**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, 2006**


****  ****


**OR**


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


**For
      the transition period from____to_____**




**Commission
      file 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
              American
                  Stock Exchange


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 o 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 o 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 o





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. o





Indicate
      by check mark whether the registrant is large accelerated filer, an accelerated
      filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act): (Check
      one):


Large
                  accelerated filer o
              Accelerated
                filer o
              Non-accelerated
                filer x


Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes o No x





The
      aggregate market value of voting stock held by non-affiliates: $8,884,801
      (computed by reference to the last sales price of such common stock on June
      30,
      2006, 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 29, 2007: 4,256,503





Documents
      incorporated by reference:




Portions
      of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Stockholders
      are incorporated by reference into Part III of this report.





-2-





**PART
      I**





**Item
      1. Business**





**General**





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





**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.





**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.




-3-


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 its
      customers.





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 OEMs, contract manufacturing (CM)
      companies, and distributors. Our distributors also sell to both the OEMs and
      CM
      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 CM companies. As a result, this has tended to increase the
      concentration of sales to the CM companies. Sales to Solectron Corporation,
      a CM
      company, accounted for approximately 11%, 12%, and 11% of our net sales in
      2006,
      2005, and 2004, respectively. Sales to Celestica Corporation, a CM company,
      accounted for approximately 10% of our sales in 2004.





Sales
      to
      our five largest customers accounted for approximately 31% of our sales in
      2006,
      compared to 33% in 2005 and 33% in 2004. Sales to CM companies accounted for
      approximately 33% of our sales in 2006, compared to 36% in 2005, and 37% in
      2004.





Export
      sales amounted to approximately 26% of our sales in 2006, 34% in 2005 and 33%
      in
      2004. 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 .




-4-


Seasonal
      Fluctuations





During
      the
      last few years, we have noticed that some of our customers, most notably the
      CM
      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 4 th quarter.





Research
      and Development





Research
      and development expenses amounted to $482,000 in 2006, $352,000 in 2005 and
      $218,000 in 2004. During 2007, we intend to increase our efforts to develop
      new
      products that provide additional functions such as frequency translators and
      jitter attenuation which would leverage off our expertise in the timing area.




Backlog





Our
      backlog of firm orders was approximately $2,028,000 at December 31, 2006
      compared to $1,602,000 at December 31, 2005. We expect to ship the entire
      December 31, 2006 backlog during 2007.





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 us, for instance
      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 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.




-5-


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.




Employees





At
      December 31, 2006, we employed 53 full-time employees. None of our employees
      are
      represented by a collective bargaining unit. We consider our relations with
      our
      employees to be satisfactory.





Available
      Information





We
      file
      annual, quarterly and current reports, proxy statements and other information
      with the Securities and Exchange Commission (the “SEC”). You may read and copy
      any document we file at the SEC’s public reference room at Room 1024, 450 Fifth
      Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for
      information on the public reference room. The SEC maintains a website
      ( www.sec.gov )
      that
      contains annual, quarterly and current reports, proxy statements and other
      information that issuers (including us) file electronically with the SEC.





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.




-6-


**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.




**While
      we reported an operating profit of $491,300 in 2006 and $350,500 in 2005, we
      had
      incurred operating losses in the four years preceding 2005 and our results
      are
      likely to fluctuate in the future.**





While
      we
      reported an operating profit of $491,300 in 2006 and **** $350,500
      in 2005, we had incurred operating losses in the four years preceding 2005
      and
      our results are likely to fluctuate in the future **.** A
      wide
      variety of factors affect our operating results. Factors that could affect
      our
      future operating results include:


·
            changes
                in sales volume and mix,


·
            price
                compression,


·
            declines
                in gross margin,


·
            increased
                research and development expenses associated with new product development,
                and


·
            costs
                to comply with changing laws and regulations and standards, including
                the
                Sarbanes-Oxley Act of 2002, new SEC regulations and American Stock
                Exchange rules.





**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, production,
      introduction and marketing of new products, including more-value added products.
      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 decline 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. These markets are cyclical and have experienced a decline
      in
      product demand in recent years. The decline in the demand for products in these
      markets could negatively affect our operating results and financial
      condition.




-7-


**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
      2006,
      sales to our top five customers accounted for approximately 31% of our sales.
      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.





**A
      significant portion of our revenues are to Contract Manufacturers (CMs). If
      we
      fail to successfully obtain orders from the CMs, our operating results and
      financial condition could be negatively affected.**





Approximately
      33% of the Company’s sales in 2006 were to Contract Manufacturers (CMs). There
      is a continuing trend among original equipment manufacturers (OEMs) to outsource
      the manufacture of their product to CMs. We first work with and receive design
      wins from OEMs. We then have to negotiate pricing, quantities and delivery
      with
      the CMs. If we fail to successfully obtain orders from the CMs, 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 on a fully diluted basis beneficially
      own 48% of the outstanding shares. Institutional and other 5% holders own
      approximately 12% of the outstanding shares. During 2006, the average trading
      volume of our common stock was 1,400 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.




-8-


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.





**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.





-9-




**Certain
      Directors and Members of Management 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 Management, on a fully diluted basis beneficially
      own
      48% of the currently outstanding shares of Common Stock. 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.





**Item
      1B. Unresolved Staff Comments**





Not
      applicable.




-10-


**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
      ours 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**





No
      matters
      were submitted to a vote of the Registrant’s security holders during the last
      quarter of the fiscal year covered by this report.




-11-


**PART
      II**





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




Our
      common
      stock is 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,
            
            2006
            
            2005High
            
            
            Low
            
            
            High
            
            
            Low4thquarter
            
            $
            3.60
            
            $
            3.29
            
            $
            4.10
            
            $
            2.963rdquarter
            
            
            3.84
            
            
            3.41
            
            
            4.21
            
            
            3.592ndquarter
            
            
            4.00
            
            
            3.30
            
            
            4.01
            
            
            2.791stquarter
            
            
            3.59
            
            
            3.00
            
            
            4.19
            
            
            3.00




No
      dividend was paid in 2006 or 2005.





The
      number
      of stockholders of record on March 19, 2007 was 723. 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, 2006 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)
            
            
            486,250
            
            $
            3.39
            
            
            172,666Equity
                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.





-12-




**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, 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 may not be sold
      or transferred, encumbered or otherwise disposed of for a period of five years
      from October 23, 2002 except that said restrictions will terminate as to 20%
      of
      the Restricted Stock upon each of October 23, 2003, 2004, 2005, 2006 and 2007.
      In addition, the Restriction shall 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, 2006, under prior authorizations from the Board of Directors,
      we
      are authorized to purchase up to 227,500 shares of common stock through the
      open
      market or negotiated transactions.





We
      made no
      repurchases of its common stock in the fourth quarter of 2006.





-13-


**PERFORMANCE
      GRAPH**





The
      graph
      below compares the cumulative total shareholder return on the Company’s Common
      Stock with the cumulative total return of the American Stock Exchange Index,
      and
      a peer index (“Peer Group”) made up of 33 companies in the electronic components
      manufacturing business, for the five years beginning December 31, 2001 and
      ending December 31, 2006 (assuming the investment of $100 on December 31, 2001,
      and the reinvestment of all dividends).









**Base**
            
            
            
            **Years
                Ending****Period****Company
                Name / Index**
            
            **12/31/01**
            
            **12/31/02**
            
            **12/31/03**
            
            **12/31/04**
            
            **12/31/05**
            
            **12/31/06****Valpey-Fisher
                Corporation**
            
            **$**
            **100.00**
            
            $
            67.65
            
            $
            76.30
            
            $
            91.36
            
            $
            77.04
            
            $
            86.91**American
                Stock Exchange Index**
            
            **$**
            **100.00**
            
            $
            97.26
            
            $
            138.45
            
            $
            169.22
            
            $
            207.53
            
            $
            242.62**Peer
                Group**
            
            **$**
            **100.00**
            
            $
            58.41
            
            $
            126.85
            
            $
            134.65
            
            $
            171.47
            
            $
            159.74





The
      Peer
      Group Index consists of the following companies: Advanced Energy Industries,
      Inc., Cambridge Display Technology, Inc., Cherokee International Corporation,
      Conolog Corporation, Corning, Incorporated, Digital Power Corporation, eMagin
      Corporation, Espey Mfg. & Electronics Corp., Giga-Tronics Incorporated, Hoku
      Scientific, Inc., Hutchinson Technology Incorporated, InPlay Technologies,
      Inc.,
      The JPM Company, LG. Philips LCD Co., Ltd (ADR), The LGL Group, Inc., Lumenon
      Innovative Lightwave Technology, Inc., Micronetics, Inc., Microwave Filter
      Company, Inc., MSGI Security Solutions, Inc., Nortech Systems Incorporated,
      Photonic Products Group, Inc., Planar Systems, Inc., Power-One, Inc., Simclar,
      Inc., Smartvideo Technologies, Inc., Sparton Corporation, Spectrum Control,
      Inc., Stoneridge, Inc., Synaptics Incorporated, TDK Corporation (ADS),
      Technitrol, Inc., Veritec, Inc., and Vicor Corporation.





-14-





**Item
      6. Selected Financial Data**





Years
                  Ended December 31,
              
              2006
                  (1)
              
              2005
              
              2004
              
              2003
              
              2002(in
                  thousands, except per share data)Continuing
                  operations:Net
                  sales
              
              $
              11,782
              
              $
              11,427
              
              $
              11,545
              
              $
              8,496
              
              $
              7,294Gross
                  profit (loss)
              
              
              4,469
              
              
              3,814
              
              
              3,260
              
              
              989
              
              
              (1,211
              )Earnings
                  (loss) before income taxes
              
              
              778
              
              
              499
              
              
              (55
              )
              
              (2,423
              )
              
              (3,988
              )Income
                  tax (expense) benefit
              
              
              71
              
              
              (195
              )
              
              -
              
              
              1,023
              
              
              1,198Earnings
                  (loss)
              
              
              849
              
              
              304
              
              
              (55
              )
              
              (1,400
              )
              
              (2,790
              )Discontinued
                  operations- net of income tax benefit
              
              
              (180
              )
              
              (60
              )
              
              (110
              )
              
              -
              
              
              (99
              )Net
                  earnings (loss)
              
              $
              669
              
              $
              244
              
              $
              (165
              )
              $
              (1,400
              )
              $
              (2,889
              )Basic
                  and diluted earnings (loss) per share:Continuing
                  operations
              
              $
              .20
              
              $
              .07
              
              $
              (.01
              )
              $
              (.33
              )
              $
              (.67
              )Discontinued
                  operations
              
              
              (.04
              )
              
              (.01
              )
              
              (.03
              )
              
              -
              
              
              (.02
              )$
              .16
              
              $
              .06
              
              $
              (.04
              )
              $
              (.33
              )
              $
              (.69
              )Cash
                  dividends per share
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Total
                  assets, end of year
              
              $
              14529
              
              $
              13,617
              
              $
              12,864
              
              $
              12,744
              
              $
              15,151Long-term
                  debt, end of year
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -





(1)
      As
      discussed in Note 2 in the Notes to Consolidated Financial Statements, 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 collectibility 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 have recorded a valuation
      allowance of $471,000 at December 31, 2006. 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.





-17


**Financial
      Condition and Liquidity**





Cash
      and
      cash equivalents amounted to $9,184,060 at December 31, 2006, an increase of
      $1,264,000 over the December 31, 2005 level. During 2006, our continuing
      operations provided cash of $1,478,000, investing activities used cash of
      $185,000, financing activities provided cash of $27,000, and discontinued
      operations used cash of $56,000.





Cash
      provided from continuing operations was $1,478,000 for 2006 compared to
      $1,574,000 in 2005. Operating cash flows during 2006 resulted mainly from net
      earnings of $849,000, net adjustments of $477,000 for the non-cash effects
      of
      depreciation, deferred income taxes and stock compensation expense and the
      $144,000 net reduction in our components of working capital. The net decrease
      in
      working capital was mainly due to a $218,000 reduction in inventory and an
      increase in current liabilities of $64,000, offset in part by a $119,000
      increase in accounts receivable, net. The decrease in inventory was mainly
      due
      to orders being filled from existing inventory and the continuing control over
      inventory purchases and levels. The net increase in current liabilities is
      mainly due to a $152,000 increase in accounts payable partially offset from
      an
      $88,000 reduction in accrued liabilities. The increase in accounts payable
      is
      mainly attributable to the timing of inventory and capital equipment purchases.
      The reduction in accrued liabilities is mainly due to a $201,000 reduction
      in
      incomes taxes payable, mainly as a result of payments due on the 2005 tax
      return, offset in part by an $82,000 increase in employee compensation and
      benefits and a $23,000 increase in commissions due to outside sales
      representatives. The increase in accounts receivable was mainly due to the
      increase in the current year’s fourth quarter sales over 2005.




Capital
      expenditures amounted to $299,000 in 2006. Our budget for 2007 capital
      expenditures is approximately $500,000. During the year, we sold machinery
      and
      equipment and received $122,500 in cash proceeds.





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
      2007.





**Results
      of Operations - 2006 versus 2005**





Net
      sales
      increased $355,000 or 3% over 2005. The sales increase is mainly attributable
      to
      higher sales in the buy and resell product line resulting from higher bookings
      in the year. The overall actual number of units sold in this product line
      increased about 23% over 2005, however, the average selling price decreased
      about 7%. Sales of our domestic products increased slightly over last year
      as
      the number of units sold decreased 27% from the 2005 level while the overall
      average selling price increased 38%. For 2006, total bookings were $12,316,000
      or 9% higher than 2005. The backlog at December 31, 2006 amounted to $2,028,000
      versus $1,602,000 million at December 31, 2005. We continue to see price
      compression in the buy and resell product line and in our older domestic
      products and we believe this pricing pressure will continue in the future.
      In
      addition, our near-term visibility continues to be poor and we continue to
      see
      customer orders for small quantities with near-term delivery dates. We are
      not
      sure of the potential impact on its future operations from the current
      continuing telecom market uncertainties, the industry-wide over capacity issues,
      and the effects of the continuing pricing compression.





We
      reported a $4,469,000 gross profit (38% of net sales) in 2006 versus a
      $3,814,000 gross profit (33% of net sales) in 2005. The higher margin was mainly
      attributable to an 11% decrease in raw material costs due to changes in product
      mix toward the more value-added, high-reliability, and higher margin products
      and product yield improvements. Direct labor as a percentage of sales decreased
      18% from 2005 mainly as a result of changes in product mix. Overhead costs
      as a
      percentage of sales in 2006 remained fairly consistent with that in 2005.





-16-




Selling
      and advertising expenses increased $291,000 or 20% over 2005. This overall
      expense increase was mainly due to higher personnel expenses of $252,000, a
      $34,000 increase in sales commission expense to outside manufacturers’
representatives, a $33,000 increase in travel and entertainment expense, and
      the
      recognition of $28,000 of stock-based compensation expense partially offset
      by
      expense reductions of $36,000 in advertising, and $17,000 in telephone
      expense.




General
      and administrative expenses increased $93,000 or 6% over 2005 mainly as a result
      of the recognition of $99,000 of stock-based compensation expense.





Research
      and development expenses increased $131,000 or 37% over 2005 primarily as a
      result of increased personnel expenses. The expense increases are consistent
      with our plans to make significant engineering investments in new product
      development in 2006.





The
      increase in interest income over 2005 is due mainly to higher interest rates
      during the current year and to a lesser extent higher average cash balances.





The
      combined federal and state income tax rate for 2006 was 9% compared to 39%
      in
      2005. The lower rate in 2006 is due to a combination of a reduction in the
      valuation allowance for deferred taxes and the reversal of accrued income taxes
      offset by the effect of the nondeductible stock compensation expense resulting
      from the adoption of SFAS No. 123R. The majority of the stock option expense
      results from incentive stock options and under SFAS No. 123R, the expense does
      not generate a tax deduction and related tax benefit. We reduced the valuation
      allowance by $257,500 in 2006 based on our assessment of the realization of
      certain deferred tax assets. As we have state income tax NOL carryforwards
      available, there is no estimated state income tax provision for 2006 and 2005.





We
      reported an operating profit of $491,000 during 2006 compared to an operating
      profit of $351,000 in 2005. The operating profit in 2006 was reduced by $170,000
      for stock option expense resulting from our adoption of SFAS No. 123R. As we
      adopted SFAS No. 123R on a modified prospective method, 2005 does not include
      any stock option expense. Interest income amounted to $293,000 in 2006 compared
      to $148,000 in 2005. We reported a pre-tax profit of $778,000 from continuing
      operations in 2006 compared to a pre-tax profit of $499,000 in 2005. For 2006,
      we reported net earnings of $849,000 from continuing operations versus net
      earnings of $304,000 in 2005. We reported after-tax losses of $180,000 in 2006
      and $60,000 in 2005 from discontinued operations. In total, we reported net
      earnings of $669,000 in 2006 versus net earnings of $245,000 in
      2005.




-17-


**Results
      of Operations - 2005 versus 2004**





Net
      sales
      decreased $118,000 or 1% from 2004 mainly due to lower sales of manufactured
      products. Sales in the buy and resell product line increased slightly over
      the
      2004 level. During 2005, the actual number of units sold has decreased about
      21%
      from the prior year, as we continue to move to more value-added, high
      reliability (“high-rel”) products with higher overall average selling prices and
      higher margins. The book-to-bill ratio during 2005 was .99, versus 1.01 in
      2004.
      Our backlog amounted to $1.6 million at December 31, 2005 compared to $1.8
      million at December 31, 2004. While we experienced some modest growth in our
      principal market (telecommunication infrastructure) in 2005, it was offset
      by
      overall price compression and our conscious effort to discontinue low margin
      product. We believe that we will continue to be challenged by price compression
      and the industry-wide excess capacity issues in 2006 and beyond. In addition,
      our near-term visibility continues to be poor and we continue to see customer
      orders for small quantities with near-term delivery dates.





We
      reported a $3,814,000 gross profit (33% of net sales) in 2005 versus a
      $3,260,000 gross profit (28% of net sales) in 2004. The higher margin was mainly
      attributable to decreases in raw material costs due to changes in product mix
      toward the more value-added, high-rel products with higher selling prices as
      well as some yield improvements. Direct labor and overhead costs as a percentage
      of sales in the 2005 remained fairly consistent with that in 2004.





Selling
      and advertising expenses were comparable to that in 2004. Decreases in personnel
      and benefit expenses of $64,000 and travel and entertainment expenses of $15,000
      were offset by a $73,000 increase in bad debt expense. The increase in bad
      debt
      expense over the 2004 amount was mainly due to the 2004 expense provision
      benefiting from the $59,000 recovery of accounts receivable written-off in
      prior
      years.





General
      and administrative expenses decreased $53,000 (3%) from 2004 mainly as a result
      of a reduction in personnel and benefit expenses.





Research
      and development expenses increased $134,000 over 2004 primarily as a result
      of
      increased personnel and benefit expenses. This expense increase was consistent
      with our plan to make significant engineering investments in new product
      development in 2005.





The
      increase in interest income for 2005 over 2004 was due to a combination of
      higher average cash balances and higher interest rates during the current year.
      During 2004, we sold equipment and realized a $13,000 gain.




The
      combined federal and state effective income tax rate for 2005 is 39%. As we
      have
      state income tax NOL carryforwards available, there is no estimated state income
      tax provision. We reduced the valuation allowance by $45,500 in 2005 based
      on
      its assessment of the realization of certain deferred tax assets. For 2004,
      no
      provision for income taxes has been recorded. While for financial reporting
      purposes we recorded a loss, no income tax benefit was provided as we recorded
      a
      valuation allowance of $70,000. During both years, we are providing a valuation
      allowance for the full amount of the state income tax benefit relating to net
      operating loss carryforwards due to the uncertainty of realization.





During
      2005, we reported an operating profit of $351,000 compared to an operating
      loss
      of $104,000 in 2004. The $454,000 improvement in operating performance over
      2004
      was due to the $554,000 increase in gross margin in 2005 offset in part by
      a
      $100,000 increase in operating expenses. Other income amounted to $148,000
      in
      2005 compared to $48,000 in 2004. As a result, we reported pre-tax profits
      of
      $499,000 from continuing operations during 2005 compared to a pre-tax loss
      of
      $55,000 in 2004. We reported after-tax losses of $59,700 in 2005 and $110,000
      in
      2004 from discontinued operations. In total, we reported net earnings of
      $245,000 in 2005 versus a net loss of $165,000 in 2004.




-18-





**Off-Balance
      Sheet Arrangements**





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




-19-


**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, 2006, we had outstanding
      purchase commitments approximating


$911,000,
      all of which are expected to be fulfilled in 2007. At December 31, 2006, we
      did
      not have any contractual obligations for capital leases, operating leases or
      long-term debt.





**Forward-Looking
      Statements**





This
      Annual Report on Form 10-K contains forward-looking statements that involve
      risks and uncertainties that could cause actual results to differ materially
      from those in the forward-looking statements. Words such as “expects”,
“believes”, “estimates”, “plans” or similar expressions are intended to identify
      such forward-looking statements. The forward-looking statements are based on
      our
      current views and assumptions and involve risks and uncertainties that include,
      but not limited to: our ability to continue to achieve profitability, the
      current production over-capacity within the suppliers of frequency control
      devices, the ability to develop, market and manufacture new innovative products
      competitively, the fluctuations in product demand of the telecommunications
      industry, our ability, including our suppliers to produce and deliver materials
      and products competitively, the ability to limit the amount of the negative
      effect on operating results caused by pricing pressure, and our ability to
      comply with Section 404 of the Sarbanes-Oxley Act.





**Recent
      accounting pronouncements**





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an
      interpretation of FASB Statement No. 109)” (“FIN 48”) which is effective
      for fiscal years beginning after December 15, 2006. FIN 48 prescribes how a
      company should recognize, measure, present and disclose in its financial
      statements uncertain tax positions that a company has taken or expects to take
      on a tax return. We are currently evaluating our tax positions and do not expect
      this interpretation will have a material impact on our results of operations
      or
      financial position.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (“SFAS”) No. 157, “ Fair Value Measurements” *,* which
      defines fair value, establishes a framework for measuring fair value, and
      expands disclosures about fair value measurements. The provisions of SFAS No.
      157 are effective for fiscal years beginning after November 15, 2007. We have
      not yet determined the impact of adopting SFAS No. 157 on our results of
      operations or financial position.





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements
      when Quantifying Misstatements in Current Year Financial Statements” to address
      the process of quantifying financial statement misstatements. We adopted SAB
      No.
      108 in the fourth quarter of 2006 and there was no impact on our consolidated
      financial statements.




**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, 2006, 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 $91,800 increase or decrease in interest income.


-20-


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.




-21-


**Item
      8. Financial Statements and Supplementary Data**





**Valpey-Fisher
      Corporation**


**Consolidated
      Balance Sheets**





December
                31,
            
            2006
            
            2005**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            9,184,060
            
            $
            7,920,235Accounts
                receivable, less allowance for doubtful accounts of
              $115,000
                in 2006 and 2005
            
            
            1,613,713
            
            
            1,494,910Inventories,
                net
            
            
            809,854
            
            
            1,028,103Deferred
                income taxes and other current assets
            
            
            867,070
            
            
            653,081Total
                current assets
            
            
            12,474,697
            
            
            11,096,329Property,
                plant and equipment, at cost:Land
                and improvements
            
            
            226,505
            
            
            226,505Buildings
                and improvements
            
            
            2,042,975
            
            
            2,042,975Machinery
                and equipment
            
            
            8,449,500
            
            
            8,657,94310,718,980
            
            
            10,927,423Less
                accumulated depreciation
            
            
            8,825,859
            
            
            8,559,6931,893,121
            
            
            2,367,730Other
                assets
            
            
            160,902
            
            
            152,837$
            14,528,720
            
            $
            13,616,896**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable
            
            $
            648,570
            
            $
            496,954Accrued
                liabilities
            
            
            1,673,938
            
            
            1,707,568Total
                current liabilities
            
            
            2,322,508
            
            
            2,204,522Deferred
                income taxes
            
            
            343,367
            
            
            448,330Commitments
                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: 4,256,503 and 4,246,503 shares,
                respectively
            
            
            212,825
            
            
            212,325Capital
                surplus
            
            
            5,276,189
            
            
            5,105,201Retained
                earnings
            
            
            6,415,331
            
            
            5,746,518Less
                unearned compensation
            
            
            (41,500
            )
            
            (100,000
            )Total
                stockholders’ equity
            
            
            11,862,845
            
            
            10,964,044$
            14,528,720
            
            $
            13,616,896





See
      notes
      to consolidated financial statements.





-22-


**Valpey-Fisher
      Corporation**


**Consolidated
      Statements of Operations**




For
                the Years Ended December 31,
            
            2006
            
            2005
            
            2004Net
                sales
            
            $
            11,781,851
            
            $
            11,426,673
            
            $
            11,545,159Cost
                of sales
            
            
            7,313,214
            
            
            7,612,645
            
            
            8,284,788Gross
                profit
            
            
            4,468,637
            
            
            3,814,028
            
            
            3,260,371Selling
                and advertising expenses
            
            
            1,718,223
            
            
            1,427,612
            
            
            1,409,361General
                and administrative expenses
            
            
            1,776,863
            
            
            1,684,203
            
            
            1,736,619Research
                and development expenses
            
            
            482,283
            
            
            351,687
            
            
            218,1643,977,369
            
            
            3,463,502
            
            
            3,364,144Operating
                profit (loss)
            
            
            491,268
            
            
            350,526
            
            
            (103,773
            )Other
                income (expense):Interest
                income
            
            
            293,399
            
            
            148,322
            
            
            34,720Gain
                (loss) on sales of assets
            
            
            (6,916
            )
            
            -
            
            
            13,667286,483
            
            
            148,322
            
            
            48,387Earnings
                (loss) from continuing operations before income taxes
            
            
            777,751
            
            
            498,848
            
            
            (55,386
            )Income
                tax (expense) benefit
            
            
            71,400
            
            
            (194,600
            )
            
            -Earnings
                (loss) from continuing operations
            
            
            849,151
            
            
            304,248
            
            
            (55,386
            )(Loss)
                from discontinued operations, net of income tax benefit
            
            
            (180,338
            )
            
            (59,700
            )
            
            (110,000
            )Net
                earnings (loss)
            
            $
            668,813
            
            $
            244,548
            
            $
            (165,386
            )Basic
                and diluted earnings (loss) per share:Continuing
                operations
            
            $
            .20
            
            $
            .07
            
            $
            (.01
            )Discontinued
                operations
            
            
            (.04
            )
            
            (.01
            )
            
            (.03
            )$
            .16
            
            $
            .06
            
            $
            (.04
            )


See
      notes
      to consolidated financial statements.




-23-


**Valpey-Fisher
      Corporation**


**Consolidated
      Statements of Cash Flows**





For
                the Years Ended December 31,
            
            2006
            
            2005
            
            2004Cash
                Flows from Operating Activities:Earnings
                (loss) from continuing operations
            
            $
            849,151
            
            $
            304,248
            
            $
            (55,386
            )Adjustments
                to reconcile earnings (loss) from continuing
              operations
                to net cash provided by operating activities:Depreciation
            
            
            644,495
            
            
            751,966
            
            
            818,838Changes
                in deferred income taxes
            
            
            (365,738
            )
            
            (72,382
            )
            
            32,000Stock
                based compensation
            
            
            164,625
            
            
            -
            
            
            -Non-cash
                restricted stock compensation, net of taxes
            
            
            33,753
            
            
            35,000
            
            
            35,500(Gain)
                loss on sales of assets
            
            
            6,916
            
            
            -
            
            
            (13,667
            )Stock
                option income tax benefit
            
            
            -
            
            
            10,000
            
            
            -Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (118,803
            )
            
            (357,473
            )
            
            1,277,984Inventories,
                net
            
            
            218,249
            
            
            472,592
            
            
            70,278Other
                current assets
            
            
            (18,668
            )
            
            331
            
            
            (22,338
            )Accounts
                payable and accrued liabilities
            
            
            64,126
            
            
            430,197
            
            
            231,631Net
                cash provided by operating activities of continuing
                operations
            
            
            1,478,106
            
            
            1,574,479
            
            
            2,374,840(Loss)
                from discontinued operations
            
            
            (180,338
            )
            
            (59,700
            )
            
            (110,000
            )Change
                in deferred income taxes
            
            
            70,384
            
            
            (30,000
            )
            
            -Change
                in accrued expenses
            
            
            53,
                53,860
            
            
            67,415
            
            
            68,900Net
                cash (used) by operating activities of discontinued
                operations
            
            
            (56,094
            )
            
            (22,285
            )
            
            (41,100
            )Net
                cash provided by operating activities
            
            
            1,422,012
            
            
            1,552,194
            
            
            2,333,740Cash
                Flows from Investing Activities:Capital
                expenditures
            
            
            (299,302
            )
            
            (120,843
            )
            
            (140,672
            )Proceeds
                from sales of assets
            
            
            122,500
            
            
            -
            
            
            24,600Other
            
            
            (8,065
            )
            
            (10,207
            )
            
            (8,065
            )Collection
                of notes receivable
            
            
            -
            
            
            -
            
            
            19,351Net
                cash (used) by investing activities
            
            
            (184,867
            )
            
            (131,050
            )
            
            (104,786
            )Cash
                Flows from Financing Activities:Stock
                options exercised
            
            
            26,680
            
            
            61,750
            
            
            16,964Purchases
                of common stock
            
            
            -
            
            
            (17,932
            )
            
            -Net
                cash provided by financing activities
            
            
            26,680
            
            
            43,818
            
            
            16,964Net
                Increase in Cash and Cash Equivalents
            
            
            1,263,825
            
            
            1,464,962
            
            
            2,245,918Cash
                and Cash Equivalents at beginning of year
            
            
            7,920,235
            
            
            6,455,273
            
            
            4,209,355Cash
                and Cash Equivalents at end of year
            
            $
            9,184,060
            
            $
            7,920,235
            
            $
            6,455,273Supplemental
                Disclosures of Cash Flow InformationCash
                paid during the year by continuing operations for income
                taxes
            
            $
            525,000
            
            $
            83,000
            
            $
            -





Noncash
      Investing and Financing Activities:


In
      2004,
      the Company issued 29,500 shares of common stock valued at $85,550 to four
      employees in payment for a bonus accrued in 2003.





See
      notes
      to consolidated financial statements.




-24-


**Valpey-Fisher
      Corporation**


**Consolidated
      Statements of Stockholders’ Equity**


**Common
                  **Stock****
              
              **Capital**
              
              **Retained**
              
              **Unearned****Shares**
              
              **Amount**
              
              **Surplus**
              
              **Earnings**
              
              **Compensation**Balance,
                  January 1, 2004
              
              
              4,184,815
              
              $
              209,241
              
              $
              4,998,453
              
              $
              5,667,356
              
              $
              (217,000
              )Net
                  (loss)
              
              
              -
              
              
              -
              
              
              -
              
              
              (165,386
              )
              
              -Amortization
                  of restricted stock grant
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              58,500Tax
                  effect of restricted stock grant
              
              
              -
              
              
              -
              
              
              (23,000
              )
              
              -
              
              
              -Exercise
                  of stock options
              
              
              37,704
              
              
              1,885
              
              
              100,629
              
              
              -
              
              
              -Balance,
                  December 31, 2004
              
              
              4,222,519
              
              
              211,126
              
              
              5,076,082
              
              
              5,501,970
              
              
              (158,500
              )Net
                  earnings
              
              
              -
              
              
              -
              
              
              -
              
              
              244,548
              
              
              -Amortization
                  of restricted stock grant
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              58,500Tax
                  effect of restricted stock grant
              
              
              -
              
              
              -
              
              
              (23,500
              )
              
              -
              
              
              -Exercise
                  of stock options
              
              
              29,984
              
              
              1,499
              
              
              60,251
              
              
              -
              
              
              -Purchases
                  and retirement of common stock
              
              
              (6,000
              )
              
              (300
              )
              
              (17,632
              )
              
              -
              
              
              -Stock
                  option income tax benefit
              
              
              -
              
              
              -
              
              
              10,000
              
              
              -
              
              
              -Balance,
                  December 31, 2005
              
              
              4,246,503
              
              
              212,325
              
              
              5,105,201
              
              
              5,746,518
              
              
              (100,000
              )Net
                  earnings
              
              
              -
              
              
              -
              
              
              -
              
              
              668,813
              
              
              -Amortization
                  of restricted stock grant
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              58,500Tax
                  effect of restricted stock grant
              
              
              -
              
              
              -
              
              
              (24,747
              )
              
              -
              
              
              -Exercise
                  of stock options
              
              
              10,000
              
              
              500
              
              
              26,180
              
              
              -
              
              
              -Stock
                  based compensation
              
              
              -
              
              
              -
              
              
              169,555
              
              
              -
              
              
              -Balance,
                  December 31, 2006
              
              
              4,256,503
              
              $
              212,825
              
              $
              5,276,189
              
              $
              6,415,331
              
              $
              (41,500
              )
  See
        notes
        to consolidated financial statements.




-25-





**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 receivable **** are
      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 collectibility of all accounts receivable **.** The
      Company determines the allowance based on numerous **** factors
      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, 2006, approximately $1,792,000
      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, 2006, three customers each represented about 10%
      of
      the Company’s accounts receivable. At December 31, 2005, one customer
      represented about 10% 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 collectibilty 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).


**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.




-26-




**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 $81,600 in 2006,
      $117,300 in 2005, and $114,900 in 2004.




-27-


**Valpey-Fisher
      Corporation**


**Notes
      Continued**





**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
      (loss) per share -** Basic
      earnings (loss) per share is computed by dividing net earnings (loss) by the
      weighted average number of common shares outstanding. Diluted earnings (loss)
      per share is computed by dividing net earnings (loss) by the diluted weighted
      average shares outstanding. Diluted weighted average shares includes the
      weighted average number of common shares outstanding and the weighted average
      number of common shares that would have been outstanding if potentially dilutive
      common shares relating to stock options had been issued using the treasury
      stock
      method.


**Stock
      compensation plans -** Effective
      January 1, 2006, the Company began recording compensation expense associated
      with stock options 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 option plans. Accordingly, the
      Company did not recognize compensation expense for options 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 options recognized in the year ended December 31, 2006 includes: (a)
      expense related to the remaining unvested portion of all stock option 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 option 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.




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
      during the year ended December 31, 2006 (in thousands):





Cost
                of sales
            
            $
            31Selling
                and advertising
            
            
            29General
                and administrative
            
            
            99Research
                and development
            
            
            11Pre-tax
                stock-based compensation expense
            
            
            170Income
                tax (benefit)
            
            
            (5
            )Net
                stock-based compensation expense
            
            $
            165




-28-


**Valpey-Fisher
      Corporation**


**Notes
      Continued**





The
      following table illustrates the effect on net earnings and earnings per share
      if
      the Company had applied the fair value recognition provisions of SFAS No. 123
      to
      stock-based compensation:


For
                the Year Ended December 31,
            
            2005
            
            2004Net
                earnings (loss), as reported
            
            $
            244,548
            
            $
            (165,386
            )Deduct:
                Total stock-based employee compensation expense determined
              under the fair value based method for all awards, net of related
                tax
                effects
            
            
            (173,271
            )
            
            (55,299
            )Pro
                forma net earnings (loss)
            
            $
            71,277
            
            $
            (220,685
            )Basic
                and diluted earnings (loss) per share, as reported
            
            $
            .06
            
            $
            (.04
            )Basic
                and diluted earnings (loss) per share, pro forma
            
            $
            .02
            
            $
            (.05
            )





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, 2006, 2005, and 2004,
      the Company had no items of other comprehensive income (loss).




**** **Recent
      accounting pronouncements -** In July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an
      interpretation of FASB Statement No. 109)” (“FIN 48”) which is effective
      for fiscal years beginning after December 15, 2006. FIN 48 prescribes how a
      company should recognize, measure, present and disclose in its financial
      statements uncertain tax positions that a company has taken or expects to take
      on a tax return. We are currently evaluating our tax positions and do not expect
      this interpretation will have a material impact on our results of operations
      or
      financial position.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements” *,* which
      defines fair value, establishes a framework for measuring fair value, and
      expands disclosures about fair value measurements. The provisions of SFAS No.
      157 are effective for fiscal years beginning after November 15, 2007. We have
      not yet determined the impact of adopting SFAS No. 157 on our results of
      operations or financial position.





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements
      when Quantifying Misstatements in Current Year Financial Statements” to address
      the process of quantifying financial statement misstatements. We adopted SAB
      No.
      108 in the fourth quarter of 2006 and there was no impact on our consolidated
      financial statements.




-29-


**Valpey-Fisher
      Corporation**


**Notes
      Continued**





**(3)
      Discontinued Operations:**




In
      1998,
      the Company sold all the assets a subsidiary located in New Jersey. As a result
      of this sale, the Company was required to perform environmental cleanup at
      this
      site. During 2006, 2005 and 2004, the Company recorded pre-tax expenses of
      $285,500, $100,000 and $110,000, respectively, to increase the environmental
      expense accrual to reflect the then revised estimate to complete the
      remediation. These expense amounts, net of income tax benefit, are presented
      in
      the Consolidated Statements of Operations under the caption “(Loss) from
      discontinued operations, net of income tax benefit”. As of December 31, 2006, a
      total of $1,560,000 has been expensed for the cleanup and $450,000 (see Note
      7)
      is accrued for the above agreement and other expenses relating to the cleanup.




**(4)
                Inventories, net:**Inventories,
                net of reserves, consist of the following:
            
            2006
            
            2005Raw
                materials
            
            $
            480,830
            
            $
            636,715Work
                in process
            
            
            106,011
            
            
            194,247Finished
                goods
            
            
            223,013
            
            
            197,141$
            809,854
            
            $
            1,028,103




-30-





**Valpey-Fisher
      Corporation**


**Notes
      Continued**





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


2006
            
            2005
            
            2004Current:Federal
            
            $
            399,700
            
            $
            278,100
            
            $
            -State
            
            
            (80,800
            )
            
            (800
            )
            
            -318,900
            
            
            277,300
            
            
            -Deferred:Federal
            
            
            (101,100
            )
            
            (93,000
            )
            
            (47,500
            )State
            
            
            (31,700
            )
            
            55,800
            
            
            (22,500
            )(132,800
            )
            
            (37,200
            )
            
            (70,000
            )Valuation
                allowance
            
            
            (257,500
            )
            
            (45,500
            )
            
            70,000Total
            
            $
            (71,400
            )
            $
            194,600
            
            $
            -





The
      Company recorded an income tax benefit relating to the discontinued operations
      of $105,000 in 2006, $40,300 in 2005 and $0 in 2004.





The
      total
      income tax provision (benefit) 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:


2006
            
            2005
            
            2004Income
                taxes at statutory rates
            
            $
            264,400
            
            $
            169,600
            
            $
            (56,230
            )State
                income taxes, net of federal tax effect
            
            
            (62,900
            )
            
            36,300
            
            
            (10,170
            )Federal
                tax effect of state tax operating losses utilized
            
            
            41,800
            
            
            31,200
            
            
            -Stock
                based compensation
            
            
            53,500
            
            
            -
            
            
            -Change
                in valuation allowance
            
            
            (257,500
            )
            
            (45,500
            )
            
            70,000Reversal
                of accruals
            
            
            (80,800
            )
            
            -
            
            
            (9,000
            )Other,
                net
            
            
            (29,900
            )
            
            3,000
            
            
            5,400$
            (71,400
            )
            $
            194,600
            
            $
            -





-31-




The
      tax
      effects of significant items comprising the Company’s deferred tax assets and
      liabilities as of  December 31, 2006 and 2005 are as follows:


2006
            
            2005Deferred
                tax assets:Inventory
                valuation
            
            $
            585,000
            
            $
            666,800State
                tax loss carryforward
            
            
            575,500
            
            
            526,500Accruals
                and allowances
            
            
            103,500
            
            
            137,800Stock
                compensation
            
            
            4,900
            
            
            -Valuation
                allowance
            
            
            (471,000
            )
            
            (728,500
            )Net
                deferred tax assets
            
            
            797,900
            
            
            602,600Deferred
                tax liabilities:Depreciation
            
            
            216,600
            
            
            287,800DISC
                commissions
            
            
            126,800
            
            
            160,500Total
                deferred tax liabilities
            
            
            343,400
            
            
            448,300Net
                deferred tax assets
            
            $
            454,500
            
            $
            154,300





At
      December 31, 2006, the Company has state tax loss benefit carryforwards of
      $575,500 that begin to expire in 2007. 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
      has
      established a valuation allowance of $471,000 at December 31, 2006. Other
      current assets include deferred income taxes of approximately $797,900 in 2006
      and $602,600 in 2005 .





**(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 $25,700 in 2006 and $0 in 2005 and 2004. 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 $81,000 in 2006, $76,000 in 2005 and $74,000 in 2004.





-32-


**Valpey-Fisher
      Corporation**


**Notes
      Continued**




**(7)
                Accrued Liabilities:**Accrued
                liabilities consist of the following items:
            
            2006
            
            2005Employee
                compensation
            
            $
            693,400
            
            $
            611,600Income
                taxes
            
            
            19,000
            
            
            334,300Professional
                fees
            
            
            145,000
            
            
            160,000Environmental
                costs (see Note 3)
            
            
            450,000
            
            
            220,600Commissions
            
            
            118,400
            
            
            95,100Other
            
            
            248,138
            
            
            285,968$
            1,673,938
            
            $
            1,707,568





**(8)
      Debt:** At
      December 31, 2006, the Company had no outstanding credit arrangements with
      banks
      or any other financial institution.





**(9)
      Stockholders’ Equity:** The
      Company has 4,256,503 and 4,246,503 shares of its $.05 par value Common Stock
      outstanding at December 31, 2006 and 2005, respectively.




During
      2005, the Company acquired 6,000 shares of common stock at a cost of $17,900
      and
      retired the shares. At December 31, 2006, under prior authorizations from the
      Board of Directors, the Company is authorized to purchase up to an additional
      227,500 shares of stock through the open market or negotiated
      transactions.





In
      2004,
      the Company issued options to four employees for 29,500 shares of common stock
      in payment for a bonus accrued in 2003. The option price was $.05 per share.
      At
      the date of grant, the fair market value of the 29,500 shares of common stock
      less the option price was $85,550.




In
      the
      fourth quarter of 2002, the Company granted 100,000 shares of restricted stock
      to the President and Chief Executive Officer for $5,000. The shares issued
      under
      a Restricted Stock Agreement vest 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. Unearned compensation, which is shown as a separate
      component of stockholders’ equity, is being amortized over the five year vesting
      period. At December 31, 2006 and 2005, 20,000 and 40,000, respectively, of
      these
      shares were nonvested. During 2006, 20,000 of these shares vested and no shares
      of restricted stock were granted or forfeited. The amount amortized to expense
      in each of the years 2006, 2005 and 2004 was $58,500. The tax effect of the
      differences between compensation expense for financial statement and income
      tax
      purposes is charged or credited to capital surplus.





At
      December 31, 2006, the Company has four Stock Option Plans that allow 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. 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. The
      options granted in 2006, vest 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, 2006, options for 172,666 shares remain available for future grants under
      the Plans and 486,250 common shares are reserved for issuance upon exercise
      of
      the outstanding stock options.




-33-


**Valpey-Fisher
      Corporation**


**Notes
      Continued**




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





**For
                the Year Ended December 31,****2006**
            
            **2005**
            
            **2004**Weighed-average
                grant date fair value
            
            $
            1.06
            
            $
            1.84
            
            $
            1.65Assumptions:Expected
                dividend yield
            
            
            0
            %
            
            0
            %
            
            0
            %Risk-free
                interest rate
            
            
            4.6
            %
            
            4.0
            %
            
            4.4
            %Expected
                life of options in years
            
            
            3.5
            
            
            7
            
            
            7Assumed
                volatility
            
            
            36
            %
            
            57
            %
            
            60
            %





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. Prior to 2006, the expected term of the
      option was determined by taking the average of the vesting term and the
      contractual life of the option .





A
      summary
      of the status of the Company’s fixed stock option plans as of December 31, 2006,
      2005, and 2004, and changes during the years ended on those dates is presented
      below:





**2006**
            
            **2005**
            
            **2004****Number
                of**
              **shares**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number
                of**
              **shares**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number
                of**
              **shares**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**Outstanding,
                January 1
            
            
            488,750
            
            $
            2.98
            
            
            532,234
            
            $
            3.40
            
            
            578,438
            
            $
            3.41Granted
            
            
            10,000
            
            
            3.25
            
            
            121,500
            
            
            2.99
            
            
            83,500
            
            
            2.01Exercised
            
            
            (10,000
            )
            
            2.67
            
            
            (29,984
            )
            
            2.06
            
            
            (37,704
            )
            
            .45Forfeited
            
            
            (2,500
            )
            
            2.96
            
            
            (135,000
            )
            
            3.42
            
            
            (92,000
            )
            
            3.40Outstanding,
                December 31
            
            
            486,250
            
            $
            3.39
            
            
            488,750
            
            $
            3.38
            
            
            532,234
            
            $
            3.40Exercisable,
                December 31
            
            
            281,004
            
            $
            3.68
            
            
            203,658
            
            $
            3.89
            
            
            274,345
            
            $
            3.59





As
      of
      December 31, 2006, the intrinsic value (the difference between the exercise
      price and the market price) for all outstanding options was $211,275 and the
      intrinsic value for all options exercisable was $104,327. The total intrinsic
      value of all options exercised during the years ended December 31, 2006, 2005,
      and 2004 was $11,820, $28,680, and $121,640, respectively.




-34-


**Valpey-Fisher
      Corporation**


**Notes
      Continued**





The
      following table summarizes information about fixed stock options outstanding
      and
      exercisable at December 31, 2006:





**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of exercise prices**
            
            **Number**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted**
              **Average
                Remaining**
              **Life
                in**
              **Years**
            
            **Number**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted**
              **Average
                Remaining**
              **Life
                inYears**$2.48
                - 2.96
            
            
            168,500
            
            $
            2.80
            
            
            7.4
            
            
            59,500
            
            $
            2.71
            
            
            7.0$3.05
                - 4.28
            
            
            299,000
            
            
            3.24
            
            
            6.2
            
            
            202,754
            
            
            3.28
            
            
            5.9$11.04
            
            
            18,750
            
            
            11.04
            
            
            3.8
            
            
            18,750
            
            
            11.04
            
            
            3.8486,250
            
            $
            3.39
            
            
            6.5
            
            
            281,004
            
            $
            3.68
            
            
            6.0







A
      summary
      of the status of the Company’s nonvested stock options as of December 31, 2006
      and the changes during the year then ended is as follows:





**Shares**
            
            **Weighted-Average**
              **Grant-Date**
              **Fair
                Value**Nonvested
                at December 31, 2005
            
            
            285,092
            
            $
            1.80Granted
            
            
            10,000
            
            
            1.06Vested
            
            
            (87,346
            )
            
            1.80Forfeited
            
            
            (2,500
            )
            
            1.82Nonvested
                at December 31, 2006
            
            
            205,246
            
            $
            1.76





At
      December 31, 2006, there was approximately $297,000 of total unrecognized
      compensation cost related to nonvested stock options granted. That cost is
      expected to be recognized over a weighted-average period of 1.8 years.




-35-


**Valpey-Fisher
      Corporation**


**Notes
      Continued**





**(10)
      Earnings**  **(Loss)
      Per Share:** The
      computation of basic and diluted earnings (loss) per share from continuing
      operations is as follows:


**2006**
              
              **2005**
              
              **2004****Basic:**Earnings
                  (loss) from continuing operations
              
              $
              849,151
              
              $
              304,248
              
              $
              (55,386
              )Weighted
                  average shares outstanding
              
              
              4,252,777
              
              
              4,239,547
              
              
              4,212,353Basic
                  earnings (loss) per share from continuing operations
              
              $
              .20
              
              $
              .07
              
              $
              (.01
              )**Diluted:**Earnings
                  (loss) from continuing operations
              
              $
              849,151
              
              $
              304,248
              
              $
              (55,386
              )Weighted
                  average shares outstanding
              
              
              4,252,777
              
              
              4,239,547
              
              
              4,212,353Diluted
                  effect of stock options outstanding, using the treasury stock
                  method
              
              
              7,863
              
              
              68,629
              
              
              -Diluted
                  weighted average shares outstanding
              
              
              4,260,640
              
              
              4,308,176
              
              
              4,212,353Diluted
                  earnings (loss) per share from continuing operations
              
              $
              .20
              
              $
              .07
              
              $
              (.01
              )


In
      2006,
      the computation of diluted earnings per share excluded stock options to purchase
      378,000 shares as the assumed proceeds exceeded the average market price during
      the period. In 2006 and 2005, the computation of diluted earnings per share
      excluded stock options to purchase 28,750 shares as the exercise prices were
      greater than the average market price. The Company had 532,234 options
      outstanding in 2004, which were not included in the computation of dilutive
      shares since the Company had a net loss and the inclusion of such shares would
      be anti-dilutive.




-36-


**Valpey-Fisher
      Corporation**


**Notes
      Continued**





**(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 11%, 12% and 11% of net sales in 2006,
      2005
      and 2004, respectively. A second customer accounted for approximately 10% of
      net
      sales in 2004. Export sales to foreign markets are as follows:


2006
            
            2005
            
            2004Asia
                Pacific
            
            $
            1,581,500
            
            $
            1,955,900
            
            $
            1,988,700Europe
                and Middle East
            
            
            875,900
            
            
            1,190,600
            
            
            708,600Canada
            
            
            607,600
            
            
            704,200
            
            
            1,044,600Other
            
            
            25,500
            
            
            33,900
            
            
            25,500$
            3,090,500
            
            $
            3,884,600
            
            $
            3,767,400





**(12)**  **Quarterly
      Financial Data (unaudited):** Selected
      unaudited quarterly financial data for 2006 and 2005 is set forth
      below:


First
            
            Second
            
            Third
            
            Fourth(in
                thousands, except per share data)2006Net
                sales from continuing operations
            
            $
            2,872
            
            $
            2,927
            
            $
            2,875
            
            $
            3,107Gross
                profit
            
            
            1,011
            
            
            1,072
            
            
            1,062
            
            
            1,324Earnings
                before income taxes
            
            
            77
            
            
            119
            
            
            179
            
            
            403Net
                earnings (loss) from:
              Continuing
                operations
            
            
            33
            
            
            62
            
            
            98
            
            
            656Discontinued
                operations
            
            
            -
            
            
            -
            
            
            -
            
            
            (180
            )Net
                earnings
            
            $
            33
            
            $
            62
            
            $
            98
            
            $
            476Basic
                and diluted earnings (loss) per share:
              Continuing
                operations
            
            $
            .01
            
            $
            .01
            
            $
            .02
            
            $
            .15Discontinued
                operations
            
            
            -
            
            
            -
            
            
            -
            
            
            (.04
            )$
            .01
            
            $
            .01
            
            $
            .02
            
            $
            .11




First
            
            Second
            
            Third
            
            Fourth(in
                thousands, except per share data)2005Net
                sales from continuing operations
            
            $
            3,022
            
            $
            3,015
            
            $
            2,780
            
            $
            2,610Gross
                profit
            
            
            965
            
            
            1,056
            
            
            967
            
            
            826Earnings
                before income taxes
            
            
            69
            
            
            145
            
            
            146
            
            
            139Net
                earnings (loss) from:
              Continuing
                operations
            
            
            45
            
            
            96
            
            
            96
            
            
            67Discontinued
                operations
            
            
            -
            
            
            -
            
            
            -
            
            
            (60
            )Net
                earnings
            
            $
            45
            
            $
            96
            
            $
            96
            
            $
            7Basic
                and diluted (loss) per share:
              Continuing
                operations
            
            $
            .01
            
            $
            .02
            
            $
            .02
            
            $
            .01Discontinued
                operations
            
            
            -
            
            
            -
            
            
            -
            
            
            (.01
            )$
            .01
            
            $
            .02
            
            $
            .02
            
            $
            -




-37-




**Valpey-Fisher
      Corporation**


**Notes
      Continued**





Earnings
      (loss) 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 (loss) per share
      amounts.





In
      the
      fourth quarter of 2006, the Company reduced the valuation allowance for deferred
      tax assets and reversed income tax accruals. As a result, income tax expense
      was
      reduced by $338,300 or $.08 per share.






( **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, 2006,
      the Company has outstanding purchase commitments approximating $911,000, all
      of
      which are expected to be fulfilled in 2007.





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).




-38-





**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 and subsidiaries (the “Company”) as of December 31, 2006 and
                2005, and the related consolidated statements of operations, stockholders’
                equity, and cash flows for each of the three years in the period
                ended
                December 31, 2006. These financial statements are the responsibility
                of
                the Company’s management. Our responsibility is to express an opinion on
                these financial statements based on our
                audits.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our 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, 2006
                and
                2005, and the results of their operations and their cash flows for
                each of
                the three years in the period ended December 31, 2006, in conformity
                with
                accounting principles generally accepted in the United States of
                America.




As
        discussed in Notes 2 and 9 to the consolidated financial statements, the
        Company
        changed its method of accounting for Share-Based Payments under SFAS No.
        123(R)
        as of January 1, 2006.




/s/
      Grant
      Thornton LLP


Boston,
      Massachusetts


February
      16, 2007




-39-


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





Not
      applicable.





**Item
      9A. Controls and Procedures**





**Evaluation
      of disclosure controls and procedures.**




As
      of
      December 31, 2006, 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, except as noted below, that our disclosure controls and
      procedures are effective in timely alerting them to material information
      relating to us (including our consolidated subsidiaries) required to be included
      in our periodic SEC filings. We believe that this deficiency did not affect
      the
      accuracy of our financial statements in this report.





Our
      independent registered accounting firm has advised management and the audit
      committee that the following identified internal control deficiency constitutes
      a significant deficiency in our internal control.





1.
            Reliance
                on the Chief Financial Officer for period end financial reporting
                functions, accounting estimates and income
                taxes.





Management
      recognizes that a control system, no matter how well conceived and operated,
      can
      provide only reasonable, not absolute assurance that the objectives of the
      control system are met. Further, the design of a control system must reflect
      the
      fact that there are resource constraints, and the benefits of controls must
      be
      considered relative to their costs. Management will continue to evaluate the
      employees involved and the control procedures in place, the risks associated
      with such lack of segregation of duties and whether the potential benefits
      of
      adding employees to clearly segregate duties or other alternatives justifies
      the
      expense associated with the changes. In addition, management will be reviewing
      this matter with its outside consultants to examine other available alternative
      solutions.





**Changes
      in internal control.**





Other
      than
      as discussed above , such
      evaluation did not identify any change in our internal controls over financial
      reporting that occurred during the quarter ended December 31, 2006 that has
      materially affected, or is reasonably likely to materially affect, our internal
      control over financial reporting.




-40-


**Item
      9B. Other Information**





None





**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 2007 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.





-41-


**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, 2006 and 2005Consolidated
                  Statements of Operations for the Years Ended December 31, 2006,
                  2005 and
                  2004Consolidated
                  Statements of Cash Flows for the Years Ended December 31, 2006,
                  2005 and
                  2004Consolidated
                  Statements of Stockholders’ Equity for the Years EndedDecember
                  31, 2006, 2005 and 2004Notes
                  to Consolidated Financial StatementReport
                  of Independent Registered Public Accounting
                  Firm




2.
              The
                  following schedule to the Consolidated Financial Statements and
                  the Report
                  of IndependentRegistered
                  Accounting Firm on Schedule are filed as part of this
                  report.




Registered
      Accounting Firm on Schedule are filed as part of this report.


Report
      of
      Independent Registered Public Accounting Firm on Supplementary Schedule


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.




-42-


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







**Exhibit
                No.**
            
            **Description**2.
            
            Agreement
                of Merger and Recapitalization2.1
            
            Asset
                Purchase Agreement dated April 30, 2003 between Seller, William Stein,
                Martin Finkelstein and the Company3.1
            
            Restated
                and Amended Articles of Incorporation3.2
            
            By-Laws
                effective May 8, 200310.1
            *
            1992
                Stock Option Plan10.2
            *
            1999
                Stock Option Plan10.3
            *
            2001
                Stock Option Plan10.4
            *
            Restricted
                Stock Agreement10.5
            *
            2003
                Stock Option Plan10.6
            *
            Key
                Employee Bonus Plan for 200614
            
            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 Ex hibit
      pursuant to Item 15(c) of this report.





-43-


**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
                30, 2007
              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
                  30, 2007Ted
                  Valpey, Jr.
              and
                  Director/s/
                  Michael J. Ferrantino
              President,
                  Chief Executive Officer
              March
                  30, 2007Michael
                  J. Ferrantino
              and
                  Director (PrincipalExecutive
                  Officer)/s/
                  Michael J. Kroll
              Vice
                  President, Treasurer and
              March
                  30, 2007Michael
                  J. Kroll
              Chief
                  Financial Officer(Principal
                  Financial Officerand
                  Principal AccountingOfficer)/s/Mario
                  Alosco
              Director
              March
                  30, 2007Mario
                  Alosco/s/Richard
                  W. Anderson
              Director
              March
                  30, 2007Richard
                  W. Anderson/s/Eli
                  Fleisher
              Director
              March
                  30, 2007Eli
                  Fleisher/s/Lawrence
                  Holsborg
              Director
              March
                  30, 2007Lawrence
                  Holsborg/s/John
                  J. McArdle III
              Director
              March
                  30, 2007John
                  J. McArdle III




-44-





**Report
      of Independent Registered Public Accounting Firm on Supplementary Schedule**





Board
      of
      Directors and Stockholders of Valpey-Fisher Corporation:




We
                have audited in accordance with the standards of the Public Company
                Accounting Oversight Board (United States) the consolidated financial
                statements of Valpey-Fisher Corporation and Subsidiaries referred
                to in
                our report dated February 16, 2007, which is included in the Company’s
                2006 Annual Report to Stockholders. Our audit was conducted for the
                purpose of forming an opinion on the basic financial statements taken
                as a
                whole. The schedule of valuation and qualifying accounts Schedule
                II is
                presented for purposes of additional analysis and is not a required
                part
                of the basic financial statements. This schedule has been subjected
                to the
                auditing procedures applied in the audit of the basic financial statements
                and, in our opinion, is fairly stated in all material respects in
                relation
                to the basic financial statements taken as a
                whole.


/s/
      GRANT
      THORNTON LLP





Boston,
      Massachusetts


February
      16, 2007




-45-


**Valpey-Fisher
      Corporation and Subsidiaries**




**Schedule
      II - Valuation and Qualifying Accounts**




**Additions****Description**
            
            **Balance
                at**
              **Beginning**
              **of
                Period**
            
            **Charged
                to**
              **Costs
                and**
              **Expenses**
            
            **Charged
                to**
              **Other**
              **Accounts**
            
            **Deductions
                (1)**
            
            **Balance
                at**
              **End**
              **of
                Period**Allowance
                for
              Doubtful
                Accounts:Year
                Ended:December
                31, 2006
            
            $
            115,000
            
            $
            38,575
            
            $
            -
            
            $
            (38,575
            )
            $
            115,000December
                31, 2005
            
            $
            100,000
            
            $
            36,100
            
            $
            -
            
            $
            (21,100
            )
            $
            115,000December
                31, 2004
            
            $
            80,000
            
            $
            (36,600
            )
            $
            -
            
            $
            56,600
            
            $
            100,000Inventory
                Reserve:Year
                Ended:December
                31, 2006
            
            $
            1,163,100
            
            $
            109,600
            
            $
            -
            
            $
            (221,700
            )
            $
            1,051,000December
                31, 2005
            
            $
            1,019,500
            
            $
            351,800
            
            $
            -
            
            $
            (208,200
            )
            $
            1,163,100December
                31, 2004
            
            $
            1,002,000
            
            $
            371,300
            
            $
            -
            
            $
            (353,800
            )
            $
            1,019,500





(1)
      Deductions related to the allowance for doubtful accounts represent the amounts
      written-off against the reserve, less recoveries.




-46-


**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).2.1
            
            Asset
                Purchase Agreement dated April 30, 2003 between Seller, William Stein,
                Martin Finkelstein and the Company (incorporated by reference to
                Exhibit 2
                on Registrant’s Form 8-K dated May 28, 2003).3.1
            
            Restated
                and Amended Articles of Incorporation as of June 3, 2002 (incorporated
                by
                reference to Exhibit 3.2 on Registrant’s Form 10-Q for the period ended
                June 30, 2002).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 (incorporated by reference to Exhibit 10.1 on
                Registrant’s Form 10-K for the year ended December 31,
                2002).10.2
            
            1999
                Stock Option Plan. (incorporated by reference to Exhibit 10.2 on
                Registrant’s Form 10-K for the year ended December 31,
                2004).10.3
            
            2001
                Stock Option Plan. Filed herewith.10.4
            
            Restricted
                Stock Agreement (incorporated by reference to Exhibit 10.5 on Registrant’s
                Form 10-K for the year ended December 31, 2003).10.5
            
            2003
                Stock Option Plan (incorporated by reference to Exhibit 10.1 on
                Registrant’s Form 10-Q for the quarterly period ended June 29,
                2003).10.6
            
            Key
                Employee Bonus Plan for 2006. (incorporated by reference to Exhibit
                10.1
                on Registrant’s Form 10-Q for the quarterly period ended April 2, 2006).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.




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