The operating results for the first quarter of 1997 are the first chapter in the chronicle of what Mason Carter calls the "reinvention of Merrimac." The gains in sales and earnings are most gratifying, because they also include the absorption of non-recurrent costs of former consultants, personnel restructuring and the run-off of unprofitable contracts. We have increased executive overhead by the first recruitment of top talent in recent memory.

   We expect to continue the solid operating results shown in the first quarter. As we implement state-of-the-art business practices and make long overdue reinvestment into research, product development and infrastructure, the 80/20 platform technology designs to specific customer application will be our next critical milestone. We will comment further on this point in our next financial report. Our capital plans call for a $2 million investment in our West Caldwell facility and a six-fold expansion of our San Jose, Costa Rica operation. Selective recruiting of needed key personnel continues.

   As the new management team reforms the accounting system, we can properly attribute overheads. This will remove obfuscation and allow us to institute activity-based costing - the key to greatly improved profit performance. These changes will allow every co-worker to identify one’s own contribution.

   We will introduce a form of variable compensation to our co-workers based on achieving objectives. Reward can take many forms but performance stock options will give every co-worker a stake in the Company’s results and their future. Top management has

significantly increased its ownership of the Company; we now want to enfranchise all co-workers. Our plan will conserve much needed cash, tie dilution to performance, lower taxes and justify the repurchase of more than $9 million of treasury stock over the past five years.

   On November 29, 1996 Charlie Huber wrote, "A market-driven, production company is rising and will draw on its core competencies to grow in its niches. It will be structured, disciplined and growth-oriented." Our first quarter results are the first indication that we are on our way.

   As our customer requirements mandate, we will apply technology to design and build products that are smaller, lighter, price competitive and deliverable on time anywhere in the world.

Mason N. Carter
President and CEO

May 27, 1997

Current assets:
       Cash and cash equivalents
       Available-for-sale securities*
       Accounts receivable
       Inventories
       Other current assets