com.  Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and amendments to reports filed or furnished pursuant to Sections
13(a) and 15 (d) of the Securities Exchange Act of 1934, as amended, are
available free of charge on our website as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the
SEC.  The information on our website is not incorporated by reference
into this report.





Foreign
and Domestic Operations and Export Sales





Financial
information about our export sales is set forth in Note 11 of the Notes to
Consolidated Financial Statements included in Item 8 of this Report, which Note
is incorporated by reference.


- 7
-


Item 1A.  Risk
Factors





Our
business, financial condition and results of operations can be affected by a
number of factors, including but not limited to those set forth below and
elsewhere in this Annual Report on Form 10-K, any one of which could cause our
actual results to vary materially from past results or from our anticipated
future results.





Our
results for 2009 will be negatively impacted by the current global economic
conditions and uncertainties.





In 2009
our business will be adversely impacted by the current world-wide economic
conditions.   The uncertainty concerning the potential duration
and depth of these negative conditions persists.  These conditions
also make it difficult for our customers, our vendors and us to accurately
forecast and plan future business activities. In addition, our customers and
suppliers also may face credit and debt issues, which could have an adverse
effect on their operations.  The continued global economic condition
will likely have an adverse effect on our revenue, operating results and cash
flow. In addition we could experience decreased demand for our products,
increased risk of excess inventories, and increased risk in the collectability
of accounts receivable from our customers.





If
we are unable to introduce new products, including more-value added products,
our future operating results may decrease.





Our future
operating results are dependent on the timely development, customer acceptance,
production, introduction and marketing of new products, including more-value
added products.  The time lag between our customer’s acceptance of our
product (a design win) and the receipt of production orders affects the timing
of our sales growth and operating results.  We have continuing sales
of older/mature products that tend to decline in average selling prices over the
product life cycle.  By developing these new products, we can replace
and/or offset the impact of the lower average selling prices of the older/mature
products.





The
future demand for our products depends in a large part to growth of the markets
that incorporate our frequency control products.  These markets are
cyclical and have experienced a modest increase in product demand in recent
years.





The future
demand for our products depends in a large part to growth of the markets that
incorporate our frequency control products.  These markets include
telecommunications equipment, computers and computer peripheral and scientific
instrumentation.  A decline in the demand for products in these
markets could negatively affect our operating results and financial
condition.


- 8
-


A significant portion of our revenues
is derived from sales to a few customers.  The loss of one or more of our
significant customers could have an adverse impact on our operating results and
financial condition.





In 2008,
sales to our top five customers accounted for approximately 39% of our sales
compared to 30% in 2007.  The loss of one or more of our significant
customers or a reduction in sales to any one of them could have an adverse
impact on our operating results and financial condition.  All our
sales are made on a purchase order basis and we do not have long-term purchase
contracts with our customers.  As a result, our customers may cancel
or change delivery dates within a specific period of time without
penalty.





A significant portion of our revenues
are to Electronics
Manufacturing Services (EMS) companies.  If we fail to
successfully obtain orders from the EMS companies, our operating results and
financial condition could be negatively affected.





Approximately
39% of the Company’s sales in 2008 were to EMS companies.  There is a
continuing trend among original equipment manufacturers (OEMs) to outsource the
manufacture of their product to EMS companies.  We first work with and
receive design wins from OEMs.  We then have to negotiate pricing,
quantities and delivery with the EMS companies.  If we fail to
successfully obtain orders from the EMS companies, our operating results and
financial condition could be negatively affected.





There is a limited market and limited
trading activity for our common shares.  The purchase or sale of a
relatively small number of shares could result in significant share price
fluctuations.





There is a
limited public market and limited trading activity for our common
shares.  Directors and executive officers currently beneficially own
53% of the outstanding shares on a fully diluted basis.  5% holders,
other than our directors and executive officers, and institutional
holders  own approximately 17% of the outstanding
shares.   During 2008, the average trading volume of our common
stock was 4,700 shares per day.  As a result of the low trading volume
and the limited outstanding float, the purchase or sale of a relatively small
number of shares could result in significant share price
fluctuations.





We may make an acquisition that is
not successful.





As part of
our business strategy, we continue to evaluate acquisition opportunities that
could complement, enhance or expand our current business or provide additional
product offerings or technologies.  We may have difficulty finding
these opportunities or, if we do find an opportunity, we may not be able to
complete the transaction for reasons including a failure to secure financing, if
necessary.  Any transaction we are able to complete may involve a
number of risks including, but not limited to:


·
            the
      diversion of our management’s attention from our existing business to
      integrate the operations and personnel of the acquired
      business,


·
            the
      possible adverse effects on the Company’s operating results during the
      integration period,


·
            the
      loss of key employees, customers and vendors as a result of the change in
      management, and


·
            our
      possible inability to achieve the intended objectives of the
      transaction.




- 9
-


In
addition, future acquisitions may result in dilutive issuances of equity
securities or the incurrence of debt.





Our
success depends on our ability to retain our existing management and technical
team and to recruit and retain qualified technical, sales and marketing and
management personnel.





Our future
growth and success will depend in a large part on our ability to retain our
existing management and technical team and to recruit and retain qualified
technical, sales and marketing and management personnel.  Competition
for qualified employees in our industry is at times intense.  The loss
of any of these key personnel or our inability to attract and retain these key
employees to operate and expand our business could adversely affect our
operations.





We
face global business, political and economic risks which may adversely affect
us.





We sell
our products to customers and purchase inventory from vendors located outside of
the United States.  As a result, we face global business, political
and economic risks which may adversely affect us.  These risks
include, but are not limited to:


·
            political
      and economic instability in countries where our products are sold or
      manufactured,


·
            expropriation
      or the imposition of government
controls,


·
            export
      license requirements,


·
            trade
      restrictions,


·
            high
      levels of inflation or deflation,


·
            greater
      difficulty in collecting our accounts receivable and longer payment
      terms,


·
            less
      favorable intellectual property laws,
and


·
            increases
      in duties.





In
addition, these same factors may also place us at a competitive disadvantage to
some of our foreign competitors.





To date,
very few of our international transactions have been denominated in foreign currency.  As
a result, a change in the value of the US dollar relative to the foreign
currencies could make our products more expensive, and thus less
competitive.  We may find it necessary in the future from a
competitive position to complete transactions denominated in foreign
currency.  This will subject us with the risks associated with
fluctuations in these foreign currencies.


- 10
-


Our
markets are highly competitive, and we may lose business to larger and better
financed competitors.





Our
markets are highly competitive worldwide with few import barriers. Foreign
competitors, particularly from the Far East, continue to dominate the U.S. and
world markets.  We compete primarily on our quality, strong design and
application engineering, responsive customer service and a willingness to
provide specialty small quantity orders.  Our major competitors, most
of which are larger than we are, have substantially greater financial resources
and more extensive engineering, manufacturing, marketing and customer support
capabilities than we have.





Certain
Directors and Executive Officers Beneficially Own a Substantial
Portion


of
Our Common Stock and May Be in a Position to Determine the Outcome of Our
Corporate Elections





Members of
the Board of Directors and Executive Officers, beneficially own 53% of the
currently outstanding shares of Common Stock on a fully diluted
basis.  By virtue of such ownership, such members of the Board and
Management including Ted Valpey, Jr. may have the practical ability to determine
the election of all directors and control the outcome of substantially all
matters submitted to our stockholders.  Such concentration of
ownership could have  the effect of making it more difficult for a
third party to acquire, or discourage a third party from seeking to acquire,
control of us.





Compliance
with changing corporate governance and public disclosure regulations may result
in additional expenses.




Compliance
with the changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002
(SOX), new Securities and Exchange Commission regulations and the NASDAQ Stock
Market rules, requires significant management attention and has increased our
professional fee expense. We will incur additional general and administrative
expenses as we continue the ongoing evaluation and testing of our internal
control over financial reporting as we comply with Section 404 of
SOX.





Item
1B.  Unresolved Staff Comments





Not
applicable.


- 11
-


Item
2.  Properties





We own our
32,000 square foot facility located in Hopkinton, Massachusetts that contains
office and manufacturing space and serves as our corporate
headquarters.





We believe
our facility is suitable for our current use and is adequate to satisfy our
current production capacity needs.








Item 3.  Legal
Proceedings





Not
applicable.








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





A Special
Meeting of Stockholders was held on September 30, 2008.  Listed below
is the matter submitted to stockholders and the results of the stockholder
votes.





Approval
of Amendments to the Valpey-Fisher Corporation 1992, 1999, 2001, and 2003 Stock
Option Plans (i) to permit the Board to adjust outstanding options in the event
of any distribution of assets to stockholders other than an ordinary dividend
and (ii) to increase the number of shares covered by the Plans by the number of
shares necessary to adjust the outstanding Options as described in (i) but in no
event in excess of 127,214 shares under the 1992 Plan, 99,000 shares under the
1999 Plan, 132,715 shares under the 2001 Plan, and 28,286 shares under the 2003
Plan.





“For”                 3,372,113


“Against”   
            33,299


“Abstained”  
          12,925


- 12
-


PART
II





Item 5.  Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities





Since
October 28, 2008, our common stock has been listed and traded on the NASDAQ
Capital Market under the symbol VPF.  Prior to October 28, 2008, our
common stock had been listed and traded on the American Stock Exchange under the
symbol VPF.   The range of high and low prices each quarter for
the past two years is shown below:







For the years ended December
      31,
                        
                        2008
                        
                        
                        2007High
                        
                        
                        Low
                        
                        
                        High
                        
                        
                        Low4th
      quarter
                        
                        $
                        4.79
                        
                        
                        $
                        0.91
                        
                        
                        $
                        6.00
                        
                        
                        $
                        4.103rd
      quarter
                        
                        
                        4.86
                        
                        
                        
                        2.94
                        
                        
                        
                        6.15
                        
                        
                        
                        4.002nd
      quarter
                        
                        
                        5.30
                        
                        
                        
                        3.80
                        
                        
                        
                        7.51
                        
                        
                        
                        4.111st
      quarter
                        
                        
                        5.10
                        
                        
                        
                        3.85
                        
                        
                        
                        4.56
                        
                        
                        
                        3.21





On October
17, 2008, we paid a special one-time cash dividend in the amount of $1.50 per
share to shareholders of record on October 6, 2008.  No dividend was
paid in 2007.





The number
of stockholders of record on March 11, 2009 was 627.This number does not include
stockholders for whom shares are held in a “nominee” or “street”
name.








Equity Compensation Plan
Information





The
following table presents information as of December 31, 2008 regarding the
number of shares of our common stock that may be issued under our equity
compensation plans.





Plan
      Category
              Number
      of securities
                to
      be issued upon
                exercise
      of
                outstanding
      options,
                warrants
      and rights
              Weighted-average
                exercise
      price of
                outstanding
      options,
                warrants
      and rights
              Number
      of securities
                remaining
      available
                for
      future issuance
                under
      equity
                compensation
      plans
                (excluding
      securities
                reflected
      in the first
                column)Equity
      compensation
                plans
      approved by
                security
      holders (1)
              823,265
              $1.45
              168,666Equity
      compensation
                plans
      not approved by
                security
      holders (2)
              -0-
              -0-
              -0-





(1)
Includes the 2003, 2001, 1999 and 1992 Stock Option Plans.


(2) Does
not include 100,000 shares of Restricted Stock awarded pursuant to the
Restricted Stock Agreement dated December 19, 2002 between Mr. Ferrantino and
us.


- 13
-


Material
Feature of Restricted Stock Agreement between Us and Mr. Ferrantino Not Approved
by Shareholders





As an
inducement to becoming our employee, pursuant to a Restricted Stock Agreement
dated December 19, 2002 between us and Michael J. Ferrantino, our director and
President and Chief Executive Officer, on December 24, 2002, we issued Mr.
Ferrantino 100,000 shares of Common Stock for a purchase price of $.05 per share
or an aggregate purchase price of $5,000.  Pursuant to the Agreement,
the Stock could not be sold or transferred, encumbered or otherwise disposed of
for a period of five years.  Said restrictions terminated as to 20% of
the Restricted Stock upon each of October 23, 2003, 2004, 2005, 2006 and
2007.  Pursuant to the Agreement, the Restriction was to terminate as
to an additional 20% of the Restricted Stock upon the death of the employee
after October 23, 2003 or entirely upon a change in control of ownership of 70%
or more of our outstanding Common Stock by anyone other than Ted Valpey, Jr. or
certain mergers or reorganization of us.  The Restricted Stock
Agreement was not submitted to shareholders for approval.





Sale
of Unregistered Securities





The
100,000 shares of Common Stock issued to Mr. Ferrantino pursuant to the
Restricted Stock Agreement described above in this Item 5 have not been
registered under the Securities Act of 1933 (the “Act”).  Transfer of
the shares is subject to the restrictions and limitations under the
Act.  The issuance of the shares was exempt from registration pursuant
to Section 4(2) of the Act as a transaction not involving any public
offering.





Stock
Repurchases





At
December 31, 2008, under prior authorizations from the Board of Directors, we
are authorized to purchase up to 219,700 shares of common stock through the open
market or negotiated transactions.





We made no
repurchases of ours common stock in the fourth quarter of 2008.


- 14
-


Item 6. Selected Financial
Data





Years
      Ended December 31,
                                                                              
                                                                              2008
      (1)
                                                                              
                                                                              
                                                                              2007
      (1)
                                                                              
                                                                              
                                                                              2006
      (1)
                                                                              
                                                                              
                                                                              2005
                                                                              
                                                                              
                                                                              2004(in
      thousands, except per share data)Continuing
      operations:Net
      sales
                                                                              
                                                                              $
                                                                              13,021
                                                                              
                                                                              
                                                                              $
                                                                              13,419
                                                                              
                                                                              
                                                                              $
                                                                              11,782
                                                                              
                                                                              
                                                                              $
                                                                              11,427
                                                                              
                                                                              
                                                                              $
                                                                              11,545Gross
      profit
                                                                              
                                                                              
                                                                              5,061
                                                                              
                                                                              
                                                                              
                                                                              5,441
                                                                              
                                                                              
                                                                              
                                                                              4,469
                                                                              
                                                                              
                                                                              
                                                                              3,814
                                                                              
                                                                              
                                                                              
                                                                              3,260Earnings
      (loss) before income taxes
                                                                              
                                                                              
                                                                              1,328
                                                                              
                                                                              
                                                                              
                                                                              1,712
                                                                              
                                                                              
                                                                              
                                                                              778
                                                                              
                                                                              
                                                                              
                                                                              499
                                                                              
                                                                              
                                                                              
                                                                              (55
                                                                              )Income
      tax (expense) benefit
                                                                              
                                                                              
                                                                              (592
                                                                              )
                                                                              
                                                                              
                                                                              (521
                                                                              )
                                                                              
                                                                              
                                                                              71
                                                                              
                                                                              
                                                                              
                                                                              (195
                                                                              )
                                                                              
                                                                              
                                                                              -Earnings
      (loss)
                                                                              
                                                                              
                                                                              736
                                                                              
                                                                              
                                                                              
                                                                              1,191
                                                                              
                                                                              
                                                                              
                                                                              849
                                                                              
                                                                              
                                                                              
                                                                              304
                                                                              
                                                                              
                                                                              
                                                                              (55
                                                                              )Discontinued
      operations- net of income tax benefit
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              (180
                                                                              )
                                                                              
                                                                              
                                                                              (60
                                                                              )
                                                                              
                                                                              
                                                                              (110
                                                                              )Net
      earnings (loss)
                                                                              
                                                                              $
                                                                              736
                                                                              
                                                                              
                                                                              $
                                                                              1,191
                                                                              
                                                                              
                                                                              $
                                                                              669
                                                                              
                                                                              
                                                                              $
                                                                              244
                                                                              
                                                                              
                                                                              $
                                                                              (165
                                                                              )Basic
      earnings (loss) per share:Continuing
      operations
                                                                              
                                                                              $
                                                                              .17
                                                                              
                                                                              
                                                                              $
                                                                              .28
                                                                              
                                                                              
                                                                              $
                                                                              .20
                                                                              
                                                                              
                                                                              $
                                                                              .07
                                                                              
                                                                              
                                                                              $
                                                                              (.01
                                                                              )Discontinued
      operations
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              (.04
                                                                              )
                                                                              
                                                                              
                                                                              (.01
                                                                              )
                                                                              
                                                                              
                                                                              (.03
                                                                              )$
                                                                              .17
                                                                              
                                                                              
                                                                              $
                                                                              .28
                                                                              
                                                                              
                                                                              $
                                                                              .16
                                                                              
                                                                              
                                                                              $
                                                                              .06
                                                                              
                                                                              
                                                                              $
                                                                              (.04
                                                                              )Diluted
      earnings (loss) per share:Continuing
      operations
                                                                              
                                                                              $
                                                                              .17
                                                                              
                                                                              
                                                                              $
                                                                              .27
                                                                              
                                                                              
                                                                              $
                                                                              .20
                                                                              
                                                                              
                                                                              $
                                                                              .07
                                                                              
                                                                              
                                                                              $
                                                                              (.01
                                                                              )Discontinued
      operations
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              (.04
                                                                              )
                                                                              
                                                                              
                                                                              (.01
                                                                              )
                                                                              
                                                                              
                                                                              (.03
                                                                              )$
                                                                              .17
                                                                              
                                                                              
                                                                              $
                                                                              .27
                                                                              
                                                                              
                                                                              $
                                                                              .16
                                                                              
                                                                              
                                                                              $
                                                                              .06
                                                                              
                                                                              
                                                                              $
                                                                              (.04
                                                                              )Cash
      dividends per share
                                                                              
                                                                              $
                                                                              1.50
                                                                              
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              -Total
      assets, end of year
                                                                              
                                                                              $
                                                                              10,086
                                                                              
                                                                              
                                                                              $
                                                                              15,950
                                                                              
                                                                              
                                                                              $
                                                                              14,529
                                                                              
                                                                              
                                                                              $
                                                                              13,617
                                                                              
                                                                              
                                                                              $
                                                                              12,864Long-term
      debt, end of year
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              -





(1) As
discussed in Note 2 in the Notes to Consolidated Financial Statements, effective
January 1, 2006, we changed our method of accounting for stock-based
compensation to conform to Statement of Financial Accounting Standards No. 123R
“Share-Based Payment”.


- 15
-


Item
7.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Critical
Accounting Policies





Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The preparation of these financial statements requires us to
make estimates, judgments, and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the related disclosure of
contingent assets and liabilities.  Actual results may differ from
these estimates under different assumptions or conditions.





Management
believes that judgments and estimates related to the following critical
accounting policies could materially affect its consolidated financial
statements.





Accounts
receivable - We perform on-going credit evaluations of our customers and assess
the collectability of our accounts receivable based on a number of factors
including the customer’s financial condition and collection history, and current
economic trends when evaluating the adequacy of the allowance for doubtful
accounts.





Inventory
- We estimate the carrying value of our inventory based upon historic usage and
management’s assumptions relating to projected customer purchases, product
design changes and product obsolescence.  The changing technology
markets that we supply also affect these estimates.  If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.





Income
Taxes - We have recorded deferred tax assets and liabilities resulting from
differing treatment of items for tax and financial statement reporting
purposes.  We must estimate our income tax valuation allowance by
assessing which deferred tax assets are more likely than not to be recovered in
the future.  Based on our assessment of the realization of these
assets, we do not have a valuation allowance at December 31,
2008.   In reaching our conclusion, we evaluated the existence of
deferred tax liabilities that can be used to absorb deferred tax assets, taxable
income in prior carryback years and taxable income by jurisdiction in which we
operate and the period over which the deferred tax assets would be
recoverable.  In the event that actual results differ from these
estimates in future periods, we may need to establish an additional valuation
allowance or reduce the valuation allowance, which could materially impact our
financial position and results of operations.





Financial
Condition and Liquidity





Cash and
cash equivalents amounted to $4,515,000 at December 31, 2008, a decrease of
$5,486,000 from the December 31, 2007 level. During 2008, our continuing
operations provided cash of $1,191,000, investing activities used cash of
$227,000, financing activities used cash of $6,410,000, and discontinued
operations used cash of $40,000.





Cash
provided from continuing operations amounted to $1,191,400 in 2008 compared to
$1,243,700 in 2007.  Operating cash flows during 2008 resulted mainly
from net earnings of $735,800 and an increase of $454,900 for the non-cash
effects of depreciation, deferred income taxes, and stock compensation
expense.   During 2008, the overall components of net working
capital remained level with 2007.


- 16
-


The
$307,000 decrease in accounts receivable from the 2007 amount was mainly due to
a decrease in the current year’s fourth quarter sales from the 2007 comparable
period.   The inventory increase of $281,000 is mainly due to a
combination of the lead times for certain raw material items and the necessary
inventory to support the current level of shipments and backlog and to meet
customer delivery requirements.   The decrease in accrued
liabilities is mainly due to a $214,000 reduction in the key employee bonus plan
accrual.





Capital
expenditures amounted to $215,000 in 2008. Our budget for 2009 capital
expenditures is approximately $250,000.





The
Company’s Board of Directors approved a special one-time cash dividend in the
amount of $1.50 per share (total amount $6,447,000) payable on October 17, 2008
to shareholders of record on October 6, 2008.





We believe
that based on our current working capital and the expected cash flows from
operations, our resources are sufficient to meet our financial needs and to fund
our capital expenditures for the projected levels of business in
2009.





Results
of Operations – 2008 versus 2007





Our net
sales decreased $398,000 (3%) from 2007.The sales
decrease was due to sales reductions in our standard product line of $1,212,000
(18%) and our transducer product line of $198,000 (23%) partially offset by a
$1,012,000 (18%) sales increase in our high precisionand high reliability
product lines.  The lower sales in our standard product and transducer
product lines were primarily due to a decrease in the number of units sold and,
to a lesser extent, decreases in the average selling prices.  The
higher sales in our high precisionand high reliability
product lines were mainly due to an increase in the number of units sold. We
continue to pursue sales of our more value-added, higher performance and higher
average selling price products included in our high precision product
line.  Total bookings for 2008 amounted to $12,519,000 versus
$13,435,000 in 2007.Our backlog amounted to
$1,666,000 at December 31, 2008 compared to $2,134,000 at December 31, 2007.





We
reported a gross profit of $5,061,000 or 38.9% of net sales in 2008 versus a
$5,441,000 gross profit or 40.5% of net sales in 2007.  The decrease
in gross profit is mainly due to an overall 6% increase in raw material
expense  primarily in the standard product
line.   Direct labor and overhead costs as a percentage of sales
remained fairly consistent during both years.





Selling
and advertising expenses amounted to $1,654,000 or 12.7% of net sales in 2008
compared to $1,756,000 13.1% of net sales in 2007.  The $102,000
decrease was primarily due to a decrease in employee compensation and benefits
of $89,000 and decreased commission expense to outside sales representatives of
$15,000, partially offset by $2,000 net increase in other expenses.





General
and administrative expenses amounted to $1,660,000 or 12.7% of net sales in 2008
compared to $1,890,000 or 14.1% of net sales in 2007.  The $230,000
expense decrease was primarily the result of decreases of $125,700 in employee
compensation and benefits, $57,700 in stock based compensation expense and
$41,500 in restricted stock expense.





Research
and development expenses amounted to $611,000 or 4.7% of net sales in 2008
compared to $495,000 or 3.7% of net sales in 2007.  The $117,000
expense increase is primarily as a result of increased employee compensation and
benefits to support new product development.


- 17
-


Interest
income amounted to $192,000 in 2008 versus $412,000 in 2007.  The
decrease in interest income is primarily due to interest rates being
approximately 2 percentage points lower during 2008.





The combined federal and state income
tax rate for 2008 is 45% compared to 30% in 2007.  The main reason for
the higher rate in 2008 is due to a $281,000 reduction in the valuation
allowance for deferred income taxes which amounts to approximately a 16% point
reduction in the 2007 rate.





We
reported an operating profit of $1,136,000 during 2008, compared to an operating
profit of $1,300,000 in 2007.  The current year decrease in operating
profit from last year results from the lower sales and corresponding decrease in
gross profit of $380,000 offset in part by a $216,000 decrease in operating
expenses.  Interest income amounted to $192,000 in 2008, compared to
$412,000 in 2007.  We reported a pre-tax profit of $1,328,000 in 2008
compared to a pre-tax profit $1,712,000 in 2007.  For 2008, we
reported net earnings of $736,000 versus net earnings of $1,191,000 in
2007.





Off-Balance
Sheet Arrangements





We do not
maintain any off-balance sheet financing arrangements.





Contractual
Obligations





During the
normal course of business, we incur certain commitments to make future payments
for the purchase of inventory, machinery and equipment and production supplies
based on our projected requirements.  At December 31, 2008, we had
outstanding purchase commitments approximating $513,000,
all of which we expect to be fulfilled in 2009.  At December 31, 2008,
we did not have any contractual obligations for capital leases, operating leases
or long-term debt.





Recent
accounting pronouncements





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”), which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 157 was effective
for the Company on January 1, 2008 and had no impact on our consolidated
financial statements. In February 2008, FASB issued FASB Staff
Position  (“FSP”) No. 157-2, which delayed the effective date of
SFAS 157 for certain non-financial assets and non-financial liabilities to
fiscal years beginning after November 15, 2008. The Company is in the
process of evaluating the effect, if any, the adoption of FSP No. 157-2
will have on its results of operations or financial position




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115 (“SFAS No. 159”) which permits an entity to elect to measure
certain assets and liabilities at fair value at specified election
dates.  SFAS No. 159 was effective for the Company on January 1, 2008
and had no impact on our consolidated financial statements as we did not elect
to use the fair value option.




In December 2007, the FASB issued
SFAS 141 (revised 2007), "Business Combinations", (SFAS 141R).
SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, including goodwill, the liabilities assumed and any non-controlling
interest in the acquiree. The Statement also establishes disclosure requirements
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination.


- 18
-


SFAS 141R
is effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The impact of adopting SFAS 141R will be dependent
on the future business combinations that the Company may pursue after its
effective date.





In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 110, extending under certain circumstances the provisions
of SAB 107 relating to the use of the “simplified method” in developing
estimates of the expected term of “plain vanilla” share options in accordance
with SFAS No. 123R, Share-Based Payment.  Through December 31, 2007,
we used the “simplified method” to determine the expected life of option
grants.  SAB 110 is effective for stock option grants after December
31, 2007.  The impact of adopting SAB 110 did not have a material
impact on the Company’s results of operations, financial position or cash
flows.











Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk





Our cash
balances in excess of operating requirements are currently invested in money
market accounts. These money market accounts are subject to interest rate risk
and interest income will fluctuate in relation to general money market rates.
Based on the cash and cash equivalent balance at December 31, 2008, and assuming
the balance was totally invested in money market instruments for the full year,
a hypothetical 1% point increase or decline in interest rates would result in an
approximate $45,150 increase or decrease in interest income.





We
purchase certain inventory from and sell product in foreign countries. As these
activities are currently transacted in U.S. dollars, they are not subject to
foreign currency exchange risk. However, significant fluctuation in the
currencies where we purchase inventory or sell product could make the U.S.
dollar equivalent of such transactions more or less favorable to us and the
other involved parties.


- 19
-


Item 8. Financial Statements
and Supplementary Data





Valpey-Fisher
Corporation


Consolidated
Balance Sheets





December
      31,
                      
                      2008
                      
                      
                      2007AssetsCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      4,514,985
                      
                      
                      $
                      10,001,022Accounts
      receivable, less allowance for doubtful accounts of
                        $105,000
      in 2008 and  2007
                      
                      
                      1,631,041
                      
                      
                      
                      1,937,951Inventories,
      net
                      
                      
                      1,376,350
                      
                      
                      
                      1,095,498Deferred
      income taxes
                      
                      
                      825,523
                      
                      
                      
                      959,422Other
      current assets
                      
                      
                      40,038
                      
                      
                      
                      61,570Total
      current assets
                      
                      
                      8,387,937
                      
                      
                      
                      14,055,463Property,
      plant and equipment, at cost:Land
      and improvements
                      
                      
                      226,505
                      
                      
                      
                      226,505Buildings
      and improvements
                      
                      
                      2,058,873
                      
                      
                      
                      2,042,975Machinery
      and equipment
                      
                      
                      8,971,689
                      
                      
                      
                      8,772,65811,257,067
                      
                      
                      
                      11,042,138Less
      accumulated depreciation
                      
                      
                      9,748,875
                      
                      
                      
                      9,326,5361,508,192
                      
                      
                      
                      1,715,602Other
      assets
                      
                      
                      190,132
                      
                      
                      
                      178,459$
                      10,086,261
                      
                      
                      $
                      15,949,524Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable
                      
                      $
                      605,851
                      
                      
                      $
                      619,746Accrued
      liabilities
                      
                      
                      1,610,802
                      
                      
                      
                      1,757,467Total
      current liabilities
                      
                      
                      2,216,653
                      
                      
                      
                      2,377,213Deferred
      income taxes
                      
                      
                      149,722
                      
                      
                      
                      249,222Commitments
      and contingencies
                      
                      
                      -
                      
                      
                      
                      -Stockholders’
      equity:Preferred
      stock, $1.00 par value-Authorized 1,000,000 shares; issued,
      none
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $.05 par value-Authorized 10,000,000 shares;
                        issued
      and outstanding: 4,297,898 and 4,282,503 shares,
    respectively
                      
                      
                      214,895
                      
                      
                      
                      214,125Capital
      surplus
                      
                      
                      5,609,608
                      
                      
                      
                      5,502,538Retained
      earnings
                      
                      
                      1,895,383
                      
                      
                      
                      7,606,426Total
      stockholders’ equity
                      
                      
                      7,719,886
                      
                      
                      
                      13,323,089$
                      10,086,261
                      
                      
                      $
                      15,949,524





See notes to consolidated financial
statements.


- 20
-


Valpey-Fisher
Corporation


Consolidated
Statements of Operations





For
      the Years Ended December 31,
                                          
                                          2008
                                          
                                          
                                          2007Net
      sales
                                          
                                          $
                                          13,020,834
                                          
                                          
                                          $
                                          13,419,213Cost
      of sales
                                          
                                          
                                          7,960,198
                                          
                                          
                                          
                                          7,978,044Gross
      profit
                                          
                                          
                                          5,060,636
                                          
                                          
                                          
                                          5,441,169Selling
      and advertising expenses
                                          
                                          
                                          1,653,977
                                          
                                          
                                          
                                          1,756,465General
      and administrative expenses
                                          
                                          
                                          1,659,760
                                          
                                          
                                          
                                          1,889,826Research
      and development expenses
                                          
                                          
                                          611,321
                                          
                                          
                                          
                                          494,6413,925,058
                                          
                                          
                                          
                                          4,140,932Operating
      profit
                                          
                                          
                                          1,135,578
                                          
                                          
                                          
                                          1,300,237Interest
      income
                                          
                                          
                                          192,226
                                          
                                          
                                          
                                          411,858Earnings
      before income taxes
                                          
                                          
                                          1,327,804
                                          
                                          
                                          
                                          1,712,095Income
      tax (expense)
                                          
                                          
                                          (592,000
                                          )
                                          
                                          
                                          (521,000
                                          )Net
      earnings
                                          
                                          $
                                          735,804
                                          
                                          
                                          $
                                          1,191,095Basic
      earnings per share
                                          
                                          $
                                          .17
                                          
                                          
                                          $
                                          .28Diluted
      earnings per share
                                          
                                          $
                                          .17
                                          
                                          
                                          $
                                          .27Cash
      dividend per share
                                          
                                          $
                                          1.50
                                          
                                          
                                          $
                                          -





See notes
to consolidated financial statements.


- 21
-


Valpey-Fisher
Corporation


Consolidated
Statements of Cash Flows





For
      the Years Ended December 31,
                                                
                                                2008
                                                
                                                
                                                2007Cash
      Flows from Operating Activities:Net
      earnings
                                                
                                                $
                                                735,804
                                                
                                                
                                                $
                                                1,191,095Adjustments
      to reconcile net earnings to net
                                                  cash
      provided by operating activities:Depreciation
                                                
                                                
                                                422,339
                                                
                                                
                                                
                                                500,677Changes
      in deferred income taxes
                                                
                                                
                                                (38,891
                                                )
                                                
                                                
                                                (128,046
                                                )Stock
      based compensation
                                                
                                                
                                                71,456
                                                
                                                
                                                
                                                148,579Tax
      benefits from exercise of stock options
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (25,800
                                                )Non-cash
      restricted stock compensation, net of taxes
                                                
                                                
                                                -
                                                
                                                
                                                
                                                24,800Changes
      in assets and liabilities:Accounts
      receivable, net
                                                
                                                
                                                306,910
                                                
                                                
                                                
                                                (324,238
                                                )Inventories,
      net
                                                
                                                
                                                (280,852
                                                )
                                                
                                                
                                                (285,644
                                                )Other
      current assets
                                                
                                                
                                                21,532
                                                
                                                
                                                
                                                7,577Accounts
      payable and accrued liabilities
                                                
                                                
                                                (46,942
                                                )
                                                
                                                
                                                134,648Net
      cash provided by operating activities of continuing
    operations
                                                
                                                
                                                1,191,356
                                                
                                                
                                                
                                                1,243,648Change
      in deferred income taxes
                                                
                                                
                                                27,190
                                                
                                                
                                                
                                                27,400Change
      in accrued expenses
                                                
                                                
                                                (67,519
                                                )
                                                
                                                
                                                (209,141
                                                )Net
      cash (used) by operating activities of discontinued
    operations
                                                
                                                
                                                (40,329
                                                )
                                                
                                                
                                                (181,741
                                                )Net
      cash provided by operating activities
                                                
                                                
                                                1,151,027
                                                
                                                
                                                
                                                1,061,907Cash
      Flows from Investing Activities:Capital
      expenditures
                                                
                                                
                                                (214,929
                                                )
                                                
                                                
                                                (323,158
                                                )Other
                                                
                                                
                                                (11,673
                                                )
                                                
                                                
                                                (17,557
                                                )Net
      cash (used) by investing activities
                                                
                                                
                                                (226,602
                                                )
                                                
                                                
                                                (340,715
                                                )Cash
      Flows from Financing Activities:Dividend
      paid
                                                
                                                
                                                (6,446,847
                                                )
                                                
                                                
                                                -Stock
      options exercised
                                                
                                                
                                                68,678
                                                
                                                
                                                
                                                69,970Purchases
      of common stock
                                                
                                                
                                                (32,293
                                                )
                                                
                                                
                                                -Tax
      benefits from exercise of stock options
                                                
                                                
                                                -
                                                
                                                
                                                
                                                25,800Net
      cash provided (used) by financing activities
                                                
                                                
                                                (6,410,462
                                                )
                                                
                                                
                                                95,770Net
      Increase (Decrease) in Cash and Cash Equivalents
                                                
                                                
                                                (5,486,037
                                                )
                                                
                                                
                                                816,962Cash
      and Cash Equivalents at beginning of year
                                                
                                                
                                                10,001,022
                                                
                                                
                                                
                                                9,184,060Cash
      and Cash Equivalents at end of year
                                                
                                                $
                                                4,514,985
                                                
                                                
                                                $
                                                10,001,022





Supplemental
      Disclosures of Cash Flow Information
                  Cash
      paid during the year by continuing operations for income
    taxes
                
                $
                525,000
                
                
                $
                667,500





See notes
to consolidated financial statements.


- 22
-


Valpey-Fisher
Corporation


Consolidated
Statements of Stockholders’ Equity


Common
      Stock
              
              
              Capital
              
              
              Retained
              
              
              UnearnedShares
              
              
              Amount
              
              
              Surplus
              
              
              Earnings
              
              
              CompensationBalance,
      January 1,  2007
              
              
              4,256,503
              
              
              $
              212,825
              
              
              $
              5,276,189
              
              
              $
              6,415,331
              
              
              $
              (41,500
              )Net
      earnings
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,191,095
              
              
              
              -Amortization
      of restricted stock grant
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              41,500Tax
      effect of restricted stock grant
              
              
              -
              
              
              
              -
              
              
              
              (16,700
              )
              
              
              -
              
              
              
              -Exercise
      of stock options
              
              
              26,000
              
              
              
              1,300
              
              
              
              68,670
              
              
              
              -
              
              
              
              -Stock
      option income tax benefit
              
              
              -
              
              
              
              -
              
              
              
              25,800
              
              
              
              -
              
              
              
              -Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              148,579
              
              
              
              -
              
              
              
              -Balance,
      December 31, 2007
              
              
              4,282,503
              
              
              
              214,125
              
              
              
              5,502,538
              
              
              
              7,606,426
              
              
              
              -Net
      earnings
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              735,804
              
              
              
              -Exercise
      of stock options
              
              
              23,200
              
              
              
              1,160
              
              
              
              67,517
              
              
              
              -
              
              
              
              -Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              71,456
              
              
              
              -
              
              
              
              -Dividend
      paid ($1.50 per share)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,446,847
              )
              
              
              -Purchases
      and retirement of common stock
              
              
              (7,805
              )
              
              
              (390
              )
              
              
              (31,903
              )
              
              
              -
              
              
              
              -Balance,
      December 31, 2008
              
              
              4,297,898
              
              
              $
              214,895
              
              
              $
              5,609,608
              
              
              $
              1,895,383
              
              
              $
              -





See notes
to consolidated financial statements.


- 23
-


Valpey-Fisher
Corporation


Notes
to Consolidated Financial Statements





(1)   Description of
Business – Valpey-Fisher Corporation (the Company), a Maryland
corporation, is involved in the design, production, import, and sale of quartz
crystals and oscillators marketed primarily to customers operating in the
telecommunications industry and the design, production and sale of ultrasonic
transducer devices.





(2)  Summary
of Significant Accounting Policies:


Principles
of consolidation –The accompanying consolidated financial statements
include the accounts of Valpey-Fisher Corporation and its wholly owned
subsidiaries. In 2005, the Company dissolved all the consolidating subsidiaries,
except for Matec International, Inc.   Significant intercompany
balances and transactions have been eliminated in consolidation


Use
of estimates –The preparation of the Company’s consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the balance sheet dates.  Estimates include
reserves for accounts receivable and inventory, useful lives of property, plant
and equipment, accrued liabilities, deferred income taxes and assumptions used
to calculate stock compensation expense.  Actual results could differ
from those estimates.


Fair value of financial instruments
– The carrying amounts of cash, cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value because of their
short-term nature.


Cash equivalents – The Company
considers all highly liquid money market investments with a maturity of three
months or less when purchased to be cash equivalents.  Cash
equivalents are stated at cost plus accrued interest, which approximates market
value.


Accounts
receivable–Trade accounts
receivableare
recorded at the invoiced amount and do not bear interest.  An
allowance for doubtful accounts is maintained for potential credit losses based
upon the Company’s expected collectability of all accounts receivable.The Company
determines the allowance based on numerousfactors including the
customer’s financial condition and collection history, and current economic
trends.  Account balances are charged-off against the allowance after
all means of collection have been exhausted and the potential for recovery is
considered remote.


Concentration of credit risk –
Financial instruments that potentially subject us to concentrations of credit
risk consist principally of cash and cash equivalents and accounts
receivable.  The Company places its cash and cash equivalents
primarily in money market accounts and reduces its exposure to credit risk by
maintaining such accounts with high quality financial
institutions.  At December 31, 2008, approximately $1,952,000 of the
Company’s cash and cash equivalents balance were in excess of the applicable
insurance limits.  Concentrations of credit risk with respect to
accounts receivable are primarily due to customers with large outstanding
balances.  At December 31, 2008, two customers represented about 17%
and 11%, respectively, of the Company’s accounts receivable.  At
December 31, 2007, one  customer represented about 29%  of
the Company’s accounts receivable.  To reduce credit risk, the Company
performs ongoing credit evaluations of its customers, but generally does not
require advance payments or collateral.  The Company maintains an
allowance for doubtful accounts based upon the expected collectability of such
receivables.


Inventories – Inventories are
stated at the lower of cost or market and are determined by the first-in, first
out method (FIFO).




- 24
-


Property,
plant and equipment – The Company uses the straight-line method of
providing for depreciation of property, plant and equipment for financial
reporting purposes and accelerated methods for tax purposes. The estimated lives
used to compute depreciation are as follows: land improvements – 10 years,
building and improvements - 15 to 40 years and machinery and equipment – 3 to 10
years.


Expenditures
for additions, renewals and betterments of property and equipment are
capitalized.  Expenditures for repairs and maintenance are charged to
expense as incurred.  As assets are retired or sold, the related cost
and accumulated depreciation are removed from the accounts and any gain or loss
is included in the results of operations.


Revenue recognition – Revenue
is recognized when an agreement of sale exists, product delivery has occurred,
title has passed, pricing is fixed or determinable, and collection is reasonably
assured.


Research and development–Research and development costs are expensed as incurred.


Advertising-Advertising costs are
expensed as incurred.  Advertising expenses were $106,400 in 2008 and
$79,500 in 2007.


Income taxes – The Company
computes deferred income taxes based on the differences between the financial
statement and tax basis of assets and liabilities using enacted rates in effect
in the years in which the differences are expected to
reverse.  Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.  The
tax effect of the differences between stock compensation expense for financial
statement and income tax purposes is charged or credited to capital
surplus.


Earnings per share–Basic
earnings per share is computed by dividing net earnings by the weighted average
number of common shares outstanding during the period.  Diluted
earnings per share is computed using the weighted average number of common
shares outstanding during the period, plus the net incremental shares that would
be issued using the treasury stock method assuming  dilutive
outstanding stock options were exercised and dilutive unvested restricted stock
were vested.  The assumed proceeds under the treasury stock method
include:


·
            the
      amount paid to the Company upon exercise of the
  option;


·
            compensation
      expense for future services that the Company has not yet recognized;
      and


·
            the
      amount of excess tax benefits, if any, that would be credited to
      additional paid-in capital upon exercise of the
  options.





The
computation of diluted earnings per share excludes stock options and restricted
stock with an exercise price in excess of the average market price as they are
antidilutive.  In calculating diluted earnings per share, the dilutive
effect of stock options and restricted stock are computed using the average
market price for the respective period.





Stock
compensation plans – Effective January 1, 2006, the Company began
recording compensation expense associated with stock-based payments in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R,
“Share-Based Payment”.  Prior to January 1, 2006, the Company applied
the intrinsic value method, Accounting Principles Board Opinion No. 25
“Accounting for Stock Issued to Employees” and related interpretations in
accounting for its stock-based payments.  Accordingly, the Company did
not recognize compensation expense for stock-based payments granted with
exercise prices equal to or greater than the market value on the date of
grant.  The Company has adopted the modified prospective method as
permitted under SFAS No. 123R.  Under this transition provision,
compensation expense associated with stock-based payments  recognized
beginning January 1, 2006 includes: (a) expense related to the remaining
unvested portion of all stock-based payment  awards granted prior to
December 31, 2005, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123, and (b) expense related to all stock- based
payment  awards granted subsequent to December 31, 2005, based on the
grant date fair value estimated in accordance with the provisions of SFAS No.
123R.  In accordance with the modified prospective method of adoption,
the Company’s results of operations and financial position for prior periods
have not been restated.


- 25
-


As a
result of the adoption of SFAS No. 123R, the Company recorded the following
stock-based compensation expense in the Consolidated Statement of Operations (in
thousands):





2008
                                  
                                  
                                  2007Cost
      of sales
                                  
                                  $
                                  20
                                  
                                  
                                  $
                                  27Selling
      and advertising
                                  
                                  
                                  16
                                  
                                  
                                  
                                  29General
      and administrative
                                  
                                  
                                  24
                                  
                                  
                                  
                                  82Research
      and development
                                  
                                  
                                  11
                                  
                                  
                                  
                                  11Pre-tax
      stock-based compensation expense
                                  
                                  
                                  71
                                  
                                  
                                  
                                  149Income
      tax (benefit)
                                  
                                  
                                  (5
                                  )
                                  
                                  
                                  (5
                                  )Net
      stock-based compensation expense
                                  
                                  $
                                  66
                                  
                                  
                                  $
                                  144





See Note 9
for further information regarding the Company’s stock-based compensation
assumptions.





Comprehensive income (loss) –
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. For the years ended December 31, 2008 and 2007 the
Company had no items of other comprehensive income (loss).





Recent accounting pronouncements
–




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”), which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 157 was effective
for the Company on January 1, 2008 and had no impact on our consolidated
financial statements. In February 2008, FASB issued FASB Staff
Position  (“FSP”) No. 157-2, which delayed the effective date of
SFAS 157 for certain non-financial assets and non-financial liabilities to
fiscal years beginning after November 15, 2008. The Company is in the
process of evaluating the effect, if any, the adoption of FSP No. 157-2
will have on its results of operations or financial position




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115 (“SFAS No. 159”) which permits an entity to elect to measure
certain assets and liabilities at fair value at specified election
dates.  SFAS No. 159 was effective for the Company on January 1, 2008
and had no impact on our consolidated financial statements as we did not elect
to use the fair value option.




In December 2007, the FASB
issued SFAS 141 (revised 2007), "Business Combinations", (SFAS 141R).
SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, including goodwill, the liabilities assumed and any non-controlling
interest in the acquiree. The Statement also establishes disclosure requirements
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
impact of adopting SFAS 141R will be dependent on the future business
combinations that the Company may pursue after its effective date.





In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 110, extending under certain circumstances the provisions
of SAB 107 relating to the use of the “simplified method” in developing
estimates of the expected term of “plain vanilla” share options in accordance
with SFAS No. 123R, Share-Based Payment.  Through December 31, 2007,
we used the “simplified method” to determine the expected life of option
grants.  SAB 110 is effective for stock option grants after December
31, 2007.  The impact of adopting SAB 110 did not have a material
impact on the Company’s results of operations, financial position or cash
flows.


- 26
-


(3)
Discontinued Operations:





In 1998,
the Company sold all the assets of a subsidiary located in New
Jersey.  As a result of this sale, the Company was required to perform
environmental cleanup at this site.  As of December 31, 2008, a total
of $1,560,000 has been expensed for the cleanup and $314,400 (see Note 7) is
accrued for expenses relating to the cleanup.





(4) Inventories, net:Inventories, net of reserves, consist of the
    following:
              
              2008
              
              
              2007Raw
      materials
              
              $
              903,051
              
              
              $
              757,625Work
      in process
              
              
              149,760
              
              
              
              101,012Finished
      goods
              
              
              323,539
              
              
              
              236,861$
              1,376,350
              
              
              $
              1,095,498





At
December 31, 2008 and 2007, inventories are presented net of inventory reserves
of $1,050,000 and $925,000, respectively.





(5) Income Taxes:The
provision for income taxes for continuing operations consisted of the
following:





2008
                        
                        
                        2007Current:Federal
                        
                        $
                        603,700
                        
                        
                        $
                        612,600State
                        
                        
                        -
                        
                        
                        
                        -603,700
                        
                        
                        
                        612,600Deferred:Federal
                        
                        
                        (136,200
                        )
                        
                        
                        16,700State
                        
                        
                        132,500
                        
                        
                        
                        172,700(3,700
                        )
                        
                        
                        189,400Valuation
      allowance
                        
                        
                        (8,000
                        )
                        
                        
                        (281,000
                        )Total
                        
                        $
                        592,000
                        
                        
                        $
                        521,000




- 27
-


The total
income tax provision for continuing operations differs from that computed by
applying the federal income tax rate to income before income taxes. The reasons
for the difference are as follows:





2008
                                                                                                            
                                                                                                            
                                                                                                            2007Income
      taxes at statutory rates
                                                                                                            
                                                                                                            $
                                                                                                            51,500
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            82,100State
      income taxes, net of federal tax effect
                                                                                                            
                                                                                                            
                                                                                                            (27,400
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            31,200Federal
      tax effect of state tax operating losses utilized
                                                                                                            
                                                                                                            
                                                                                                            115,200
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            115,700Stock
      based compensation
                                                                                                            
                                                                                                            
                                                                                                            20,100
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            46,400Change
      in valuation allowance
                                                                                                            
                                                                                                            
                                                                                                            (8,000
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (281,000
                                                                                                            )Other,
      net
                                                                                                            
                                                                                                            
                                                                                                            40,600
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            26,600$
                                                                                                            92,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            21,000
  The tax
effects of significant items comprising the Company’s deferred tax assets and
liabilities as of D ecember
31, 2008 and 2007 are as follows:
  2008
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2007Deferred
      tax assets:Inventory
      valuation
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            575,600
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            538,600State
      tax loss carryforward
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            356,200Accruals
      and allowances
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            235,100
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            244,700Stock
      compensation
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            14,800
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            9,900Valuation
      allowance
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            (190,000
                                                                                                                                            )Net
      deferred tax assets
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            825,500
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            959,400Deferred
      tax liabilities:Depreciation
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            149,700
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            186,200DISC
      commissions
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            -
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            63,000Total
      deferred tax liabilities
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            149,700
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            249,200Net
      deferred tax assets
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            675,800
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            710,200




At
December 31, 2007, the Company had state tax loss benefit carryforwards of
$356,200 that expired  in 2008.  During 2007, the Company
reduced the valuation allowance based on the Company’s ability to use state tax
loss carryforwards previously reserved for.  Due to the uncertainty of
the realization of this state tax benefit and management’s estimate that
operating income and the reversal of future taxable temporary differences will
more likely than not be sufficient to recognize all of the other deferred tax
assets, the Company established a valuation allowance of $190,000 at December
31, 2007.





Tthe Company adopted Financial
Accounting Standards Board (“FASB”) Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes” (“FIN 48”) effective January 1,
2007.  Adoption of FIN 48 on January 1, 2007 did not result in a
cumulative effect adjustment to retained earnings.  At December 31,
2008 and 2007, the Company had no reserves for unrecognized tax benefits on the
balance sheet.    Although there are no income tax audits
currently in process, the Company’s federal and state of Massachusetts tax
returns for 2005 through 2007 are open tax years.  The Company’s
policy is to include interest expense on underpayments of income taxes in our
income tax provision whereas penalties are included in general and
administrative expense.


- 28
-


(6) Profit Sharing and Savings
Plan: The Company has a trusteed profit sharing 401(k) plan that covers
all qualified employees. Under the profit sharing section of the plan, the
Company may make contributions to the plan at the discretion of the Board of
Directors. Profit sharing expense amounted to $29,900 in 2008 and $60,000 in
2007.  Under the 401(k) section of the plan, the Company matched 50%
of employee contributions up to 6% of compensation. Total Company contributions
charged to operations were approximately $84,000 in 2008 and $55,000 in
2007.





(7) Accrued Liabilities:Accrued liabilities consist of the following items:
                    
                    2008
                    
                    
                    2007Employee
      compensation
                    
                    $
                    688,000
                    
                    
                    $
                    833,800Professional
      fees
                    
                    
                    110,000
                    
                    
                    
                    165,000Environmental
      costs (see Note 3)
                    
                    
                    314,400
                    
                    
                    
                    381,900Commissions
                    
                    
                    93,600
                    
                    
                    
                    115,000Other
                    
                    
                    404,802
                    
                    
                    
                    261,767$
                    1,610,802
                    
                    
                    $
                    1,757,467





(8) Debt:At
December 31, 2008, the Company had no outstanding credit arrangements with banks
or any other financial institution.





(9) Stockholders’ Equity: The
Company has 4,297,898 and 4,282,503 shares of its $.05 par value Common Stock
outstanding at December 31, 2008 and 2007, respectively.





At
December 31, 2008, under prior authorizations from the Board of Directors, the
Company is authorized to purchase up to an additional 219,700 shares of stock
through the open market or negotiated transactions.





The
Company granted 100,000 shares of restricted stock to the President and Chief
Executive Officer for $5,000 in 2002.  The shares issued under a
Restricted Stock Agreement vested over a period of five
years.  Unearned compensation was recorded at the date of the grant
based on the market value of $295,000 or $2.95 per
share and was amortized over the five year vesting period.  At
December 31, 2008 and 2007 all shares are vested.  During 2008, no
shares of restricted stock were granted or forfeited. The amount amortized to
expense was $0 in 2008 and $41,500 in 2007.  The tax effect of the
differences between compensation expense for financial statement and income tax
purposes was charged or credited to capital surplus.





The
Company has four Stock Option Plans that originally allowed for the granting of
options to officers, key employees, and other individuals to purchase a maximum
of 1,000,000 shares of the Company’s common stock.  On September 30,
2008, shareholders approved amendments to the four stock option plans to adjust
the number of options allowed by these plans by an aggregate of 387,215 to
offset the expected
decline in market value of the Company’s common stock as a result of a special
cash dividend of $1.50 per share approved by the Board of Directors on August 7,
2008 and payable on October 17, 2008.  Stock-based compensation
expense was not affected by this adjustment.   At December 31,
2008, the Company’s Plans allow for the granting of options to purchase a
maximum of 1,387,215 shares of the Company’s common stock.


- 29
-


The option
price and terms are recommended by the Company’s Compensation Committee to the
Company’s Board of Directors for approval.  The options granted may
qualify as incentive stock options (“ISO’s”).  Options granted prior
to December 31, 2005 generally vested 20% on each of the first, second, third,
fourth, and fifth anniversaries of the date of grant with a contractual life of
ten years.  Options granted after December 31, 2005 have vested 33% on
each of the first, second and third anniversaries of the date of grant and have
a contractual life of five years.  The Company issues new shares upon
the exercise of stock options. At December 31, 2008, options for 168,666 shares
remain available for future grants under the Plans and 823,265 common shares are
reserved for issuance upon exercise of the outstanding stock
options.





The
estimated fair value of each option granted in 2008 was determined on the grant
date using the Black-Scholes option pricing model with the following
weighted-average assumptions for stock option grants:




Expected
      dividend yield
                      
                      
                      0
                      %Risk-free
      interest rate
                      
                      
                      1.9
                      %Expected
      life of options in years
                      
                      
                      4.8Assumed
      volatility
                      
                      
                      46
                      %





There were
no options granted in 2007.





The
risk-free interest rate is based on the yield on zero-coupon U.S. treasury
securities at the time of grant for a period commensurate with the expected
term.  The expected volatility is calculated using the Black-Scholes
model based on weighted-average historic prices for a period commensurate with
the expected term.  For options granted in 2006, the expected term of
the option is determined based on historical experiences by using the
“simplified method” as provided for in Staff Accounting Bulletin No.
107.  For options granted in 2008, the expected term of the option is
determined by using historical data.





A summary
of the status of the Company’s fixed stock option plans as of December 31, 2008
and 2007, and changes during the years then ended is presented
below:





2008
                                              
                                              
                                              2007Number
      of
                                                shares
                                              
                                              
                                              Weighted-
                                                Average
                                                Exercise
                                                Price
                                              
                                              
                                              Number
      of
                                                shares
                                              
                                              
                                              Weighted-
                                                Average
                                                Exercise
                                                PriceOutstanding,
      January 1
                                              
                                              
                                              460,250
                                              
                                              
                                              $
                                              3.43
                                              
                                              
                                              
                                              486,250
                                              
                                              
                                              $
                                              3.39Granted
                                              
                                              
                                              20,000
                                              
                                              
                                              
                                              2.83
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Exercised
                                              
                                              
                                              (23,200
                                              )
                                              
                                              
                                              2.96
                                              
                                              
                                              
                                              (26,000
                                              )
                                              
                                              
                                              2.69Forfeited
                                              
                                              
                                              (21,000
                                              )
                                              
                                              
                                              3.59
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Special
      dividend adjustment
                                              
                                              
                                              387,215
                                              
                                              
                                              
                                              1.45
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Outstanding,
      December 31
                                              
                                              
                                              823,265
                                              
                                              
                                              $
                                              1.45
                                              
                                              
                                              
                                              460,250
                                              
                                              
                                              $
                                              3.43Exercisable,
      December 31
                                              
                                              
                                              699,952
                                              
                                              
                                              $
                                              1.47
                                              
                                              
                                              
                                              343,683
                                              
                                              
                                              $
                                              3.59





The
weighted average grant date fair value of options granted in 2008 was
$1.20.  As of December 31, 2008, the intrinsic value (the difference
between the exercise price and the market price) for all outstanding options was
$233,927 and the intrinsic value for all options exercisable was
$201,436.  The total intrinsic value of all options exercised during
the years ended December 31, 2008 and 2007 was $27,776 and $87,690,
respectively.


- 30
-


The
following table summarizes information about fixed stock options outstanding and
exercisable at December 31, 2008:





Options
      Outstanding
                                                      
                                                      
                                                      Options
      ExercisableRange
      of exercise prices
                                                      
                                                      
                                                      Number
                                                      
                                                      
                                                      Weighted
                                                        Average
                                                        Exercise
                                                        Price
                                                      
                                                      
                                                      Weighted
                                                        Average
                                                        Remaining
                                                        Life
      in
                                                        Years
                                                      
                                                      
                                                      Number
                                                      
                                                      
                                                      Weighted
                                                        Average
                                                        Exercise
                                                        Price
                                                      
                                                      
                                                      Weighted
                                                        Average
                                                        Remaining
                                                        Life
      in
                                                        Years$1.09
      -1.30
                                                      
                                                      
                                                      
                                                      367,376
                                                      
                                                      
                                                      $
                                                      1.22
                                                      
                                                      
                                                      
                                                      5.6
                                                      
                                                      
                                                      
                                                      274,627
                                                      
                                                      
                                                      $
                                                      1.21
                                                      
                                                      
                                                      
                                                      5.4$1.36
      -1.72
                                                      
                                                      
                                                      
                                                      419,764
                                                      
                                                      
                                                      
                                                      1.38
                                                      
                                                      
                                                      
                                                      3.8
                                                      
                                                      
                                                      
                                                      389,200
                                                      
                                                      
                                                      
                                                      1.36
                                                      
                                                      
                                                      
                                                      3.7$4.62
                                                      
                                                      
                                                      
                                                      36,125
                                                      
                                                      
                                                      
                                                      4.62
                                                      
                                                      
                                                      
                                                      1.8
                                                      
                                                      
                                                      
                                                      36,125
                                                      
                                                      
                                                      
                                                      4.62
                                                      
                                                      
                                                      
                                                      1.8823,265
                                                      
                                                      
                                                      $
                                                      1.45
                                                      
                                                      
                                                      
                                                      4.5
                                                      
                                                      
                                                      
                                                      699,952
                                                      
                                                      
                                                      $
                                                      1.47
                                                      
                                                      
                                                      
                                                      4.3





A summary
of the status of the Company’s nonvested stock options as of December 31, 2008
and the changes during the year then ended is as follows:





Shares
              
              
              Weighted-Average
                Grant-Date
                Fair
      ValueNonvested
      at December 31, 2007
              
              
              116,567
              
              
              $
              1.77Granted
              
              
              20,000
              
              
              
              1.18Vested
      .
              
              
              (58,766
              )
              
              
              1.77Forfeited
              
              
              (6,000
              )
              
              
              1.88Special
      dividend adjustment
              
              
              51,512
              
              
              
              1.79Nonvested
      at December 31, 2008
              
              
              123,313
              
              
              $
              1.70





At
December 31, 2008, there was approximately $79,600 of total unrecognized
compensation cost related to nonvested stock options granted.  That
cost is expected to be recognized over a weighted-average period of 1.3
years.





(10) Earnings Per Share:The computation of
basic and diluted earnings per share is as follows:


2008
              
              
              2007Basic:Net
      earnings
              
              $
              735,804
              
              
              $
              1,191,095Weighted
      average shares outstanding
              
              
              4,285,096
              
              
              
              4,254,807Basic
      earnings per share
              
              $
              .17
              
              
              $
              .28Diluted:Net
      earnings
              
              $
              735,804
              
              
              $
              1,191,095Weighted
      average shares outstanding
              
              
              4,285,096
              
              
              
              4,254,807Diluted
      effect of stock options outstanding, using the treasury stock
      method
              
              
              102,625
              
              
              
              132,721Dilutive
      effect of unvested restricted stock, using the treasury stock
      method
              
              
              -
              
              
              
              12,892Diluted
      weighted average shares outstanding
              
              
              4,387,721
              
              
              
              4,400,420Diluted
      earnings per share
              
              $
              .17
              
              
              $
              .27


- 31
-


The
computation of diluted earnings per share excluded stock options to purchase
18,750 shares in 2008 and 2007 as the exercise prices were greater than the
average market price.





(11) Industry Segment: The
Company operates in one segment: the design, production, import, and sale of
quartz crystals and oscillators and ultrasonic transducer devices.





One
customer accounted for approximately 17% of net sales in 2008.  This
customer acquired another customer in 2007.  Total sales for these two
combined customers accounted for approximately 16% of net sales in
2007.  Export sales to foreign markets, based on the location of the
customer, are as follows:





2008
                        
                        
                        2007Asia
      Pacific
                        
                        $
                        2,419,700
                        
                        
                        $
                        2,272,200Mexico
                        
                        
                        865,900
                        
                        
                        
                        315,100Europe
      and Middle East
                        
                        
                        691,700
                        
                        
                        
                        828,500Canada
                        
                        
                        363,900
                        
                        
                        
                        499,200Other
                        
                        
                        29,800
                        
                        
                        
                        13,700$
                        4,371,000
                        
                        
                        $
                        3,928,700




(12)Quarterly Financial Data (unaudited):Selected unaudited quarterly financial data for 2008 and 2007 is set
forth below:


First
                  
                  
                  Second
                  
                  
                  Third
                  
                  
                  Fourth(in
      thousands, except per share data)2008Net
      sales
                  
                  $
                  3,455
                  
                  
                  $
                  3,262
                  
                  
                  $
                  3,346
                  
                  
                  $
                  2,958Gross
      profit
                  
                  
                  1,413
                  
                  
                  
                  1,316
                  
                  
                  
                  1,348
                  
                  
                  
                  984Earnings
      before income taxes
                  
                  
                  373
                  
                  
                  
                  380
                  
                  
                  
                  394
                  
                  
                  
                  181Net
      earnings
                  
                  $
                  209
                  
                  
                  $
                  207
                  
                  
                  $
                  197
                  
                  
                  $
                  123Basic
      and diluted earnings per share
                  
                  $
                  .05
                  
                  
                  $
                  .05
                  
                  
                  $
                  .05
                  
                  
                  $
                  .03




First
                  
                  
                  Second
                  
                  
                  Third
                  
                  
                  Fourth(in
      thousands, except per share data)2007Net
      sales
                  
                  $
                  3,242
                  
                  
                  $
                  3,425
                  
                  
                  $
                  3,386
                  
                  
                  $
                  3,366Gross
      profit
                  
                  
                  1,321
                  
                  
                  
                  1,371
                  
                  
                  
                  1,398
                  
                  
                  
                  1,351Earnings
      before income taxes
                  
                  
                  373
                  
                  
                  
                  442
                  
                  
                  
                  488
                  
                  
                  
                  409Net
      earnings
                  
                  $
                  280
                  
                  
                  $
                  336
                  
                  
                  $
                  343
                  
                  
                  $
                  232Basic
      and diluted earnings per share
                  
                  $
                  .07
                  
                  
                  $
                  .08
                  
                  
                  $
                  .08
                  
                  
                  $
                  .05





Earnings
per share calculations for each of the quarters is based on the weighted average
number of shares outstanding for each period and the sum of the quarters may not
necessarily be equal to the full year earnings per share amounts.





The fourth
quarter of 2007 general and administrative expense includes $75,000 of
professional fees incurred by the Company in considering possible strategic
alternatives to increase shareholder value.   This amount had
previously been classified as a current asset.  Of the $75,000 expense
correction recorded in the fourth quarter, $8,000, $25,000 and $42,000 relates
to the first, second, and third quarters, respectively, of 2007.  This
correction did not affect cash flow and its effect on the Company’s current
year’s net income and stockholders’ equity is not material.




(13) Commitments and
Contingencies:  During the normal course of business, the
Company incurs certain commitments to make future payments for the purchase of
inventory, machinery and equipment and production supplies based on its
projected requirements.  At December 31, 2008, the Company has
outstanding purchase commitments approximating $513,000, all of which are
expected to be fulfilled in 2009.
 
 In
connection with the sale of its Bergen Cable Technologies, Inc. subsidiary in
1998, the Company was required to perform environmental cleanup at this site
(see Note 3).


- 32
-


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Stockholders and Board of Directors of Valpey-Fisher Corporation





We have
audited the accompanying consolidated balance sheets of Valpey-Fisher
Corporation (a Maryland corporation) and subsidiaries (the “Company”) as of
December 31, 2008 and 2007, and the related statements of income, stockholders’
equity, and cash flows for each of the two years in the period ended December
31, 2008.Our
audits of the basic financial statements included the financial statement
schedule listed in the index appearing under Item 15(a) (2).  These
financial statements and financial statement schedule are the responsibility of
the Company’s management.Our responsibility is
to express an opinion on these financial statements and financial statement
schedule based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting.Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.Accordingly, we express
no such opinion.An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.We believe that our
audits provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Valpey-Fisher Corporation
and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2008 in conformity with accounting principles generally accepted in
the United States of America.  Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.








/s/ Stowe
& Degon, LLC


Westborough,
Massachusetts


March 13,
2009




- 33
-


Item 9.  Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure





Not
applicable.





Item
9A(T).  Controls and Procedures





Evaluation
of disclosure controls and procedures.





We carried
out an evaluation, under the supervision and with our  management,
including our President and Chief Executive Officer and our Company’s Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934).  Based upon that evaluation,
the President and Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective as of December 31,
2008.





Management’s
Annual Report on Internal Control over Financial Reporting.





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as such term is defined in Rules 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934.  Under the
supervision and with the participation of our management, including our
President and Chief Executive Officer and our Company’s Chief Financial Officer
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO Framework”).  Based on our evaluation , our
management concluded that our internal control over financial reporting was
effective as of December 31, 2008.





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





Changes
in internal control.





Our
evaluation did not identify any change in our internal controls over financial
reporting that occurred during the quarter ended December 31, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.





Item 9B. Other
Information





None


- 34
-


PART
III





We have
adopted a Code of Business Conduct and Ethics that applies to our board of
directors, officers, employees and consultants.  In addition, we have
adopted a Code of Ethics for our chief executive officer and our chief financial
and accounting officer.  These codes are posted in the Corporate
Governance section of our website (www.valpeyfisher.com).If we make any
substantive changes or grant any waivers to these codes, we will disclose the
nature of such change or waiver on our website and in a report on Form
8-K.





The
remaining information called for by Part III is hereby incorporated by reference
from the information set forth and under the headings “Common Stock Ownership of
Certain Beneficial Owners and Management”, “Election of
Directors”,  “Corporate Governance”, “Executive Compensation” and
“Principal Accountant Fees and Services” in Registrant’s definitive proxy
statement for the 2009 Annual Meeting of Stockholders, which meeting involves
the election of directors, such definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this Annual Report on Form
10-K.





PART
IV





Item 15.  Exhibits
and Financial Statement Schedules





(a)         The
following are filed as part of this Annual Report on Form 10-K:





1.  The
following Consolidated Financial Statements are included in Item 8:





Consolidated
Balance Sheets, December 31, 2008 and 2007


Consolidated
Statements of Operations for the Years Ended December 31, 2008 and
2007


Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008 and
2007


Consolidated
Statements of Stockholders’ Equity for the Years Ended December
31, 2008 and 2007


Notes
to Consolidated Financial Statements


Report
of Independent Registered Public Accounting Firm








2.  The
following schedule to the Consolidated Financial Statements is filed as part of
this report.





Schedule
II – Valuation Reserves





All other
schedules are omitted because they are not applicable, not required or because
the required information is included in the Consolidated Financial Statements or
notes thereto.




- 35
-


3.  The
exhibits filed in this report or incorporated by reference, listed on the
Exhibit Index are as follows:





Exhibit No.
                
                Description2.
                
                Agreement
      of Merger and Recapitalization3.1
                
                Restated
      and Amended Articles of Incorporation3.2
                
                By-Laws
      effective May 8, 200310.1
                *
                1992
      Stock Option Plan, as amended10.2
                *
                1999
      Stock Option Plan, as amended10.3
                *
                2001
      Stock Option Plan, as amended10.4
                *
                Restricted
      Stock Agreement10.5
                *
                2003
      Stock Option Plan, as amended10.6
                *
                Key
      Employee Bonus Plan for 200810.7
                *
                Letter
      Agreement dated September 10, 2002, between the Company and Michael
      Ferrantino10.8
                *
                Amendment
      dated April 4, 2007 to Letter Agreement dated September 10, 2002, between
      the Company and Michael Ferrantino10.9
                *
                Amendment
      effective August 7, 2008 to Letter Agreement dated September 10, 2002,
      between the Company and Michael Ferrantino10.10
                *
                Change
      in Control Severance Agreement, dated April 4, 2007, between the Company
      and Michael J. Kroll10.11
                *
                Amendment
      effective August 7, 2008 to Change in Control Severance Agreement, dated
      April 4, 2007, between the Company and Michael J.
Kroll.10.12
                *
                Change
      in Control Retention Agreement, dated April 4, 2007, between the Company
      and Michael J. Ferrantino, Jr.10.13
                *
                Amendment
      effective August 7, 2008 to Change in Control Retention Agreement, dated
      April 4, 2007, between the Company and Michael J. Ferrantino, Jr.10.14
                *
                Change
      in Control Retention Agreement, dated April 4, 2007, between the Company
      and Walt Oliwa10.15
                *
                Amendment
      effective August 7, 2008 to Change in Control Retention Agreement, dated
      April 4, 2007, between the Company and Walt Oliwa.14
                
                Code
      of Ethics of the Chief Executive Officer and the Chief Financial and
      Accounting Officer14.1
                
                Code
      of Business Conduct and Ethics21
                
                Subsidiaries
      of the Registrant23
                
                Independent
      Registered Public Accounting Firm’s Consent31.1
                
                Certification
      of the Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                
                Certification
      of the Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
                
                Certification
      of the Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002





*   Management
contract or compensatory plan or arrangement required to be filed as
an Exhibit
pursuant to Item 15(c) of this report.


- 36
-
 SIGNATURES





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




Valpey-Fisher
      CorporationDate:  March
      27,2009
                  By:
                  /s/ Michael J.
FerrantinoMichael
      J. FerrantinoPresident
      and Chief Executive Officer(Principal
      Executive
Officer)




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
  Signature
                                    Title
                                    Date/s/
      Ted Valpey, Jr.
                                    Chairman
      of the Board
                                    March
      27, 2009Ted
      Valpey, Jr.
                                    and
      Director/s/ Michael J. Ferrantino
                                    President,
      Chief Executive Officer
                                    March
      27, 2009Michael
      J. Ferrantino
                                    and
      Director (Principal Executive Officer)/s/ Michael J. Kroll
                                    Vice
      President, Treasurer and
                                    March
      27, 2009Michael
      J. Kroll
                                    Chief
      Financial Officer(Principal
      Financial Officerand
      Principal AccountingOfficer)/s/Mario Alosco
                                    Director
                                    March
      27, 2009Mario
      Alosco/s/Richard W. Anderson
                                    Director
                                    March
      27, 2009Richard
      W. Anderson/s/Eli Fleisher
                                    Director
                                    March
      27, 2009Eli
      Fleisher/s/Lawrence Holsborg
                                    Director
                                    March
      27, 2009Lawrence
      Holsborg/s/John J. McArdle III
                                    Director
                                    March
      27, 2009John
      J. McArdle III




- 37
-


Valpey-Fisher
Corporation and Subsidiaries




Schedule
II – Valuation and Qualifying Accounts





Additions
              
              
              AdditionsDescription
              
              Balance
      at
                Beginning
                of
      Period
              
              
              Charged
      to
                Costs
      and
                Expenses
              
              
              Charged
      to
                Other
                Accounts
              
              
              Deductions
              
              
              Balance
      at
                End
                of
      PeriodAllowance
      for
                Doubtful
      Accounts:Year
      Ended:December
      31, 2008
              
              $
              105,000
              
              
              $
              3,108
              
              
              $
              -
              
              
              $
              (3,108
              )
      (1)
              
              $
              105,000December
      31, 2007
              
              $
              115,000
              
              
              $
              600
              
              
              $
              -
              
              
              $
              (10,600
              )
      (1)
              
              $
              105,000Inventory
      Reserve:Year
      Ended:December
      31, 2008
              
              $
              925,000
              
              
              $
              178,715
              
              
              $
              -
              
              
              $
              (53,715
              )(2)
              
              $
              1,050,000December
      31, 2007
              
              $
              1,051,000
              
              
              $
              25,184
              
              
              $
              -
              
              
              $
              (151,184
              )(2)
              
              $
              925,000





(1)  Amounts
written-off, less recoveries.


(2)
Inventory disposed of.


- 38
-


EXHIBIT
INDEX





Exhibit No.
                  
                  (inapplicable items are
      omitted)2.
                  
                  Agreement
      of Merger and Recapitalization between MATEC Corporation a Delaware
      corporation and MATEC Corporation a Maryland
      corporation.  (incorporated by reference to Exhibit 2 on
      Registrant’s Form 10-K for the year ended December 31,
    2004).3.1
                  
                  Restated
      and Amended Articles of Incorporation as of June 3,
      2002.  incorporated by reference to Exhibit 3.1 on Registrant’s
      Form 10-K for the year ended December 31, 2007).3.2
                  
                  By-Laws
      effective May 8, 2003 (incorporated by reference to Exhibit 3.3 on
      Registrant’s Form 10-K for the year ended December 31,
    2003).10.1
                  
                  1992
      Stock Option Plan, as amended.  Filed
  herewith.10.2
                  
                  1999
      Stock Option Plan, as amended.  Filed
  herewith.10.3
                  
                  2001
      Stock Option Plan, as amended.  Filed
  herewith.10.4
                  
                  Restricted
      Stock Agreement.  Filed herewith.10.5
                  
                  2003
      Stock Option Plan, as amended.  Filed
  herewith.10.6
                  
                  Key
      Employee Bonus Plan for 2008. (incorporated by reference to Exhibit 10.1
      on Registrant’s Form 10-Q for the quarterly period ended March 30,
      2008).10.7
                  
                  Letter
      Agreement dated September 10, 2002, between the Company and Michael
      Ferrantino.  Filed herein.10.8
                  
                  Amendment
      dated April 4, 2007 to Letter Agreement dated September 10, 2002, between
      the Company and Michael Ferrantino. (incorporated by reference to Exhibit
      10.2 on Registrant’s Form 10-Q for the quarterly period ended April 1,
      2007).10.9
                  
                  Amendment
      effective August 7, 2008 to Letter Agreement dated September 10, 2002,
      between the Company and Michael Ferrantino. Filed
  herein.10.10
                  
                  Change
      in Control Severance Agreement, dated April 4, 2007, between the Company
      and Michael J. Kroll. (incorporated by reference to Exhibit 10.3 on
      Registrant’s Form 10-Q for the quarterly period ended April 1,
      2007).10.11
                  
                  Amendment
      effective August 7, 2008 to Change in Control Severance Agreement, dated
      April 4, 2007, between the Company and Michael J. Kroll. Filed
      herewith.10.12
                  
                  Change
      in Control Retention Agreement, dated April 4, 2007, between the Company
      and Michael J. Ferrantino, Jr.(incorporated
      by reference to Exhibit 10.4 on Registrant’s Form 10-Q for the quarterly
      period ended April 1, 2007).10.13
                  
                  Amendment
      effective August 7, 2008 to Change in Control Retention Agreement, dated
      April 4, 2007, between the Company and Michael J. Ferrantino, Jr.Filed
      herewith.10.14
                  
                  Change
      in Control Retention Agreement, dated April 4, 2007, between the Company
      and Walt Oliwa.  (incorporated by reference to Exhibit 10.5 on
      Registrant’s Form 10-Q for the quarterly period ended April 1,
      2007).


10.15
              
              Amendment
      effective August 7, 2008 to Change in Control Retention Agreement, dated
      April 4, 2007, between the Company and Walt Oliwa.  Filed
      herewith.14
              
              Code
      of Ethics of the Chief Executive Officer and the Chief Financial and
      Accounting Officer (incorporated by reference to Exhibit 14 on
      Registrant’s Form 10-K for the year ended December 31,
    2003).14.1
              
              Code
      of Business Conduct and Ethics. (incorporated by reference to Exhibit 14.1
      on Registrant’s Form 10-K for the year ended December 31,
      2004).21
              
              Subsidiaries
      of the Registrant. Filed herewith.23
              
              Consent
      of Independent Registered Public Accounting Firm.  Filed
      herewith.31.1
              
              Certification
      of the Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.  Filed herewith.31.2
              
              Certification
      of the Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.  Filed herewith.32.1
              
              Certification
      of the Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.  Filed
  herewith.




- 39
-