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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, 2002
-----------------

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

For the transition period from to

Commission file number 1-4184
------

Valpey-Fisher Corporation
(Exact name of registrant as specified in its charter)

Maryland 06-0737363
(State or other jurisdiction of (I.R.S. Employer
incorporation 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) 435-9039

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 (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:

Yes [X] No [ ]


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

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes [ ] No [X]

Aggregate market value of voting stock held by non-affiliates: $5,617,556
(computed by reference to the last sales price of such common stock on March 20,
2003 as reported in the American Stock Exchange consolidated trading index).

Number of shares of common stock outstanding at March 20, 2003: 4,193,515

Documents incorporated by reference:
Annual Report to Stockholders for the year ended December 31, 2002:
Parts I, II and IV
Proxy Statement for the 2003 annual meeting of stockholders: Part III


2

PART I

Item 1. Business
- -----------------

General

Valpey-Fisher Corporation ("Valpey" or "Registrant") (formerly known as
MATEC Corporation) is incorporated under the laws of Maryland. As used herein
the term "Company" refers to Valpey-Fisher and its subsidiaries.

On May 31, 2002, under an Agreement of Merger and Plan of Liquidation Under
Section 368(a)(1)(A) and Section 332 of the Internal Revenue Code of 1986, as
amended, ("IRC") Valpey-Fisher Corporation ("VFC"), a wholly owned subsidiary of
MATEC Corporation ("MATEC") was merged with and into MATEC and the separate
corporate existence of VFC ceased. The parties intend that the Merger qualify as
a reorganization described in Section 368(a)(1)(A) and a Plan of Liquidation
described in Section 332 of the IRC. MATEC changed its name to Valpey-Fisher
Corporation effective June 3, 2002.

Financial Information about Industry Segments

The Company operates in one business segment. Information about export sales
is set forth in Note 14 of the Notes to Consolidated Financial Statements in the
2002 Annual Report to Stockholders, which Note is incorporated by reference.

Narrative Description of Business

Products
--------

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

The 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.

Valpey provides a wide-frequency range of frequency control devices
including standard and custom-designed product. 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.

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


3


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

The 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 ICs are the principal raw
materials and are available from a number of domestic and foreign suppliers.

Valpey imports sub-assemblies and completed products from various Far East
(including China, Japan, South Korea, Philippines, and Taiwan) suppliers for use
in its domestically manufactured product and for resale to its customers.

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


Marketing and Customers
-----------------------

Valpey's direct sales personnel, independent manufacturers' representatives
and distributors sell the frequency control products. Valpey's ultrasonic
transducer devices are sold primarily by its direct sales personnel.

Valpey sells its frequency control products primarily to OEMs, electronic
manufacturing services (EMS) companies, and distributors. Valpey's distributors
also sell to both the OEMs and EMS companies. Ultrasonic transducer devices are
sold primarily to OEMs, colleges and universities and research facilities.

In recent years, OEMs have outsourced a significant amount of their
manufacturing capability to EMS companies. As a result, this has tended to
increase the concentration of sales to the EMS companies. Sales to Solectron
Corporation, an EMS company, accounted for approximately 22%, 15%, and 21% of
Valpey's net sales in 2002, 2001, and 2000, respectively. During 2000, sales to
Flextronics International, an EMS company, accounted for approximately 13% of
Valpey's net sales. Sales to Valpey's five largest customers accounted for
approximately 46% of its sales in 2002, compared to 45% in 2001 and 50% in 2000.
Sales to EMS companies accounted for approximately 43% of Valpey's sales in
2002, compared to 38% in 2001, and 47% in 2000.


4


Export sales amounted to approximately 27% of Valpey's sales in 2002, 23% in
2001 and 23% in 2000. Information about export sales is set forth in Note 14 of
the Notes to Consolidated Financial Statements in the 2002 Annual Report to
Stockholders, which Note is incorporated by reference. Valpey's international
sales are transacted in U. S. dollars.

Backlog
-------

Valpey's backlog of firm orders was $1,054,000 at December 31, 2002 and
$1,364,000 at December 31, 2001. The decrease in backlog is primarily due to the
drop in demand for the Company's products from the telecom equipment market.
Valpey expects to ship the entire December 31, 2002 backlog during 2003.

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 the Company. In addition, foreign competitors, particularly from the Far
East, continue to dominate the U.S. markets. However, Valpey believes it can
maintain a competitive position in its business based on its quality, strong
design and application engineering, responsive customer service and a
willingness to provide specialty small quantity orders.


Manufacturing
-------------

Valpey's manufacturing facility is located in Hopkinton, Massachusetts.
Valpey received its ISO-9001 registration for the design and manufacture of
crystals and crystal oscillators in 1997. During 2001, Valpey installed a
semi-automatic production line in order to increase its internal manufacturing
capacity for frequency control products and to improve on customer delivery
demands.

During 2001, Valpey began the manufacturing of certain raw material and
finished product in Omsk, Russia.

Valpey imports completed products from various Far East (including China,
Japan, South Korea, Philippines, and Taiwan) suppliers for resale to its
customers.

Environmental Regulations
--------------------------

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

As a result of the sale of its Bergen Cable subsidiary in 1998, the Company
is performing environmental clean up at that site. See Note 4 of the Notes to
Consolidated Financial Statements in the 2002 Annual Report to Stockholders,
which Note is incorporated by reference.


5


Employees
---------

At December 31, 2002, the Company employed 65 full-time employees. No
employees of the Company are represented by a collective bargaining unit. The
Company considers its relations with its employees to be satisfactory.


Foreign and Domestic Operations and Export Sales

During 2000, Valpey established a division located in Omsk, Russia to focus
on new product development. At December 31, 2002, Valpey had approximately
$250,000 of assets located in Russia.

Financial information about export sales is set forth in Note 14 of the
Notes to Consolidated Financial Statements in the 2002 Annual Report to
Stockholders, which Note is incorporated by reference.

Forward-Looking Statements

Items 1 and 7 of this Form 10-K contain 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 the Company's current views and assumptions and involve risks and
uncertainties that include, but not limited to: the ability to develop, market
and manufacture new innovative products competitively, the fluctuations in
product demand of the telecommunications industry, the ability of the Company
and its suppliers to produce and deliver materials and products competitively,
and the ability to limit the amount of the negative effect on operating results
caused by pricing pressure.

Item 2. Properties
- -------------------

Valpey owns its 32,000 square foot facility located in Hopkinton,
Massachusetts that contains office and manufacturing space and serves as the
Company's corporate headquarters.

The Company believes its facility is suitable for its current use and is in
good repair. The Company believes that its facility is adequate to satisfy its
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.


6


Executive Officers of the Registrant
- ------------------------------------

The names, ages and offices of the executive officers of the Company are as
follows:



Name Age Office
---- --- ------


Ted Valpey, Jr. 70 Chairman
Michael J. Ferrantino 60 President and Chief Executive Officer
Michael J. Kroll 54 Vice President, Treasurer and Chief Financial Officer



The term of office for each officer of the Registrant is until the first
meeting of the Board of Directors following the Annual Meeting of Stockholders
and until a successor is chosen and qualified.

Mr. Valpey has been Chairman of the Company since 1982 and was President and
Chief Executive Officer of the Registrant from April 28, 1997 until September
29, 2002.

Mr. Ferrantino was named President and Chief Executive Officer of the
Company on September 30, 2002 and was elected to the Board of Directors of the
Company on October 23, 2002. From January 2002 to September 2002, he was
President of Micro Networks Division (manufacturer of high frequency and filter
components and subsystems) of Integrated Circuit Systems, Inc. Mr. Ferrantino
was President and Chief Executive Officer of Micro Networks Corporation (MNC)
from December 1998 until January 2002 and was Chairman of the Board of MNC from
April 2000 to January 2002. From April 1994 to October 1998 Mr. Ferrantino was
Executive Vice President and Chief Operating Officer of CP Clare (manufacturer
of semiconductor circuits, relays and surge protector products).

Mr. Kroll has been Vice President and Treasurer of the Registrant since 1982
and was named Chief Financial Officer in May 2002.


7





PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------------

The information set forth on the inside back cover of the 2002 Annual Report
to Stockholders under the caption "Common Stock Information" is incorporated by
reference.

Equity Compensation Plan Information

The following table presents information as of December 31, 2002 regarding
the number of shares of the Registrant's common stock that may be issued under
the Registrant's equity compensation plans.



Number of securities
remaining available for
future issuance under equity
Number of securities to be Weighted-average exercise compensation plans (excluding
issued upon exercise of price of outstanding options, securities reflected in the
outstanding options, warrants warrants and rights first column)
Plan Category and rights
- ---------------------------------- -------------------------------- -------------------------------- -------------------------------


Equity compensation plans
approved by security
holders (1) 509,938 $3.57 172,166
Equity compensation plans not
approved by
security holders (2) -0- -0- -0-

(1) Includes the 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 the Company.



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

As an inducement to becoming an employee of the Company, pursuant to a
Restricted Stock Agreement dated December 19, 2002 between the Company and
Michael J. Ferrantino, a director and President and Chief Executive Officer of
the Company, on December 24, 2002, the Company 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 the outstanding
Common Stock of the Company by anyone other than Ted Valpey, Jr. or certain
mergers or reorganization of the Company. The Restricted Stock Agreement was not
submitted to shareholders for approval.


8


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.


Item 6. Selected Financial Data
- --------------------------------

The information set forth on page 4 of the 2002 Annual Report to
Stockholders under the caption "Five Year Financial Summary" is incorporated by
reference.


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

The information set forth on pages 4 through 7 of the 2002 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis" is
incorporated by reference.


9


Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------

The information set forth on page 6 of the 2002 Annual Report to
Stockholders under the section "Quantitative and Qualitative Disclosures about
Market Risk" included under the caption "Management's Discussion and Analysis"
is incorporated by reference.


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

The information contained in the Consolidated Financial Statements, Notes to
Consolidated Financial Statements and the Report of Independent Certified Public
Accountants and the Independent Auditors' Report appearing on pages 8 through 20
of the 2002 Annual Report to Stockholders is incorporated by reference.

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

Effective November 6, 2002, the Registrant dismissed Deloitte & Touche LLP
(D&T) as independent accountants and appointed Grant Thornton LLP (GT) as
independent accountants for the Registrant. The Registrant's audit committee
approved these changes and recommended them to the Board of Directors. The
Registrant's Board of Directors approved the changes.

During the Company's two most recent fiscal years and the subsequent
interim period preceding D&T's dismissal, there were no disagreements between
D&T and the Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of D&T, would have caused D&T
to make a reference to the subject matter of the disagreements in their report
on financial statements for such year. During such period, there were no
reportable events as defined in Item 304 (a) (1) (v) of Regulation S-K.

The reports of D&T on the Company's consolidated financial statements as of
and for the years ended December 31, 2001 and 2000 did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.

During the Company's two most recent fiscal years and through November 6,
2002, the Company did not consult with GT with respect to the application of
accounting principles to a specific transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or any other matters or reportable events
listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.

The Company provided D&T with a copy of the foregoing disclosures and
requested that D&T furnish it a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the statements and, if not, stating
the respects in which it does not agree. A copy of the letter from D&T to the
Commission filed as Exhibit 16.1 to the Form 8-K dated November 6, 2002 is
incorporated by reference.



10


PART III

The 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", "Executive
Compensation" and "Equity Compensation Plan Information", in Registrant's
definitive proxy statement for the 2003 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. In addition, information on Registrant's executive officers has
been included in Part I above under the caption "Executive Officers of the
Registrant".


Item 14. Controls and Procedures
- ---------------------------------

Evaluation of disclosure controls and procedures.

Within the 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the Company's management,
including the Company's President and Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that evaluation, the
President and Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.

Changes in internal control.

There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.


11

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------

(a) 1. The following Consolidated Financial Statements are incorporated by
reference from the indicated pages of the 2002 Annual Report to
Stockholders:

Page Number(s) in
Annual Report
-------------

Consolidated Balance Sheets, December 31, 2002 and 2001 8

Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 9

Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 10

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000 11

Consolidated Statements of Comprehensive Income (Loss) for the
Years Ended December 31, 2002, 2001 and 2000 11

Notes to Consolidated Financial Statement 12-19

Report of Independent Certified Public Accountants 20

Independent Auditors' Report 20

(a) 2. The following schedule to the Consolidated Financial Statements, the
Report of Independent Certified Public Accountant, and the Independent
Auditors' Report on Schedule are filed as part of this report.


Page Number
-----------
Report of Independent Certified Public Accountants on Supplementary
Schedule 17
Independent Auditors' Report 18
Schedule II - Valuation Reserves 19

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.


12


(a) 3. The exhibits filed in this report or incorporated by reference, listed
on the Exhibit Index on page 20 are as follows:




Exhibit No. Description
---------- -----------


2. Agreement of Merger and Recapitalization
3.1 Restated and Amended Articles of Incorporation
3.2 By-Laws effective March 6, 2002
7.1 Loan Agreement dated February 27, 2001
7.2 Commercial Term Promissory Note
7.3 Demand Revolving Line of Credit Promissory Note
10.1 * 1992 Stock Option Plan
10.2 * 1999 Stock Option Plan
10.3 * Management Incentive Plan
10.4 * 2001 Stock Option Plan
10.5 * Restricted Stock Agreement
13. 2002 Annual Report to Stockholders
16.1 Letter from Deloitte & Touche LLP to the Securities and Exchange Commission
dated November 6, 2002
21. Subsidiaries of the Registrant
23. Independent Certified Public Accountant Consent
23.1 Independent Auditors' Consent
99.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement required
to be filed as an Exhibit pursuant to Item 14(c) of this report.

(b) Reports on Form 8-K

On November 6, 2002, the Registrant filed a report on Form 8-K dated
November 6, 2002 reporting under Item 4. Changes in Registrant's
Certifying Accountant.


13


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 Corporation

Date: March 26, 2003 By: /s/ Michael J. Ferrantino
------------------------------
Michael J. Ferrantino
President 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 26, 2003
- ---------------------------
Ted Valpey, Jr.

/s/ Michael J. Ferrantino President, Chief Executive Officer March 26, 2003
- ---------------------------- and Director (Principal Executive Officer)
Michael J. Ferrantino


/s/ Michael J. Kroll Vice President, Treasurer and March 26, 2003
- ---------------------------- Chief Financial Officer
Michael J. Kroll (Principal Financial Officer
and Principal Accounting
Officer)

/s/ Richard W. Anderson Director March 26, 2003
- -------------------------
Richard W. Anderson

/s/ Eli Fleisher Director March 26, 2003
- --------------------------------------
Eli Fleisher

/s/ Larry Holsborg Director March 26, 2003
- --------------------------------
Lawrence Holsborg

/s/ Michael P. Martinich Director March 26, 2003
- ----------------------------
Michael P. Martinich

/s/ John J. McArdle III Director March 26, 2003
- ------------------------------
John J. McArdle III

/s/ Robert W. Muir, Jr. Director March 26, 2003
- -------------------------------
Robert W. Muir, Jr.


14


CERTIFICATION OF CHIEF EXECUTIVE OFFICER
----------------------------------------
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
---------------------------------------------------------

I, Michael J. Ferrantino, certify that:

1. I have reviewed this annual report on Form 10-K of Valpey-Fisher Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which would adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 26, 2003 By /s/ Michael J. Ferrantino
----------------------------
Michael J. Ferrantino
President and Chief Executive Officer



15


CERTIFICATION OF CHIEF FINANCIAL OFFICER
----------------------------------------
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
---------------------------------------------------------

I, Michael J. Kroll, certify that:

1. I have reviewed this annual report on Form 10-K of Valpey-Fisher Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which would adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 26, 2003 By /s/ Michael J. Kroll
-----------------------
Michael J. Kroll
Vice President, Treasurer and Chief Financial Officer



16


Report of Independent Certified Public Accountants on Supplementary Schedule

To Valpey-Fisher Corporation:

We have audited the accompanying consolidated balance sheet of
Valpey-Fisher Corporation and subsidiaries (the Company) as of December 31,
2002, and the related consolidated statements of operations, comprehensive
income (loss), stockholders' equity, and cash flows for the year then ended, and
have issued our report thereon dated February 14, 2003 (except for matters
discussed in note 10, as to which the date is March 18, 2003); such consolidated
financial statements and report are included in your 2002 Annual Report to
stockholders and are incorporated herein by reference. Our audit also included
the financial statement schedule of the Company as of and for the year ended
December 31, 2002, listed in Item 15a(2). This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audit. In our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information therein.


GRANT THORNTON LLP
Boston, Massachusetts
February 14, 2003



17


INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Valpey-Fisher Corporation (formerly MATEC Corporation)
Hopkinton, Massachusetts

We have audited the consolidated financial statements of Valpey-Fisher
Corporation (formerly MATEC Corporation) and subsidiaries as of December 31,
2001 and for each of the two years in the period ended December 31, 2001, and
have issued our report thereon dated February 15, 2002; such consolidated
financial statements and report are included in your 2002 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the financial statement schedule of Valpey-Fisher Corporation (formerly MATEC
Corporation) and subsidiaries, listed in Item 15(a)2. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule for the years ended December 31, 2001 and 2000, when
considered in relation to the basic financial statements for the years ended
December 31, 2001 and 2000, taken as a whole, presents fairly in all material
respects the information set forth therein.

DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2002


18



Valpey-Fisher Corporation and Subsidiaries

Schedule II - Valuation and Qualifying Accounts
-----------------------------------------------

Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
- ---------------------------- -------------------- -------------------- ------------------- -------------------- --------------------

Allowance for
Doubtful Accounts:
Year Ended:
December 31, 2002 $ 395,800 $ 30,000 $ 139,200 $ (365,000) $ 200,000
-------------------- -------------------- ------------------- -------------------- -------------------

December 31, 2001 $ 175,000 $ 148,200 $ 88,100 $ (15,500) $ 395,800
-------------------- -------------------- ------------------- -------------------- --------------------

December 31, 2000 $ 93,000 $ 30,700 $ 51,300 $ - $ 175,000
-------------------- -------------------- ------------------- -------------------- --------------------


Inventory Reserve:

Year Ended:
December 31, 2002 $ 3,854,000 $ 1,601,000 $ 228,000 $ (344,000) $ 5,339,000
-------------------- -------------------- ------------------- -------------------- --------------------

December 31, 2001 $ 1,673,000 $ 2,600,000 $ - $ (419,000) $ 3,854,000
-------------------- -------------------- ------------------- -------------------- --------------------

December 31, 2000 $ 1,389,000 $ 935,000 $ - $ (642,000) $ 1,673,000
-------------------- -------------------- ------------------- -------------------- --------------------


19

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 A to the Proxy Statement of
Registrant for its Special in Lieu of Annual Meeting of Stockholders held
on June 18, 1998).

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 March 6, 2002 (incorporated by reference to Exhibit 3.3
on Registrant's Form 10-Q for the period ended March 31, 2002).

7.1 Loan Agreement dated February 27, 2001 between the Registrant, Valpey
Fisher Corporation and First Massachusetts Bank, N.A. (incorporated by
reference to Exhibit 7.1 on Registrant's Form 10-Q for the quarter ended
April 1, 2001).

7.2 Commercial Term Promissory Note dated February 27, 2001 between the
Registrant, Valpey Fisher Corporation and First Massachusetts Bank, N.A.
(incorporated by reference to Exhibit on Registrant's Form 10-Q for the
quarter ended April 1, 2001).

7.3 Demand Revolving Line of Credit Promissory Note dated February 27, 2001
between the Registrant, Valpey Fisher Corporation and First Massachusetts
Bank, N.A. (incorporated by reference to Exhibit 7.1 on Registrant's Form
10-Q for the quarter ended April 1, 2001).

10.1 1992 Stock Option Plan. Filed herewith.

10.2 1999 Stock Option Plan (incorporated by reference to Exhibit A to the Proxy
Statement of Registrant for its Special In Lieu of Annual Meeting of
Stockholders held on May 13, 1999).

10.3 Management Incentive Plan (incorporated by reference to Exhibit 10.3 on
Registrant's Form 10-Q for the quarterly period ended July 2, 2000).

10.4 2001 Stock Option Plan (incorporated by reference to Exhibit A to the Proxy
Statement of Registrant for its Annual Meeting of Stockholders held on May
10, 2001).

10.5 Restricted Stock Agreement. Filed herewith.

13. Portions of the 2002 Annual Report to Stockholders. Filed herewith.

20

EXHIBIT INDEX, continued


Exhibit No. (inapplicable items are omitted)
----------


16.1 Letter from Deloitte & Touche LLP to the Securities and Exchange Commission
dated November 6, 2002 (incorporated by reference to Exhibit 16.1 on
Registrant's Form 8-K dated November 6, 2002).

21. Subsidiaries of the Registrant. Filed herewith.

23. Independent Certified Public Accountants' Consent. Filed herewith.

23.1 Independent Auditors' Consent. Filed herewith.

99.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Filed herewith.

99.2 Certification of the Chief Financial Officer Pursuant to18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Filed herewith.

21

Exhibit 10.1

MATEC CORPORATION

1992 STOCK OPTION PLAN

1. PURPOSE
-------

The Plan is intended to expand and improve the profitability
and prosperity of MATEC Corporation for the benefit of its stockholders by
permitting the Corporation to grant to officers and other key employees of, and
consultants and advisers to, the Corporation and its Subsidiaries, options to
purchase shares of the Corporation's Common Stock. These grants are intended to
provide additional incentive to such persons by offering them a greater stake in
the Corporation's continued success. The Plan is also intended as a means of
reinforcing the commonality of interest between the Corporation's stockholders
and such persons, and as an aid in attracting and retaining the services of
individuals of outstanding and specialized skills.


2. DEFINITIONS
-----------

For Plan purposes, except where the context otherwise indicates, the
following terms shall have the meanings which follow:

(a) "Agreement" shall mean a written instrument executed and
delivered on behalf of the Corporation which specifies the terms and conditions
of a Stock Option granted to a Participant.

(b) "Beneficiary" shall mean the person or persons who may be
designated by a Participant from time to time in writing to the Committee, to
receive, if the Participant dies, any Option exercise rights held by the
Participant.

(c) "Board" shall mean the Board of Directors of the
Corporation.

(d) "Code" shall mean the Internal Revenue Code of 1986, as it
may be amended from time to time, and the rules and regulations promulgated
there under.
(e) "Committee" shall mean a Committee of the Board composed
of three or more persons which shall be designated by the Board to administer
the Plan. Each member of the Committee, while serving as such, shall be a member
of the Board and shall be a disinterested person within the meaning of Rule
16b-3 of the Securities Exchange Act of 1934.

(f) "Common Stock" shall mean the Common Stock of the Corporation having a
par value of $0.05 per share.



22


(g) "Corporation" shall mean MATEC Corporation, a Delaware
corporation.

(h) "Employee" shall mean any person who is employed by the
Corporation or any Subsidiary corporation.

(i) "Exercise Price" shall mean the per share price for which
a Participant upon exercise of a Stock Option may purchase a share of Common
Stock.

(j) "Fair Market Value" shall mean the value of a share of
Common Stock to be determined by, and in accordance with procedures established
by, the Committee. Such fair market value shall be deemed conclusive upon the
determination of the Committee made in good faith. The preceding
notwithstanding, so long as the Common Stock is listed on a national stock
exchange, the "Fair Market Value" shall mean with respect to any given day, the
mean between the highest and lowest reported sales prices of the Common Stock on
the principal national stock exchange on which the Common Stock is listed, or if
such exchange was closed on such day or if it was open but the Common Stock was
not traded on such day, then on the next preceding day that the Common Stock was
traded on such exchange, as reported by a responsible reporting service.

(k) "Incentive Stock Option" shall mean a Stock Option which
is intended to meet and comply with the terms and conditions for an "incentive
stock option" as set forth in Section 422 of the Code, or any other form of tax
qualified stock option which may be incorporated and defined in the Code as it
may from time to time be amended.

(l) "Non-Qualified Option" shall mean a Stock Option which
does not meet the requirements of Section 422 of the Code or the terms of which
provide that it will not be treated as an Incentive Stock Option.

(m) "Participant" shall mean any person who is granted a Stock
Option under the Plan.

(n) "Plan" shall mean the MATEC Corporation 1992 Stock Option Plan as set
forth herein and as amended from time to time.

(o) "Stock Option" or "Option" shall mean a right to purchase
a stated number of shares of Common Stock subject to such terms and conditions
as are set forth in the Plan and an Agreement.

(p) "Subsidiary corporation" or "Subsidiary" shall mean any
corporation which is a subsidiary corporation of the Corporation as defined in
Section 424(f) of the Code.



3. ADMINISTRATION
--------------

(a) The Committee shall administer the Plan and, accordingly,
it shall have full power to grant Stock Options under the plan, to construe and
interpret the Plan, and to establish rules and regulations and perform all other
acts it believes reasonable and proper, including the authority to delegate
responsibilities to others to assist in administering the Plan.

(b) The determination of those eligible to receive Stock
Options, and the amount, type and terms and conditions of each Stock Option
shall rest in the sole discretion of the Committee, subject to the provisions of
the Plan.

(c) The Committee may permit the voluntary surrender of all or
a portion of any Option granted under the Plan to be conditioned upon the
granting to the Participant of a new Option for the same or a different number
of shares as the Option surrendered, or may require such voluntary surrender as
a condition precedent to a grant of a new Option to such Participant. Such new
Option shall be exercisable at the price, during the period and in accordance
with any other terms or conditions specified by the Committee at the time the
new Option is granted, all determined in accordance with the provisions of the
Plan without regard to the price, period of exercise, or any other terms or
conditions of the Option surrendered.


4. COMMON STOCK LIMITS
-------------------

The total number of shares of Common Stock which may be issued
on exercise of Stock Options shall not exceed 300,000 shares, subject to
adjustment in accordance with Paragraph 9 of the Plan. Shares issued under the
Plan may be, in whole or in part, as determined by the Committee, authorized but
unissued or treasury shares of Common Stock. If any Options granted under the
Plan shall expire or terminate without having been exercised, the shares subject
to such Options shall be added back to the number of shares of Common Stock
which may be issued on exercise of Stock Options.


23



5. ELIGIBILITY FOR PARTICIPATION
-----------------------------

(a) Consistent with Plan objectives, the following persons
shall be eligible to become Participants in the Plan: officers and other key
Employees and consultants and advisers to the Corporation or any Subsidiary
corporation, provided that members of the Board who are not Employees shall not
be eligible.

(b) The foregoing subparagraph (a) notwithstanding, Incentive
Stock Options shall be granted only to officers and other key Employees, and no
Incentive Stock Options shall be granted to an Employee who owns more than 10%
of the Common Stock determined in accordance with the provisions of Section
422(b)(6) of the Code, unless the Option meets the requirements of Section
422(c)(5) of the Code.

(c) Options shall be granted to consultants and advisers only
for bona fide services rendered other than in connection with the offer or sale
of securities.

6. STOCK OPTIONS - TERMS AND CONDITIONS
------------------------------------

All Stock Options granted under the Plan shall be evidenced by
Agreements which shall contain such provisions as shall be required by the Plan
together with such other provisions as the Committee may prescribe, including
the following provisions:

(a) Price: The Committee shall establish the Exercise Price,
provided, however, that in the case of an Incentive Stock Option the Exercise
Price shall not be less than the Fair Market Value of a share of Common Stock on
the date of the grant of the Option.

(b) Period: The Committee shall establish the term of any
Option awarded under the Plan, provided, however, that no Option shall be
exercisable after the expiration of 10 years from the date of the grant of the
Option.

(c) Time of Exercise: The Committee shall establish the time
or times at which an Option, or portion thereof, shall be exercisable. The
Committee, subsequent to the grant of an Option, may accelerate the date or
dates on which the Option may be exercisable.

(d) Exercise: An Option, or portion thereof, shall be
exercised by delivery or a written notice of exercise to the Corporation
together with payment of the full purchase price of the shares as to which the
Option is exercised ("Purchase Price"). Payment may be made:

(i) in United States dollars by good check, bank
draft or money order payable to the order of the
Corporation, or

(ii) at the discretion of the Committee by the
transfer to the Corporation of shares of Common Stock
owned by the Participant having an aggregate Fair Market Value on the date of
exercise equal to the Purchase Price or the portion thereof being so paid, or

(iii) at the discretion of the Committee and subject
to any restrictions or conditions as it deems
appropriate (including any restrictions as may be set forth in Rule 16b-3 under
the Securities Exchange Act of 1934), by electing to have the Corporation
withhold from the shares issuable upon exercise of the Option such number of
shares of Common Stock as shall have an aggregate Fair Market Value on the date
of exercise equal to the Purchase Price or the portion thereof being so paid, or

(iv) at the discretion of the Committee by a
combination of (i) and (ii) or (i) and (iii) above.

The Committee shall determine the procedures for the use of Common Stock in
payment of the Purchase Price and may impose such limitations and prohibitions
on such use as it deems appropriate.

(e) Special Rules for Incentive Stock Options: Notwithstanding
any other provisions of the Plan, with respect to Incentive Stock Options
granted under the Plan), the following provisions will apply:

(i) To the extent that the aggregate Fair Market
Value (determined at the time of grant) of the shares
of Common Stock with respect to which Incentive Stock Options (whether granted
hereunder or pursuant to any other plan of the Corporation or a Subsidiary) are
first exercisable by a Participant during any calendar year exceeds $100,000 (or
such other limit as may be in effect from time to time under the Code), such
Options shall be treated as Non-Qualified Options.


24


(ii) Any Participant who disposes of shares of Common
Stock acquired on the exercise of an Incentive
Stock Option by sale or exchange either (a) within two years after the date of
the grant of the Option under which such shares were acquired or (b) within one
year after the acquisition of such shares, shall notify the Corporation in
writing of such disposition and of the amount realized upon such disposition
promptly after the disposition.


7. TERMINATION OF EMPLOYMENT
-------------------------

If a Participant holding an Option shall cease to be employed
(or in the case of a Participant who is not an Employee, shall cease to be
engaged) by the Corporation or any Subsidiary corporation by reason of death or
any other reason other than voluntary quitting, discharge for cause or permanent
and total disability as defined in Section 22(e)(3) of the Code (hereinafter
called a "Disability"), as determined by the Committee, such Participant (or, if
applicable, such Participant's Beneficiary) may, but only within the three
months next succeeding such cessation of employment, exercise such Option to the
extent that such Participant would have been entitled to do so on the date of
such cessation of employments. If a Participant holding an Option voluntarily
quits or is discharged for cause, such Option shall terminate on the date of
cessation of employment.


8. DISABILITY
----------

If a Participant holding an Option shall cease to be employed
(or, in the case of a Participant who is not an Employee, shall cease to be
engaged) by the Corporation or any Subsidiary corporation by reason of a
Disability, the Option shall be exercisable by such Participant or such
Participant's duly appointed guardian or other legal representative, to the
extent that such Participant would have been entitled to do so on the date of
such cessation of employment, but only within one year following such cessation
of employment due to said Disability.


9. ADJUSTMENTS
-----------

In the event of a recapitalization, stock split, stock
combination, stock dividend, exchange of shares, or a change in the corporate
structure or shares of the Corporation, or similar event, the Board of Directors
upon recommendation of the Committee shall make appropriate adjustments in the
kind or number of shares which may be issued upon exercise of Options and in the
kind or number of shares issuable upon exercise of Options theretofore granted
and in the exercise price of such options.


25


10. MERGER, CONSOLIDATION OR SALE OF ASSETS
---------------------------------------

If the Corporation shall be a party to a merger or
consolidation or shall sell substantially all its assets, each outstanding
Option shall pertain and apply to the securities and/or property which a holder
of the number of shares of Common Stock subject to the Option immediately prior
to such merger, consolidation, or sale of assets would be entitled to receive in
such merger, consolidation or sale of assets.


11. AMENDMENT AND TERMINATION OF PLAN
---------------------------------

(a) The Board, without further approval of the stockholders,
may at any time, and from time to time, suspend or terminate the Plan in whole
or in part or amend it from time to time in such respects as the Board may deem
appropriate and in the best interests of the Corporation; provided, however,
that no such amendment shall be made, without approval of the stockholders,
which would:

(i) modify the eligibility requirements for
participation in the Plan;

(ii) increase the total number of shares of Common
Stock which may be issued pursuant to Stock Options,
except as is provided for in accordance with Paragraph 9 of the Plan; or

(iii) materially increase benefits accruing to
Participants.

(b) No amendment, suspension or termination of this Plan
shall, without the Participant's consent, alter or impair any of the rights or
obligations under any Stock Option theretofore granted to the Participant under
the Plan.

(c) The Board may amend the Plan, subject to the limitations
cited above, in such manner as it deems necessary to permit the granting of
Stock Options meeting the requirements of future amendments to the Code.


12. GOVERNMENT AND OTHER REGULATIONS
--------------------------------

The granting of Stock Options under the Plan and the
obligation of the Corporation to issue or transfer and deliver shares for Stock
Options exercised under the Plan shall be subject to all applicable laws,
regulations, rules and orders which shall then be in effect.


13. MISCELLANEOUS PROVISIONS
------------------------

(a) Rights to Continued Employment: No person shall have any
claim or right to be granted a Stock Option under the Plan, and the grant of an
Option under the Plan shall not be construed as giving any Participant the right
to be retained in the employ of the Corporation or any Subsidiary corporation
(or to be otherwise retained in the case of a Participant who is not an
Employee) and the Corporation expressly reserves the right at any time to
dismiss a Participant with or without cause, free of any liability or any claim
under the Plan, except as provided herein or in an Agreement.

(b) Who Shall Exercise: Except as provided by the Plan, an
Incentive Stock Option shall be exercisable during the lifetime of the
Participant to whom it is granted only by such Participant, and it may be
exercised only if such Participant has been in the continuous employ of the
Corporation or any Subsidiary corporation from the date of grant of the Option
to the date of its exercise.

(c) Non-Transferability: No right or interest of any
Participant in the Plan shall be assignable or transferable except by will or
the laws of descent and distribution, and no right or interest of any
Participant shall be liable for, or subject to, any lien, obligation or
liability of such Participant.

(d) Withholding Taxes: The Corporation may require a payment
to cover applicable withholding for income and employment taxes in connection
with a Stock Option.

(e) Rights as Stockholder: A Participant as such shall not
have any of the rights or privileges of a holder of Common Stock until such time
as shares of Common Stock are issued or are transferred to the Participant upon
exercise of an Option.


26


(f) Plan Expenses: Any expenses of administering this Plan
shall be borne by the Corporation.

(g) Legal Considerations: The Corporation shall not be
required to issue, transfer or deliver shares of Common Stock upon exercise of
Options until all applicable legal, listing or registration requirements, as
determined by legal counsel, have been satisfied, and any necessary or
appropriate written representations have been given by the Participant.

(h) Other Plans: Nothing contained herein shall prevent the
Corporation from establishing other incentive and benefit plans in which
Participants in the Plan may also participate.

(i) No Warranty of Tax Effect: Except as may be contained in
any Agreement, no opinion shall be deemed to be expressed or warranties made as
to the effect for federal, state or local tax purposes of any grants hereunder.

(j) Construction of Plan: The validity, construction,
interpretation, administration and effect of the Plan and of its rules and
regulations, and rights relating to the Plan, shall be determined in accordance
with the laws of the State of New York.

14. STOCKHOLDER APPROVAL - TERM OF PLAN
-----------------------------------

Upon approval by the stockholders of the Corporation, the Plan
shall become unconditionally effective as of December 4, 1992. No Option shall
be granted after December 3, 2002, provided, however, that the Plan and all
outstanding Options granted under the Plan prior to such date shall remain in
effect until the applicable Options have expired. If the stockholders shall not
approve the Plan, the Plan shall not be effective and any and all actions taken
prior thereto shall be null and void or shall, if necessary, be deemed to have
been fully rescinded.


27


Exhibit 10.5

RESTRICTED STOCK AGREEMENT
--------------------------

This Agreement is made as of the 19th day of December, 2002, by and
between Valpey-Fisher Corporation (the "Company") and Michael Ferrantino (the
"Employee").

WHEREAS, the Employee has become an employee of the Company;

WHEREAS, as an inducement to becoming an employee of the Company, the
Board of Directors of the Company has authorized the issuance of 100,000 shares
of Common Stock of the Company par value $.05 per share, (the "Common Stock") on
the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the foregoing, the mutual
promises hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Employee hereby agree as follows:

1. a) Promptly following receipt of the Purchase Price hereinafter set
forth the Company will cause to be issued to the Employee for a purchase price
of $.05 per share (the "Purchase Price"), 100,000 shares of Common Stock (the
"Restricted Stock").

b) The Employee hereby agrees to purchase the Restricted Stock and pay the
Purchase Price therefore promptly following execution hereof.

2. Restrictions on Transfer of Restricted Stock. Except as otherwise
provided pursuant to or in accordance with the terms and provisions of this
Agreement, the Restricted Stock shall be subject to the following restrictions
(the "Restrictions"); namely the Restricted Stock shall not be sold, exchanged,
assigned, transferred or permitted to be transferred, voluntarily,
involuntarily, or by operation of law, delivered, encumbered, discounted,
pledged, hypothecated, or otherwise disposed of for a period of 5 years (the
"Restricted Period") from October 23, 2002 (said October 23, 2002 herein
referred to as "the Effective Date") except in accordance with the following
provisions:

a) Except as otherwise provided herein, the Restrictions will terminate
with respect to 20% of the Restricted Stock, upon each anniversary of the
Effective Date, so that all such Restrictions shall terminate on the fifth
anniversary of the Effective Date. Upon the termination of the Restrictions with
respect to shares of Restricted Stock, whether through the passage of time or as
otherwise provided herein, the Employee shall be entitled to receive share
certificates with respect to such shares hereunder free of such Restrictions.

b) Five stock certificates, each for 20,000 shares of Common Stock, shall
be issued to and registered in the name of the Employee, shall bear the
restrictive legend referred to in Section 2(e) and such other legends as may be
appropriate, and shall be subject to appropriate stop-transfer orders; provided,
however, that such certificates shall be deposited with and held in escrow with
the Escrow Agent as provided in Section 4 until the Restrictions relating
thereto otherwise terminate, and the Employee shall deliver to such Escrow Agent
stock powers endorsed in blank relating to the Restricted Stock.

c) (i) To the extent the Restrictions have not otherwise terminated and the
Restricted Stock has not otherwise been forfeited, as provided in subsection (d)
of this Section 2, such Restrictions shall terminate (1) with respect to 20% of
the Restricted Stock, upon the death of the Employee after the first anniversary
of the Effective Date, (other than on an anniversary of the Effective Date, and
(2) entirely, upon a Change of Control of the Company.

(ii) For the purposes of this Agreement a Change in Control of the Company
shall occur:

(a) if any "Person", as such term is used in Section
13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (provided that the term "Person"
shall not include Theodore Valpey, Jr., the Company, any
trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any corporation owned,
directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock
in the Company), becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly


28


or indirectly, of securities of the Company representing 70% or more of the
combined voting power of the Company's then outstanding securities;

(b) the stockholders of the Company approve a merger
or consolidation of the Company with any other corporation;
other than (i) a merger or consolidation which would result in
the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) 30% or more of the combined voting power
of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or
consolidation or (ii) a merger or consolidation effected to
implement a re-capitalization of the Company (or similar
transaction) in which no "Person" (as hereinabove defined)
acquires 70% or more of the combined voting power of the
Company's then outstanding securities; or

(c) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all
of the Company's assets.

d) To the extent the Restrictions have not otherwise terminated, shares of
Restricted Stock shall be forfeited and returned to the Company upon cessation
of the Employee's employment with the Company.

e) During the Restricted Period certificates evidencing the Restricted
Stock shall bear the following additional legend:

"These shares are subject to forfeiture to Valpey-Fisher
Corporation (the "Company") in accordance with the terms of an
Agreement between the Company and the person in whose name the
certificate is registered. These shares may not be sold,
pledged, exchanged, transferred, hypothecated or otherwise
disposed of except in accordance with the terms of said
Agreement."

3. Investment Representation. The Employee agrees that he is acquiring the
shares subject to this Agreement for his own account and not with a view to
distribution thereof and that the shares of Restricted Stock acquired by the
Employee will not be sold except pursuant to an effective registration statement
under the Act or pursuant to an exemption from registration under the Act.

4. Deposit of Restricted Stock. (a) The Employee consents to the deposit
with the Treasurer of the Company or his successor, of the certificates
evidencing the Restricted Stock, together with stock powers or other instruments
of transfer required by the Company or its counsel appropriately endorsed in
blank by him. Such deposit shall remain in effect until the time the Company
reacquires the Restricted Stock under and pursuant to the terms and provisions
of this Agreement, or until said Restricted Stock shall be released from the
Restrictions under this Agreement.

(b) The Employee consents to the appointment of the Treasurer
of the Company, and his successor, as escrow agent (the "Escrow Agent") for said
certificates during the Restricted Period. If during such Restricted Period,
shares of Restricted Stock are forfeited in accordance with this Agreement, the
Employee hereby authorizes the Escrow Agent to cause such certificates for such
stock to be canceled on the stock record books of the Company. The Employee
agrees that the Escrow Agent is acting merely as a depository and shall have no
liability hereunder except as a depository to retain the shares of Restricted
Stock and to dispose of them in accordance with the terms of this Agreement. If
the Escrow Agent is notified of any adverse claim or demand by any persons, he
is hereby authorized to hold such certificates until the dispute shall have been
settled by the parties and notice submitted to him by persons so interested, or
until the rights of the parties have been fully adjudicated in a court of
competent jurisdiction. So long as the shares of Restricted Stock are held in
escrow, the Employee shall be entitled to all rights of a stockholder with
respect thereto, except as may be limited by the terms of this Agreement.

5. Lapse of Restrictions. Upon the termination of the Restrictions with
respect to shares pursuant to Section 2 as to which shares of Restricted Stock
have not before then been forfeited, the stock certificates for such Restricted
Stock and the related stock powers shall be delivered by the Escrow Agent to the
Employee, and such shares shall be free of all Restrictions and the legend
referred to in Section 2(e).

6. Withholding and Section 83(b) Election. (a) The Company shall withhold
all applicable taxes required by law upon any taxable event with respect to the
Restricted Stock; (b) Promptly following the issuance of the Restricted Stock,
Employee will execute and timely file an election pursuant to Section 83(b) of
the Internal Revenue Code of 1986 as amended, to include as ordinary income the
difference between the value of the Restricted Stock and the aggregate Purchase
Price, and concurrently deliver a copy of such election to the Company, and for
purposes of such election, will declare the value of the Restricted Stock to be
no less than $3.25 per share.


29


7. Distributions with Respect to Stock. Any cash dividends paid with
respect to shares of Restricted Stock shall be paid in cash to the Employee,
which payment shall be subject to any applicable withholding. Any shares of
stock received as a stock dividend, or as a result of stock splits,
recapitalizations, combinations, exchanges of shares, reorganizations, mergers,
consolidations or otherwise, directly or indirectly, with respect to shares of
Restricted Stock shall have the same status, be subject to this Agreement, and
shall bear the same legend as the shares of Restricted Stock and shall be
delivered to the Escrow Agent to be held under the same terms and conditions as
the Restricted Stock.

8. Rights of Stockholder. Subject to the terms and provisions of applicable
law and of this Agreement, the Employee shall have all rights of a stockholder
of the Company with respect to the Restricted Stock, including the right to vote
the Restricted Stock and to receive all dividends or other distributions paid or
made with respect thereto, subject to applicable withholding requirements.

9. No Right to Continued Employment. Nothing herein shall obligate the
Company or any affiliate or subsidiary to continue the Employee's employment for
any particular period.

10. Burden and Benefit. The terms and provisions of this Agreement shall be
binding upon, and shall inure to the benefit of, the Company, and its successors
and assigns and the Employee and his executors or administrators, heirs, and
personal and legal representatives.

11. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Maryland without regard to the conflict
of laws principles thereof.

12. Modifications. No change or modification of this Agreement shall be
valid unless it is in writing and signed by the parties hereto.

13. Entire Agreement. This Agreement, sets forth all of the promises,
agreements, conditions, understandings, warranties and representations, oral or
written, express or implied, between the parties hereto with respect to this
Agreement.

14. Genders. The use of any gender herein shall be deemed to include the
other gender and the use of the singular herein shall be deemed to include the
plural and vice versa, wherever appropriate.

15. Notices. Any and all notices required herein shall be addressed: (a) if
the Company, to the principal executive office of the Company; and (b) if to the
Employee, to his address as reflected in the stock records of the Company.

16. Invalid or Unenforceable Provisions. The invalidity or unenforceability
of any particular provision of this Agreement shall not affect the other
provisions hereof, and this Agreement shall be construed in all respects as if
the invalid or unenforceable provisions were omitted.

IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the day and year first above written.

VALPEY-FISHER CORPORATION


By: /s/ Ted Valpey, Jr.
--------------------

/s/ Michael Ferrantino
----------------------
MICHAEL FERRANTINO

Accepted and Agreed as
Escrow Agent hereunder:

/s/ Michael J. Kroll
- ---------------------
Michael J. Kroll, Treasurer


30


Exhibit 21

Subsidiaries of the Registrant
- ------------------------------

The following is a list of the Registrant's subsidiaries (all of which are 100%
owned):

State or Other Jurisdiction
of Incorporation
----------------
MATEC EFO Corp. Massachusetts
Matec International, Inc. Massachusetts
MEKontrol, Inc. Massachusetts
MTCI, Inc. Delaware
Old MAS, Inc. Delaware


31


Exhibit 23


Independent Certified Public Accountants' Consent

We consent to the incorporation by reference in Registration Statement
Nos. 333-94491, 033-77554 and 333-67726 of Valpey-Fisher Corporation (formerly
known as Matec Corporation) on Form S-8, of our report dated February 14, 2003
(except for the matters discussed in note 10, as to which the date is March 18,
2003), appearing in and incorporated by reference in this Annual Report on Form
10-K of Valpey-Fisher Corporation and Subsidiaries for the year ended December
31, 2002.



GRANT THORNTON LLP
Boston, Massachusetts
March 26, 2003


32


Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement Nos.
333-94491, 033-77554 and 333-67726 of Valpey-Fisher Corporation (formerly MATEC
Corporation) on Form S-8, of our reports dated February 15, 2002, appearing in
and incorporated by reference in this Annual Report on Form 10-K of
Valpey-Fisher Corporation for the year ended December 31, 2002.


DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 26, 2003



33





Exhibit 99.1

Certification Pursuant to 18 U.S.C Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002


In connection with the Annual Report of Valpey-Fisher Corporation (the Company)
on Form 10-K for the year ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, Michael J.
Ferrantino, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

Date: March 26, 2003 By /s/ Michael J. Ferrantino
----------------------------
Michael J. Ferrantino
President and Chief Executive Officer


34


Exhibit 99.2


Certification Pursuant to 18 U.S.C Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002


In connection with the Annual Report of Valpey-Fisher Corporation (the Company)
on Form 10-K for the year ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, Michael J. Kroll,
Vice President, Treasurer and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.


Date: March 26, 2003 By /s/ Michael J. Kroll
-----------------------
Michael J. Kroll
Vice President, Treasurer and Chief Financial Officer


35




Exhibit 13

Five Year Financial Summary

Years Ended December 31, 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------

(in thousands, except per share data)
Continuing operations:
- -----------------------------------------------------------------------------------------------------------------------------------

Net sales $ 7,294 $16,897 $26,408 $14,026 $12,062
- ----------------------------------------------------------------------- ------------ ------------ ------------ ---------------------
Gross profit (loss) (1,346) 2,287 7,861 3,332 2,672
- ----------------------------------------------------------------------- ------------ ------------ ------------ ---------------------
Earnings (loss) before income taxes (3,988) 4,294 5,019 226 192
- ----------------------------------------------------------------------- ------------ ------------ ------------ ---------- ---------
Income (taxes) benefit 1,198 (1,543) (1,950) (68) 13
- ----------------------------------------------------------------------- ------------ ------------ ------------ ---------- ---------
Earnings (loss) (2,790) 2,751 3,069 158 205
- ----------------------------------------------------------------------- ------------ ------------ ------------ ---------- ---------
Discontinued operations- net of income tax expense (benefit) (99) - (90) 809 680
- ----------------------------------------------------------------------- ------------ ------------ ------------ --------------------
Net earnings (loss) $ (2,889) $ 2,751 $ 2,979 $ 967 $ 885
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- -----

Basic earnings (loss) per share: (1)
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- -----
Continuing operations $ (.67) $ .66 $ .75 $ .04 $ .05
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- ------
Discontinued operations (.02) - (.02) .20 .17
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- -------
$ (.69) $ .66 $ .73 $ .24 $ .22
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- -------
Diluted earnings (loss) per share: (1)
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- ------
Continuing operations $ (.67) $ .64 $ .70 $ .04 $ .05
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- ------
Discontinued operations (.02) - (.02) .20 .17
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- ------
$ (.69) $ .64 $ .68 $ .24 $ .22
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- -------
Cash dividends per share (1) $ - $ - $ .13 $ - $ 1.17
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- -------
Total assets, end of year $15,151 $18,841 $19,654 $16,532 $16,502
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- ------
Long-term debt, end of year $ - $ 1,277 $ - $ - $1,993
- ----------------------------------------------------------------------- ------------ ------------ ------------ ------------- ------
(1) Amounts reflect the 3 for 2 stock split distributed on November 27, 2000.



1


Management's Discussion and Analysis

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. 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 - The Company performs on-going credit evaluations of
its customers and assesses the collectability of its 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 - The Company estimates the carrying value of its 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 - The Company has recorded deferred tax assets and liabilities
resulting from differing treatment of items for tax and financial statement
reporting purposes. The Company must estimate its 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, the
Company has recorded a valuation allowance of $631,000 at December 31, 2002. In
reaching our conclusion, we evaluated the existence of deferred tax liabilities
that can be used to absorb deferred tax assets, the deductibility of the
disposal of scrap and worthless inventory, 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, the Company may need to
establish an additional valuation allowance or reduce the valuation allowance,
which could materially impact our financial position and results of operations.

Financial Condition and Liquidity

Cash and cash equivalents amounted to $5,758,000 at December 31, 2002, a
decrease of $202,000 from the December 31, 2001 level.

Accounts receivable decreased $1,329,000 from the 2001 level mainly as a result
of a reduction in the days sales outstanding from 106 days in 2001 to 56 days in
2002. Refundable income taxes increased $1,093,000 over 2001 as a result of the
current year's loss which is being carried-back to offset prior years taxable
income. Inventory decreased $2,441,000 from the 2001 level mainly as a result of
orders being filled from existing inventory, a continuing control on inventory
purchasing and a $1,100,000 inventory provision for excess and obsolete
inventory as a result of lower sales volume. Accounts payable and accrued
liabilities decreased $341,000 mainly due to the lower business level.

Capital expenditures amounted to $255,000 in 2002. The Company expects capital
expenditures for 2003 to approximate the 2002 level.

During 2002, the Company received $187,000 in cash as the final proceeds from
the sales of a former subsidiary in 2000 and the related real estate in 2001and
recorded a total pre-tax gain of $187,000 on these sales.

The Company repaid $403,000 of its term debt during 2002.

During 2002, the Company purchased 45,400 shares of its common stock for
$134,000 and retired these shares. Under authorizations from the Board of
Directors, at December 31, 2002 the Company is authorized to purchase up to an
additional 55,800 shares of stock.


2


Management's Discussion and Analysis Continued

While the Company is projecting a loss in 2003 based on the current telecom
market conditions, the Company believes that, based on its current working
capital and the expected cash flows from operations, its resources are
sufficient to meet the financial needs and to fund the capital expenditures for
the projected levels of business in 2003.

Results of Operations - 2002 versus 2001

Net sales from continuing operations decreased $9,603,000 or 57% from 2001,
primarily due to the continued sharp drop in the demand for the Company's
products from the telecom market. The Company has experienced a drop-off in
market demand for its products beginning in the first quarter of 2001 and
continuing to date as customers have reported slower growth rates and excess
inventory levels. In addition, some customers requested order cancellations. As
a result of the continued decline in market demand, the Company began 2002 with
a backlog of $1.4 million versus a backlog of $16.4 million at the beginning of
2001. We believe that market conditions for our products, in particular the
telecom market, have not "bottomed out", and near-term visibility continues to
be poor. The telecom industry continues to operate at low levels of production
with customers not willing to commit to forecasts and long-term contracts.
Orders for the most part continue to be small with near-term delivery dates. The
Company's backlog at December 31, 2002 was $1.1 million.

During 2002, the Company reported a $1,346,000 gross loss on sales compared to a
gross profit of $2,287,000 in 2001. The main reasons causing the negative gross
profit on sales in 2002 were the adverse impact of allocating the fixed overhead
expenses over the lower sales volume and the $1.1 million provision for excess
inventory. During the current year, direct labor and raw material costs, as
percentages of sales, remained fairly equal to those in 2001.

Selling and advertising expenses decreased $910,000 (38%) from 2001 mainly due
to the lower sales commission expense to the Company's outside manufacturers'
representatives as a result of the decrease in sales and a reduction in
advertising and promotional expenses. General and administrative expenses
remained relatively level with 2001.

During 2002, the Company received $187,000 in cash as the final proceeds from
the sales of a former subsidiary in 2000 and the related real estate in 2001and
recorded a total pre-tax gain of $187,000 on these sales. Interest income
increased $40,000 over 2001 mainly due to the higher average cash balances in
the current year. Interest expense decreased $13,000 from 2001 mainly due to the
lower interest rate on the outstanding term-debt. During 2001, the Company sold
its investment in marketable equity securities and its ownership share of real
estate located in New Jersey and recorded a total pre-tax gain of $5,671,000 on
these sales.

The combined federal and state effective income tax rate for 2002 was 30%
compared to 36% in 2001. The combined tax benefit rate of 30% in 2002 was less
than the combined statutory rate of approximately 40%, mainly due to the Company
providing a valuation allowance for its deferred tax assets. The combined
federal and state tax rate of 36% in 2001 is lower than the statutory rate
mainly due to a lower effective state tax rate in 2001.

Based on the significant decreases in sales and gross profit in 2002, the
Company reported an operating loss of $4,201,000 in 2002 compared to an
operating loss of $1,458,000 in 2001. Nonoperating income amounted to $213,000
in 2002 versus $5,753,000 in 2001. As a result, the Company reported a pre-tax
loss from continuing operations of $3,988,000 in 2002 compared to pre-tax
earnings of $4,294,000 in 2001. The loss from continuing operations amounted to
$2,790,000 in 2002 versus earnings of $2,751,000 in 2001. Discontinued
operations net of income tax benefit reported a loss of $99,000 in 2002. In
total, the Company reported a net loss of $2,889,000 in 2002 compared to net
earnings of $2,751,000 in 2001.

Results of Operations - 2001 versus 2000

Net sales from continuing operations decreased $9,511,000 or 36% from 2000. The
main reason for the sales decrease from last year was the sharp drop in the
demand for the Company's products from the telecommunications, networking, and
wireless markets. The Company began to experience a drop-off in market demand
during the first quarter of 2001 as customers began reporting slower growth
rates and excess inventory levels. This drop-off in demand continued through the
end of 2001. In addition, some customers requested order cancellations and
push-out of deliveries. As a result of this continued market weakness, the
Company's backlog at December 31, 2001 was $1.4 million compared to $16.4
million at December 31, 2000.

The gross profit percentage decreased to 14% in 2001 from 30% in 2000. The
decrease in the margin percentage for 2001 was mainly due to an additional $1.7
million inventory provision for excess inventory and the negative impact of
allocating the fixed overhead expenses over the lower sales level. Direct labor
costs increased about 1.3% points over 2000 and material costs decreased about
2% points from 2001 mainly as a result of changes in sales mix.


3


Management's Discussion and Analysis Continued

Selling and advertising expenses decreased $626,000 (21%) from 2000 mainly due
to lower sales commission expense to both the Company's employees and outside
manufacturers' representatives as a result of the decrease in sales.

General and administrative expenses decreased $267,000 (16%) from 2000. The
reduction in the provision for the management incentive bonus offset in part by
increased personnel expenses was the primary reason for the lower expense.

During 2001, the Company sold its investment in marketable equity securities and
its ownership share of real estate located in New Jersey and recorded a total
pre-tax gain of $5,671,000 on these sales. Interest income decreased $62,000
from 2000 due to a combination of both lower average cash balance and lower
interest rates in 2001. Interest expense increased $85,000 from 2000 due to
increased levels of debt outstanding during 2001.

The effective income tax rate for 2001 was 36% compared to 39% in 2000. The
lower rate in 2001 was primarily due to a lower effective state tax rate in the
current year.

Based on the significant decreases in sales and gross profit in 2001, the
Company reported an operating loss of $1,458,000 in 2001 compared to an
operating profit of $3,222,000 in 2000. Nonoperating income amounted to
$5,753,000 in 2001 versus $1,796,000 in 2000. As a result, the Company reported
pre-tax earnings from continuing operations of $4,294,000 in 2001 compared to
$5,019,000 in 2000. Earnings from continuing operations amounted to $2,751,000
in 2001 versus $3,069,000 in 2000. Discontinued operations reported a loss of
$90,000 in 2000. In total, the Company reported net earnings of $2,751,000 in
2001 compared to $2,979,000 in 2000.

Quantitative and Qualitative Disclosures about Market Risk

The Company's 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, 2002, and assuming the balance was totally invested in money market
instruments for the full year, a hypothetical 1% point decline in interest rates
would result in an approximate $57,600 decrease in interest income.

The Company purchases certain inventory from and sells 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 the Company purchases inventory or sells
product could make the U.S. dollar equivalent of such transactions more or less
favorable to the Company and the other involved parties.

Forward-Looking Statements

This Annual Report, including Management's Discussion and Analysis, the Letter
to Stockholders and Operations, contain 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 the
Company's current views and assumptions and involve risks and uncertainties that
include, but not limited to: the ability to develop, market and manufacture new
innovative products competitively, the fluctuations in product demand of the
telecommunications industry, the ability of the Company and its suppliers to
produce and deliver materials and products competitively, and the ability to
limit the amount of the negative effect on operating results caused by pricing
pressure.

Recent accounting pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations", effective for years beginning after June 15, 2002. SFAS
No. 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The Company is currently evaluating the effect of this
Statements, however, the adoption of this SFAS is not expected to have a
material effect on the Company's financial position, results of operations and
cash flows.

The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", for the year beginning January 1, 2002. SFAS No. 144
addresses financial accounting and reporting for the impairment of long-lived
assets and for long- lived assets to be disposed of. The adoption of this
standard had no material effect on the Company's results of operations or
financial position.


4


Management's Discussion and Analysis Continued

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
With Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance, is
effective for exit activities initiated after December 31, 2002, and requires
that the liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. SFAS No. 146 also establishes that
the liability should initially be measured and recorded at fair value. Previous
accounting guidance recognized a liability for an exit at the date of a
commitment to an exit plan. Accordingly, SFAS No. 146 may affect the timing of
recognizing future restructuring costs as well as the amounts recognized by the
Company.

In November 2002, the FASB issued interpretation No. (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The interpretation expands on the
accounting guidance of SFAS Nos. 5, 57, and 107 and incorporates without change
the provisions of FASB FIN 34, which is being superseded. FIN 45 elaborates on
the existing disclosure requirements for most guarantees, including loan
guarantees, such as standby letter of credit. It also clarifies that at the time
a company issues a guarantee, the company must recognize an initial liability
for the fair value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. FIN 45 is effective on a prospective basis to guarantees issued or
modified after December 31, 2002, regardless of the guarantor's fiscal year-end.
The disclosure requirements are effective for interim or annual periods ending
after December 15, 2002. The Company is currently evaluating the impact of this
interpretation to the consolidated financial statements as of December 31, 2002
and will continue to evaluate the potential impact of this interpretation on a
prospective basis

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities". Many variable interest entities have commonly been referred to as
special-purpose entities or off-balance sheet structures. Under the
interpretation, certain entities known as "Variable Interest Entities" (VIE)
must be consolidated by the primary beneficiary of an entity. The primary
beneficiary is generally defined as having the majority of the risks and rewards
arising from the VIE. For VIE's in which a significant (but not majority)
variable interest is held, certain disclosures are required. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. At December 31, 2002, the Company is not aware of any
formed entity that could qualify the Company as primary beneficiary.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of SFAS No. 123," which
is effective for financial statements for fiscal years ending after December 15,
2002. SFAS 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based compensation. This
Statement also amends the disclosure requirements of SFAS No. 123. The Company
will continue to account for stock-based compensation of employees using
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and will continue to apply the disclosure only provisions of both
SFAS Nos. 123 and 148.


5





Consolidated Balance Sheets

December 31, 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
- ------------------------------------------------------------------------------------------------- ----------------

Cash and cash equivalents $5,758,055 $5,959,755
- ------------------------------------------------------------------------------------------------- ----------------
Receivables, net 2,175,369 2,307,353
- ------------------------------------------------------------------------------------------------- ----------------
Inventories 2,027,886 4,469,315
- ------------------------------------------------------------------------------------------------- ----------------
Deferred income taxes and other current assets 1,109,408 1,468,446
- ------------------------------------------------------------------------------------------------- ----------------
Total current assets 11,070,718 14,204,869
- ------------------------------------------------------------------------------------------------- ----------------
Property, plant and equipment, at cost:
- ------------------------------------------------------------------------------------------------- ----------------
Land and improvements 255,205 242,546
- ------------------------------------------------------------------------------------------------- ----------------
Buildings and improvements 1,996,354 1,996,354
- ------------------------------------------------------------------------------------------------- ----------------
Machinery and equipment 7,913,557 7,671,229
- ------------------------------------------------------------------------------------------------- ----------------
10,165,116 9,910,129
- ------------------------------------------------------------------------------------------------- ----------------
Less accumulated depreciation 6,231,296 5,382,954
- ------------------------------------------------------------------------------------------------- ----------------
3,933,820 4,527,175
- ------------------------------------------------------------------------------------------------- ----------------
Other assets 146,029 108,854
- ------------------------------------------------------------------------------------------------- ----------------
$15,150,567 $18,840,898
- ------------------------------------------------------------------------------------------------- ----------------


Liabilities and Stockholders' Equity
Current liabilities:
- ------------------------------------------------------------------------------------------------- ----------------
Current portion of long-term debt $1,277,402 $ 403,390
- ------------------------------------------------------------------------------------------------- ----------------
Accounts payable 269,375 475,405
- ------------------------------------------------------------------------------------------------- ----------------
Accrued liabilities 700,915 835,640
- ------------------------------------------------------------------------------------------------- ----------------
Income taxes 117,016 120,992
- ------------------------------------------------------------------------------------------------- ----------------
Total current liabilities 2,364,708 1,835,427
- ------------------------------------------------------------------------------------------------- ----------------
Deferred income taxes 704,145 754,045
- ------------------------------------------------------------------------------------------------- ----------------
Long-term debt - 1,277,401
- ------------------------------------------------------------------------------------------------- ----------------
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: 4,207,115 and 4,152,515 shares 210,356 207,626
- ------------------------------------------------------------------------------------------------- ----------------
Capital surplus 5,079,416 4,810,220
- ------------------------------------------------------------------------------------------------- ----------------
Retained earnings 7,067,442 9,956,179
- ------------------------------------------------------------------------------------------------- ----------------
Less unearned compensation (275,500) -
- ------------------------------------------------------------------------------------------------- ----------------
Total stockholders' equity 12,081,714 14,974,025
- ------------------------------------------------------------------------------------------------- ----------------
$15,150,567 $18,840,898
- ------------------------------------------------------------------------------------------------- ----------------

See notes to consolidated financial statements.



6









Consolidated Statements of Operations

For the Years Ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------- ------------------ ------------------ --------------


Net sales $ 7,294,214 $16,897,138 $26,407,735
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Cost of sales 8,640,336 14,609,911 18,547,183
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Gross profit (loss) (1,346,122) 2,287,227 7,860,552
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Selling and advertising expenses 1,456,295 2,365,802 2,991,528
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
General and administrative expenses 1,398,775 1,379,880 1,646,587
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
2,855,070 3,745,682 4,638,115
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Operating profit (loss) (4,201,192) (1,458,455) 3,222,437
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Other income (expense):
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Gains on sales of marketable equity securities and assets 187,406 5,670,873 1,511,384
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Interest income 107,571 67,760 130,151
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Interest expense (81,522) (94,511) (9,890)
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Other, net - 108,681 164,820
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
213,455 5,752,803 1,796,465
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Earnings (loss) from continuing operations before income taxes (3,987,737) 4,294,348 5,018,902
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Income tax benefit (expense) 1,198,000 (1,543,000) (1,950,000)
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Earnings (loss) from continuing operations (2,789,737) 2,751,348 3,068,902
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
(Loss) from discontinued operations (99,000) - (90,000)
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Net earnings (loss) $(2,888,737) $ 2,751,348 $ 2,978,902
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------

Basic earnings (loss) per share:
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Continuing operations $ (.67) $ .66 $ .75
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Discontinued operations (.02) .00 (.02)
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
$ (.69) $ .66 $ .73
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------

Diluted earnings (loss) per share:
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Continuing operations $ (.67) $ .64 $ .70
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
Discontinued operations (.02) .00 (.02)
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------
$ (.69) $ .64 $ .68
- ---------------------------------------------------------------------------- ------------------ ------------------ -----------------

See notes to consolidated financial statements.



7





Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------
For the Years Ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------

Cash Flows from Operating Activities:
- --------------------------------------------------------------------------

Earnings (loss) from continuing operations $(2,789,737) $ 2,751,348 $ 3,068,902
- --------------------------------------------------------------------------
Adjustments to reconcile earnings from continuing operations to net cash
provided (used) by operating activities:
- --------------------------------------------------------------------------
Depreciation and amortization 862,842 700,915 610,411
- --------------------------------------------------------------------------
Changes in deferred income taxes 254,516 (491,000) (75,000)

Gains on sales of marketable equity securities and assets (187,406) (5,670,873) (1,511,384)
- --------------------------------------------------------------------------

Tax benefit of restricted stock grant 110,900 - -
- --------------------------------------------------------------------------
Other - - 2,280

- --------------------------------------------------------------------------
Changes in assets and liabilities:

Receivables, net 1,054,145 2,340,924 (1,429,878)
- --------------------------------------------------------------------------

Inventories 2,441,429 1,943,958 (3,159,863)
- --------------------------------------------------------------------------
Other current assets 54,622 (71,313) (10,335)
- --------------------------------------------------------------------------
Accounts payable and accrued liabilities (340,755) (2,942,710) 1,762,600

Income taxes, net (1,096,976) (137,065) (204,957)
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------
Net cash provided (used) by operating activities 363,580 (1,575,816) (947,224)
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------

Cash Flows from Investing Activities:
- --------------------------------------------------------------------------
Capital expenditures (254,987) (2,176,310) (1,275,764)

Collection of notes receivable 141,729 228,498 159,553
- --------------------------------------------------------------------------

Proceeds from sales of assets 187,406 6,134,257 1,909,308
- --------------------------------------------------------------------------
Other, net (8,065) (8,065) (8,065)
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------
Net cash provided by investing activities 66,083 4,178,380 785,032
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------
Cash Flows from Financing Activities:
- --------------------------------------------------------------------------
Proceeds from long-term debt - 2,000,000 -
- --------------------------------------------------------------------------
Payments on long-term debt (403,389) (319,209) (745,000)
- --------------------------------------------------------------------------
Purchases of common stock (133,974) (31,602) -
- --------------------------------------------------------------------------
Dividends paid - - (547,830)
- --------------------------------------------------------------------------
Stock options exercised and other 5,000 81,376 53,967
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------
Net cash provided (used) by financing activities (532,363) 1,730,565 (1,238,863)
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------
Cash (Used) by Discontinued Operations (99,000) - (90,000)
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents (201,700) 4,333,129 (1,491,055)
- --------------------------------------------------------------------------
Cash and Cash Equivalents at beginning of year 5,959,755 1,626,626 3,117,681
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------
Cash and Cash Equivalents at end of year $5,758,055 $5,959,755 $1,626,626
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------
Supplemental Disclosures of Cash Flow Information Cash paid during the year by
continuing operations for:
- --------------------------------------------------------------------------
Interest $ 81,522 $ 94,511 $ 9,980
- --------------------------------------------------------------------------
Income taxes $ - $ 2,281,262 $2,423,941
- -------------------------------------------------------------------------- ----------------- ---------------- ----------------


Noncash Investing and Financing Activities:

In 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.
Unearned compensation, which is shown as a separate component of stockholders'
equity, is being amortized over the five-year vesting period.

In connection with the sale of certain assets of a product line in 2000, the
Company recorded a receivable of $295,000. During 2000, the Company issued
127,500 common shares upon the conversion of the lender's warrants as payment
for $255,000 of debt. (See Note 10)


See notes to consolidated financial statements.


8






Consolidated Statements of Stockholders' Equity

- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ --------------
Accumulated
Other
Common Stock Capital Retained Unearned Comprehensive
Shares Amount Surplus Earnings Compensation Income (Loss)
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ --------------

Balance, January 1, 2000 3,975,169 $198,758 $ 4,460,347 $ 4,773,759 $ - $ 1,744,433

- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ --------------
Net earnings - - - 2,978,902 - -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ --------------
Cash dividend paid ($.13 per share) - - - (547,830) - -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ --------------
Exercise of stock options 28,346 1,417 52,550 - - -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ --------------
Conversion of debt 127,500 6,375 248,625 - - -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ --------------
Unrealized (loss) on marketable
equity securities - - - - - (58,037)
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Balance, December 31, 2000 4,131,015 206,550 4,761,522 7,204,831 - 1,686,396
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Net earnings - - - 2,751,348 -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Exercise of stock options 31,500 1,576 79,800 - - -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Purchases and retirement of
common stock (10,000) (500) (31,102) - - -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Reclassification adjustment for
realized gain included in net earnings - - - - -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Balance, December 31, 2001 4,152,515 207,626 4,810,220 9,956,179 - -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Net (loss) - - - (2,888,737) -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Issuance of restricted stock 100,000 5,000 290,000 - (290,000) -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Purchases and retirement of
common stock (45,400) (2,270) (131,704) - - -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Amortization of restricted stock grant - - - - 14,500 -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Tax benefit of restricted stock grant - - 110,900 - - -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------
Balance, December 31, 2002 4,207,115 $210,356 $5,079,416 $7,067,442 $(275,500) $ -
- ----------------------------------------- ------------- ----------- -------------- -------------- ------------------ ---------------

See notes to consolidated financial statements.





Consolidated Statements of Comprehensive Income (Loss)

For the Years Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------- ----------------------- -------------- ----------------


Net earnings (loss) $(2,888,737) $ 2,751,348 $2,978,902
- ------------------------------------------------------------------------------------- ------------------ ----------------- --------
Other comprehensive income (loss), before tax:
- ------------------------------------------------------------------------------------- ------------------ ----------------- --------
Less reclassification adjustment for realized gain included in net
earnings, net of income tax expense of $575,000 - (1,686,396) -
- ------------------------------------------------------------------------------------- ------------------ ----------------- --------
Unrealized (loss) on marketable equity securities, net of
income tax benefit of $39,000 - - (58,037)
- ------------------------------------------------------------------------------------- ------------------ ----------------- --------
Other comprehensive (loss), net of tax - (1,686,396) (58,037)
- ------------------------------------------------------------------------------------- ------------------ ----------------- --------
Comprehensive income (loss) $(2,888,737) $ 1,064,952 $2,920,865
- ------------------------------------------------------------------------------------- ------------------ ----------------- --------

See notes to consolidated financial statements.



9




Notes to Consolidated Financial Statements

(1) Description of Business -- The Company 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. 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, and deferred income taxes.
Fair value of financial instruments - The carrying amounts of cash, cash
equivalents, accounts payable and accrued expenses approximate fair value
because of their short-term nature. The carrying amounts of the Company's debt
instruments approximate fair value.
Cash equivalents - The Company considers all highly liquid 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. The Company reduces its exposure to credit risk by maintaining
such deposits with high quality financial institutions. At December 31, 2002,
the majority of the Company's cash and cash equivalents balance were in excess
of the applicable insurance limits.
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 and amortization of property, plant and equipment
for financial reporting purposes and accelerated methods for tax purposes. The
estimated lives used to compute depreciation and amortization are as follows:
land improvements - 10 years, building and improvements - 15 to 40 years and
machinery and equipment - 3 to 10 years.
Revenue recognition - Revenue is recognized when an agreement of sale
exists, product delivery has occurred, pricing is fixed or determinable, and
collection is reasonably assured.
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. Tax benefits
associated with restricted stock grants are recorded to capital surplus in the
year the tax benefits are realized.
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) adjusted for the after-tax interest expense reduction that would
arise from the assumed conversion of the warrants, if dilutive, by the diluted
weighted average shares outstanding. Diluted weighted average shares includes
the weighted average number of common shares outstanding, 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 and the weighted average number of shares issued upon the conversion of
the warrants, if dilutive.
Stock compensation plans - The Company applies 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.
The Company provides the disclosure requirements of Statement of Financial
Accounting Standards (SFAS) Nos. 123 and 148, "Accounting for Stock-Based
Compensation," and related interpretations and amendments.

The Company adopted the disclosure-only option under SFAS No.123 "Accounting
for Stock-Based Compensation." The following table illustrates the effect on net
earnings (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No.123 to stock-based compensation.


10



Notes Continued


For the Year Ended December 31,
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------
2002 2001 2000
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------

Net earnings (loss), as reported $ (2,888,737) $ 2,751,348 $ 2,978,902
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------
Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all awards,
net of related tax effects (123,442) (72,518) (95,263)
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------
Pro forma net earnings (loss) $(3,012,179) $ 2,678,830 $ 2,883,639
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------
Basic net earnings (loss) per share, as reported $ (.69) $ .66 $ .73
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------
Basic net earnings (loss) per share, pro forma $ (.72) $ .65 $ .70
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------
Diluted net earnings (loss) per share, as reported $ (.69) $ .64 $ .68
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------
Diluted net earnings (loss) per share, pro forma $ (.72) $ .63 $ .66
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------



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 year ending
December 31, 2002, the Company had no items of other comprehensive income
(loss). For the years ending December 31, 2001 and 2000, the only component of
other comprehensive income (loss) for the Company was unrealized holding gains
(losses) on available for sale marketable equity securities.

Recent accounting pronouncements - In August 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", effective for years beginning after June 15, 2002. SFAS
No. 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The Company is currently evaluating the effect of this
Statements, however, the adoption of this SFAS is not expected to have a
material effect on the Company's financial position, results of operations and
cash flows.
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", for the year beginning January 1, 2002. SFAS No.
144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long- lived assets to be disposed of. The adoption of
this standard had no material effect on the Company's results of operations or
financial position.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, is effective for exit activities initiated after December 31, 2002,
and requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Previous accounting guidance recognized a liability for an exit cost at
the date of a commitment to an exit plan. Accordingly, SFAS No. 146 may affect
the timing of recognizing future restructuring costs as well as the amounts
recognized by the Company.

In November 2002, the FASB issued interpretation No. (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The interpretation expands on the
accounting guidance of SFAS Nos. 5, 57, and 107 and incorporates without change
the provisions of FASB FIN 34, which is being superseded. FIN 45 elaborates on
the existing disclosure requirements for most guarantees, including loan
guarantees, such as standby letter of credit. It also clarifies that at the time
a company issues a guarantee, the company must recognize an initial liability
for the fair value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. FIN 45 is effective on a prospective basis to guarantees issued or
modified after December 31, 2002, regardless of the guarantor's fiscal year-end.
The disclosure requirements are effective for interim or annual periods ending
after December 15, 2002. The Company is currently evaluating the impact of this
interpretation to the consolidated financial statements as of December 31, 2002
and will continue to evaluate the potential impact of this interpretation on a
prospective basis.


11



Notes Continued

In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities". Many variable interest entities have commonly been referred
to as special-purpose entities or off-balance sheet structures. Under the
interpretation, certain entities known as "Variable Interest Entities" (VIE)
must be consolidated by the primary beneficiary of an entity. The primary
beneficiary is generally defined as having the majority of the risks and rewards
arising from the VIE. For VIE's in which a significant (but not majority)
variable interest is held, certain disclosures are required. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. As at December 31, 2002, the Company is not aware of any
formed entity that could qualify the Company as primary beneficiary.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of SFAS No. 123," which
is effective for financial statements for fiscal years ending after December 15,
2002. SFAS 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based compensation. This
Statement also amends the disclosure requirements of SFAS No. 123. The Company
will continue to account for stock-based compensation of employees using
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and will continue to apply the disclosure only provisions of both
SFAS Nos. 123 and 148.

(3) Gains on Sales of Marketable Equity Securities and Assets:
As part of the proceeds from the sale of its Bergen Cable Technologies,
Inc. subsidiary, (BCT") in 1998 (see Note 4), the Company received a 10% stock
and membership interest in the acquiring entities, Bergen Cable Technology, Inc.
("BCTI") and Bergen Real Estate L.L.C. ("BRE"). In the second quarter of 2001,
the real estate owned by BRE was sold and the Company received $182,700 in cash
after estimated expenses for its ownership share in this company and recorded a
pre-tax gain of $151,700 on the sale.
In the fourth quarter of 2002, the Company received $32,400 in cash as its
ownership share of the note receivable related to the sale and recorded a
pre-tax gain of $32,400 on the sale. The Company had deferred any gain on its
share of the note receivable pending collection of the note.

In 2002, the Company received $155,000 in cash representing its share of
the net escrow balance from the sale of its common stock investment in BCTI in
2000 and reported this amount as a gain on the sale of assets. In the first
quarter of 2000, the Company sold its common stock investment in BCTI received
$1,319,000 in cash after estimated expenses and recorded a pre-tax gain of
$1,226,000 on the sale. This gain did not include the Company's share of the
sale escrow balance, less any claims for indemnity thereon, if any.

In 2001, the Company sold its investment in marketable equity securities
which consisted of 517,527 shares of MetroWest Bank common stock for $5,951,600
in cash. The Company recorded a pre-tax gain of $5,519,200 on the sale. The
Company had valued these securities under SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" and had classified these securities
as "available for sale". At December 31, 2000, this investment had a fair market
value (based on quoted market prices) of $2,975,780 and the net unrealized gain
included in "Accumulated Other Comprehensive Income" amounted to $1,686,400.

In 2000, the Company sold its real estate complex located in Northborough,
Massachusetts for $550,000 in cash and recorded a pre-tax gain of $272,000 on
the sale.

In 2000, the Company sold certain assets of its piezoelectric and optical
components product line. Sales proceeds consisted of approximately $40,000 in
cash, a secured promissory note in the principal amount of $210,000 bearing
interest at prime rate and a $103,000 noninterest bearing receivable discounted
to $85,000 based on an imputed interest rate of 9.5%. The Company recorded a
pre-tax gain of $13,000 on this sale. Sales from this product line amounted to
approximately $987,000 in 2000.

(4) Discontinued Operations:
In 1998, the Company sold all the assets of BCT (see Note 3). As a result of
this sale, the Company was required to perform environmental cleanup at the BCT
site. During 2002, the Company expensed $150,000 to increase the environmental
expense accrual to reflect the revised estimate to complete the remediation.
This after-tax expense of $99,000 is presented in the Consolidated Statements of
Operations under the caption "(Loss) from discontinued operations". As of
December 31, 2002, a total of $950,000 has been expensed for the cleanup and
$125,000 (see Note 9) is accrued for future payments. These costs represent the
Company's best estimate, but the ultimate costs will not be known until the
remediation is complete.


12




Notes Continued




(5) Receivables, net: Receivables, net of allowances, consist of the following:
2002 2001
- ---------------------------------------------------------------------------------------- ---------------- ----------------

Accounts receivable, less allowance for doubtful accounts of $200,000 and $396,000 $ 776,369 $1,909,324
- ---------------------------------------------------------------------------------------- ---------------- ----------------
Refundable income taxes 1,375,000 282,000
- ---------------------------------------------------------------------------------------- ---------------- ----------------
Amounts due from the sales of discontinued operations and assets 24,000 116,029

- ---------------------------------------------------------------------------------------- ---------------- ----------------
$2,175,369 $2,307,353


(6) Inventories, net: Inventories, net of reserves, consist of the following: 2002 2001
- ---------------------------------------------------------------------------------------- ---------------- ----------------
Raw materials $1,560,364 $3,572,844
- ---------------------------------------------------------------------------------------- ---------------- ----------------
Work in process 152,932 306,087
- ---------------------------------------------------------------------------------------- ---------------- ----------------
Finished 314,590 590,384
goods
- ---------------------------------------------------------------------------------------- ---------------- ----------------
$2,027,886 $4,469,315
- ------------------------------------------------------------------------------------------------------ ----------------





(7) Income Taxes: The components of the provision (benefit) for income taxes are
as follows:
2002 2001 2000
- ------------------------------------------------------------------------------------- ------------------ ----------------------
Current:
- ------------------------------------------------------------------------------------- ------------------ ----------------------

Federal (excluding $(51,000) and $60,000 income tax (benefit) expense from
discontinued operations in 2002 and 2000, respectively) $ (1,324,000) $ 1,726,000 1,607,000
- ------------------------------------------------------------------------------------- ------------------ --------------------------
State (246,000) 308,000 418,000
- ------------------------------------------------------------------------------------- ------------------ --------------------------
(1,570,000) 2,034,000 2,025,000
- ------------------------------------------------------------------------------------- ------------------ --------------------------
Deferred:
- ------------------------------------------------------------------------------------- ------------------ --------------------------
Federal (31,000) (388,000) (70,000)
- ------------------------------------------------------------------------------------- ------------------ --------------------------
State (228,000) (103,000) (5,000)
- ------------------------------------------------------------------------------------- ------------------ --------------------------
(259,000) (491,000) (75,000)
- ------------------------------------------------------------------------------------- ------------------ --------------------------

Valuation allowance 631,000 - -
- ------------------------------------------------------------------------------------- ------------------ -------------- -----------
Total (1,198,000) $1,543,000 $ 1,950,000
- ------------------------------------------------------------------------------------- ------------------ -------------- -----------

The total income tax provision (benefit) differs from that computed by
applying the federal income tax rate to income before income taxes. The reasons
for the difference are as follows:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Income taxes at statutory rates $(1,355,800) $1,460,100 $1,706,400
- -----------------------------------------------------------------------------------------------------------------------------------
State income tax, net of federal tax benefit (241,400) 135,300 272,600
- -----------------------------------------------------------------------------------------------------------------------------------
Change in valuation allowance 631,000 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Reversal of accruals (235,000) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Other, net including dividend exclusion 3,200 (52,400) (29,000)
- -----------------------------------------------------------------------------------------------------------------------------------
$(1,198,000) $1,543,000 $1,950,000
- -----------------------------------------------------------------------------------------------------------------------------------



13

Notes Continued

The tax effects of significant items comprising the Company's deferred tax
assets and liabilities as of December 31, 2002 and 2001 are as follows:



2002 2001
- ------------------------------------------------------------------------------------- -------------- ---------------
Deferred tax assets:
- ------------------------------------------------------------------------------------- -------------- ---------------

Inventory valuation $1,305,700 $1,090,500
- ------------------------------------------------------------------------------------- -------------- ---------------
Accruals and allowances 123,300 258,400
- ------------------------------------------------------------------------------------- -------------- ---------------
State tax carryforward 246,000 -
- ------------------------------------------------------------------------------------- -------------- ---------------
Valuation allowance (631,000) -
- ------------------------------------------------------------------------------------- -------------- ---------------
Net deferred tax assets 1,044,000 1,348,900
- ------------------------------------------------------------------------------------- -------------- ---------------
Deferred tax liabilities:
- ------------------------------------------------------------------------------------- -------------- ---------------
Depreciation 383,300 379,400
- ------------------------------------------------------------------------------------- -------------- ---------------
DISC commissions 321,100 374,600
- ------------------------------------------------------------------------------------- -------------- ---------------
Total deferred tax liabilities 704,400 754,000
- ------------------------------------------------------------------------------------- -------------- ---------------
Net deferred tax assets $ 339,600 $ 594,900


At December 31, 2002, the Company has a state tax loss benefit carryforward
of $246,000 that expires 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 $631,000 at December 31, 2002. Other
current assets include deferred income taxes of approximately $1,044,000 in 2002
and $1,349,000 in 2001.

(8) 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 expenses amounted to $ 0 in
2002 and 2001 and $186,000 in 2000. 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 $58,000 in 2002, $58,000 in
2001 and $79,000 in 2000.



(9) Accrued Liabilities: Accrued liabilities consist of the following items: 2002 2001
- ----------------------------------------------------------------------------------------- --------------- ---------------

Employee compensation $ 215,900 $ 199,200
- ----------------------------------------------------------------------------------------- --------------- ---------------
Environmental costs 125,000 38,000
- ----------------------------------------------------------------------------------------- --------------- ---------------
Other 360,015 598,440
- ----------------------------------------------------------------------------------------- --------------- ---------------
$ 700,915 $ 835,640
- ----------------------------------------------------------------------------------------- --------------- ---------------


(10) Borrowing Arrangements: On February 27, 2001, the Company entered into a
bank credit arrangement which includes an unsecured $2 million 5 year term
promissory note and an unsecured $1.25 million revolving line of credit. The
interest rate on the term note is at prime (4.25% at December 31, 2002) with a
maximum rate of 6.62% and borrowings under the line of credit bear interest at
LIBOR plus either 1.4% or 1.5% based on the option term chosen by the Company.
There are no compensating balance or commitment fees under the arrangement. The
credit arrangement includes certain typical financial covenants, including among
other things, a minimum tangible net worth, an interest coverage ratio, and a
limit on the total amount of capital stock repurchases. At December 31, 2002,
the Company was not in compliance with the minimum tangible net worth, the
interest coverage ratio and the limit on the amount of capital stock repurchases
during 2002. On March 18, 2003, the Company paid off the outstanding term-debt
balance and the above borrowing arrangements terminated. As a result, the total
outstanding amount of the term debt has been classified as current portion of
long-term debt. The Company had no borrowings outstanding under the line of
credit at December 31, 2002.


14




Notes Continued

In January 2000, the Company paid $745,000 in cash and issued 127,500
shares of common stock as payment in full for the $1 million remaining portion
of a 10% $2 million Term Debt Note due on June 30, 2000. In this transaction,
the Company issued the lender transferable common stock warrants to purchase
127,500 shares of the Company's common stock at $3.17 per share less certain
adjustments.

(11) Stockholders' Equity: The Company has 4,207,115 and 4,152,515 shares of its
$.05 par value Common Stock outstanding at December 31, 2002 and 2001,
respectively. During 2002, the Company acquired 45,400 shares of common stock at
a cost of $134,000 and retired the shares. During 2001, the Company acquired
10,000 shares of common stock at a cost of $31,600 and retired the shares.

Under prior authorizations from the Board of Directors, the Company is
authorized to purchase up to an additional 55,800 shares of stock through the
open market or negotiated transactions.

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. Unearned compensation, which is shown as a separate
component of stockholders' equity, is being amortized over the five year vesting
period. The amount amortized to expense in 2002 was $14,500. The tax effect of
the difference between compensation expense for financial statement and income
tax purposes is credited to capital surplus.

The Valpey-Fisher Corporation 2001, 1999 and 1992 Stock Option Plans allow
for the granting of options to officers, key employees, and other individuals to
purchase a maximum of 800,000 shares of the Company's common stock. The option
price and terms are determined by the Company's Stock Option-Compensation
Committee. The options granted may qualify as incentive stock options ("ISO's").
Through December 31, 2002, all options granted except for 90,000 options were
ISO's. At December 31, 2002, the 1992 and 1999 Plans had no options available
for future grant and 482,104 common shares reserved for issuance upon exercise
of the outstanding stock options. At December 31, 2002, the 2001 Plan has
172,166 options available for future grants and 27,834 common shares reserved
for issuance upon exercise of the outstanding stock options.

A summary of the status of the Company's fixed stock option plans as of
December 31, 2002, 2001, and 2000, and changes during the years ended on those
dates is presented below:



2002 2001 2000
- ------------------------------------ ------------------------------- -------------------------------- -----------------------------
Number Weighted-Avg. Number of Weighted-Avg. Number of Weighted-Avg.
of shares Exercise Price shares Exercise Price shares Exercise Price
- ------------------------------------ ------------ ------------------ ------------- ------------------ ------------- ---------------

Outstanding, January 1 314,438 $ 3.89 473,188 $3.48 239,035 $2.37
- ------------------------------------ ------------ ------------------ ------------- ------------------ ------------- ---------------
Granted 207,500 3.24 10,000 4.23 270,000 4.26
- ------------------------------------ ------------ ------------------ ------------- ------------------ ------------- ---------------
Exercised - - (31,500) 2.59 (28,347) 1.92
- ------------------------------------ ------------ ------------------ ------------- ------------------ ------------- ---------------
Forfeited (12,000) 6.02 (137,250) 2.81 (7,500) 2.39
- ------------------------------------ ------------ ------------------ ------------- ------------------ ------------- ---------------
Outstanding, December 31 509,938 $3.57 314,438 $3.89 473,188 $3.48
- ------------------------------------ ------------ ------------------ ------------- ------------------ ------------- ---------------
Exercisable, December 31 174,157 $3.55 80,941 $3.40 53,494 $2.31
- ------------------------------------ ------------ ------------------ ------------- ------------------ ------------- ---------------


The following table summarizes information about fixed stock options outstanding
at December 31, 2002:



Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted-Average
Range of Number Remaining Exercise Number Weighted
Exercise Outstanding Contractual Price Exercisable Avg. Exercise
Prices at 12/31/02 Life at 12/31/02 Price
- ------------------------ --------------------- ---------------------- --------------------- --------------------- ------------------

$1.83 - 1.95 26,188 4.6 years $ 1.85 26,188 $ 1.85
- ------------------------ --------------------- ---------------------- --------------------- --------------------- ------------------
$2.39 - 2.80 24,000 6.3 2.52 11,700 2.39
- ------------------------ --------------------- ---------------------- --------------------- --------------------- ------------------
$3.25 - 4.28 438,000 8.3 3.36 125,769 3.39
- ------------------------ --------------------- ---------------------- --------------------- --------------------- ------------------
$11.04 21,750 6.8 11.04 10,500 11.04
- ------------------------ --------------------- ---------------------- --------------------- --------------------- ------------------
509,938 8.1 $ 3.57 174,157 $ 3.55
- ------------------------ --------------------- ---------------------- --------------------- --------------------- ------------------



15


Notes Continued

The Company adopted the disclosure-only option under SFAS No.123 "Accounting
for Stock-Based Compensation." The following table illustrates the effect on net
earnings (loss), and earnings (loss) 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,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
As Reported

Net earnings (loss) $ (2,888,737) $ 2,751,348 $ 2,978,902
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------
Basic net earnings (loss) per share $(.69) $ .66 $ .73
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------
Diluted net earnings (loss) per share $(.69) $ .64 $ .68
- -------------------------------------------------------------------- -------------------------- ------------------- ----------------

Pro Forma
Net earnings (loss) $ (3,012,179) $ 2,678,830 $ 2,883,639
- -------------------------------------------------------------------- -------------------------- ------------------- ----------------
Basic net earnings (loss) per share $ (.72) $ .65 $ .70
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------
Diluted net earnings (loss) per share $ (.72) $ .63 $ .66
- -------------------------------------------------------------------- -------------------------- ------------------- ---------------


For purposes of the above pro forma disclosures, the estimated fair value
of the options is amortized to expense over the five-year vesting period of the
options. The fair value of these options was estimated at the grant date using
the Black-Scholes option pricing model with the following weighted-assumptions:



For the Year Ended December 31,
- ---------------------------------------------------------------------------------- ----------------- -------------- ---------------
2002 2001 2000
- ---------------------------------------------------------------------------------- ----------------- -------------- ---------------

Expected dividend yield 0% 0% 0%
- ---------------------------------------------------------------------------------- ----------------- -------------- ---------------
Risk-free interest rate 3.4% 5.1% 6.6%
- ---------------------------------------------------------------------------------- ----------------- -------------- ---------------
Expected life of options in years 7 7 7
- ---------------------------------------------------------------------------------- ----------------- -------------- ---------------
Assumed volatility 61% 55% 50%
- ---------------------------------------------------------------------------------- ----------------- -------------- ---------------
Estimated fair value per share at $1.79 $2.60 $2.56
date of grant
- ---------------------------------------------------------------------------------- ----------------- -------------- ---------------


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



- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
2002 2001 2000
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Basic:
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------

Earnings (loss) from continuing operations $ (2,789,737) $ 2,751,348 $ 3,068,902
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Weighted average shares outstanding 4,165,659 4,138,363 4,107,079
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Basic earnings (loss) per share from continuing operations $ (.67) $.66 $.75
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Diluted:
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Earnings (loss) from continuing operations $ (2,789,737) $ 2,751,348 $ 3,068,902
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Add: interest impact, net of tax, from the assumed debt
reduction from the conversion of warrants - - 4,420
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Adjusted earnings (loss) from continuing operations $ (2,789,737) $ 2,751,348 $ 3,073,322
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Weighted average shares outstanding 4,165,659 4,138,363 4,107,079
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Dilutive effect of stock options outstanding, using the
treasury stock method - 139,125 241,849
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Conversion of warrants - - 9,432
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Diluted weighted average shares outstanding 4,165,659 4,277,488 4,358,360
- ---------------------------------------------------------------------- -------------------- --------------------- -----------------
Diluted earnings (loss) per share from continuing operations $ (.67) $.64 $.70

- ---------------------------------------------------------------------- -------------------- --------------------- -----------------


In 2002, the Company had 509,938 options outstanding 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.


16




Notes Continued

(13) Other Income (Expense), net: Other, net consists of the following items:



2001 2000
- --------------------------------------------------------------------- -------------------- --------------------- -------------------

Dividends $ 108,681 $ 144,908
- --------------------------------------------------------------------- -------------------- --------------------- -------------------
Real estate operations - 19,912
- --------------------------------------------------------------------- -------------------- --------------------- -------------------
$ 108,681 $ 164,820
- --------------------------------------------------------------------- -------------------- --------------------- -------------------



(14) 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 22% and 15% of net sales in 2002
and 2001, respectively. During 2000, two customers accounted for approximately
21% and 13% of net sales. Export sales to foreign markets are as follows:



2002 2001 2000
- --------------------------------------------------------------------- --------------------- --------------------- -----------------

Asia Pacific $ 1,133,900 $ 401,100 $ 1,342,000
- --------------------------------------------------------------------- --------------------- --------------------- -----------------
Canada 374,200 1,889,800 2,942,800
- --------------------------------------------------------------------- --------------------- --------------------- -----------------
Europe and Middle East 345,600 1,518,500 1,744,100
- --------------------------------------------------------------------- --------------------- --------------------- -----------------
Other 94,900 106,600 36,100
- --------------------------------------------------------------------- --------------------- --------------------- -----------------
$ 1,948,600 $3,916,000 $ 6,065,000
- --------------------------------------------------------------------- --------------------- --------------------- -----------------


17





Notes Continued

(15) Quarterly Financial Data (unaudited): Selected unaudited quarterly
financial data for 2002 and 2001 is set forth below:



First Second Third Fourth
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
2002 (in thousands, except per share data)
- ------------------------------------------------------------------------ ----------------------------------------------------------

Net sales from continuing operations $2,353 $1,722 $ 1,617 $ 1,602
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Gross profit (loss) 163 (24) (1,071) (414)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Earnings (loss) before income taxes (339) (694) (1,730) (1,225)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Net earnings (loss) from:
Continuing operations (203) (418) (1,092) (1,077)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Discontinued operations (45) - - (54)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Net earnings (loss) $ (248) $ (418) $(1,092) $(1,131)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------

Basic earnings (loss) per share:
Continuing operations $(.05) $(.10) $(.26) $(.26)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Discontinued operations (.01) - - (.01)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
$(.06) $(.10) $(.26) $(.27)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------

Diluted earnings (loss) per share:
Continuing operations $(.05) $(.10) $(.26) $(.26)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Discontinued operations (.01) - - (.01)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
$(.06) $(.10) $(.26) $(.27)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------

2001
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Net sales from continuing operations $7,001 $4,913 $3,007 $ 1,976
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Gross profit (loss) 2,016 1,225 408 (1,362)
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Earnings (loss) before income taxes 830 289 (409) 3,584
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Net earnings (loss) from:
Continuing operations 498 173 (245) 2,325
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Discontinued operations
- - -
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Net earnings (loss) $ 498 $ 173 $ (245) $ 2,325
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------

Basic earnings (loss) per share:
Continuing operations $.12 $.04 $(.06) $.56
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Discontinued operations - - - -
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
$.12 $.04 $(.06) $.56
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------

Diluted earnings (loss) per share:
Continuing operations $.11 $.04 $(.06) $.55
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
Discontinued operations - - - -
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------
$.11 $.04 $(.06) $.55
- ------------------------------------------------------------------------ ------------- -------------- ---------------- ------------



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

In the fourth quarter of 2002, net loss from continuing operations
includes tax expense of $396,000 ($.09 basic and diluted (loss) per share as a
result of a provision for a deferred tax asset valuation allowance net of a tax
accrual reversal.
The third quarter of 2002 gross profit (loss) includes a $.9 million
inventory write-off provision for excess inventory.
In the second quarter of 2001, net earnings from continuing operations
includes a gain on sale of assets of $91,200 ($.02 basic and diluted earnings
per share). See Note 3.
In the fourth quarter of 2001, net earnings from continuing operations
includes a gain on sale of assets of $3,460,000 ($.83 basic earnings per share
and $.82 diluted earnings per share). See Note 3.
The fourth quarter of 2001 gross profit (loss) includes a $1.7 million
inventory write-off provision for excess inventory.


18


Report of Independent Certified Public Accountants

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

We have audited the accompanying consolidated balance sheet of
Valpey-Fisher Corporation and subsidiaries (the Company) as of December 31,
2002, and the related consolidated statements of operations, comprehensive
income (loss), stockholders' equity, and cash flows for the year then ended.
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 audit
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Valpey-Fisher Corporation and subsidiaries as of December 31, 2002, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.

Grant Thornton LLP

Boston, Massachusetts
February 14, 2003
(except for the matters discussed in note 10, as to which the date is March
18, 2003)



Independent Auditors' Report

To the Stockholders and Board of Directors of Valpey-Fisher Corporation
(formerly MATEC Corporation):

We have audited the accompanying consolidated balance sheet of
Valpey-Fisher Corporation (formerly MATEC Corporation) and subsidiaries as of
December 31, 2001, and the related consolidated statements of operations,
comprehensive income (loss), stockholders' equity, and cash flows for each of
the two years in the period ended December 31, 2001. 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 audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Valpey-Fisher Corporation
(formerly MATEC Corporation) and subsidiaries as of December 31, 2001, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.

Deloitte & Touche LLP

Boston, Massachusetts
February 15, 2002



19



Common Stock and Stockholder Information


COMMON STOCK INFORMATION

Valpey-Fisher 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, 2002 2001
- ------------------------------------------------------------------------------- ----------- -------------- ------------- ----------
High Low High Low
- ------------------------------------------------------------------------------- ----------- -------------- ------------- ----------

4th quarter $3.10 $2.40 $5.09 $3.51
- ------------------------------------------------------------------------------- ----------- -------------- ------------- ----------
3rd quarter 3.65 2.90 4.55 3.00
- ------------------------------------------------------------------------------- ----------- -------------- ------------- ----------
2nd quarter 7.19 3.20 5.65 3.75
- ------------------------------------------------------------------------------- ----------- -------------- ------------- ----------
1st quarter 6.09 3.10 9.00 4.25
- ------------------------------------------------------------------------------- ----------- -------------- ------------- ----------


No dividend was paid in 2002 or 2001.

The number of stockholders of record on March 18, 2003 was 858. This number does
not include stockholders for whom shares are held in a "nominee" or "street"
name.


20