10-Q

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

FORM 10-Q

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

For the quarterly period ended October 3, 2010

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-FisherCorporation

(Exact name of registrant as specified in its charter)

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

(508) 435-6831

(Registrant’s telephone number, including area code)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [  ]   No [  ]

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

                   Large accelerated filer [  ]          Accelerated filer [  ]

                   Non-accelerated filer [  ]            Smaller reporting company [X]

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

As of November 9, 2010, the number of shares outstanding of Registrant’s Common Stock, par value $.05 was 4,325,897.

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Valpey-Fisher Corporation

	INDEX	PAGE
PART I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
Consolidated Condensed Balance Sheets – October 3, 2010 (Unaudited) and December 31, 2009 (Audited)		3
Consolidated Statements of Operations – (Unaudited) Three Months and Nine Months Ended October 3, 2010 and September 27, 2009		4
Consolidated Statements of Cash Flows – (Unaudited) Nine Months Ended October 3, 2010 and September 27, 2009		5
Notes to Consolidated Condensed Financial Statements – (Unaudited)		6-9
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10-12
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	13
ITEM 4.	Controls and Procedures	14
PART II.	OTHER INFORMATION
ITEM 1A.	Risk Factors	14
ITEM 6.	Exhibits	14
SIGNATURES		15

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Valpey-Fisher Corporation and Subsidiaries

Consolidated Condensed Balance Sheets

(In thousands, except share data)

	10/3/2010		12/31/2009
	(Unaudited)		(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,315	$	4,053
Restricted cash		201		-
Receivables, net		2,618		1,744
Inventories, net		1,361		1,105
Deferred income taxes		837		848
Other current assets		28		111
Total current assets		9,360		7,861
Property, plant and equipment, at cost		11,961		11,613
Less accumulated depreciation		10,456		10,128
		1,505		1,485
Other assets		214		203
Total assets	$	11,079	$	9,549
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,307	$	949
Accrued liabilities		1,563		861
Total current liabilities		2,870		1,810
Deferred income taxes		195		175
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: 4,306,638 and 4,297,898 shares		215		215
Capital surplus		5,712		5,667
Retained earnings		2,087		1,682
Total stockholders’ equity		8,014		7,564
Total liabilities and stockholders’ equity	$	11,079	$	9,549

See notes to consolidated condensed financial statements.

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Valpey-Fisher Corporation and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended					Nine Months Ended
	10/3/2010		9/27/2009			10/3/2010		9/27/2009
Net sales	$	3,803	$	2,502		$	11,170	$	7,580
Cost of sales		2,310		1,621			6,879		5,035
Gross profit		1,493		881			4,291		2,545
Operating expenses:
Selling and advertising		542		410			1,601		1,238
General and administrative		356		332			1,079		1,005
Retirement agreement		-		265			-		265
Research and development		325		138			964		423
		1,223		1,145			3,644		2,931
Operating profit (loss)		270		(264	)		647		(386	)
Interest income		4		7			13		27
Earnings (loss) before income taxes		274		(257	)		660		(359	)
Income tax expense (benefit)		100		(119	)		255		(122	)
Net earnings (loss)	$	174	$	(138	)	$	405	$	(237	)
Basic and diluted earnings (loss) per share	$	.04	$	(.03	)	$	.09	$	( .06	)
Basic weighted average shares		4,306		4,298			4,302		4,298
Diluted weighted average shares		4,496		4,298			4,450		4,298

See notes to consolidated condensed financial statements.

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Valpey-Fisher Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended
	10/3/2010			9/27/2009
Cash flows from operating activities:
Net earnings (loss)	$	405		$	(237	)
Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities of continuing operations:
Depreciation		328			291
Provisions for inventory		50			167
Deferred income taxes		31			71
Stock-based compensation		34			42
Changes in operating assets and liabilities:
Receivables, net		(874	)		(70	)
Inventories		(306	)		60
Other current assets		83			10
Accounts payable and accrued liabilities		1,081			(227	)
Net cash provided by operating activities of continuing operations		832			107
Cash flows from operating activities: - Discontinued Operations
Change in accrued expenses		(21	)		(133	)
Net cash (used) by operating activities of discontinued operations		(21	)		(133	)
Net cash provided (used) by operating activities		811			(26	)
Cash flows from investing activities:
Capital expenditures		(348	)		(190	)
Other, net		(11	)		(11	)
Net cash (used) by investing activities		(359	)		(201	)
Cash flows from financing activities:
Change in restricted cash		(201	)		-
Stock options exercised		11			-
Net cash provided (used) by financing activities		(190	)		-
Net increase (decrease) in cash and cash equivalents		262			(227	)
Cash and cash equivalents:
Beginning of period		4,053			4,515
End of period	$	4,315		$	4,288
Supplemental Cash Flow Information
Cash paid during the period by continuing operations for income taxes	$	177		$	87

See notes to consolidated condensed financial statements.

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Valpey-Fisher Corporation and Subsidiaries

Notes to Consolidated Condensed Financial Statements

(Unaudited)

1. Financial Presentation:

The unaudited interim financial statements, in the opinion of management, reflect all adjustments necessary for fair presentation of results for such periods.  The results of operations for any interim period are not necessarily indicative of results for the full year.

These unaudited interim financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s 2009 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

In the Consolidated Statements of Cash Flows, certain amounts for 2009 have been reclassified to conform to the current year presentation.

The Company has evaluated all subsequent events through the date these financial statements are being filed with the Securities & Exchange Commission, and has determined there were no events or transactions deemed to be reportable.

2. Stock Compensation Plans:

At October 3, 2010, options for 77,090 shares are available for future grants to officers, key employees, and other individuals under the Company’s four Stock Option Plans.  The option price and terms are recommended by the Company’s Compensation Committee to the Company’s Board of Directors for approval.  The maximum contractual term of an option is ten years.  The options granted may qualify as incentive stock options (“ISO’s”).  Compensation expense related to stock options granted is recognized ratably over the vesting period of the option.  The Company issues new shares upo n the exercise of stock options.

The Company recorded the following stock-based compensation expense in the Consolidated Statement of Operations (in thousands):

	3 Months Ended				9 Months Ended
	10/3/2010		9/27/2009		10/3/2010		9/27/2009
Cost of sales	$	2	$	3	$	8	$	11
Selling and advertising		1		3		4		11
General and administrative		3		4		15		13
Research and development		2		2		7		7
Pre-tax stock-based compensation expense		8		12		34		42
Income tax (benefit)		(1)		(1)		(2)		(3)
Net stock-based compensation expense	$	7	$	11	$	32	$	39

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The estimated fair value of each option grant is determined on the date of grant using the Black-Scholes option pricing model with the weighted-average assumptions for stock option grants during the nine months ended October 3, 2010 and September 29, 2009 are listed in the table below.

	2010		2009
Stock options granted		60,000		45,000
Weighted-average exercise price	$	1.32	$	1.43
Weighted-average grant date fair value	$	.55	$	.59
Assumptions:
Risk-free interest rate		2.4%		2.4%
Expected volatility		46%		46%
Expected term in years		4.8		4.8
Expected dividend yield		0%		0%

            The risk-free interest rate is based on the yield on zero-coupon U.S. treasury securities at the time of grant for a period commensurate with the expected term.  The expected volatility is calculated using the Black-Scholes model based on the historic prices for a period commensurate with the expected term.  The expected term of the option is determined by using historical data.

A summary of the activity under all the Company’s stock option plans as of October 3, 2010 and the changes during the nine month period then ended are as follows:

	Number of  Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life In Years		Aggregate Intrinsic Value
Outstanding at December 31, 2009		887,891		$	1.45
Options granted		60,000			1.32
Options exercised		(8,740	)		1.21
Options forfeited or expired		(385,734	)		1.36
Outstanding at October 3, 2010		553,417		$	1.50		3.6	$	573,118
Exercisable at October 3, 2010		415,222		$	1.54		3.4	$	435,164

A summary of the status of the Company’s nonvested stock options as of October 3, 2010 and the changes during the nine month period then ended are as follows:

	Shares		Weighted-Average Grant-Date Fair Value
Nonvested at December 31, 2009		130,742	$	1.05
Granted		60,000		.55
Vested		(51,769)		1.48
Forfeited		(778)		1.80
Nonvested at October 3, 2010		138,195	$	.67

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At October 3, 2010, there was approximately $61,000 of total unrecognized compensation cost related to nonvested stock options granted.  That cost is expected to be recognized as follows: $8,000 in 2010, $29,900 in 2011, $21,100 in 2012, and $2,000 in 2013.  The total grant-date fair value of stock options that vested during the nine months ended October 3, 2010 was $76,600.

3. Comprehensive Income (Loss):

During the three and nine months ended October 3, 2010 and September 27, 2009, there were no differences between comprehensive income (loss) and net income (loss).

4. Receivables, net:

Receivables, net of allowances, consist of the following:

(in thousands)	10/3/2010		12/31/2009
		(unaudited)
Accounts receivables, less allowance for doubtful accounts of  $103,500 in 2010 and $100,000 in 2009	$	2,567	$	1,673
Refundable income taxes		51		71
	$	2,618	$	1,744

5. Inventories, net:

Inventories, net of reserves of $1,250,000 in 2010 and $1,200,000 in 2009, consist of the following:

(in thousands)	10/3/2010		12/31/2009
		(unaudited)
Raw materials	$	824	$	634
Work in process		262		182
Finished goods		275		289
	$	1,361	$	1,105

6. 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 during the period.  Diluted earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period, plus the net incremental shares that would be issued using the treasury stock method assuming  dilutive outstanding stock options were exercised, except when anti-dilutive.  The computation of diluted earnings per share excludes stock options with an exercise price in excess of the average market price as they are anti-dilutive.  In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the respective period.

The following table shows a reconciliation of weighted average shares (in thousands):

	Three Months Ended				Nine Months Ended
	10/3/2010		9/27/2009		10/3/2010		9/27/2009
Weighted average shares outstanding		4,306		4,298		4,302		4,298
Dilutive effect of stock options outstanding, using the treasury stock method		190		-		148		-
Diluted weighted average shares outstanding		4,496		4,298		4,450		4,298

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During the three and nine months ended October 3, 2010, stock options to purchase 36,125 and 53,415 , respectively, common shares were not included in the computation of "Diluted Earnings (Loss) per Share" because their inclusion would be anti-dilutive.  During the three and nine months ended September  27, 2009, stock options to purchase 857,891 common shares were not included in the computation of "Diluted Earnings (Loss) per Share" because of the anti-dilutive effect of the options since the Company reported a loss from operations in these periods.

7. Income Taxes:

At October 3, 2010 and December 31, 2009, the Company had no reserves for unrecognized tax benefits on the balance sheet.

There are currently no income tax examinations in progress.  During 2009, the Company’s federal income tax return for 2007 was examined by the IRS and resulted in no changes to the tax return.  The federal income tax return for 2009 and 2008 and the state of Massachusetts tax returns for 2007 through 2009 are open tax years.  The Company’s policy is to include interest expense on underpayments of income taxes in our income tax provision whereas penalties are included in general and administrative expense.

8. Restricted Cash and Letter of Credit:

At October 3, 2010, the Company had restricted cash of $201,000 held as collateral in a money market account for the Company’s issuance of an irrevocable standby letter of credit expiring on October 1, 2011.  This letter of credit has been issued as security for the Company’s performance under a  remediation agreement with the New Jersey Department of Environmental Protection.

9. Recent Accounting Pronouncements:

In January 2010, the FASB issued ASU 2010-06, which is an update to Topic 820, “Fair Value Measurement and Disclosures”. This update establishes further disclosure requirements regarding transfers in and out of levels 1 and 2 (effective for all interim and annual reporting periods beginning after December 15, 2009) and activity in level 3 fair value measurements (effective for all interim and annual reporting periods beginning after December 15, 2010). The update also provides clarification as to the level of disaggregation for each class of assets and liabilities, requires disclosures about inputs and valuation techniques, and also includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets.  The adoption of this standard has not and is not expected to have a material impact on the Company’s financial position or results of operation.

In February 2010, the FASB issued ASU 2010-09, which is an update to Topic 855, “Subsequent Events”.  This update clarifies the date through which the Company is required to evaluate subsequent events. SEC filers will be required to evaluate subsequent events though the date that the financial statements are issued. ASU 2010-09 was effective upon issuance, and did not have a material impact on the Company’s financial position or results of operation.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

 Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of our 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 our critical accounting policies could materially affect its consolidated financial statements.  Our most critical accounting policies, which were discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, pertain to accounts receivable, inventories and income taxes.  These policies continue to be our most critical accounting policies for the period covered by this report and there were no significant changes in the application of those policies during this reporting period.

Liquidity and Capital Resources

Cash and cash equivalents amounted to $4,315,000 at October 3, 2010, an increase of $262,000 from the December 31, 2009 balance.  During this period, our operations provided cash of $811,000 and our investing and financing activities used cash of $359,000 and $190,000, respectively.

Cash provided from operations of $811,000 resulted from the net earnings of $405,000 and the net positive adjustments of $443,000 for the non-cash effects of depreciation and provisions for inventory, deferred income taxes and stock compensation offset by the net cash outflow of $37,000 from changes in our operating assets and liabilities.  The major items accounting for the net cash outflow from changes in our operating assets and liabilities were increases of $874,000 in receivables and $306,000 in inventory offset in part by a $1,081,000 increase in accounts payable and accrued liabilities.  Theincrease in accounts receivable is mainly due to the 36% increase in the 3rd qua rter of 2010 sales over the 4th quarter of 2009 and, to a lesser extent, due to a 10% increase in the number of days sales outstanding.   The inventory increase is mainly due to the 2010 sales increase and is also affected by the lead times of certain items to support the current level of shipments and backlog to meet customer delivery requirements.  The main items accounting for the net increase in accrued liabilities were increases in employee compensation and benefits and commissions payable.  The increase in accounts payable is primarily due to the timing of inventory and equipment purchases.

Capital expenditures during the nine months ended October 3, 2010 amounted to $348,000.  These expenditures relate primarily to new production and test equipment capabilities in connection with the introduction of new products and enhancements to existing products.  At October 3, 2010, we have purchase commitments for capital equipment amounting to $257,000.

During the nine months ended October 3, 2010, the Company transferred $201,000 of cash to a restricted cash   money market account held as collateral for the Company’s issuance of an irrevocable standby letter of credit.

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We believe that based on our current working capital and the expected cash flow from operations, our resources are sufficient to meet our financial needs and to fund our capital expenditures for the projected levels of business during the next twelve months.

Off-Balance Sheet Arrangements

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

Contractual Obligations

During the normal course of business, we incur certain commitments to make future payments for the purchase of inventory, equipment, and production supplies based on projected requirements.  At October 3, 2010, we had outstanding purchase commitments totaling approximately $2,373,000, all of which are expected to be fulfilled by March 31, 2011.   At October 3, 2010, we had no contractual obligations for capital leases, no material contractual obligations for operating leases and no long-term debt.

Results of Operations for the Three and Nine Months Ended October 3, 2010 Compared to the Three and Nine Months Ended September 27, 2009

During the three and nine months ended October 3, 2010, net sales increased $1,301,000 (52%) and $3,590,000 (47%) over the comparable periods in 2009.  During these periods all product lines experienced sales growth resulting primarily from an increase in the overall number of units sold.  The higher sales levels resulted from an increase in demand for our products as our bookings began to improve in the 4th quarter of 2009 and have continued to improve into 2010. The order backlog at the beginning of the 2010 was $2,023,000 or $357,000 higher than the backlog at the beginning of 2009.Bookings during the three and nine months ended October 3, 2010 were $1,043,000 (38%) and $3,676,000 (48%), respectively, higher than the comparable periods in 2009.  Our backlog amounted to $2,201,000 at October 3, 2010 versus $1,765,000 at September 27, 2009.  During most of 2009 the global economic factors adversely impacted our bookings, revenue and operating performance.

During the three months ended October 3, 2010, our gross profit as a percentage of sales was 39% compared to 35% in the comparable 2009 period.  Our year-to-date gross profit percentage was 38% compared to 34% in 2009.  The favorable effect of spreading the fixed overhead costs over the higher sales volume offset in part by an increase in the raw material percentage was the main reason for the increase in the gross profit percentages.  During the three and nine months 2010 periods, raw material costs as a percentage of sales were about 2 and 3 percentage points, respectively,  higher than in the comparable 2009 periods mainly due to changes in the product mix of sales.

Selling and advertising expenses increased $132,000 (32%) and $363,000 (29%) during the three and nine months ended October 3, 2010, respectively, over the comparable periods in 2009.  During the three months ended October 3, 2010 increases of $60,000 in commission expense to outside sales representatives, $58,000 in employee compensation and benefits, and $12,000 in advertising expenses were the main reasons for the higher expense.  On a year-to-date basis, increases of $166,000 in commission expense to outside sales representatives, $144,000 in employee compensation and benefits, and $43,000 in advertising expenses were the main reasons for the higher expense.  During the three and nine months ended October 3, 2010,  employee compensation included increases of $16,500 and $55,500, respectively ,  in incentive compensation expense over the comparable 2009 periods.  The remaining increase in the 2010 employee compensation and benefits over the 2009 periods was mainly due to an increase in the number of employees.  Expenses related to the microwave product line accounted for about $58,000 and $180,000 of the increase during the three and nine months ended October 3, 2010, respectively.   During the 4th quarter of 2009, the Company decided to expand its product offering with the formation of a Microwave Product line that will focus on microwave components and modules.

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General and administrative expenses increased $24,000 (7%) and $74,000 (7%) during the three and nine months ended October 3, 2010 over the comparable 2009 periods.   The increases were mainly due to higher incentive compensation expense of $38,500 and $129,500 during the three and nine months periods in 2010, respectively, partially offset by decreases in other employee compensation and benefits of $20,000 and $73,000 during the same periods, respectively.  The reductions in other employee compensation and benefits mainly result from the difference in salaries of the current CEO and the former CEO.

In 2009, the Company and Michael Ferrantino, Sr., Chief Executive Officer (“CEO”) and a Director of the Company at that time, entered into a Retirement Agreement and General Release.   Effective October 31, 2009, Mr. Ferrantino resigned as CEO and a Director of the Company.  Pursuant to the Retirement Agreement, the Company paid Mr. Ferrantino a lump sum retirement payment of $265,225 on November 9, 2009 and Mr. Ferrantino agreed to a one year non-compete provision, an eighteen month non-solicitation provision and a general release of claims.

During the three months ended October 3, 2010, research and development expenses increased $187,000 over the $138,000 recorded in the comparable 2009 period.  Increases of $101,000 in employee compensation and benefits and $71,000 in operating supplies were the main reasons for the higher expense. On a year-to-date basis, research and development expenses increased $541,000 over the $423,000 recorded in the comparable 2009 period.  Increases of $314,000 in employee compensation and benefits and $151,000 in operating supplies were the main reasons for the higher expense. During the three and nine months ended October 3, 2010,  employee compensation included increases of $27,500 and $92,500, respectively,  in incentive compensation expense over the comparable 2009 periods.  The remaining increase in the 2010 employee compensation and benefits over the 2009 periods was mainly due to an increase in the number of employees.   Expenses related to the microwave product line accounted for about $146,000 and $406,000 of the increase during the three and nine months ended October 3, 2010, respectively.

Interest income decreased during the three and nine months ended October 3, 2010 from the corresponding 2009 periods as a result of the effect of interest rates being approximately 25 basis points and 75 basis points lower during the three and nine months ended October 3, 2010, respectively.

The estimated annual combined federal and state income tax rate for 2010 is 39% compared to 34% in 2009.  The rates differ from the expected combined rate of approximately 40% mainly due to the effects state tax provisions and nondeductible stock option and meals and entertainment expenses.

For the three months ended October 3, 2010, we reported an operating profit of $270,000 compared to an operating loss of $264,000 in 2009.  The $534,000 improvement in operating profit results from a $612,000 increase in gross profit partially offset by a $78,000 increase in operating expenses.  The higher gross profit was primarily due to the 52% increase in sales. The $78,000 net increase in operating expenses includes $204,000 of costs incurred in the developing and marketing of the Company’s new microwave product line in 2010, offset by the $265,000 expense in 2009 related to the retirement agreement with the former CEO.  We reported pre-tax earnings of $274,000 during the 2010 period compared to a pre-tax loss of $257,000 in the comparable 2009 period.  For the three months ended Octo ber 3, 2010, we reported net earnings of $174,000 versus a net loss of $138,000 in 2009.

For the nine months ended October 3, 2010, we reported an operating profit of $647,000 compared to an operating loss of $386,000 in 2009.  The $1,033,000 operating profit improvement during this period results from a $1,746,000 increase in gross profit partially offset by a $713,000 increase in operating expenses.  The higher gross profit was primarily due to the 47% increase in sales.  The $713,000 net increase in operating expenses includes $586,000 of costs incurred in the developing and marketing of the Company’s new microwave product line in 2010, offset by the $265,225 expense in 2009 related to the retirement agreement with the former CEO.  We reported pre-tax earnings of $660,000 during the 2010 period compared to a pre-tax loss of $359,000 in the comparable 2009 period.   ;For the nine months ended October 3, 2010, we reported net earnings of $405,000 versus a net loss of $237,000 in 2009.

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Forward-Looking Statements

Certain statements made herein 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 our current views and assumptions and involve risks and uncertainties that include, but not limited to:

·   our results for 2010 may be negatively impacted by the current global economic conditions and uncertainties,

·   our ability to develop, market and manufacture new innovative products competitively,

·    the fluctuations in product demand of the telecommunications industry,

·   our ability, including that of our suppliers to produce and deliver materials and products competitively,

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

·   a significant portion of our revenue is derived from products manufactured by one supplier and a significant change in the supplier’s manufacturing capability or in our relationship with this supplier could have an adverse impact on our operating results and financial condition,

·   our operating results and financial condition could be negatively affected if after receiving design wins from OEMs, which in turn outsource the manufacture of their products to electronics manufacturing services ("EMS") companies, we fail to negotiate terms and  successfully obtain orders from the EMS companies directly, and

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our cash balances in excess of operating requirements are currently invested in money market accounts. These money market accounts are subject to interest rate risk and interest income will fluctuate in relation to general money market rates. Based on the cash and cash equivalent balance at October 3, 2010, and assuming the balance was totally invested in money market instruments for the full year, a hypothetical 1% point increase or decrease in interest rates would result in an approximate $45,200 increase or decrease in interest income.

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

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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

We carried out an evaluation, under the supervision of and with our  management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934).  Based upon that evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of October 3, 2010.

Changes in internal control.

Our evaluation did not identify any change in our internal controls over financial reporting that occurred during the quarter ended October 3, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item1A. Risk Factors

Information regarding risk factors areset forth under the caption “Forward-Looking Statements” in Part I, Item 2 of this Form 10-Q and in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the Year Ended December 31, 2009.  There have been no material changes from the risk factors previously disclosed in the Company’s 2009 Annual Report on Form 10-K.

Item 6. Exhibits

10.1	Amendment effective October 28, 2010 to Change in Control Severance Agreement, dated October 21, 2009 between the Company and Michael J. Ferrantino, Jr.  Filed herewith.
10.2	Amendment effective October 28, 2010 to Change in Control Severance Agreement, dated April 4, 2007 between the Company and Michael J. Kroll.  Filed herewith.
10.3	Amendment effective October 28, 2010 to Change in Control Retention Agreement, dated April 4, 2007 between the Company and Walt Oliwa. Filed herewith.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1	Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Valpey-Fisher Corporation
Date:  November 10, 2010	By:	/s/ Michael J. Ferrantino, Jr.
		Michael J. Ferrantino, Jr.
		President and Chief Executive Officer

Date:  November 10, 2010	By:	/s/ Michael J. Kroll
		Michael J. Kroll
		Vice President, Treasurer and Chief Financial Officer

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EX-10.1

Exhibit 10.1

October 28, 2010

Mr. Michael J. Ferrantino, Jr.

11 Starr Avenue West

Andover, MA  01810

Dear Michael:

This letter will confirm the October 21, 2009 agreement between Valpey-Fisher Corporation (the “Company”) and you concerning amounts payable to you as severance in the event of a change in control of the Company.

The Company and you agree that effective October 28, 2010 the first paragraph of the Letter Agreement is hereby amended to read in its entirety as follows:

“This letter will confirm the October 21, 2009 agreement between Valpey-Fisher Corporation (the “Company”) and you concerning amounts payable to you as severance in the event of a change in control of the Company on or prior to December 31, 2011.”

The Company and you agree that effective October 28, 2010 the second paragraph of the Letter Agreement is hereby amended to read in its entirety as follows:

“In the event of a change in control of Valpey-Fisher on or prior to December 31, 2011, you will be paid a 2x annual base salary as severance, in the event that within 65 days after the change in control you have incurred  a “Separation from Service” (as defined in Exhibit A) as a result of termination of your employment by the Company or the successor employer resulting from the change in control, or as a result of your termination of your employment for “Good Reason” (as defined  in Exhibit A); provided  however, that no severance payment will be made if you incurred a “Separation from Service” (as defined in Exhibit A) for any reason , prior to the change in control.

Any severance payment payable hereunder in the event of a change in control will be paid no later than March 15, following the end of the calendar year in which the applicable separation from service following the change in control occurs.”

Please indicate your agreement by signing this letter in the space provided below.

	Sincerely,
	VALPEY-FISHER CORPORATION
Date	By:	/s/ Ted Valpey, Jr.
		Ted Valpey, Jr.
		Chairman

AGREED AND ACCEPTED:

/s/ Michael J. Ferrantino, Jr.

Michael J. Ferrantino, Jr.

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EXHIBIT A

(a)  “Separation from Service”  means , your “separation from service”, within the meaning of Section 409A of the Internal Revenue Code of 1980 as amended (the “Code’), from the Company or successor employer resulting from change in control.  To the extent required by the definition of “separation from service” under Section 409A of the Code, “Separation from Service” shall mean your separation from service (as so defined) from both the Company or successor employer resulting from the change in control, and all other persons with whom the Company or such successor employer would be considered a “single employer under Section 414(b) or (c) of the Code, but replacing the phrase R 20;at least 80 %” with the phrase “at least 50% where it appears in Section 1563(a)(1), (2), and (3) of the Code and in the regulations under Section 414(c).

(b)  “Termination for Good Reason” means separation from service within 65 days following the initial existence of one or more of the following conditions arising without your consent:

 (1) A material diminution in your base compensation.

 (2) A material diminution in your authority, duties, or responsibilities.

 (3) A material change in the geographic location at which the service provider must perform the services;

provided that you have provided notice to the Company or successor employer resulting from a change in control, of the existence of one of the above conditions, within 30 days of the initial existence of the condition, upon the notice of which the Company or such successor employer has a period of at least 30 days during which it may remedy the condition and not be required to pay the amount due you.

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EX-10.2

Exhibit 10.2

October 28, 2010

Mr. Michael J. Kroll

22 Oak St.

Uxbridge, MA  01569

Dear Mike:

This letter will confirm the April 4, 2007 agreement between Valpey-Fisher Corporation (the “Company”) and you concerning amounts payable to you as severance in the event of a change in control of the Company.

The Company and you agree that effective October 28, 2010 the first paragraph of the Letter Agreement is hereby amended to read in its entirety as follows:

“This letter will confirm the April 4, 2007 agreement between Valpey-Fisher Corporation (the “Company”) and you concerning amounts payable to you as severance in the event of a change in control of the Company on or prior to December 31, 2011.”

The Company and you agree that effective October 28, 2010 the second paragraph of the Letter Agreement is hereby amended to read in its entirety as follows:

“In the event of a change in control of Valpey-Fisher on or prior to December 31, 2011,  you will be paid a 2x annual base salary as severance, in the event that within 65 days after the change in control you have incurred  a “Separation from Service” (as defined in Exhibit A) as a result of termination of your employment by the Company or the successor employer resulting from the change in control, or as a result of your termination of your employment for “Good Reason” (as defined in Exhibit A); provided  however, that no severance payment will be made if you incurred a “Separation from Service” (as defined in Exhibit A) for any reason , prior to the change in control.

Any severance payment payable hereunder in the event of a change in control will be paid no later than March 15, following the end of the calendar year in which the applicable separation from service following the change in control occurs.”

Please indicate your agreement by signing this letter in the space provided below.

	Sincerely,
	VALPEY-FISHER CORPORATION
Date	By:	/s/ Ted Valpey, Jr.
		Ted Valpey, Jr.
		Chairman

AGREED AND ACCEPTED:

/s/ Michael J. Kroll
Michael J. Kroll

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EXHIBIT A

(a)  “Separation from Service”  means , your “separation from service”, within the meaning of Section 409A of the Internal Revenue Code of 1980 as amended (the “Code’), from the Company or successor employer resulting from change in control.  To the extent required by the definition of “separation from service” under Section 409A of the Code, “Separation from Service” shall mean your separation from service (as so defined) from both the Company or successor employer resulting from the change in control, and all other persons with whom the Company or such successor employer would be considered a “single employer under Section 414(b) or (c) of the Code, but replacing the phrase R 20;at least 80 %” with the phrase “at least 50% where it appears in Section 1563(a)(1), (2), and (3) of the Code and in the regulations under Section 414(c).

(b)  “Termination for Good Reason” means separation from service within 65 days following the initial existence of one or more of the following conditions arising without your consent:

 (1) A material diminution in your base compensation.

 (2) A material diminution in your authority, duties, or responsibilities.

 (3) A material change in the geographic location at which the service provider must perform the services;

provided that you have provided notice to the Company or successor employer resulting from a change in control, of the existence of one of the above conditions, within 30 days of the initial existence of the condition, upon the notice of which the Company or such successor employer has a period of at least 30 days during which it may remedy the condition and not be required to pay the amount due you.

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EX-10.3

Exhibit 10.3

October 28, 2010

Mr. Walt Oliwa

36 Marton Drive

Bedford, NH  03110

Dear Walt:

This letter will confirm the April 4, 2007 agreement between Valpey-Fisher Corporation (the “Company”) and you concerning a retention bonus payable to you under certain circumstances.

The Company and you agree that effective October 28, 2010 the second, third, and fourth sentences of the second paragraph of the Letter Agreement are hereby amended to read as follows:

As an incentive for your continued employment with the Company, and your efforts on behalf of the strategic alternatives, the Company hereby agrees to pay you a bonus of one times your current base salary in the event of a change  in control of the Company on or prior to December 31, 2011.  Any bonus payment payable hereunder  in the event of a change in control will be paid no  later than March 15, following the end of the calendar year in which  the change in control occurs; provided however that no bonus payment will be made if you have incurred prior to the first business day immediately following such change in control. “Separation fromService” means, your “separation from service”, within the meaning of Section 409A of the Internal Revenue Code of 1980 as amended (the “Code’), from the Company or successor employer resulting from change in control.  To the extent requi red by the definition of “separation from service” under Section 409A of the Code, “Separation from Service” shall mean your separation from service (as so defined) from both the Company or successor employer resulting from the change in control, and all other persons with whom the Company or such successor employer would be considered a “single employer under Section 414(b) or (c) of the Code, but replacing the phrase “at least 80 %” with the phrase “at least 50% where it appears in Section 1563(a)(1), (2), and (3) of the Code and in the regulations under Section 414(c).

Please indicate your agreement by signing this letter in the space provided below.

	Sincerely,
	VALPEY-FISHER CORPORATION
Date	By:	/s/ Ted Valpey, Jr.
		Ted Valpey, Jr.
		Chairman

AGREED AND ACCEPTED:

/s/ Walt Oliwa
Walt Oliwa

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EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. Ferrantino, Jr. certify that:

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

2.  Based on my knowledge, this 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 report;

3.  Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptable accounting principles;
 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 10, 2010	/s/ Michael J. Ferrantino,  Jr.
	Michael J. Ferrantino, Jr. President and Chief Executive Officer

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EX-31.2

Exhibit 31.2

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 quarterly report on Form 10-Q of Valpey-Fisher Corporation;

2.  Based on my knowledge, this 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 report;

3.  Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e))  and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptable accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 10, 2010	/s/ Michael J. Kroll
	Michael J. Kroll
	Vice President, Treasurer and Chief Financial Officer

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EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Valpey-Fisher Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

1. The Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2010 (“Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

Date:  November 10, 2010	/s/ Michael J. Ferrantino, Jr.
	Michael J. Ferrantino, Jr.
	President and Chief Executive Officer
Date:  November 10, 2010	/s/ Michael J. Kroll
	Michael J. Kroll
	Vice President, Treasurer and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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