**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D. C.  20549**

**FORM 10-K**

**(Mark One)**

x          **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]**

**FOR THE FISCAL YEAR ENDED MAY 29, 2005**

Commission File Number 0-12611

**AULT INCORPORATED**

(Exact name of registrantas specified in its charter)

| **MINNESOTA**                    | **41-0842932**                        |
|----------------------------------|---------------------------------------|
| (State or other  jurisdiction of | (IRS Employer  Identification Number) |
| incorporation or  organization)  |                                  |

 

**7105 Northland Terrace,Brooklyn Park, MN  55428-1028**

Address of principalexecutive offices

Registrant’s telephone number, including area code:(763) 592-1900Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act:

Common Stock, No Par Value

(Title of Class)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. YES xNO o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendments to this Form 10-K. o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2). YES oNO x

The aggregate market value of the voting stock held bynon-affiliates of the registrant was approximately $8,070,000 based uponthe closing price of the Company’s common stock on the NASDAQ National Marketon September 13, 2005, multiplied by the number of outstanding shares ofthe Company held by persons other than officers, directors and 10% or moreshareholders referred to in the “Security Ownership of Principal Shareholdersand Management” table referred to under Item 12 herein.

On September 13, 2005, there were outstanding4,861,192 shares of the Registrant’s common stock.

The Form 10-K consists of 70 pages. The Exhibit Indexis located on page 64.

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the act). YES o NO x

 

----

**AULT INCORPORATED**

**FORM 10-KFOR THE FISCAL YEAR ENDED MAY 29, 2005**

**PART I**

**ITEM 1.**   BUSINESS

**(a)****          GeneralDevelopment of Business**

Ault Incorporated (herein “Ault” or the “Company”) wasincorporated under the laws of the State of Minnesota in 1961. The Companydesigns, manufactures, and markets power conversion products and is a leadingdomestic supplier of such products to original equipment manufacturers (OEMs)of data communications equipment, telecommunications equipment, portablemedical devices and equipment as well as scanning and printing equipment andindustrial equipment.

On July 16, 2002, the Company purchased a portionof the operating assets of the Power General division of Nidec AmericaCorporation. The Power General division developed, manufactured, and soldhigh-efficiency DC/DC converters and custom power supplies at various powerlevels up to 1200 watts under the Power General brand name. Pursuant to thePurchase Agreement, the Company paid the Seller $366,000 in cash and issued$2,074,000 face amount of the Company’s newly created Series B 7%Convertible Preferred Stock, no par value (the “Preferred Stock”). Furtherinformation regarding this acquisition is contained in Note 15 of the Notes toFinancial Statements under Item 8 herein. Since the acquisition of the PowerGeneral division significant time and resources have been expended integratingthe Massachusetts engineering group and internal power supply line into Ault’sexisting processes and team structure. As planned, production of Power General’sopen-frame AC-DC power supplies and the DC/DC converters was transferred fromMassachusetts to Ault’s existing facilities in Asia. In addition, throughtraining provided to Ault’s field sales organization worldwide, Ault’scustomers and prospects are familiar with the additional products and designengineering capabilities provided by this acquisition.

On July 17, 2003, the Company announced theconsolidation of its manufacturing operations. The consolidation includes theclosing of its Minneapolis production operations, eliminating approximately 40jobs in assembly, equipment maintenance, procurement and administrative supportand the integration of production into Ault’s other manufacturing plants. Ault’sengineering, documentation, safety certification/reliability, sales, marketingand administrative services will remain at the Minneapolis headquartersfacility. The consolidation was implemented to reduce expenses, improve cashflow and return the Company to profitability. The savings have been approximately$1.3 million on an annual basis.

On May 20, 2005, the Company completed the saleof its wholly owned subsidiary, Ault Korea Corporation (“Ault Korea”), to JECKorea Co., Ltd. for $3.7 million. The agreement includes the receipt of$1,472,000 in cash and a secured note in the amount of $2,250,000. The saleincludes all assets and liabilities of Ault Korea Corporation and the use ofthe “Ault Korea” name in Korea for a period of three years. Ault Korea includesthe property in Seoul, South Korea and approximately 110 employees. As part ofthe terms of the agreement, JEC has the rights to sell power conversionproducts in Korea while Ault will have rights to sell the same power conversionproducts throughout the rest of the world. Prior to this transaction, JEC was asupplier of Ault, but otherwise no material relationship existed between Aultand JEC, or their respective affiliates, directors or officers, or anyassociates of their directors and officers. The transaction resulted in a lossof approximately $2,442,000, principally the result of the Company forgiving anintercompany note in the amount of approximately $2.3 million.

On May 27, 2005, the Company completed the saleof its Minneapolis headquarter building (64,000 square feet) and land to DaneIndustries Inc. for $3.85 million. The gross proceeds of $3.85 million was usedto pay off the mortgage balance of $2,509,000 and $255,000 of transactionexpenses, which included 

2

----

the realtors’ commissions,leaving net cash proceeds of $1,086,000 for the Company. The transactionresulted in a loss of approximately $137,000. Prior to this transaction, nomaterial relationship existed between Ault and Dane, or their respectiveaffiliates, directors or officers, or any associates of their directors and officers.Related to this sales transaction, Ault entered into an agreement to lease aportion (13,313 square feet) of its headquarter building for a period oftwenty-seven months with a monthly rent payment of $18,860.

During June 2005, the Company became aware ofaccounting errors in its China operations that affected fiscal year 2004 andthe first three quarters of fiscal 2005. As a result of these errors, the lossapplicable to common stockholders was underreported by $593,000 in fiscal year2004 and underreported by $425,000 in the first three quarters of fiscal year2005.

The sale of the Korean subsidiary has required theCompany to adjust the financial statements to treat the Korean subsidiary asdiscontinued operations.

TheCompany maintains a website at www.aultinc.com. The annual reports on Form 10-K,quarterly reports on Form 10-Q and periodic reports on Form 8-K (andany amendments to these reports) are available free of charge on the website assoon as reasonably practical after the reports are filed with the SEC. Toobtain copies of these reports, go to www.http://www.aultinc.com.

**(b)   Financial Information About Industry Segments**

TheCompany operates in only one industry segment—the manufacture and sale of powerconversion devices.

**(c)    NarrativeDescription of the Business**

Ault’spower conversion products are used to adapt alternating current (AC) to providea source of power at various levels up to more than one kilowatt of continuouspower for a wide variety of electronic equipment. A significant amount of theCompany’s products are located outside the equipment they power as a wallplug-in or as in-line components. Both of these styles are generally referredto as external power conversion products. A smaller percentage of the Company’sproducts are located inside the equipment they power and are generally known asinternal power conversion devices. Each product configuration, external andinternal, offers distinct advantages to the OEM buyer. Internal power productsare more generally accepted among design engineers across all segments of theelectronic original equipment market (EOEM). Internal power has traditionallybeen the norm in product design and, in terms of range, it provides greaterlatitude especially in applications beyond 100 watts. External power stillranks as a high growth area in the power supply industry due to the increasingemphasis on smaller and portable products that perform increasinglysophisticated functions. Ault’s business strategy is to offer OEMs in thesemarkets an expanding line of high-quality power conversion products, diversedesign engineering expertise and customized customer services.

**(1)   Products**

Ault’s product line includes internal AC/DC and DC/DCswitching power supplies, DC/DC converters, DC mobile adapters and four majorcategories of external power conversion products:  switching power supplies, linear powersupplies, transformers and battery chargers. The Company’s broad range of powerconversion products—ranging from 1 watt to more than 1 kilowatt—are capable ofproviding power at most output levels that OEMs require. The Company’s designand application engineers work closely with customers to ensure that theseproducts are customized to meet each OEM customer’s unique power conversionneeds.

3

----

The following tablesummarizes the proportion of sales of each of the Company’s five major productcategories for its last three fiscal years ended May 29, 2005:

**Saleof Products by Categoryas a Percentage of Total Sales**

| ** **                | ** ** | **Years Ended** | ** ** |
|---------------------------|------------|----------------------|------------|
| **Product Type**     | ** ** | ** **           | ** ** | **May 29, 2005** | ** ** | **May 30, 2004** | ** ** | **June 1, 2003** | ** ** |
| Switching Power  Supplies |       |                 | 69         | % |   |   | 59 | % |   |   | 54 | % |   |
| Linear Power  Supplies    |       |                 | 16         |   |   |   | 25 |   |   |   | 30 |   |   |
| Transformers              |       |                 | 3          |   |   |   | 5 |   |   |   | 6 |   |   |
| Battery Chargers          |       |                 | 7          |   |   |   | 7 |   |   |   | 7 |   |   |
| DC/DC Converters          |       |                 | 5          |   |   |   | 4 |   |   |   | 3 |   |   |
| Total                     |       |                 | 100        | % |   |   | 100 | % |   |   | 100 | % |   |
|                           |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Power Supplies.******  ***The Company’s traditionalpower supplies provide all power conversion elements for electronic equipmentin power outputs ranging from 1 to 1200 watts. The majority of the Company’sproducts contain a component level transformer, which reduces the voltage level,as well as other circuitry and components, which convert alternating current(AC) to direct current (DC) and, in most cases, maintain voltage withinspecific limits.

·       ***Internaland External Switching Power Supplies.  ***The Companybelieves the market for switching power supplies in the 1-500 watt rangeis generally the fastest growing segment of the overall power supply industry. Forinternals, switching power supplies are efficient and easily modified to meetan OEM’s specific footprint and power requirements. In externals, switchingpower supplies use switching transistors to convert power from AC to DC and aremore energy efficient, smaller and lighter in weight than linear units withcomparable power outputs. The applications in which these internal and externalproducts are currently used include telecommunications (wireless, wire line,cellular), data communications (networking, broadband modem, Power overEthernet, routers, hubs, switches), computer and related peripherals, medicalequipment, microprocessor controlled systems, printing and scanning equipment,security systems, automatic teller terminals, test equipment, multiplexers,digital cameras and point of sale equipment.

Most of the Company’sinternal and external switching power supplies incorporate a universal inputranging from 90 to 265 volts AC. This universal input means that the powersupplies can be used in virtually any country for applications such as localarea networks (LANs), printers and fiber optic links. The Company has also designedmedical grade switching power supplies with similar universal input ranges.

·       ***Linear Power Supplies.  ***Linearpower supplies are larger and generally less expensive than switching powersupplies because their design is based on technology employing steellaminations with windings of copper wire rather than switching transistors. Linearpower supplies tend to be used when the wattage output required is relativelylow. Ault manufactures linear power supplies that provide up to 12 watts ofregulated power and 25 watts of unregulated power. The Company’s linear powersupplies are used in a variety of applications including modems,telecommunications products, local area networks, microprocessor controlledsystems, test equipment and multiplexers.

·       ***Transformers.  ***The Companymanufactures a wide variety of wall plug-in transformers as part of its fullrange of power conversion products. Transformers are used primarily inapplications where OEMs desire to remove heat, electromagnetic interference andweight from electronic equipment, while incorporating the rest of the powerconversion system within the product. These products reduce AC voltage fromapproximately 110 volts (230 volts in some countries) down to lower 

4

----

voltages that range from 5to 60 volts AC. The Company’s product line also includes highly customizedtransformers that operate within stringent power output tolerances, featuresthat are not offered by most of the Company’s competitors. The Company’stransformers are utilized in a broad spectrum of applications including modems,telephone sets, multimedia products and scanners.

·       ***Battery Chargers.  ***Ault hasbeen an innovator in battery charging technology since the early 1980s. Aultspecializes in providing custom designed, advanced solutions for manufacturersof portable and battery powered equipment. Applications for the Company’sbattery chargers include medical devices, mobile telecom devices, notebookcomputers, global positioning equipment and radio frequency communicationsproducts.

The Company’s productsserve the entire range of widely used battery chemistries such as nickelcadmium, sealed lead acid, gel cell and nickel-metal hydride. In addition, theCompany has developed battery chargers for the particular requirements of newerbattery chemistries such as zinc air, lithium ion and lithium polymer. TheCompany is committed to supporting these new emerging chemistries and todeveloping battery charger products to be introduced as these new batterychemistries become commercially accepted.

The Company sells primarily “smart” battery chargersas distinguished from trickle chargers. Smart charger products use integratedcircuits to control various charging characteristics while allowing for fastcharge time and extended battery life. Trickle charging is typically used forslow (8 to 10 hours) charging and/or standby battery maintenance.

The Company believes thatthe demand for high-quality battery chargers will continue to increase toaccommodate the growing sophistication of portable electronic equipment.

·       ***High-Efficiency and High-Density DC/DC Converters.  ***Theaddition of DC/DC converters to the Company’s product offering was in responseto customer requests for “on-the-board” power solutions and Ault’s strategy tofulfill the “total solution” approach as a preferred supplier to valued OEMcustomers. In fiscal 2003, as part of the Power General product offering, Aultacquired a line of DC/DC converters and seasoned engineers who have developednew, innovative high-density quarter-brick and eighth-brick designs. Theseproducts provide Ault with a wide range of converter options to meet the needsof OEMs using distributed power architecture in their next generation and newelectronic product designs. In fiscal 2002, Ault signed a private labelagreement with a third party manufacturer for distribution of high-efficiencyDC/DC converters. The agreement was in-place for fiscal 2002, 2003 and part offiscal 2004. Since the agreement was subject to an annual review by each party,Ault decided to terminate the agreement during the second quarter of fiscalyear 2005 due to a lack of sales activity.

·       ***Mobile Products.  ***In late 2002,the Company expanded its product offering to include a line of mobile productsfor powering laptop computers in a broad range of field and serviceapplications. The product focus is on mobile adapters in a single and dualoutput with a primary sales focus on laptop OEMs and value-added resellers(VARs). The Company anticipates nearly 65% of the market to be field andservice applications in the business travel, insurance, trucking and deliveryindustries. The remainder of the applications is in emergency fire, police andmedical services (20%); military and government (10%); and a small percentagein miscellaneous uses (5%). The product family, known as Transport, wasintroduced in fiscal 2003. The TR75 (75watts) is a single output mobile adapterthat has generated approximately $380,000 in revenue. The next models in theproduct family are the TR100 (up to 100 watts) and the TR120 (up to 120 watts)in a same footprint as the TR75. These products will power the next generationof laptop computers that require 90, 100 or 120 watts.

5

----

**(2)   Markets and Customers**

The Company’s marketing efforts are directed primarilytoward OEMs producing non-consumer electronic equipment for broadband modems,wireless and wire line telecommunications product, networking, Power overEthernet, as well as industrial and retail data acquisition. These markets arecharacterized by trends toward smaller, portable products capable of performingincreasingly sophisticated functions, as well as intense competitive pressureto rapidly introduce new products and product enhancements. Based on itsexpertise to tailor a broad range of products to meet customer requirements,the Company believes it is well positioned to serve the needs of its OEMcustomers as they respond to these trends and competitive factors.

Historically, the most significant market for theCompany’s products has been OEMs of telecommunications/data communicationsequipment (broadband modems, wireless and wire line); in fiscal 2005 sales inthis market represented approximately 39% of net sales. The Company’s productspower cable and ADSL modems, network termination equipment (devices whichinterface between telephone network and the customer’s PBX or other telephonesystem), line conditioning equipment (devices which prepare telephone lines forthe transmission of computer generated data), Wi-Fi and Power over Ethernetapplications and various items of equipment ancillary to business telephones,including speaker phones, automatic dialers, caller identification units andalpha numeric displays, low to medium speed PC modems and multiplexers(equipment which enables the simultaneous transmission of multiple channels ofinformation over the same telephone line).

In fiscal 2004, the telecommunications industryoverall began to rebound as OEMs began launching new projects/designs and hadthe need to replenish existing product inventory that had been slow-moving overthe past two years. A couple of telecommunication segments have beenparticularly strong:  wireless and networking.There are new applications such as broadband wireless routers and wirelessEthernet devices that require cost-effective switching power supplies in the 12-32watt range. The Company introduced a family of single-port Power-over-Ethernetpower supplies that combine power through integrated RJ45 jacks as well as dataover a single CAT 5 Ethernet cable. Two versions of the product are available:one that is 100% compliant to the Institute of Electrical and ElectronicsEngineers (IEEE) 802.3af standard that addresses Power over Ethernetrequirements. A second version in the PW130 family is available to power OEMdevices that are not compliant to the standard. Both versions can be sold as astandard product or be modified to suit specific requirements.

Approximately 33% of net sales in fiscal 2005 were toOEMs of portable medical equipment such as infusion pumps, patient monitoringsystems, apnea monitors, and portable terminals for patient history inputdiagnostics.

In fiscal 2005 approximately 17% of the Company’s netsales were to OEMs in the industrial market segment that includes digitalcameras, load survey equipment, industrial lighting, outdoor and specialtylighting as well as power tools, metal detectors and GPS equipment. Theremaining 11% of the Company’s net sales were to OEMs of computers and computerperipherals such as digitizers, printers, plotters, portable terminals, pointof sale scanners and optical character readers, LAN hardware and multimediaspeakers for computer applications.

The Company has workeddiligently to support the growth of sales through our network of regional,national and international distributors. In fiscal 2005, approximately 36% ofthe Company’s net sales were to our distributors and their broad base ofcustomers. While the specific percentages per market segment are not available,the Company’s distributors target the same market segments as those outlinedabove. (I.e. the data communications/telecommunications segment ranks at thetop of their market mix as well).

6

----

**(3) Design Engineering and Product Development**

Design engineering teamsat the Company’s facilities in the United States and the People’s Republic ofChina are responsible for developing new power conversion products andcustomizing existing products to meet customer needs. The Company also utilizesthe significant engineering resources of its Asian subcontractors for thedevelopment of products targeted for subcontract manufacturing. The Company’sproduct development activities are divided equally between developing productsto satisfy customer needs and new products based upon anticipated customerneeds and market trends. New product development opportunities are evaluatedbased upon criteria such as global market potential, return on investment andtechnological advantages. The Company believes that its collaborative effortswith customers, combined with its forward-looking concern for power technologyand market trends, have enabled it to gain a reputation as a leading innovatorin the development of new power conversion products.

**(4) Sales and Distribution**

The Company markets its products primarily in the U.S.and Canada through a network of 17 manufacturer representatives employingapproximately 120 salespersons, each of whom represents, in addition to Ault’sproducts, several different but complementary product lines of othermanufacturers. The Company also sells through four national distributororganizations, which employ over 1,000 salespersons, and 13 regionaldistributors, which employ over 75 salespersons. The Company selectsrepresentatives based upon their industry knowledge as well as accountexpertise with products that are synergistic with the Company’s products.Individual salespersons are trained, mentored and technically assisted by theCompany’s application engineers and other sales administration staff. Anyreduction in the efforts of these manufacturer representatives or distributorscould adversely affect the Company’s business and operating results.

The Company begins the sales process by identifying apotential customer or market; researching the target or potential customer’stotal business, product and strategic needs; and then preparing a totalsolution proposal that includes engineering, product development, safety agencyapprovals, logistics and project development processes, coordinating pilot runsand assisting OEMs with their product introductions.

The Company focuses its selling efforts primarily onOEMs in the U.S. and Canada. However, many of the larger OEM customers of theCompany manufacture and sell their products globally. As a result, the Companyhas extended its presence to markets throughout the world. The Company’s salesin the Pacific Rim are primarily to customers in China.

The Company markets its products in Europe through anetwork of distributors who are managed through the Company’s customer teamlocated in Minnesota and in Maryland. In the Pacific Rim, the Company marketsits products through direct sales teams located in Shanghai, People’s Republicof China.

**(5) Safety Agency Certification**

The power conversionsystem is potentially the most hazardous element in most electronic equipmentbecause the power supply modifies standard power to a level appropriate forsuch equipment. Virtually all of the Company’s customers require that the powerconversion products supplied by the Company meet or exceed establishedinternational safety and quality standards, since many of the Company’sproducts are used in conjunction with equipment that is distributed throughoutthe world. In response to these customer requirements, the vast majority of theCompany’s products are designed and manufactured in accordance withcertification requirements of many safety agencies, including UnderwritersLaboratories Incorporated (UL) in the United States; the Canadian StandardsAssociation (CSA) in Canada; Technischer Uberwachungs-Verein (TUV) in Germany;the British Approval Board for Telecommunication (BABT) in the United Kingdom;the International Electrotechnical Committee (IEC), a European standards 

7

----

organizationand (CE) a standard for the European Community. In addition, some of theCompany’s products have also received Japanese Ministry of International Tradeand Industry (MITI) approval. For certain safety applications, the Company’sproducts conform to FCC Class B requirements, which regulate the levels ofelectronic magnetic interference that may be emitted by electronic equipment.Unlike most of its competitors, the Company is a certified test laboratory forUL, CSA and TUV and is able to conduct most certification tests at itsMinneapolis headquarters. This procedure reduces the time required to obtainsafety certifications.

**(6) Competition**

The Company competes primarily with variousmanufacturers of external power conversion products. The industry is highlyfragmented, with manufacturers generally focusing their marketing on specificsegments. The Company has experienced strong competition from Taiwanese-basedmanufacturers principally on price. Many of these competitors have a smaller presencein the external conversion market than the Company, although several areengaged in more than one business and have significantly greater financialresources.

No single company dominates the overall external powerconversion product market, and the Company’s competitors vary depending uponthe particular power conversion product category. The companies with which Aultcompetes most directly in each of its major product categories are: LeaderElectronics, Inc. and Golden Pacific Electronics, Inc. fortransformers; Dee Van Enterprise Co., Ltd., Friwo, and EMC, Inc. forlinear power supplies; GlobTek, Inc., Condor and Phihong Enterprise Co.,Ltd. for switching power supplies; and Friwo, Phihong and Anam for batterychargers.

The Company competes on the basis of the quality andperformance of its products, the breadth of its product line, customer service,and dependability in meeting delivery schedules, design engineering services,and price. The Company believes it is currently one of a small number ofcompanies that design, manufacture and obtain certifying agency approvals forthe full range of internal and external power conversion devices, which OEMsconsider in designing their electronic product.

The Company provides a total solution approach to theOEM’s entire power conversion product needs (under 1 kilowatt) through itscommitment to reliable partnerships and its delivery of high quality productssupported by solution-oriented design engineering. The manufacturing facilityin China, and arrangements with subcontract manufacturers in China and Thailandenable the Company to compete effectively when price is the primaryconsideration.

Internal power conversion products continue to be usedfor most electronic equipment, and as a result the Company experiencescompetition from numerous OEMs and independent suppliers offering internalproducts. With the trend toward lower power requirements in portable electronicequipment and with the increasing availability of smaller, competitively pricedinternal switching power supplies, certain customers of the Company may chooseto return to internal power supplies in place of the external power conversionproducts they currently purchase. In response to this issue, the Company is nowwell positioned to service the power requirements of its customers, whetherinternal or external, as a result of the Power General acquisition. Thisacquisition not only provided the engineering expertise to design internalpower supplies, but also has expanded the Company’s product offeringsignificantly to include a line of AC/DC and DC/DC switching power supplies andDC/DC converters. The Company competes with a number of manufacturers ofinternal AC/DC power supplies, including Astec, Power-One, GlobTek, Condor andDelta Electronics.

The Company competes with a broad range ofmanufacturers in the DC/DC converter market. The industry is fragmented, withmanufacturers concentrating their sales and marketing on specific customerrequirements in specific markets. The Company’s primary competitors are Synqor,Power-One, Ericsson, Artesyn, and Galaxy. In the past 12 months, all of the keyplayers in the DC/DC market have introduced 

8

----

models in the isolated,high-efficiency eighth-brick and quarter-brick models. The largest singlemarket segment for the sale of these high-efficiency models istelecommunications. To date, no single competitor dominates the DC/DC market interms of market share.

The estimated size of themobile products market in North America is $55-$65 million. The major competitors,Targus, Lind and Mobility, specialize in this market segment. These threecompanies dominate the market with combined revenues of approximately $47million. The rest of the market includes smaller companies with limited salesto a handful of key customers.

**(7) Manufacturingand Sources of Supply**

The Company’s manufacturing operations consist ofassembly and integration of electronic components to meet productspecifications and design requirements for a variety of power conversionapplications. Manufacturing of the Company’s products is located at the Company’sfacilities in Xianghe, China, and at subcontract manufacturers in fourfacilities in China and Thailand.

As discussed above, the Company discontinued itsMinneapolis manufacturing operations beginning in the first quarter of fiscal2004, moving this production to its other manufacturing plants, primarily China.The consolidation included the closing of its Minneapolis productionoperations, with the headquarters location continuing to provide engineering,safety certification, reliability testing, sales, marketing and administrativeservices for its global customers. Ault’s headquarters will continue to provideprototypes and engineering builds as part of its engineering support services.

Electronic components and raw materials used in theCompany’s products are generally available from a large number of suppliers,although from time to time shortages of particular items are experienced.

Quality and reliability are emphasized in both thedesign and manufacture of the Company’s products. This emphasis is reflected inthe ISO 9001 certification of the Company’s Minneapolis facility in 1991 andits China facility in 1998. The Company tests 100% of its finished productsagainst its own and the customers’ specifications, and then ships the productsin custom-engineered protective packaging to minimize any damage duringshipment.

The Company hassubcontract manufacturing arrangements with two business partners in Thailandand two in China. The Company does not have long-term commitments with itssubcontractors and the subcontractors build product for the Company pursuant toindividual purchase orders. Either party may terminate the arrangements at anytime. The product that is manufactured by the subcontractors is not specific tothat subcontractor. The product could be produced by one of the othersubcontractors or a company owned facility. Currently the subcontractorsaccount for less than 15% of the current year’s revenue. The Company selectsits subcontract manufacturers based upon their ability to manufacture high-qualityproducts, the sufficiency of their engineering capabilities to support productsbeing manufactured; and their ability to meet required delivery times.

**(8) Significant Customers: Backlog**

The Company sells its products to over 400 customers,and it is the Company’s objective to maintain a diversified customer base toavoid, where practicable, dependence upon a single customer. In fiscal 2005,2004, and 2003, no customers accounted for more than 10% of sales.

The Company’s order backlog at May 29, 2005totaled $9,678,000 compared to $10,027,000 at May 30, 2004. The orderbacklog represents sales for approximately 14 weeks.

The Company enters intobuying commitments and other scheduling agreements with certain customers. Forits larger customers, these agreements allow for order increases and decreaseswithin 

9

----

scheduledlimits and include cancellation charges for completed and in-process productsand procured materials. Most products are shipped within 4 to 10 weeks of anorder.

**(9) Warranties**

The Company provides up toa three-year parts and labor warranty against defects in materials orworkmanship on all of its products. Servicing and repairs are conducted at theCompany’s facilities in Minneapolis. The Company’s warranty expenses have notbeen significant.

**(10) Patents**

The Company holds nosignificant patents.

**(11) Seasonality**

In the past three years,sales of the Company have not reflected seasonality.

**(12) Employees**

As of August 11, 2005, the Company employedapproximately 577 full-time employees. Listed below is a breakdown bygeographic area:

| ** **                  | ** ** | **China** | ** ** | **US** | ** ** | **Total** | ** ** |
|-----------------------------|------------|-----------|------------|--------|------------|-----------|------------|
| Manufacturing               |       |      | 400        |   |       |      | 5          |   |   |   | 405 |   |   |
| Engineering                 |       |      | 48         |   |       |      | 31         |   |   |   | 79 |   |   |
| Marketing                   |       |      | 8          |   |       |      | 17         |   |   |   | 25 |   |   |
| General and  Administrative |       |      | 58         |   |       |      | 10         |   |   |   | 68 |   |   |
| Total                       |       |      | 514        |   |       |      | 63         |   |   |   | 577 |   |   |

 

None of the Company’semployees are represented by a labor organization, and the Company has neverexperienced a work stoppage or interruption due to a labor dispute. Managementbelieves that its relations with its employees are good.

**(13) ExecutiveOfficers of the Registrant**

Certaininformation with respect to the executive officers of the Company is set forth:
| **Name**              | ** ** | ** ** | ** ** | **Age**                                            | ** ** | **Position** | ** ** | **Officer Since** |
|-----------------------|------------|------------|------------|----------------------------------------------------|------------|--------------|------------|-------------------|
| Frederick M. Green    |       | 62         |       | President and Chief Executive Officer and Director |       | 1980         |
| Xiaodong Wang         |       | 47         |       | Vice President—Asia Pacific                   |       | 2000         |
| Gregory L. Harris     |       | 52         |       | Vice President—Business Development           |       | 1988         |
| William J. Birmingham |       | 64         |       | Interim Chief  Financial Officer                   |       | 2005         |

 

**(14) Working Capital**

With almost all of theCompany’s products manufactured in China, Korea and Thailand, and shipped tocustomers around the world, principally over the ocean by boat, it can takefour to seven weeks for product shipments to reach customers. Generally, theCompany invoices customers shortly after the product has been shipped from theAsian manufacturing location. The long shipping schedule results in delays incustomer payments of invoices and increases the amount of account receivablesthat are ineligible as part of the borrowing base on the credit line facilitywith the bank.

10

----

**(15) Risk Factors**

The following riskfactors are relevant to an understanding of the Company’s business:

·       ***The Company recently received a delisting noticefrom Nasdaq and there can be no assurance that the Company’s securities willcontinue to be listed on Nasdaq.***   On September 15,2005, the Company received a notice from Nasdaq that because the Company’sannual report on Form 10-K for the fiscal year ended May 29, 2005 hasnot been filed, the Company is subject to delisting. On September 27, 2005Nasdaq advised the Company that because its stockholders’ equity dropped belowthe $10 million threshold, another grounds for delisting exists. The Companyhas appealed the delisting notice and believes that it will be able to maintaincompliance with Nasdaq listing requirements, but continued listing is subjectto a hearing before a Nasdaq Qualifications Panel, and there can be noassurance that the Panel will permit the Company’s securities to continue to belisted.

·       ***The Company has experienced materialweaknesses in its internal controls***.   The Company hasrecently experienced material weaknesses in its internal controls related toits Ault China subsidiaries, and related to its warehouse arrangements withthird parties. These weaknesses in controls resulted in certain adjustments tothe Company’s financial statements. The Company has undertaken a remediationprogram to address these weaknesses, but there can be no assurance that theCompany may not suffer additional material weaknesses and adjustments orrestatements to its financial statements.

·       ***The electronic equipment market is characterized byrapidly changing technology and shorter product life cycles.*  **TheCompany’s future success will continue to depend upon its ability to enhanceits current products and to develop new products that keep pace withtechnological developments and respond to changes in customer requirements. Anyfailure by the Company to respond adequately to technological changes andcustomer requirements or any significant delay in new product introductionscould have a material adverse effect on the Company’s business and results ofoperations. In addition, there can be no assurance that new products to bedeveloped by the Company will achieve market acceptance. See “Business—DesignEngineering and Product Development.”

·       ***The Company’s financial results are influenced by anumber of factors.*  **The Company’s financial results aresubject to fluctuation due to various factors, including general businesscycles in the Company’s markets, the mix of products sold, the stage of eachproduct in its life cycle and the rate and cost of development of new products.In addition, component and material costs, the timing of orders from andshipments of products to customers and deferral or cancellation of orders frommajor customers could adversely affect financial results.

·       ***The Company’s reliance on outside contractorsreduces its control over quality and delivery schedules.*  **TheCompany currently depends on third parties located in foreign countries for asignificant portion of the manufacture and assembly of certain of its products.While the Company takes an active role in overseeing quality control with itsthird-party manufacturers, the failure by one or more of these subcontractorsto deliver quality products or to deliver products in a timely manner couldhave a material adverse effect on the Company’s operations. In addition, theCompany’s third-party manufacturing arrangements are short term in nature andcould be terminated with little or no notice. If this happened, the Companywould be compelled to seek alternative sources to manufacture certain of itsproducts. There can be no assurance that any such attempts by the Company wouldresult in suitable arrangements with new third-party manufacturers. See “Manufacturingand Sources of Supply.”

11

----

·       ***The Company’s success depends in part upon thecontinued services of many of its highly skilled personnel involved inmanagement, engineering and sales, and upon its ability to attract and retainadditional highly qualified employees.***   The loss ofservice of any of these key personnel could have a material adverse effect onthe Company. The Company does not have key-person life insurance on any of itsemployees. In addition, the Company’s future success will depend on the abilityof its officers and key employees to successfully manage the Company for growthand profitability and to attract, retain, motivate and effectively utilize theteam approach to manage its employees.

·       ***While the Company actively trains and technicallyassists the individual sales representatives representing its products, areduction in the sales efforts by the current manufacturer representatives anddistributors or termination of their relationships with Ault could adverselyaffect the sales and operations.***   The Company markets andsells products primarily through independent manufacturer representatives anddistributors that are not under its direct control. The Company employs alimited number of internal sales personnel.

·       ***To satisfy customer demand and to obtain greaterpurchasing discounts, the Company carries increased inventory levels of certainitems.***   The Company’s financial results may be adverselyaffected when inventory exceeds anticipated demand. Carrying additionalinventory levels also increases the risk of loss due to obsolescence. Grossmargin can be adversely affected by increases in costs of raw materials. Therecan be no assurance that raw material cost increases or the cost of carryingincreased finished goods inventory will not have a material adverse effect onthe financial results.

·       ***A prolonged reduction in demand for the Company’sproducts will continue to impact the financial success.*  **Infiscal year 2002, sales declined in large part due to a substantial downturn insales to the telecommunications and data communications markets. Sales to thesemarkets stabilized in fiscal 2003 and fiscal 2004 with modest growth in fiscal2005. A decline of the telecommunications and data communications markets wouldadversely affect the Company’s results.

·       ***The financing agreements contain covenants with which the Company maynot be able to comply.*  **TheCompany has entered into a financing agreement that contains financialcovenants. These covenants require, that the Company, among other things,maintain a minimum working capital base, and also impose certain limitations onadditional capital expenditures and the payment of dividends. The Company believesthe covenants are achievable based on the expected operating results. Itsability to comply with financial covenants depends upon future operatingperformance. And, future operating performance depends, in part, on generalindustry conditions and other factors beyond the Company’s control. If theCompany were unable to obtain a waiver or amendment from the lender on itscredit facility on reasonable terms, the credit facility could be acceleratedand the entire balance could be due. The default interest rate would rise toprime plus 5%. Availability under the facility is based on the Company’saccounts receivables. Historically, the balance has fluctuated between $2.3 and$2.6 million. If the balance were accelerated and the interest rate rose to thedefault rate, the Company would be required to secure an alternative creditfacility or capital. There can be no assurance that a replacement for therevolving credit facility could be obtained at all, or on terms favorable tothe Company. A failure to obtain a replacement facility would have a materialadverse effect on the Company.

·       ***Civilunrest, labor disruptions, or acts of aggression could impede the Company’sability to operate in foreign locations and would have a material adverseeffect on future business and consequently, the operating results.***   Manufacturingis conducted at the Company’s facilities in China and through manufacturingrelationships in the People’s Republic of China (China), Korea and Thailand. Whilethis Pacific Rim manufacturing strategy enables the Company to competeworldwide against other suppliers of external power conversion products, italso involves risks. While, its manufacturing operations in China, Korea andThailand have not been affected by labor disruptions, civil unrest or 

12

----

politicalinstability, the risk of civil unrest and political instability is present ineach of these countries.

**(d) FinancialInformation About Foreign and Domestic Operations and Export Sales**

Export sales in fiscalyear 2005 represented 15.7% of the Company’s gross sales, most of which were toOEMs in Europe and Canada. For other financial information about foreign anddomestic operations and export sales including the amount of export sales forthe last 3 years, refer to “Note 13—Segment Information and Foreign Operations”under notes to consolidated financial statements.

**ITEM 2.**                PROPERTIES

The Company leases approximately 13,000 square feet ofoffice space in its former headquarters facility in Brooklyn Park, a suburb ofMinneapolis, Minnesota.

The Company leases a 10,500-square-foot office inNorwood, Massachusetts.

Ault China Corporation owns and occupies a 40,000square foot facility in the Province of Xianghe in China. The land use rightsexpire in 2050.

Ault Shanghai Corporation leases a 9,000-square-footfacility in Shanghai, China.

Management considers allof the Company’s properties to be well maintained, and together withsubcontract arrangements in China and Thailand, adequate for all Companyfunctions, including manufacturing requirements.

**ITEM 3.**                LEGALPROCEEDINGS

No material litigation orother claims are presently pending against the Company.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

13

----

**PARTII.**

**ITEM 5.**                MARKETFOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)           MarketInformation

Aultcommon shares are traded on the NASDAQ market under the symbol AULT.  The following table presents the range ofclosing bid prices for the Company's common stock on the NASDAQ Market forfiscal 2005 and 2004.  The Companyrecently received a delisting notice from NASDAQ and there can be no assurancethat the Company’s securities will continue to trade on NASDAQ.

| ** **  | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|-------------|------------|----------------------|------------|----------------------|------------|
| ** **  | ** ** | **$**                | ** ** | **$**                | ** ** | **$** | ** ** | **$** | ** ** |
| **Quarter** | ** ** | ** **           | ** ** | **High**             | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| 1st    |       | 3.100                |       | 2.350                |       | 2.310 |   | 1.860 |   |
| 2nd    |       | 3.580                |       | 2.570                |       | 2.990 |   | 2.000 |   |
| 3rd    |       | 3.570                |       | 2.410                |       | 3.760 |   | 2.300 |   |
| 4th    |       | 2.580                |       | 1.890                |       | 3.770 |   | 2.800 |   |
|             |            |                      |            |                      |            |  |  |  |  |  |  |

 

(b)          Holders

As ofSeptember 1, 2005 there were 266 shareholders of record for the Company'scommon stock.  This number of recordstockholders does not include beneficial owners of common stock whose sharesare held of record by Depository Trust under the name CEDE & Co.

(c)           Dividends

Aulthas not paid cash dividends on its common shares, and the present policy of itsBoard of Directors is to retain any earnings for use in the business.  The Board of Directors does not anticipatepaying cash dividends on its common shares in the foreseeable future.  The Company is obligated to pay dividends onits outstanding 7% Convertible Preferred Stock. See Note 9 of the Notes to Financial Statements under Item 9 herein.

(d)          OtherInformation Regarding Equity Compensation Plans

| ** **                                                   | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                                                     | ** ** | **(c)**                                                                                                     | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                       | ** ** | ** ** | ** ** | **Number of shares of  common stock to be  issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of shares of  common stock remaining  available for future  issuance under equity  compensation plans  (excluding shares in  column (a))** | ** ** |
| Equity compensation  plans approved by security holders:     |       |       |       |                                                                                                                                                                        |       |                                                                                                        |       |   |   |   |   |   |   |
| 1986 Stock Plan                                              |       |       | 122,500    |                                                                                                                                                                        |       |                                                                                                        | $          | 5.638 |   |   |   | — |   |   |
| 1996 Stock Plan                                              |       |       | 1,143,126  |                                                                                                                                                                        |       |                                                                                                        | 5.021      |   |   |   | 203,775 |   |   |
| Employee Stock  Purchase Plan                                |       |       | 6,003      |                                                                                                                                                                        |       |                                                                                                        | 2.040      |   |   |   | 68,193 |   |   |
| Equity  compensation plans not approved by security holders: |       |       |       |                                                                                                                                                                        |       |                                                                                                        |       |   |   |   |   |   |   |
| None                                                         |       |       |       |                                                                                                                                                                        |       |                                                                                                        |       |   |   |   |   |   |   |
|                                                              |            |            |            |                                                                                                                                                                             |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |

----

(1)          The Company does nothave individual compensation arrangements involving the granting of optionswarrants and rights.

(2)          Duringthe past three fiscal years, the Company has not sold its securities exceptpursuant to registration statements under the Securities Act of 1933.

14

----

**ITEM 6.**                SELECTEDFINANCIAL SUMMARY

(Amountsin Thousands, Except Per Share Data)

| ** **                                               | ** ** | **YEARS ENDED**            | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | **May 29,  2005(1) ** | ** ** | **May 30,  2004(1)(2)** | ** ** | **June 1,  2003(1)(3)** | ** ** | **June 2,  2002(1)** | ** ** | **June 3,  2001(4)(1)** | ** ** |
| Net sales                                                |       | $                               | 37,216     |   |   | $ | 35,361 |   |   |   | $ | 35,996 |   |   | $ | 36,080 |   |   | $ | 78,231 |   |   |
| Gross profit                                             |       | 10,139                          |       |   | 8,173 |   |   |   | 6,895 |   |   | 6,474 |   |   | 16,824 |   |   |
| Operating  expenses                                      |       | 12,003                          |       |   | 13,249 |   |   |   | 14,069 |   |   | 10,338 |   |   | 12,702 |   |   |
| Operating income (loss)                                  |       | (1,864                          | )          |   | (5,076 | ) |   |   | (7,174 | ) |   | (3,864 | ) |   | 4,122 |   |   |
| Nonoperating income (expense)                            |       | (518                            | )          |   | (415 | ) |   |   | (284 | ) |   | (127 | ) |   | (188 | ) |   |
| Income (loss) before income taxes                        |       | (2,382                          | )          |   | (5,491 | ) |   |   | (7,458 | ) |   | (3,991 | ) |   | 3,934 |   |   |
| Income tax expense (benefit)                             |       | 8                               |       |   | 60 |   |   |   | (340 | ) |   | (819 | ) |   | 1,355 |   |   |
| Cumulative effect  of accounting change, net of tax      |       |                            |       |   |   |   |   |   |   |   |   |   |   |   | (50 | ) |   |
| Income (loss) from continuing  operations                |       | (2,390                          | )          |   | (5,551 | ) |   |   | (7,118 | ) |   | (3,172 | ) |   | 2,529 |   |   |
| Discontinued operations                                  |       | (2,595                          | )          |   | 150 |   |   |   | (446 | ) |   | (392 | ) |   | (333 | ) |   |
| Net Income (loss)                                        |       | (4,985                          | )          |   | (5,401 | ) |   |   | (7,564 | ) |   | (3,564 | ) |   | 2,196 |   |   |
| Redeemable convertible preferred stock dividends         |       | (145                            | )          |   | (145 | ) |   |   | (128 | ) |   | — |   |   | — |   |   |
| Net income (loss) applicable to common stockholders      |       | $                               | (5,130     | ) |   | $ | (5,546 | ) |   |   | $ | (7,692 | ) |   | $ | (3,564 | ) |   | $ | 2,196 |   |   |
| Net income (loss) per  share from continuing operations: |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                    |       | $                               | (.53       | ) |   | $ | (1.22 | ) |   |   | $ | (1.58 | ) |   | $ | (0.70 | ) |   | $ | 0.56 |   |   |
| Diluted                                                  |       | (.53                            | )          |   | (1.22 | ) |   |   | (1.58 | ) |   | (0.70 | ) |   | 0.54 |   |   |
| Total assets                                             |       | $                               | 16,807     |   |   | $ | 29,835 |   |   |   | $ | 33,065 |   |   | $ | 36,697 |   |   | $ | 43,457 |   |   |
| Property, plant  and equipment, net                      |       | 2,375                           |       |   | 6,126 |   |   |   | 8,427 |   |   | 7,298 |   |   | 6,524 |   |   |
| Working capital                                          |       | 5,856                           |       |   | 5,677 |   |   |   | 8,431 |   |   | 14,084 |   |   | 17,840 |   |   |
| Long-term debt,  less current maturities                 |       | 0                               |       |   | 2,313 |   |   |   | 2,483 |   |   | 2,754 |   |   | 3,035 |   |   |
| Stockholders' equity                                     |       | 7,950                           |       |   | 11,937 |   |   |   | 17,319 |   |   | 24,753 |   |   | 28,129 |   |   |

----

(1)          The years have beenadjusted to reflect the Company’s Korean subsidiary as discontinued operations.

(2)          The 2004 results includeexit costs of $2,064.

(3)          The 2003 results includea goodwill impairment charge of $1,153.

(4)          The2001 results include a noncash, pretax cumulative effect of accounting changerelated to the adoption of Staff Accounting Bulletin No. 101 of $77 expense($50 after tax, or $0.01 per share).  The2001 results include 53 weeks of activity.

15

----

**ITEM 7.**                MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

**Critical Accounting Policies**

The discussion and analysis of our financial conditionand results of operations are based on our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets andliabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities at the date of our financial statements.  Actual results may differ from theseestimates under different assumptions or conditions.

Critical accounting policies are defined as those thatinvolve significant judgments and uncertainties and potentially result inmaterially different results under different assumptions and conditions.  Application of these policies is particularlyimportant to the portrayal of our financial condition and results ofoperations.  We believe the accountingpolicies described below meet these characteristics.  Our significant accounting policies are morefully described in the notes to the consolidated financial statements includedin this annual report on Form 10-K.

*Revenue Recognition*—The Company’s policy is torecognize revenue for product sales when title transfers and risk of loss haspassed to the customer, which is generally upon acceptance of the product bythe overseas freight carrier. The Company’s policies comply with the guidanceprovided by Staff Accounting Bulletin No. 104, Revenue Recognition, issued bythe Securities and Exchange Commission. Judgments are required in evaluatingthe credit worthiness of our customers. Credit is not extended to customers andrevenue is not recognized until the Company has determined that the risk ofuncollectibility is minimal.

*Inventory Valuation*—Inventory is written downfor estimated surplus and discontinued inventory items. The amount of thewrite-down is determined by analyzing historical and projected salesinformation, plans for discontinued products and other factors. Changes insales volumes due to unexpected economic or competitive conditions are amongthe factors that would result in materially different amounts for this item.

*Allowance for Doubtful Accounts*—An allowance isestablished for estimated uncollectible accounts receivable. The requiredallowance is determined by reviewing customer accounts and making estimates ofamounts that may be uncollectible. Factors considered in determining the amountof the reserve include the age of the receivable, the financial condition ofthe customer, general business, economic and political conditions, and otherrelevant facts and circumstances. Unexpected changes in the aforementionedfactors would result in materially different amounts for this item.

*Product Warranties*—The Company’s products aresold with warranty provisions that require it to remedy deficiencies in qualityor performance over a specified period of time, up to 36 months, at no cost tothe Company’s customers. The Company’s policy is to establish warranty reservesat levels that represent its estimate of the costs that will be incurred tofulfill those warranty requirements at the time that revenue is recognized. TheCompany believes that its recorded liabilities are adequate to cover its futurecost of materials, and overhead for the servicing of its products sold throughthat date. If there is an actual product failure, or material or servicedelivery costs differ from the Company’s estimates, its warranty liabilitywould need to be revised accordingly.

*Deferred Taxes*—Deferred tax assets andliabilities are recognized using enacted tax rates for the effect of temporarydifferences between the book and tax basis of recorded assets andliabilities.  Deferred tax assets arereduced by a valuation allowance if it is likely that some portion or theentire deferred tax asset will not be realized. Based upon prior taxable income and estimates of future taxable income,the 

16

----

Companyhas determined that it is likely that the net deferred tax asset will not berealized in the future.  Thus a fullvaluation allowance has been established. If actual taxable income varies from these estimates, the Company may berequired to change the valuation allowance against the deferred tax assetsresulting in a change in income tax benefit, which will be recorded in theconsolidated statement of operations.

**LIQUIDITY AND CAPITAL RESOURCES**

The financial statements have been prepared on agoing-concern basis, which contemplates the realization of assets andsatisfaction of liabilities in the normal course of business. The Companysustained net losses applicable to common stockholders of $5,129,917 in 2005and $5,545,646 in 2004 and at May 29, 2005 had an accumulated deficit of$13,450,961. The Company generated $1,480,000 of cash from operating activitiesin 2005. In May 2005 the Company sold its Korean subsidiary and its Minneapolisheadquarter building. The sale of the Korean subsidiary resulted in the receiptof cash from JEC Korea Co., Ltd. of $1,472,039 and a secured note for$2,250,000. The sale of the Minneapolis headquarter building resulted in thereceipt of cash from Dane Industries Inc. of $3,850,000, of which $2,509,203was used to pay the mortgage. During May 2005 the Company paid off the bankdebt in the United States and at May 29, 2005 the Company’s bank debt was$289,628, all applicable to its China operations. The Company continues to havea $7,000,000 line-of-credit agreement with Wells Fargo Bank in Minneapolis thatruns through December 4, 2006.

Based on available funds, current plans and businessconditions, management believes the Company’s available cash and amountsgenerated from operations and bank borrowings, will be sufficient to meet theCompany’s cash requirements for the next twelve months and in the foreseeablefuture. The assumptions underlying this belief include, among other things,that there will be no material adverse developments in the business or marketin general. There can be no assurances however that those assumed events willoccur. If management’s plans are not achieved, there may be further negativeeffects on the results of operations and cash flows, which could have amaterial adverse effect on the Company.

Thefollowing table summarizes the Company’s working capital position at May 29,2005 and May 30, 2004:

| ** **                             | ** ** | **May 29, 2005**                   | ** ** | **May 30, 2004** | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **(US Dollars in Thousands)** | ** ** |
| Working capital                        |       |                                         | 5,856      |                       |       |   | 5,677 |   |   |
| Cash and cash  equivalents             |       |                                         | 2,191      |                       |       |   | 837 |   |   |
| Cash provided by  (used in) operations |       |                                         | 1,480      |                       |       |   | (950 | ) |   |
| Unutilized bank credit  facility       |       |                                         | 3,357      |                       |       |   | 1,489 |   |   |

 

**Current Working Capital Position**

At May 29, 2005, the Company had current assets of$12,638,522 and current liabilities of $6,782,333 representing working capitalof $5,856,189 and a current ratio of 1.9. This represents an increase inworking capital of $179,000 from $5,677,000 at May 30, 2004. The Company relieson its credit facilities as sources of working capital to support normal growthin revenue, capital expenditures and attainment of profit goals. The Companyhas not committed to any material capital expenditures as of May 29, 2005.

**Cashand Investments**:   At May 29, 2005, the Companyhad cash and securities totaling $2,191,000, up from $837,000 at May 30, 2004.The increase in cash was principally due to the cash receipts from the sale ofthe Korean subsidiary and the Minneapolis headquarters building. 

**Credit Facility**:   TheCompany maintains a credit facility with Wells Fargo Bank N.A., which is anasset-based credit facility of $7,000,000, secured by all company assets. Theborrowing base is eligible trade receivables. At May 29, 2005 there were noborrowings compared to borrowings of $1,965,000 at May 30, 

17

----

2004. The financingagreement contains financial covenants. These covenants require the Company,among other things, to maintain a minimum capital/equity base, and also imposecertain limitations on additional capital expenditures and the payment ofdividends. At the end of fiscal 2005, the Company’s actual net book worth andincome before taxes did not meet the minimum of the credit agreement. Theminimum net book worth covenant was $13,809,000 and the minimum income beforetaxes covenant was a loss of $573,000. The Company has received a waiver andamendment for these covenants. Following the August 31, 2005 waiver, theCompany believes the provisions imposed by this credit agreement are achievablebased on the Company’s expected operating results for the next year.

**CASH FLOWS FOR FISCAL 2005**

**Operations:****  **Operations provided $1,480,000 ofcash during fiscal 2005 due principally to the following activities: (1) theloss, net of non-cash charges for: depreciation of $518,000, loss on the saleof Minneapolis headquarter’s building of $137,000, loss on the sale of Koreansubsidiary of $2,442,000 and an increase in the provision for bad debts ontrade receivables of $490,000 used cash of $1,398,000; (2) net changes ofcurrent assets and current liabilities provided $2,387,000 of cash, and (3) thediscontinued Korean operation provided $470,000 of cash.

**InvestingActivities:**   Proceeds from the sale of the Koreansubsidiary and Minneapolis headquarters building less amounts spent for toolingand test equipment provided $4,523,000 of cash.

**FinancingActivities:**   Financing activities used cash of$4,648,000, with repayments for bank borrowings of $1,965,000 and principalpayments on long-term debt of $2,483,000, principally the mortgage debt on theMinneapolis building, representing the major financing activities for the year.

**Effect of Foreign CurrencyExchange Rate Fluctuations:**   The effect oftranslating the Chinese financial statements, which were prepared in ChineseYuan (Yuan) to U.S. Dollars, had minimal effect on cash for the year.

**RESULTS OF OPERATIONS**

*Recent Events*—DuringJune 2005 the Company became aware of accounting errors in its China operationsthat resulted in an understatement of the loss applicable to commonstockholders of $593,000 for fiscal year 2004 and $425,000 for the first threequarters of fiscal year 2005 compared to results that were originally reported.The sale of the Company’s Korean subsidiary in May 2005, required adjustmentsto the financial statements to present Korean operations as “discontinuedoperations”.

**Fiscal Year EndedMay 29, 2005**

| ** **     | ** ** | ** **           | ** ** | ** **           | ** ** | **Increase** | ** ** | **Increase** | ** ** |
|----------------|------------|----------------------|------------|----------------------|------------|--------------|------------|--------------|------------|
| ** **     | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** | **Amount**   | ** ** | **Percent**  | ** ** |
| ** **     | ** ** | **($000)**           | ** ** |
| Net Sales      |       |                 | $          | 37,216               |       |         |       | $            | 35,361     |   |   |   | $ | 1,855 |   |   |   | 5 | % |   |
| Operating Loss |       |                 | $          | (1,864               | )          |         |       | $            | (5,076     | ) |   |   | $ | 3,212 |   |   |   | 63 | % |   |

 

Net sales were $37,216,000 for fiscal 2005, up 5% fromfiscal 2004 of $35,361,000. During fiscal year 2005 the Company saw a growth inthe number of medical equipment customers and the start of a recovery inbusiness activity in the data communications area.

The gross profit margin was 27.2% for fiscal 2005compared to 23.1% for fiscal 2004. The improvement in gross profit margin ispartially due to lower production costs in China compared to U.S.manufacturing, which was discontinued in the early months of fiscal year 2004.The consolidation of manufacturing operations to Asian locations has started toproduce some efficiencies and cost savings 

18

----

during fiscal year 2005that were not enjoyed in the early quarters of fiscal year 2004, ofapproximately $650,000.

Operating expenses, in total, decreased to $12,002,000during fiscal 2005, down from $13,249,000 in fiscal 2004, which included$2,064,000 of exit costs, which did not repeat in fiscal 2005. During fiscal2005 general and administrative costs were $5,641,000 compared to $4,769,000 inthe previous fiscal year. Some of the more significant expense increases ingeneral and administrative expenses during fiscal 2005 included outsideconsultants for the start of Sarbanes-Oxley compliance of $210,000, one year’sseverance pay and related taxes for the former general manager of the Koreansubsidiary of $164,000 and an increase to the bad debt allowance of$490,000.   

The Company’s order backlog at May 29, 2005 was$9,678,000, down 3.5% from May 30, 2004 of $10,027,000.

Interest expenses were$407,000 during fiscal 2005, about the same as the $411,000 in fiscal 2004.Other expenses of  $111,000 during fiscal2005, included the $137,000 loss on sale of the Minneapolis headquarterbuilding. 

**CASH FLOWS FOR FISCAL 2004**

**Operations:**   Operationsused $950,000 of cash during fiscal 2004 due principally to the followingactivities: (1) the loss, net of non-cash charges for: depreciation of$872,000, and asset impairment of $1,742,000 used cash of $2,786,000; (2) netchanges of current assets and current liabilities provided $1,443,000 of cash,and (3) the discontinued Korean operation provided $375,000 of cash.

**InvestingActivities:**   The purchase of tooling and testequipment used $322,000 of cash, including $9,000 from discontinued operations.

**FinancingActivities:**   Net bank borrowings provided$1,965,000 of cash and repayments on long-term debt used $270,000.  Discontinued Korean operations used $507,000of cash, principally repayments on the credit facility.

**Effect of Foreign CurrencyExchange Rate Fluctuations**:   The effect wasminimal on cash for the year.

**RESULTS OF OPERATIONS**

**Fiscal Year EndedMay 30, 2004**

| ** **     | ** ** | ** **           | ** ** | ** **           | ** ** | **Increase/** | ** ** | **(Decrease)** | ** ** |
|----------------|------------|----------------------|------------|----------------------|------------|---------------|------------|----------------|------------|
| ** **     | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** | **Amount**    | ** ** | **Percent**    | ** ** |
| ** **     | ** ** | **($000)**           | ** ** |
| Net Sales      |       |                 | $          | 35,361               |       |          |       | $              | 35,996     |   |   |   | $ | (635 | ) |   |   | (2 | %) |   |
| Operating Loss |       |                 | $          | (5,076               | )          |          |       | $              | (7,174     | ) |   |   | $ | 2,098 |   |   |   | 29 | % |   |

 

Net sales were $35,361,000 for fiscal 2004, down 2%from $35,996,000 for fiscal 2003. The Korean subsidiary, which has been treatedas discontinued operations and excluded from the above revenue figures, had asales increase of $4,265,000 in fiscal 2004 compared to fiscal 2003.

The gross profit margin was 23.1% for fiscal 2004, comparedto 19.2% for fiscal 2003. The gross profit margin in fiscal 2004 increased$797,000 from cost reductions related to the exit of manufacturing activitiesin Minneapolis, reduced by inventory write-downs of $545,000 for such exit.Increased business volume in North America contributed approximately $311,000to fiscal 2004 gross profit margins. Fiscal 2003 gross margins were adverselyaffected by $740,000 from the acquisition of Power General.

19

----

Operating expenses decreased to $13,249,000 in fiscal2004, compared to $14,069,000 in fiscal 2003. The fiscal year 2003 had agoodwill impairment charge of $1,153,000, which did not repeat in fiscal 2004.The fiscal 2004 operating expenses include $2,064,000 of exit costs related tothe discontinuance of manufacturing activities in Minneapolis. Severance payfor employees affected by this exit is included in the $2,064,000 amount.

The Company’s order backlog at May 30, 2004 was$10,027,000 compared to $13,850,000 at June 1, 2003. The backlog decrease isprincipally the result of many customers ordering on a just in time basis.

Increased bank debt duringfiscal 2004, compared to fiscal 2003 resulted in interest expense of $411,000for fiscal 2004, compared to $264,000 in fiscal 2003.

**InformationAbout Revenue by Geography**

Revenuefrom the U.S., from each foreign country that is a source of significantrevenue, and from all other foreign countries as a group are as follows:

| ** **    | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|---------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **May 29, 2005**      | ** ** | **May 30, 2004**      | ** ** |
| ** **    | ** ** | **($000)**                      | ** ** | **($000)**                      | ** ** |
| U.S.          |       |                            | $          | 27,062                          |       |   |   | $ | 26,702 |   |   |
| China         |       |                            | 4,305      |                            |       |   | 3,567 |   |   |
| Canada        |       |                            | 1,281      |                            |       |   | 1,182 |   |   |
| Ireland       |       |                            | 1,533      |                            |       |   | 983 |   |   |
| Belgium       |       |                            | 97         |                            |       |   | 22 |   |   |
| Other Foreign |       |                            | 2,938      |                            |       |   | 2,905 |   |   |
| Total         |       |                            | $          | 37,216                          |       |   |   | $ | 35,361 |   |   |

 

The Company considers acountry to be the geographic source of revenue if it has contractualobligations, including obligation to pay for trade receivable invoices.

**Impactof Foreign Operations and Currency Changes**

Products manufactured bythe Company’s Chinese subsidiaries comprise a large portion of total sales. TheCompany will experience normal valuation changes as the Chinese currencyfluctuates. The effect of translating the Chinese financial statements hadminimal effect for the year.

**Forward Looking Statements**

From time to time, inreports filed with the Securities and Exchange Commission (SEC), in pressreleases, and in other communications to shareholders or the investing public,the Company may make forward-looking statements concerning possible oranticipated future results of operations or business developments that aretypically preceded by the words “believes,” “expects,” “anticipates,” “intends”or similar expressions. For such forward-looking statements, the Company claimsthe protection of the safe harbor for forward-looking statements contained inthe Private Securities Litigation Reform Act of 1995. Shareholders and theinvesting public should understand that such forward-looking statements aresubject to risks and uncertainties which could cause results or developments todiffer significantly from those indicated in the forward-looking statements. Suchrisks and uncertainties include, but are not limited to, the overall level ofsales by original equipment manufacturers (OEMs) in the telecommunications,data communications, medical and other markets; buying patterns of the Company’sexisting and prospective customers; the impact of new products introduced bycompetitors; delays in new product introductions; higher than expected expenserelated to sales and new marketing initiatives; availability of adequatesupplies of raw materials and components; dependence on outsidecontractors;  reliance on third-party 

20

----

distribution;  unanticipated expenses related to integrationof manufacturing and personnel from acquisitions, such as the acquisition of thePower General assets;  dependence onforeign manufacturing and other operations; and other risks affecting theCompany’s target markets generally.

**Contractual Obligations**

Thefollowing table summarizes the Company’s contractual obligations and commercialcommitments as of May 29, 2005 (in thousands):

| ** **                     | ** ** | **Payment due by Period** | ** ** |
|--------------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                | ** ** | **1 Year** | ** ** | **2 Years** | ** ** | **3 Years** | ** ** | **After 3 Years** | ** ** |
| Contractual Obligations:       |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                 |       | $                                        | 290        |   |   | 290 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |
| Operating leases               |       | 1,079                                    |       |   | 444 |   |   |   | 435 |   |   |   | 200 |   |   |   | 0 |   |   |
| Total Contractual  Obligations |       | $                                        | 1,369      |   |   | $ | 734 |   |   |   | $ | 435 |   |   |   | $ | 200 |   |   |   | 0 |   |   |
|                                |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Accounting Pronouncements**

In June 2001, theFinancial Accounting Standards Board (FASB) approved for issuance SFAS No. 142,*Goodwill and Other Intangible Assets*.SFAS No. 142 requires that upon adoption, amortization of goodwill willcease and instead, the carrying value of goodwill will be evaluated forimpairment on an annual basis. In fiscal 2002 the amortization expense was $100,000.On June 3, 2002, the Company adopted SFAS No. 142, and the initialimpairment test was performed and it was determined that there was no goodwillimpairment on June 3, 2002. During the fourth quarter of fiscal 2003, theannual goodwill impairment test was performed and the fair value of the Companywas assessed to determine whether goodwill carried was impaired and the extentof such impairment. After performing this evaluation it was evident thatimpairment of goodwill had occurred because of a decline in revenues for thefourth quarter compared to forecasted revenues, as well as a significantincrease in the fourth quarter loss compared to forecast. The Company did notperform an impairment test prior to the fourth quarter as there wasn’t an eventthat had occurred or circumstances had changed in such a manner to warrant animpairment test prior to the fourth quarter. Accordingly, an impairment chargeof $1,153,153 was recorded in the fourth quarter of fiscal 2003.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company experiences foreign currency gains andlosses, which are reflected in the financial statements, due to thestrengthening and weakening of the U.S. Dollar against currencies of theCompany’s foreign subsidiaries. To date, the effect of translating the Chinesefinancial statements, which were prepared in Chinese Yuan to U.S. Dollars, hashad minimal effect on the Company’s financial position. There are no assurancesthat future results will not be significantly affected by future exchange ratesbetween the Chinese Yuan and U.S. Dollar.

The Company has bank borrowing facilities which havevariable interest rate terms. For every $1,000,000 of bank debt, an interestrate increase of 1% would result in $10,000 of additional expense.

21

----

**ITEM8.**                FINANCIALSTATEMENTS AND SUPPLEMENTAL DATA

(a) FinancialStatements

**Indexto Consolidated Financial Statements**
|                                              | ** ** | ** **                                                                                                                     | ** ** | **Page** |
|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| *                                       |       | Report of Independent Registered Public Accounting  Firm—Grant Thornton LLP                                               |       | 23       |
| *                                       |       | Report of Independent Registered Public Accounting  Firm—Deloitte  Anjin LLC                                              |       | 24       |
| *                                       |       | Report of Independent Registered Public Accounting  Firm—Deloitte & Touche LLP                                   |       | 25       |
| *                                       |       | Consolidated  Balance Sheets, May 29, 2005 and May 30, 2004                                                          |       | 26-27    |
| *                                       |       | Consolidated Statements of Operations, Years Ended  May 29, 2005, May 30, 2004, and June 1, 2003                |       | 28       |
| *                                       |       | Consolidated Statements of Stockholders’ Equity, Years  Ended May 29, 2005, May 30, 2004, and June 1, 2003 |       | 29       |
| *                                       |       | Consolidated Statements of Cash Flows, Years Ended  May 29, 2005, May 30, 2004, and June 1, 2003                |       | 30       |
| *                                       |       | Notes to Consolidated Financial Statements                                                                                     |       | 31       |
| (b) Supplemental  Financial Information |       |                                                                                                                           |
| *                                       |       | Quarterly Financial Data                                                                                                       |       | 44-45    |

 

22

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Stockholders and Board of DirectorsAult Incorporated and Subsidiaries

We have audited the consolidated balance sheets ofAult Incorporated and subsidiaries (a Minnesota corporation) as of May 29,2005 and May 30, 2004, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for the years then ended. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We did not audit the 2004 financial statements of Ault KoreaCorporation, a wholly-owned subsidiary, presented as discontinued operations,which statements reflect total assets and revenues constituting 37 percent and22 percent, respectively, of the related consolidated totals as of and for theyear ended May 30, 2004. Those statements were audited by other auditorswhose report has been furnished to us, and our opinion, insofar as it relatesto the 2004 amounts included for the Ault Korea Corporation is based solely onthe report of the other auditors.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall consolidated financialstatement presentation. We believe our audits, and the report of other auditorsprovide a reasonable basis for our opinion.

In our opinion, based on our audits and the report ofother auditors, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of Ault Incorporatedand subsidiaries as of May 29, 2005 and May 30, 2004, and the resultsof their operations and their cash flows for the years then ended, inconformity with accounting principles generally accepted in the United Statesof America.

We have also auditedSchedule II for the years ended May 29, 2005 and May 30, 2004. In ouropinion, based on our audits and the report of other auditors, this 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

Minneapolis, MinnesotaAugust 8, 2005

23

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Shareholder ofAult Korea Corporation

We have audited thebalance sheet of Ault Korea Corporation(the “Company”) as ofApril 30, 2004, and the related statements of income, stockholder’s equityand cash flows for the year then ended (all expressed in Korean won, none ofwhich are presented herein). These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

In our opinion, suchfinancial statements present fairly, in all material respects, the financial position of the Company as of April 30,2004, and the results of its operations, and its cash flows for the year thenended in conformity with accounting principles generally accepted in theUnited States of America.

As described in Note 6 tothe financial statements,the Companysells a substantial portion of its finished goods to and purchases rawmaterials from related parties. For the year ended April 30, 2004, salesto related parties totaled KRW7,438 million and purchases from related partiestotaled KRW993 million.As of April 30 2004, the related accounts receivable were KRW2,398 million and therelated accounts payable, including long-term accounts payable, were KRW5,215 million. Inaddition, as of April 30, 2004, loans provided to related parties were KRW163 million.

Deloitte Anjin LLC

Seoul, Republic of KoreaJune 1, 2004

24

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Stockholders and Board of DirectorsAult Incorporated and SubsidiariesMinneapolis, Minnesota

We have audited the accompanying consolidatedstatement of operations, stockholders’ equity, and cash flows of AultIncorporated and Subsidiaries (the “Company”) for the fiscal year ended June 1,2003. Our audit also included the information for the fiscal year ended June 1,2003, in the financial statement schedule listed in the index as Item 15.(2). Theseconsolidated financial statements and the financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on the consolidated financial statements and financial statementschedule based on our audit.

We conducted our audit in accordance with standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all material respects, theresults of operations and cash flows of Ault Incorporated and Subsidiaries forthe fiscal year ended June 1, 2003, in conformity with accountingprinciples generally accepted in the United States of America. Also, in ouropinion, such financial statement schedule, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly inall material respects the information set forth therein for the fiscal yearended June 1, 2003

Deloitte & ToucheLLP

Minneapolis, MinnesotaAugust 18, 2003 (October 4, 2005, as to the information  for the year ended June 1, 2003, in Note 2)

25

----

**AULT INCORPORATED AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSMAY 29, 2005 AND MAY 30, 2004**

| ** **                                                                                     | ** ** | **May 29,  2005** | ** ** | **May 30,  2004** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **ASSETS**                                                                                     |       |                   |       |                   |       |
| CURRENT ASSETS:                                                                                |       |                   |       |                   |       |
| Cash and cash equivalents                                                                      |       | $                      | 2,191,422  |                   | $          | 836,827 |   |
| Trade receivables, less allowance for doubtful  accounts of $781,000 in 2005; $291,000 in 2004 |       | 5,766,027              |       | 5,902,849              |       |
| Inventories                                                                                    |       | 3,377,431              |       | 4,898,167              |       |
| Note receivable for sale of Korean  operations—current portion                            |       | 562,500                |       | 0                      |       |
| Prepaid and other expenses                                                                     |       | 741,142                |       | 946,131                |       |
| Assets related to discontinued operations                                                      |       | 0                      |       | 6,401,010              |       |
| Total current assets                                                                           |       | 12,638,522             |       | 18,984,984             |       |
| PROPERTY, PLANT  AND EQUIPMENT:                                                                |       |                   |       |                   |       |
| Land                                                                                           |       | 0                      |       | 728,827                |       |
| Building and leasehold improvements                                                            |       | 763,856                |       | 4,058,852              |       |
| Machinery and equipment                                                                        |       | 5,313,815              |       | 5,585,855              |       |
| Office furniture and equipment                                                                 |       | 344,406                |       | 402,713                |       |
| Data processing/computer equipment                                                             |       | 1,629,681              |       | 1,450,937              |       |
| Total property, plant and equipment                                                            |       | 8,051,758              |       | 12,227,184             |       |
| Less accumulated depreciation                                                                  |       | 5,676,8165             |       | 6,101,074              |       |
| Net property, plant and equipment                                                              |       | 2,374,942              |       | 6,126,110              |       |
| OTHER ASSETS                                                                                   |       | 105,694                |       | 145,913                |       |
| NOTE RECEIVABLE FROM SALE OF KOREAN OPERATIONS                                                 |       | 1,687,500              |       | 0                      |       |
| NON-CURRENT ASSETS RELATED TO DISCONTINUED OPERATIONS                                          |       | 0                      |       | 4,578,284              |       |
| TOTAL ASSETS                                                                                   |       | $                      | 16,806,658 |                   | $          | 29,835,291 |   |

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

26

----

**AULT INCORPORATEDAND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (Continued)MAY 29, 2005 AND MAY 30, 2004**

| ** **                                                                                                                            | ** ** | **May 29,  2005** | ** ** | **May 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                        |       |                   |       |                   |       |
| CURRENT LIABILITIES:                                                                                                                  |       |                   |       |                   |       |
| Notes payable to bank                                                                                                                 |       | $                      | 0          |                   | $          | 1,965,464 |   |
| Current maturities of long-term debt                                                                                                  |       | 289,628                |       | 459,969                |       |
| Accounts payable                                                                                                                      |       | 4,892,093              |       | 3,914,782              |       |
| Accrued compensation                                                                                                                  |       | 978,192                |       | 776,561                |       |
| Accrued commissions                                                                                                                   |       | 272,103                |       | 280,794                |       |
| Other                                                                                                                                 |       | 350,317                |       | 486,981                |       |
| Liabilities related to discontinued operations                                                                                        |       | 0                      |       | 5,423,447              |       |
| Total current liabilities                                                                                                             |       | 6,782,333              |       | 13,307,998             |       |
| LONG-TERM DEBT, less current maturities                                                                                               |       | 0                      |       | 2,312,892              |       |
| NON-CURRENT  LIABILITIES RELATED TO DISCONTINUED                                                                                      |       |                   |       |                   |       |
| OPERATIONS                                                                                                                            |       | 0                      |       | 203,465                |       |
| REDEEMABLE CONVERTIBLE PREFERRED STOCK  liquidation preference of $1,000 per share                                                    |       | 2,074,000              |       | 2,074,000              |       |
| STOCKHOLDERS’  EQUITY:                                                                                                           |       |                   |       |                   |       |
| Preferred stock, no par value; authorized 1,000,000  shares; none issued                                                              |       | 0                      |       | 0                      |       |
| Common stock, no par value; authorized 10,000,000  shares; issued and outstanding 4,806,116 shares in 2005; 4,705,083 shares in  2004 |       | 21,390,135             |       | 21,172,717             |       |
| Notes receivable arising from the sale of common  stock                                                                               |       | (44,227                | )          | (45,000                | )          |
| Accumulated other comprehensive income (loss)                                                                                         |       | 55,378                 |       | (869,737               | )          |
| Accumulated deficit                                                                                                                   |       | (13,450,961            | )          | (8,321,044             | )          |
| Total stockholders’ equity                                                                                                       |       | 7,950,325              |       | 11,936,936             |       |
| TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                      |       | $                      | 16,806,658 |                   | $          | 29,835,291 |   |

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

27

----

**AULT INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTOF OPERATIONSYEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

| ** **                                                                   | ** ** | **May 29, 2005** | ** ** | **May 30, 2004** | ** ** | **June 1, 2003** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| NET SALES                                                                    |       | $                          | 37,215,509 |                       | $          | 35,360,584                 |       | $ | 35,995,845 |   |
| COST OF GOODS SOLD                                                           |       | 27,076,924                 |       | 27,188,047                 |       | 29,100,551                 |       |
| Gross profit                                                                 |       | 10,138,585                 |       | 8,172,537                  |       | 6,895,294                  |       |
| OPERATING EXPENSES:                                                          |       |                       |       |                       |       |                       |       |
| Marketing                                                                    |       | 3,366,104                  |       | 3,359,864                  |       | 4,148,850                  |       |
| Design engineering                                                           |       | 2,994,967                  |       | 3,056,132                  |       | 3,711,085                  |       |
| General and administrative                                                   |       | 5,641,570                  |       | 4,768,967                  |       | 5,056,230                  |       |
| Exit costs                                                                   |       | 0                          |       | 2,063,998                  |       | 0                          |       |
| Goodwill impairment                                                          |       | 0                          |       | 0                          |       | 1,153,153                  |       |
|                                                                         |       | 12,002,641                 |       | 13,248,961                 |       | 14,069,318                 |       |
| OPERATING LOSS                                                               |       | (1,864,056                 | )          | (5,076,424                 | )          | (7,174,024                 | )          |
| OTHER INCOME (EXPENSE):                                                      |       |                       |       |                       |       |                       |       |
| Interest expense                                                             |       | (407,167                   | )          | (411,472                   | )          | (264,569                   | )          |
| Interest income                                                              |       | 0                          |       | 0                          |       | 24,894                     |       |
| Other                                                                        |       | (110,905                   | )          | (3,188                     | )          | (43,894                    | )          |
|                                                                         |       | (518,072                   | )          | (414,660                   | )          | (283,569                   | )          |
| LOSS BEFORE  INCOME TAXES                                                    |       | (2,382,128                 | )          | (5,491,084                 | )          | (7,457,593                 | )          |
| INCOME TAX EXPENSE (BENEFIT)                                                 |       | 7,534                      |       | 59,989                     |       | (340,200                   | )          |
| LOSS FROM  CONTINUING OPERATIONS                                             |       | (2,389,662                 | )          | (5,551,073                 | )          | (7,117,393                 | )          |
| DISCONTINUED OPERATIONS:                                                     |       |                       |       |                       |       |                       |       |
| Income (loss), from Korean operations net of tax  benefit of $13,127 in 2004 |       | (153,075                   | )          | 150,607                    |       | (446,438                   | )          |
| Loss from sale of Korean operations                                          |       | (2,442,000                 | )          | 0                          |       | 0                          |       |
| NET LOSS                                                                     |       | (4,984,737                 | )          | (5,400,466                 | )          | (7,563,831                 | )          |
| REDEEMABLE CONVERTIBLE PREFERRED                                             |       |                       |       |                       |       |                       |       |
| STOCK DIVIDENDS                                                              |       | (145,180                   | )          | (145,180                   | )          | (128,242                   | )          |
| NET LOSS APPLICABLE TO COMMON                                                |       |                       |       |                       |       |                       |       |
| STOCKHOLDERS                                                                 |       | $                          | (5,129,917 | )                          | $          | (5,545,646                 | )          | $ | (7,692,073 | ) |
| NET BASIC AND DILUTED LOSS PER COMMON SHARE:                                 |       |                       |       |                       |       |                       |       |
| From continuing operations                                                   |       | $                          | (0.53      | )                          | $          | (1.22                      | )          | $ | (1.58 | ) |
| From discontinued operations                                                 |       | $                          | (0.54      | )                          | $          | 0.03                       |       | $ | (0.09 | ) |
| Net basic and diluted loss per common share                                  |       | $                          | (1.07      | )                          | $          | (1.19                      | )          | $ | (1.67 | ) |
| Weighted average common shares outstanding:                                  |       |                       |       |                       |       |                       |       |
| Basic                                                                        |       | 4,776,075                  |       | 4,679,570                  |       | 4,596,882                  |       |
| Diluted                                                                      |       | 4,776,075                  |       | 4,679,570                  |       | 4,596,882                  |       |

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

28

----

**AULT INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITYYEARS NEDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003  **

| ** **                                                                                                    | ** ** | ** **            | ** ** | ** **         | ** ** | **Notes**          | ** ** | ** **    | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|--------------------|------------|---------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                                    | ** ** | ** **            | ** ** | ** **         | ** ** | **Receivable**     | ** ** | **Retained**  | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                                                                    | ** ** | ** **            | ** ** | ** **         | ** ** | **from Sale** | ** ** | **Earnings/** | ** ** | **Comprehensive**      | ** ** | **Total**  | ** ** |
| ** **                                                                                                    | ** ** | **Common Stock** | ** ** | **of Common** | ** ** | **Accumulated**    | ** ** | **Income**    | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                                    | ** ** | **Shares**            | ** ** | **Amount**         | ** ** | **Stock**          | ** ** | **Deficit**   | ** ** | **(Loss)**             | ** ** | **Equity** | ** ** |
| BALANCE AT JUNE 2, 2002                                                                                       |       | 4,563,610             |       | $                  | 20,857,629 |               |       | $             | (100,000   | )                      |       |       | $          | 4,916,675 |   |   |   | $ | (921,572 | ) |   |   | $ | 24,752,732 |   |   |
| Comprehensive loss:                                                                                           |       |                  |       |               |       |               |       |          |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                                      |       |                  |       |               |       |               |       |          |       |                   | (7,692,073 | )          |       |   |   |   |   |   | (7,692,073 | ) |   |
| Net change in foreign currency translation adjustment                                                         |       |                  |       |               |       |               |       |          |       |                   |       |       |       |   | 35,122 |   |   |   | 35,122 |   |   |
| Total comprehensive loss                                                                                      |       |                  |       |               |       |               |       |          |       |                   |       |       |       |   |   |   |   |   | (7,656,951 | ) |   |
| Issuance of 33,712 shares of common stock in  accordance with stock purchase plan and stock option plan  |       | 33,712                |       | 59,648             |       |               |       |          |       |                   |       |       |       |   |   |   |   |   | 59,648 |   |   |
| Write-off of stock receivable                                                                                 |       |                  |       |               |       |               | 55,000     |          |       |                   |       |       |       |   |   |   |   |   | 55,000 |   |   |
| Issuance of 51,177 shares of common stock in  accordance with redeemable preferred stock                      |       | 51,177                |       | 108,885            |       |               |       |          |       |                   |       |       |       |   |   |   |   |   | 108,885 |   |   |
| BALANCE AT JUNE 1, 2003                                                                                       |       | 4,648,499             |       | 21,026,162         |       |               | (45,000    | )             |       |                   | (2,775,398 | )          |       |   | (886,450 | ) |   |   | 17,319,314 |   |   |
| Comprehensive  loss:                                                                                          |       |                  |       |               |       |               |       |          |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                                      |       |                  |       |               |       |               |       |          |       |                   | (5,400,466 | )          |       |   |   |   |   |   | (5,400,466 | ) |   |
| Net change in foreign currency translation adjustment                                                         |       |                  |       |               |       |               |       |          |       |                   |       |       |       |   | 16,713 |   |   |   | 16,713 |   |   |
| Total comprehensive loss                                                                                      |       |                  |       |               |       |               |       |          |       |                   |       |       |       |   |   |   |   |   | (5,383,753 | ) |   |
| Issuance of 1,000 shares of common stock in  accordance with stock purchase plan and stock option plan   |       | 1,000                 |       | 1,375              |       |               |       |          |       |                   |       |       |       |   |   |   |   |   | 1,375 |   |   |
| Issuance of 55,584 shares of common stock in  accordance with redeemable preferred stock                      |       | 55,584                |       | 145,180            |       |               |       |          |       |                   | (145,180   | )          |       |   |   |   |   |   | 0 |   |   |
| BALANCE AT MAY 30, 2004                                                                                  |       | 4,705,083             |       | 21,172,717         |       |               | (45,000    | )             |       |                   | (8,321,044 | )          |       |   | (869,737 | ) |   |   | 11,936,936 |   |   |
| Comprehensive  loss:                                                                                          |       |                  |       |               |       |               |       |          |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                                      |       |                  |       |               |       |               |       |          |       |                   | (4,984,737 | )          |       |   |   |   |   |   | (4,984,737 | ) |   |
| Net change in foreign currency translation adjustment                                                         |       |                  |       |               |       |               |       |          |       |                   |       |       |       |   | 925,115 |   |   |   | 925,115 |   |   |
| Total comprehensive loss                                                                                      |       |                  |       |               |       |               |       |          |       |                   |       |       |       |   |   |   |   |   | (4,059,622 | ) |   |
| Issuance of 48,875 shares of common stock in  accordance with stock purchase plan and stock option plan  |       | 48,875                |       | 72,238             |       |               |       |          |       |                   |       |       |       |   |   |   |   |   | 72,238 |   |   |
| Issuance of 52,158 shares of common stock in  accordance with redeemable preferred stock                      |       | 52,158                |       | 145,180            |       |               |       |          |       |                   | (145,180   | )          |       |   |   |   |   |   | 0 |   |   |
| Payment of stock receivable                                                                                   |       |                  |       |               |       |               | 773        |          |       |                   |       |       |       |   |   |   |   |   | 773 |   |   |
| BALANCE AT  MAY 29, 2005                                                                                 |       | 4,806,116             |       | $                  | 21,390,135 |               |       | $             | (44,227    | )                      |       |       | $          | (13,450,961 | ) |   |   | $ | 55,378 |   |   |   | $ | 7,950,325 |   |   |

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

29

----

**AULT INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF CASH FLOWSYEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

| ** **                                                                                 | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                 | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                     |       |             |       |             |       |             |       |
| Net loss                                                                                   |       | $                | (4,984,737 | )                | $          | (5,400,466       | )          | $ | (7,563,831 | ) |
| Adjustments to reconcile net loss to net cash provided  by (used in) operating activities: |       |             |       |             |       |             |       |
| Depreciation                                                                               |       | 517,990          |       | 872,276          |       | 721,439          |       |
| Asset impairment                                                                           |       | —           |       | 1,742,470        |       | —           |       |
| Loss from the sale of  headquarter building                                                |       | 136,736          |       | —           |       | —           |       |
| Loss from the sale of Korean  subsidiary                                                   |       | 2,442,000        |       | —           |       | —           |       |
| Allowance for doubtful accounts                                                            |       | 490,000          |       | 24,000           |       | 95,000           |       |
| Goodwill impairment                                                                        |       | —           |       | —           |       | 1,153,153        |       |
| Deferred taxes                                                                             |       | —           |       | —           |       | (1,242           | )          |
| Change in assets and liabilities, net of effect of acquisition:                            |       |             |       |             |       |             |       |
| (Increase) decrease in:                                                                    |       |             |       |             |       |             |       |
| Trade receivables                                                                          |       | (353,089         | )          | 109,640          |       | (192,202         | )          |
| Inventories                                                                                |       | 1,480,840        |       | 1,711,061        |       | (431,072         | )          |
| Prepaid and other expenses                                                                 |       | 246,088          |       | (278,617         | )          | 63,357           |       |
| Increase (decrease) in:                                                                    |       |             |       |             |       |             |       |
| Accounts payable                                                                           |       | 977,156          |       | (335,604         | )          | 1,610,609        |       |
| Accrued expenses                                                                           |       | 56,258           |       | 230,355          |       | 365,748          |       |
| Income taxes                                                                               |       | —           |       | —           |       | 582,450          |       |
| Discontinued operations                                                                    |       | 470,453          |       | 375,207          |       | 540,519          |       |
| Net cash provided by (used in)  operating activities                                       |       | 1,479,695        |       | (949,680         | )          | (3,056,072       | )          |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |       |             |       |             |       |             |       |
| Purchase of property and  equipment                                                        |       | (347,055         | )          | (313,571         | )          | (253,006         | )          |
| Power General acquisition, net of cash acquired                                            |       | —           |       | —           |       | (366,000         | )          |
| Proceeds from sale of Korean subsidiary                                                    |       | 1,472,039        |       | —           |       | —           |       |
| Proceeds from sale of headquarter building                                                 |       | 3,443,489        |       | —           |       | —           |       |
| Discontinued operations                                                                    |       | (45,442          | )          | (8,791           | )          | (19,861          | )          |
| Net cash used in investing  activities                                                     |       | 4,523,031        |       | (322,362         | )          | (638,867         | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |       |             |       |             |       |             |       |
| Net borrowings (payments) on  revolving credit agreement                                   |       | (1,965,464       | )          | 1,965,464        |       | 289,607          |       |
| Write-off of notes receivable  arising from the sale of common stock                       |       | —           |       | —           |       | 55,000           |       |
| Payment of notes receivable  arising from the sale of common stock                         |       | 773              |       | —           |       | —           |       |
| Proceeds from issuance of  common stock                                                    |       | 72,238           |       | 1,375            |       | 59,648           |       |
| Principal payments on long-term  borrowings                                                |       | (2,483,254       | )          | (270,493         | )          | (281,507         | )          |
| Discontinued operations                                                                    |       | (272,463         | )          | (507,428         | )          | —           |       |
| Net cash provided by (used in)  financing activities                                       |       | (4,648,170       | )          | 1,188,918        |       | 122,748          |       |
| EFFECT OF FOREIGN CURRENCY  EXCHANGE RATE CHANGES ON CASH                                  |       | 39               |       | (20              | )          | (612             | )          |
| INCREASE (DECREASE) IN CASH AND  CASH EQUIVALENTS                                          |       | 1,354,595        |       | (83,144          | )          | (3,572,803       | )          |
| CASH AND CASH EQUIVALENTS AT  BEGINNING OF YEAR                                            |       | 836,827          |       | 919,971          |       | 4,492,774        |       |
| CASH AND CASH EQUIVALENTS AT  END OF YEAR                                                  |       | $                | 2,191,422  |             | $          | 836,827          |       | $ | 919,971 |   |
| NON-CASH TRANSACTION:                                                                      |       |             |       |             |       |             |       |
| Issuance of redeemable  convertible preferred stock to acquire Power General               |       | $                | —     |             | $          | —           |       | $ | 2,074,000 |   |
| Issuance of common stock to pay  preferred stock dividends                                 |       | 145,180          |       | 145,180          |       | 108,885          |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                                         |       |             |       |             |       |             |       |
| Cash payments for:                                                                         |       |             |       |             |       |             |       |
| Interest                                                                                   |       | 407,167          |       | 606,516          |       | 434,714          |       |
| Taxes                                                                                      |       | —           |       | 46,862           |       | —           |       |

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

30

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

**1.   NATUREOF BUSINESS, LIQUIDITY, AND SIGNIFICANT ACCOUNTING POLICIES**

*Natureof Business**—*AultIncorporated and Subsidiaries (Ault or the Company) operate in one businesssegment which includes the design, manufacturing, and marketing of powerconversion products, principally to original equipment manufacturers of datacommunications equipment, microcomputers and related peripherals,telecommunications equipment, and portable medical equipment. Sales are tocustomers worldwide, and credit is granted based upon the credit policies ofthe Company.

*Liquidity**—*The financial statements have been prepared on agoing-concern basis, which contemplates the realization of assets andsatisfaction of liabilities in the normal course of business. The Companysustained net losses applicable to common stockholders of $5,129,917 in 2005and $5,545,646 in 2004 and at May 29, 2005 had an accumulated deficit of$13,450,961. The Company generated $1,480,000 of cash from operating activitiesin 2005. In May 2005 the Company sold its Korean subsidiary and itsMinneapolis headquarter building. The sale of the Korean subsidiary resulted inthe receipt of cash from JEC Korea Co., Ltd. of $1,472,039 and a secured notefor $2,250,000. The gross proceeds of $3.85 million from the sale of theMinneapolis headquarter building was used to pay off the mortgage balance of$2,509,000 and $255,000 of transaction expenses, which included the realtors’commissions, leaving net cash proceeds of $1,086,000 for the Company. During May 2005the Company paid off the bank debt in the United States and at May 29,2005 the Company’s bank debt was $289,628, all applicable to its Chinaoperations. The Company continues to have a $7,000,000 line-of-credit agreementwith Wells Fargo Bank in Minneapolis that runs through December 4, 2006.

Based on available funds, current plans and businessconditions management believes that the Company’s available cash, borrowingsand amounts generated from operations, will be sufficient to meet the Company’scash requirements for the next 12 months. The assumptions underlying thisbelief include, among other things, that there will be no material adversedevelopments in the business or market in general. There can be no assuranceshowever that those assumed events will occur. If management’s plans are notachieved, there may be further negative effects on the results of operationsand cash flows, which could have a material adverse effect on the Company.

A summary of the Company’s significant accountingpolicies follows:

*Principlesof Consolidation**—*Theconsolidated financial statements include the accounts of Ault Incorporated andits wholly owned subsidiaries. All intercompany transactions have beeneliminated. The foreign currency translation adjustment represents thetranslation into United States dollars of the Company’s investment in the netassets of its foreign subsidiaries.

*FiscalYear**—*The Companyoperates on a 52 to 53-week fiscal year. The fiscal years for thefinancial statements presented end on May 29, 2005, May 30, 2004, andJune 1, 2003. All years presented contain 52 weeks. The Company’s foreignsubsidiaries have an April 30 fiscal year-end, and the Companyconsolidates the subsidiaries for financial reporting purposes on a one-monthlag basis to facilitate timely and accurate consolidation and in order to meetfinancial reporting deadlines of the Company.

*Cash and Cash Equivalents**—*The Company maintains its cash in bank deposit accountswhich, at times, may exceed federally insured limits. The Company has notexperienced any losses in such accounts. The Company considers all highlyliquid financial instruments purchased with an original maturity of threemonths or less to be cash equivalents. Cash equivalents consist primarily ofshort-term commercial paper. 

31

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

The Companymaintained cash at various financial institutions located in China totaling$545,362 and $553,807 at May 29, 2005 and May 30, 2004.

*AccountsReceivable**—*The Companygrants credit to customers in the normal course of business, but generally doesnot require collateral or any other security to support amounts due. Managementperforms on-going credit evaluations of customers based on financial position,past history, the customer’s cur­rent ability to pay its obligation to theCompany, and the condition of the gen­eral economy and the industry as a whole.The Com­pany maintains allowances for potential credit losses which, whenrealized, have generally been within management expectations. The Companywrites-off accounts receivable when they become uncollectible, and paymentssubsequently received on such receivables are cred­ited to the allowance fordoubtful accounts.

*Inventories**—*Inventories are stated at the lower of cost (first-in,first-out) or market. Inventories include material, labor, and manufacturing overhead.

*Depreciation**—*Depreciation is based on the estimated useful lives of theindividual assets and is calculated on the straight-line method for financialreporting and accelerated methods for tax purposes. The estimated useful livesare as follows:

| ** **                      | ** ** | **Years**  | ** ** |
|---------------------------------|------------|------------|------------|
| Building                        |       | 36         |       |
| Machinery and  equipment        |       | 3-10       |       |
| Office furniture  and equipment |       | 5-15       |       |
| Data processing  equipment      |       | 3-5        |       |
| Leasehold improvement           |       | Lease term |       |

* *

*FinancialInstruments**—*The fair valueof the long-term debt is estimated based on the use of discounted cash flowanalysis using interest rates for the same or similar debt offered to theCompany having the same or similar remaining maturities and collateralrequirements. Management estimates the carrying value of the long-term debtapproximates fair value. All other financial instruments approximate fair valuebecause of the short-term nature of these instruments.

*RevenueRecognition**—*The Company recognizes revenue at theshipping point for sales to customers located within the Company’s or subsidiaries’country of domicile. For sales to customers outside of the Company’s orsubsidiaries’ country of domicile, the Company recognizes revenue at the timerisk of ownership passes. All of the Company’s product held by distributors arestocked for OEM’s and the sales terms are noncancelable, and nonreturnable. Paymentterms for distributors are no different than other customers, 0.5% 10 net 30.

*Freight**—*Customer billings for freight are included in sales, andthe freight costs are included in costs of sales.

*Design Engineering**—*Design engineering costs are those incurred for research,design, and development of new products and redesign of existing products. Thesecosts are expensed as incurred.

32

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

*AdvertisingExpense**—*The Companyexpenses advertising costs as incurred. Advertising expenses of approximately$13,000, $129,000, and $76,000 were charged to operations during the yearsended May 29, 2005, May 30, 2004, and June 1, 2003,respectively.

*StockCompensation**—*The Company’s1986 and 1996 stock option plans have reserved 600,000 and 1,500,000 commonshares, for issuance under qualified and nonqualified stock options for its keyemployees and directors. Option prices are determined by the market value ofthe stock at the time the option was granted. Options become exercisable asdetermined at the date of grant by a committee of the Board of Directors. Optionsexpire ten years after the date of grant unless an earlier expiration date isset at the time of grant.

Theintrinsic value method is used to value the stock option grants to employeesand directors. No compensation cost has been recognized for the stock optionplans, as all options have been issued with exercised prices at or above fairvalue. Had compensation cost for the Company’s stock option plans beendetermined based on the fair value at the grant date for awards in 2005, 2004,and 2003, the Company’s net loss and net loss per share would have changed tothe pro forma amounts indicated below:

| ** **                                   | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|----------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                   | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| Net loss  applicable to common stockholders: |       |             |       |             |       |             |       |
| As reported                                  |       | $                | (5,129,917 | )                | $          | (5,545,646       | )          | $ | (7,692,073 | ) |
| Pro forma                                    |       | (5,335,874       | )          | (5,806,664       | )          | (8,092,340       | )          |
| Per share, basic, as reported                |       | (1.07            | )          | (1.19            | )          | (1.67            | )          |
| Per share, diluted, as reported              |       | (1.07            | )          | (1.19            | )          | (1.67            | )          |
| Per share, basic, pro forma                  |       | (1.12            | )          | (1.24            | )          | (1.76            | )          |
| Per share,  diluted, pro forma               |       | (1.12            | )          | (1.24            | )          | (1.76            | )          |
|                                              |            |                  |            |                  |            |                  |            |  |  |  |

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions used for grants in 2005, 2004, and 2003:

| ** **                       | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                       | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| Expected dividend  yields        |       | $                | —     |             | $          | —           |       | $ | — |   |
| Expected stock  price volatility |       | 68.95            | %          | 71.01            | %          | 73.63            | %          |
| Risk-free  interest rate         |       | 3.33             | %          | 2.77             | %          | 2.01             | %          |
| Expected life of options         |       | 7.29 years       |       | 7.48 years       |       | 7.55 years       |       |
|                                  |            |                  |            |                  |            |                  |            |  |  |  |

* *

*Long-LivedAssets**—*The Companyreviews its long-lived assets annually to determine potential impairment bycomparing the carrying value of the long-lived assets outstanding withestimated future undiscounted cash flows expected to result from the use of theassets, including cash flows from disposition. Should the sum of the expectedfuture undiscounted cash flows be less than the carrying value, the Companywould recognize an impairment loss. An impairment loss would be measured bycomparing the amount by which the carrying value exceeds the fair value of thelong-lived assets and intangibles. To date, management has determined that noimpairment of long-lived assets exists.

*NetLoss per Share**—*Basic net lossper share is computed by dividing net loss by the weighted-average number ofcommon shares outstanding during the period. Diluted loss per share is computedby dividing 

33

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

net loss by theweighted-average number of common shares outstanding during the period adjustedby common share equivalents related to stock options and warrants. Options topurchase 1,265,626, 1,187,826, and 1,093,426, shares of common stock wereoutstanding at the fiscal years ended May 29, 2005, May 30, 2004, andJune 1, 2003, but were excluded from the computation of common stockequivalents because they were anti-dilutive.

Thefollowing table reflects the calculation of basic and diluted net loss pershare:

| ** **                                                   | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| Numerator—                                              |       |             |       |             |       |             |       |
| Net loss applicable to common stockholders                   |       | $                | (5,129,917 | )                | $          | (5,545,646       | )          | $ | (7,692,073 | ) |
| Denominator:  Basic—weighted-average shares outstanding |       | 4,776,075        |       | 4,679,570        |       | 4,596,882        |       |
| Effect of dilutive shares:                                   |       |             |       |             |       |             |       |
| Stock options outstanding and employee stock  purchase plan  |       | 0                |       | 0                |       | 0                |       |
| Diluted—weighted-average shares outstanding             |       | 4,776,075        |       | 4,679,570        |       | 4,596,882        |       |
| Basic net loss per share                                     |       | $                | (1.07      | )                | $          | (1.19            | )          | $ | (1.67 | ) |
| Diluted net loss  per share                                  |       | $                | (1.07      | )                | $          | (1.19            | )          | $ | (1.67 | ) |

 

The numerator for net loss for continuing operationsincludes loss from continuing operations and preferred stock dividends.

*Useof Estimates**—*Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

*ComprehensiveLoss**—*The Company’sfiscal 2005 comprehensive loss consists of net loss and foreign currencytranslation adjustments.

*ForeignCurrency Translation**—*TheCom­pany’s international subsidiaries have United States dollars as theirfunctional currency. Specific transactions that are denominated in the foreigncurrency are translated at the current exchange rate.

**2.**                 **DISCONTINUED OPERATIONS**

OnMay 20, 2005, the Company completed the sale of its wholly ownedsubsidiary, Ault Korea Corporation (“Ault Korea”), to JEC Korea Co., Ltd(“JEC”) for $3.7 million. The agreement includes the receipt of $1,472,000 incash and a secured note in the amount of $2,250,000. The transaction resultedin a loss of approximately $2,442,000 and the reclassification of the Koreansubsidiary activity as “discontinued operations” for all periods presented.

34

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

Thesale includes all assets and liabilities of Ault Korea Corporation and the useof the “Ault Korea” name in Korea for a period of three years. Ault Koreaincludes the property in Seoul, South Korea and approximately 110 employees. Aspart of the terms of the agreement, JEC has the rights to sell power conversionproducts in Korea while Ault will have rights to sell the same power conversionproducts throughout the rest of the world. Prior to this transaction, JEC was asupplier of Ault, but otherwise no material relationship existed between Aultand JEC, or their respective affiliates, directors or officers, or anyassociates of their directors and officers.

Thesecured note receivable is scheduled to be paid in four equal installments of$562,500 in December 2005, June 2006, December 2006 and thefinal installment in June 2007.

Revenues and results ofoperations for the Korean subsidiary for the most recent three fiscal yearsinclude the following:

| ** **                                  | ** ** | **Year Ended**        | ** **  | **Year Ended**        | ** ** | **Year Ended**        | ** ** |
|---------------------------------------------|------------|----------------------------|-------------|----------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **May 29, 2005** | ** **  | **May 30, 2004** | ** ** | **June 1, 2003** | ** ** |
| Net Sales                                   |       | $                          | 12, 973.692 |                       |       | $                          | 9,748,493  |   |   | $ | 5,483,165 |   |
| Income (Loss)  from Discontinued Operations |       | $                          | (153,075    | )                          |       | $                          | 150,607    |   |   | $ | (446,438 | ) |

 

Thebalance sheet information of discontinued operations includes the following:

| ** **                                                   | ** ** | **May 30, 2004** | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|
| Current Assets related  to Discontinued Operations:          |       |                       |       |   |   |
| Cash                                                         |       |                       | $          | 221,339 |   |   |
| Accounts Receivable                                          |       |                       | 2,496,526  |   |   |
| Inventories                                                  |       |                       | 3,245,461  |   |   |
| Prepaid and Other Expenses                                   |       |                       | 437,684    |   |   |
| Total Current Assets                                         |       |                       | $          | 6,401,010 |   |   |
| Non-Current  Assets Related to Discontinued Operations:      |       |                       |       |   |   |
| Property, Plant and Equipment, net                           |       |                       | $          | 4,546,432 |   |   |
| Other Assets                                                 |       |                       | 31,852     |   |   |
| Total Non-Current Assets                                     |       |                       | $          | 4,578,284 |   |   |
| Current  Liabilities Related to Discontinued Operations:     |       |                       |       |   |   |
| Notes Payable to Bank                                        |       |                       | $          | 2,685,003 |   |   |
| Accounts Payable                                             |       |                       | 2,350,260  |   |   |
| Accrued Compensation                                         |       |                       | 388,184    |   |   |
| Total Current Liabilities                                    |       |                       | $          | 5,423,447 |   |   |
| Non-Current  Liabilities Related to Discontinued Operations: |       |                       |       |   |   |
| Other Long-Term  Liabilities                                 |       |                       | $          | 203,465 |   |   |

 

35

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

 

**3.**                 **INVENTORIES**

Thecomponents of inventory are as follows:

| ** **      | ** ** | **May 29,** | ** ** | **May 30,** | ** ** |
|-----------------|------------|------------------|------------|------------------|------------|
| ** **      | ** ** | **2005**         | ** ** | **2004**         | ** ** |
| Raw materials   |       | $                | 1,701,154  |             | $          | 2,870,393 |   |
| Work-in-process |       | 513,986          |       | 115,847          |       |
| Finished goods  |       | 1,162,291        |       | 1,911,927        |       |
|            |       | $                | 3,377,431  |             | $          | 4,898,167 |   |

 

**4.**                 **WARRANTY**

The Company offers its customers a three-year warrantyon products. Warranty expense is estimated at the time revenue is recognizedand is determined by calculating the historical relationship between sales andwarranty costs and applying the calculation to the current period’s sales.Based on warranty repair costs and the rate of return, the Company periodicallyreviews and adjusts its warranty accrual. Actual repair costs are offsetagainst the reserve.  The following tableshows the activity for the Company’s warranty accrual (in thousands):

| ** **                  | ** ** | **May 29,** | ** ** | **May 30,** |
|-----------------------------|------------|------------------|------------|------------------|
| ** **                  | ** ** | **2005**         | ** ** | **2004**         |
| Beginning Balance           |       |             | $          | 125              |   |   |   | $ | 134 |   |
| Charges and Costs  Accrued  |       |             | 113        |             |   |   | 14 |   |
| Less Repair Costs  Incurred |       |             | (104       | )                |   |   | (23 | ) |
| Ending Balance              |       |             | $          | 134              |   |   |   | $ | 125 |   |

 

**5.**                 **FINANCING ARRANGEMENT AND LONG-TERM DEBT**

*Financing Arrangement*—TheCompany has a financing agreement, which includes a $7,000,000 revolvingline-of-credit agreement through December 4, 2006. Interest on advances isat the prime rate plus 2% (prime plus 5% default rate). The rate at May 29,2005 was 8.00% and on May 30, 2004 the rate was 6.00%. All advances aredue on demand and are collateralized by all assets of the Company.  The availability of the line is based on theoutstanding receivables of the Company; the amount available at May 29,2005 was $3,357,000. There was nothing outstanding on this line-of-credit at May 29,2005. The Company’s financing agreement contains financial covenants. Thesecovenants require the Company, among other things, to maintain a minimumcapital base, and also impose certain limitations on additional capitalexpenditures and the payment of dividends. At the end of fiscal 2005, theCompany’s actual net book worth and income before taxes did not meet theminimum of the credit agreement. The Company received a waiver and amendmentfor these covenants. Following the August 2005 waiver, the Companybelieves the provisions imposed by this credit agreement are achievable basedon the Company’s expected operating results for the next year.

36

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

*Long-Term Debt—*

| ** **                                                           | ** ** | **May 29,** | ** ** | **May 30,** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                           | ** ** | **2005**         | ** ** | **2004**         | ** ** |
| 5.3%  uncollateralized term loan to bank, due in January 2006   |       | $                | 289,628    |             | $          | 289,607 |   |
| 8.05% term loan  to financing company, paid in full in May 2005 |       | —           |       | 2,465,062        |       |
| 7.94% term loan  to bank, paid in full in September 2004        |       | —           |       | 18,192           |       |
| Total                                                                |       | 289,628          |       | 2,772,861        |       |
| Less current maturities                                              |       | 289,628          |       | 459,969          |       |
|                                                                 |       | $                | —     |             | $          | 2,312,892 |   |

 

**6.**                 **PLANT CLOSING**

On July 17, 2003, the Company announced theconsolidation of its manufacturing operations. The consolidation included theclosing of its Minneapolis production operations, eliminating approximately 40jobs in assembly, equipment maintenance, procurement and administrative supportand the integration of production into Ault’s other manufacturing plants. Theconsolidation was completed at the end of February 2004. Ault’sengineering, documentation, safety certification/reliability, sales, marketingand administrative services remain at the Minneapolis headquarters facility. Theconsolidation was implemented to reduce expenses, improve cash flow and help returnthe Company to profitability.

As a result ofthese decisions, the Company recorded charges in fiscal year 2004 of $301,000,for severance related to workforce reductions of approximately 40 employees,$1,743,000 for asset impairment write down, $545,000 for obsolete inventory,and $20,000 related to other costs associated with the  restructuring. Costs of $15,000 related tothe restructuring were paid in fiscal 2005.

Asummary of the restructuring activity during the year ending May 29, 2005is as follows:

| ** **                  | ** ** | ** **                 | ** ** | **Current Period** | ** ** | ** **   | ** ** | **Restructuring**          | ** ** |
|-----------------------------|------------|----------------------------|------------|-------------------------|------------|--------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Balance at**        | ** ** | **Restructuring**       | ** ** | **Paid/**    | ** ** | **Liabilities at**    | ** ** |
| ** **                  | ** ** | **May 31, 2004** | ** ** | **Charges**             | ** ** | **Expensed** | ** ** | **May 29, 2005** | ** ** |
| Employee  termination costs |       |                       | $          | 15,000                  |       |         |       | $                          | —     |   |   |   | $ | 15,000 |   |   |   | $ | — |   |   |
|                             |            |                            |            |                         |            |              |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**7.**                 **INCOME TAXES**

Pretaxincome (loss) for domestic and foreign operations was as follows:

| ** ** | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| Domestic   |       | $                | (3,712,746 | )                | $          | (4,607,298       | )          | $ | (6,549,516 | ) |
| Foreign    |       | (1,264,457       | )          | (733,179         | )          | (1,354,515       | )          |
| Total      |       | $                | (4,977,203 | )                | $          | (5,340,477       | )          | $ | (7,904,031 | ) |

 

37

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

Thecomponents of the provision (benefit) for income taxes are as follows:

| ** ** | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| Current:   |       |             |       |             |       |             |       |
| Domestic   |       | $                | —     |             | $          | —           |       | $ | (340,200 | ) |
| Foreign    |       | 1,167            |       | —           |       | —           |       |
| State      |       | 6,367            |       | 59,989           |       | —           |       |
| Deferred   |       | —           |       | —           |       | —           |       |
|       |       | $                | 7,534      |             | $          | 59,989           |       | $ | (340,200 | ) |

 

The income tax provision(benefit) differs from the amount of income tax determined by applying the U.S.federal income tax rate to pretax income for the fiscal years ended May 29,2005, May 30, 2004, and June 1, 2003, due to the following:

| ** **                                          | ** ** | **May 29,** | ** **  | **May 30,** | ** ** | **June 1,** | ** ** |
|-----------------------------------------------------|------------|------------------|-------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **2005**         | ** **  | **2004**         | ** ** | **2003**         | ** ** |
| Computed expected  tax provision (benefit           |       | $                | (1,742,000) |             | $          | (1,870,000       | )          | $ | (2,687,000 | ) |
| Increase (decrease) in income taxes resulting from: |       |             |        |             |       |             |       |
| Nondeductible expenses                              |       | 10,000           |        | 5,000            |       | 4,888            |       |
| State income taxes, net of federal benefit          |       | (123,000         | )           | (123,000         | )          | 59,000           |       |
| Foreign taxes                                       |       | 18,000           |        | (20,000          | )          | —           |       |
| Current year R&D tax credits                    |       | —           |        | —           |       | —           |       |
| Foreign losses not benefited                        |       | 562,440          |        | 292,382          |       | —           |       |
| Change in valuation allowance                       |       | 1,258,000        |        | 1,363,088        |       | 2,282,912        |       |
| Change in foreign tax rate on deferreds             |       | —           |        | 41,718           |       | —           |       |
| Other                                               |       | 24,094           |        | 370,801          |       | —           |       |
|                                                |       | $                | 7,534       |             | $          | 59,989           |       | $ | (340,200 | ) |

 

38

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

Netdeferred taxes consist of the following components:

| ** **                           | ** ** | **May 29,** | ** ** | **May 30,** | ** ** |
|--------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                           | ** ** | **2005**         | ** ** | **2004**         | ** ** |
| Deferred tax  assets (liabilities):  |       |             |       |             |       |
| Current deferred taxes               |       |             |       |             |       |
| Allowance for doubtful accounts      |       | $                | 206,000    |             | $          | 106,000 |   |
| Inventory reserve                    |       | 166,000          |       | 144,000          |       |
| Accrued vacation                     |       | 106,000          |       | 61,000           |       |
| Accrued warranty                     |       | 49,000           |       | 45,000           |       |
| Inventory capitalization             |       | 2,000            |       | 2,000            |       |
| Imputed interest                     |       | —           |       | 77,000           |       |
| Valuation allowance                  |       | (529,000         | )          | (435,000         | )          |
| Total current deferred taxes         |       | —           |       | —           |       |
| Long-term deferred taxes             |       |             |       |             |       |
| Goodwill deductible for tax          |       | 357,000          |       | 384,000          |       |
| Equipment and leasehold improvements |       | 212,000          |       | 396,000          |       |
| Tax credit carryforwards and other   |       | 8,000            |       | —           |       |
| Federal NOL carryforwards            |       | 3,959,000        |       | 2,592,000        |       |
| Foreign deferred tax asset           |       | —           |       | —           |       |
| Foreign deferred liability           |       | —           |       | —           |       |
| Valuation allowance                  |       | (4,536,000       | )          | (3,372,000       | )          |
| Total long-term  deferred taxes      |       | $                | —     |             | $          | — |   |

 

TheCompany has net operating loss carryforwards of approximately $10,846,000 as ofMay 29, 2005, with various expiration dates through 2023. Based on priortaxable income and estimates of future taxable income, the Company hasdetermined that it is likely that the net deferred tax asset will not be fullyrealized in the future. Thus a full valuation allowance has been established.

**8.**                 **EMPLOYEE BENEFIT PLANS**

*401(k) Employer MatchPlan*—The Company has a 401(k) plan coveringsubstantially all U.S. employees. The Company is required to match 25% of theemployees’ first 6% of contributions and may make additional contributions tothe plan to the extent authorized by the Board of Directors. The contributionamounts charged to operating expenses in the fiscal years ended May 29,2005, May 30, 2004, and June 1, 2003 approximated $46,000, $55,000,and $58,000, respectively.

*Stock Purchase Plan*—TheCompany maintains a stock purchase plan in which up to 200,000 shares of commonstock may be purchased by employees. The purchase price is equal to the lesserof 85% of the fair market value of the shares on the date the phase commencesor 85% of the fair market value of the shares on the termination date of thephase. Each phase is one year from the commencement date of a phase. There were23,212, and 25,875 shares purchased under this plan during the fiscal yearsended June 1, 2003, and May 29, 2005, respectively. No shares werepurchased under the plan during the year ended May 30, 2004 due to thephase ending on May 31, 2004.

39

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

**9.      REDEEMABLECONVERTIBLE PREFERRED STOCK**

In July 2002,in connection with the purchase of certain assets and liabilities of PowerGeneral, the Company issued 2,074 shares of redeemable 7% convertible preferredstock at $1,000 face value. The preferred stock is convertible into commonstock at the holders’ option at a conversion price of $4.25 principal amount ofpreferred stock for each share and has a mandatory redemption of one-third ofthe outstanding shares of unconverted preferred stock on July 16, 2006,one-half of the remaining outstanding shares on July 16, 2007, and theremaining outstanding shares on July 16, 2008. The dividends on thepreferred stock are cumulative and payable quarterly beginning October 15,2002, and can be paid in cash; however, during the first three years theCompany can pay dividends in shares of common stock in lieu of cash based onthe fair market value of the common stock at the time the dividends aredeclared. In fiscal 2005 the Company declared dividends of $145,180, which havebeen paid with 52,158 shares of common stock. In fiscal 2004 the Companydeclared dividends of $145,180, which have been paid with 55,584 shares ofcommon stock. In fiscal 2003 the Company declared dividends of $128,242, ofwhich $108,885 have been paid with 51,177 shares of common stock. The preferredstock has a preference in liquidation over common stock. In the event ofliquidation or winding up of the Company, the preferred stockholders willreceive an amount equal to $1,000 per share plus any unpaid dividends accruedthrough the date of such event.

**10.   STOCKOPTION PLAN**

Informationrelating to all outstanding options as of May 29, 2005, May 30, 2004,and June 1, 2003 is as follows:

| ** **                                                      | ** ** | **May 29, 2005** | ** ** | **May 30, 2004**              | ** ** | **June 1, 2003** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|----------------------------|------------|
| ** **                                                      | ** ** | **Shares**                 | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares**                 | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Options  outstanding at beginning of year                       |       | 1,187,826                  |       |                                    | $          | 5.18                       |       |   | 1,093,426 |   |   | $ | 5.43 |   |   | 978,926 |   |   | $ | 5.70 |   |   |
| Options exercised                                               |       | (23,000                    | )          |                                    | 1.23       |                       |       | (1,000 | ) |   | 1.38 |   |   | (10,500 | ) |   | 2.32 |   |   |
| Options expired                                                 |       | (1,000                     | )          |                                    | 2.13       |                       |       | (1,000 | ) |   | 1.38 |   |   | (13,000 | ) |   | 4.00 |   |   |
| Options granted                                                 |       | 101,800                    |       |                                    | 2.99       |                       |       | 96,400 |   |   | 2.34 |   |   | 138,000 |   |   | 3.11 |   |   |
| Options  outstanding at end of year                             |       | 1,265,626                  |       |                                    | $          | 5.08                       |       |   | 1,187,826 |   |   | $ | 5.18 |   |   | 1,093,426 |   |   | $ | 5.43 |   |   |
| Options exercisable at end of year                              |       | 1,106,828                  |       |                                    | $          | 5.40                       |       |   | 1,030,526 |   |   | $ | 5.46 |   |   | 905,176 |   |   | $ | 5.58 |   |   |
| Weighted-average  fair value of options granted during the year |       |                       |       |                                    | $          | 2.10                       |       |   |   |   |   | $ | 1.72 |   |   |   |   |   | $ | 1.94 |   |   |

 

40

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

Thefollowing table summarizes information about stock options outstanding at May 29,2005:

|                                             | ** **                        | ** **                                          | ** ** | **Options Outstanding**                                      | ** ** | **Options Exercisable**            | ** ** |
|---------------------------------------------|-----------------------------------|-----------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Range of Exercise Prices** | ** **                        | **Number  Outstanding  at May 29,  2005** | ** ** | **Weighted-  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  Exercisable  at May 29,  2005** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                             | $                                 | 1.19 - $1.72                              |       |                                                              |       | 0                                       |       |   |   | 0.0 |   |   |   | $ | 0.00 |   |   | 0 |   |   | $ | 0.00 |   |   |
|                                        | 1.73 -   2.58 |                                                |       |                                                              | 141,400    |                                    |       |   | 2.5 |   |   |   | 2.31 |   |   | 100,200 |   |   | 2.32 |   |   |
|                                             | 2.59 -   3.45 |                                                |       |                                                              | 236,800    |                                    |       |   | 3.4 |   |   |   | 3.07 |   |   | 119,202 |   |   | 3.12 |   |   |
|                                        | 3.46 -   4.31 |                                                |       |                                                              | 218,124    |                                    |       |   | 3.4 |   |   |   | 3.78 |   |   | 218,124 |   |   | 3.78 |   |   |
|                                             | 4.32 -   5.17 |                                                |       |                                                              | 10,000     |                                    |       |   | 3.3 |   |   |   | 5.06 |   |   | 10,000 |   |   | 5.06 |   |   |
|                                        | 5.18 -   6.03 |                                                |       |                                                              | 278,800    |                                    |       |   | 4.9 |   |   |   | 5.82 |   |   | 278,800 |   |   | 5.82 |   |   |
|                                             | 6.04 -   6.90 |                                                |       |                                                              | 62,918     |                                    |       |   | 1.9 |   |   |   | 6.52 |   |   | 62,918 |   |   | 6.52 |   |   |
|                                        | 6.91 -   7.76 |                                                |       |                                                              | 197,000    |                                    |       |   | 3.6 |   |   |   | 7.38 |   |   | 197,000 |   |   | 7.38 |   |   |
|                                             | 7.77 -   8.63 |                                                |       |                                                              | 120,584    |                                    |       |   | 2.5 |   |   |   | 8.44 |   |   | 120,584 |   |   | 8.44 |   |   |
|                                        | $                                 | 1.19 - $8.63                                        |       |                                                              |       | 1,265,626                               |       |   |   | 3.5 |   |   |   | $ | 5.08 |   |   | 1,106,828 |   |   | $ | 5.40 |   |   |

 

**11.   STOCKHOLDERS’EQUITY**

The Board of Directors is empowered to establish andto designate classes and series of preferred shares and to set the terms ofsuch shares, including terms with respect to redemption, dividends, liquidation,conversion, and voting rights. The Restated Articles of Incorporation providethat the preferred shares are senior to the common shares with respect todividends and liquidation.

The Company has a shareholders’ rights plan—underwhich, a Class A, Junior Participating Preferred Stock with no par valuewas created. In addition, a dividend of one right was declared for each shareof common stock at an exercise price of $36 per right and a redemption price of$0.001 per right. Each right is equal to a right to purchase one one-hundredthof a share of the Class A, Junior Participating Preferred Stock. 100,000shares of preferred stock are reserved for the exercise of the rights. Norights were exercised during the years ended May 29, 2005, May 30,2004, and June 1, 2003.

TheCompany has notes receivable from certain officers of the Company arising fromthe sale of common stock recorded as an offset to stockholders’ equity. During2003, the Company wrote off $55,000 of such notes as compensation expense.

**12.   COMMITMENTAND CONTINGENCIES**

*OperatingLeases**—*The Companyleases certain facilities under operating leases through March 2008. Inaddition, certain equipment and motor vehicles are leased under operatingleases with terms of approximately 36 months.

During May 2005, the Company entered into anagreement for the sale of its headquarter building in Brooklyn Park, Minnesotaand the leaseback of a part of that building. The lease is for a twenty-sevenmonth period, and is classified as an operating lease.

41

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

Approximateminimum annual rental commitments at May 29, 2005 are as follows:

| 2006   | ** ** | **$  444,000** | ** ** |
|--------|------------|--------------------------|------------|
| 2007   |       | 435,000                  |       |
| 2008   |       | 200,000                  |       |
|   |       | $                        | 1,079,000  |   |
|        |            |                          |            |  |

 

Totalrental expense for the fiscal years ended May 29, 2005, May 30, 2004,and June 1, 2003 was approximately $217,000, $227,000, and $393,000respectively.

**13.  ****SEGMENTINFORMATION AND FOREIGN OPERATIONS**

The Company conducts itsbusiness within one reportable segment: the power conversion product industry. Manufacturing of the Company’sproducts are performed at the Company’s former Korean subsidiary, the Chinesesubsidiaries, and certain nonaffiliated companies in China and Thailand. Asummary of the Company’s revenues, net income, and identifiable assets bygeographic area is presented below:

| ** **                                           | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| Revenues:                                            |       |             |       |             |       |             |       |
| Domestic operations                                  |       | $                | 33,944,131 |             | $          | 32,385,149       |       | $ | 31,009,020 |   |
| Asian operations—customers                      |       | 3,271,378        |       | 2,975,435        |       | 4,986,825        |       |
| Asian operations—parent                         |       | 10,406,081       |       | 7,356,824        |       | 3,123,908        |       |
| Eliminations                                         |       | (10,406,081      | )          | (7,356,824       | )          | (3,123,908       | )          |
| Consolidated                                         |       | $                | 37,215,509 |             | $          | 35,360,584       |       | $ | 35,995,845 |   |
| Net income (loss)  applicable to common stockholder: |       |             |       |             |       |             |       |
| Domestic operations                                  |       | $                | (3,864,293 | )                | $          | (4,812,467       | )          | $ | (6,337,558 | ) |
| Asian operations                                     |       | (1,112,553       | )          | (885,986         | )          | (908,077         | )          |
| Discontinued Operations                              |       | (153,074         | )          | 150,607          |       | (446,438         | )          |
| Eliminations                                         |       | 3                |       | 2,200            |       | —           |       |
| Consolidated                                         |       | $                | (5,129,917 | )                | $          | (5,545,646       | )          | $ | (7,692,073 | ) |
| Identifiable  assets:                                |       |             |       |             |       |             |       |
| Domestic operations                                  |       | $                | 13,653,449 |             | $          | 23,547,646       |       | $ | 27,823,792 |   |
| Asian operations                                     |       | 8,293,724        |       | 9,083,004        |       | 7,380,047        |       |
| Discontinued Operations                              |       | —           |       | 13,922,280       |       | 13,838,483       |       |
| Eliminations                                         |       | (5,140,515       | )          | (16,717,639      | )          | (15,977,405      | )          |
| Consolidated                                         |       | $                | 16,806,658 |             | $          | 29,835,291       |       | $ | 33,064,917 |   |
| Long-lived  assets:                                  |       |             |       |             |       |             |       |
| Domestic operations                                  |       | $                | 300,984    |             | $          | 4,176,751        |       | $ | 6,493,373 |   |
| Foreign operations                                   |       | 2,073,958        |       | 1,949,359        |       | 1,933,912        |       |
| Consolidated                                         |       | $                | 2,374,942  |             | $          | 6,126,110        |       | $ | 8,427,285 |   |

 

42

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003**

Sales from the subsidiary to the parent company arebased upon profit margins, which represent competitive pricing of similarproducts.

*ExportSales**—*The Companyalso had foreign export sales amounting to 15.7%, 14.4%, and 12.1% of totalsales for the fiscal years ended May 29, 2005, May 30, 2004, and June 1,2003, respectively.

*Other Foreign Production—*Inaddition to the manufacturing done by the Asian subsidiaries, the Company hassubcontracting agreements for the purchase of finished assemblies from certainmanufacturers in China and Thailand. Total purchases under these agreements wereapproximately $4,288,000, $5,243,000, and $5,918,000 for the fiscal years endedMay 29, 2005, May 30, 2004, and June 1, 2003, respectively.

**14.   MAJORCUSTOMER**

TheCompany had no customers with revenues or accounts receivable of more than 10%of the total during the fiscal years ended May 29, 2005. May 30, 2004and June 1, 2003

**15.   ACQUISITION**

On July 16, 2002, the Company purchased a portionof the operating assets of the Power General division of Nidec AmericaCorporation. The Power General division developed, manufactured, and soldhigh-efficiency DC/DC converters and custom power supplies at various powerlevels up to 1200 watts under the Power General brand name. Pursuant to thePurchase Agreement, the Company paid the seller $366,000 in cash and issued$2,074,000 face amount of the Company’s newly created Series B 7%Convertible Preferred Stock, no par value (the Preferred Stock). The PreferredStock issued to seller is convertible into 488,000 shares of the Company’scommon stock. The Company has filed a registration statement covering theshares of common stock issuable upon conversion of the Preferred Stock with theSecurities and Exchange Commission. Diluted EPS reflects the potential dilutionthat could occur if the Preferred Stock was converted into common stock of theCompany during reported periods. The Preferred Stock was excluded from DilutedEPS in the current year as the effect of its inclusion would be antidilutive. TheCompany has maintained Power General’s engineering group in Massachusetts andhas moved Power General’s manufacturing operations and related functions to theCompany’s other facilities in Asia.

Thetotal cost of the acquisition was $2,559,278 and was accounted for under thepurchase method of accounting. Accordingly, the acquired assets and liabilitiesassumed have been recorded at their respective fair values as of the date ofacquisition. The results of operations of the acquired business is included inthe financial statements since the date of the acquisition. The following tablesummarizes the estimated fair values of the assets acquired and liabilitiesassumed from Nidec on the date of the acquisition:

| Inventories             |   | $         | 1,048,675 |   |
|-------------------------|--------|-----------|-----------|--------|
| Property and  equipment |   | 1,634,971 |      |
| Total assets acquired   |   | 2,683,646 |      |
| Current  liabilities    |   | 124,368   |      |
| Net assets  acquired    |   | $         | 2,559,278 |   |

 

 

43

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003  **

Pro-formaresults of the Company, assuming the acquisition had been made at the beginningof each period presented, are (in thousands, except per share data):

| ** **                                  | ** ** | **Year Ended** | ** ** |
|---------------------------------------------|------------|---------------------|------------|
| ** **                                  | ** ** | **June 1,**    | ** ** |
| ** **                                  | ** ** | **2003**            | ** ** |
| Revenue                                     |       |                | $          | 36,365 |   |   |
| Net Loss                                    |       |                | (7,899     | ) |   |
| Preferred Stock  Dividends                  |       |                | 146        |   |   |
| Net Loss  Applicable to Common Stockholders |       |                | $          | (8,045 | ) |   |
| Basic Loss Per Share                        |       |                | $          | (1.75 | ) |   |
| Diluted Loss Per  Share                     |       |                | $          | (1.75 | ) |   |
| Common and equivalent shares outstanding:   |       |                |       |   |   |
| Basic                                       |       |                | 4,597      |   |   |
| Diluted                                     |       |                | 4,597      |   |   |

 

**16.****          QUARTERLYFINANCIAL INFORMATION**

Accounting errors discovered in the Company’s Chinaoperations increased the loss applicable to common stockholders by $593,000 forfiscal year 2004 and $425,000 for the first three quarters of fiscal year 2005compared to results that were originally reported. The sale of the Company’sKorean subsidiary in May 2005, required adjustments to the financialstatements to present Korean operations as “discontinued operations”.

During the fourth quarter of fiscal year 2005, theCompany recorded adjustments and accounting entries that increased the lossapplicable to common stockholders by $3,328,000. The loss on the sale of theKorean subsidiary was approximately $2,442,000 and the loss on the sale of theMinneapolis headquarters’ building was $137,000. The value of accountsreceivable and inventories for Ault’s China operations was reduced by $198,000and $427,000 respectively. The value of inventories in the United States wasreduced by $124,000.

44

----

**AULT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1, 2003  **

**QUARTERLYFINANCIAL DATA(Unaudited)(Amounts in Thousands, Except Per Share Data)**

| ** **                                 | ** ** | **FISCAL QUARTERS** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|
| ** **                                 | ** ** | **1**ST                  | ** ** | **2**ND | ** ** | **3**RD | ** ** | **4**TH | ** ** |
| Fiscal Year 2005 as  adjusted:             |       |                     |       |   |   |   |   |   |   |
| Net Sales                                  |       | $                        | 10,336     |   | $ | 8,225 |   | $ | 8,941 |   | $ | 9,714 |   |
| Gross Profit                               |       | 2,761                    |       | 2,395 |   | 2,759 |   | 2,223 |   |
| Loss From Continuing Operations            |       | (119                     | )          | (563 | ) | (364 | ) | (1,344 | ) |
| Loss From Discontinued Operations          |       | 36                       |       | (5 | ) | (177 | ) | (2,449 | ) |
| Net Loss Applicable to Common Stockholders |       | (119                     | )          | (604 | ) | (577 | ) | (3,830 | ) |
| Loss  Per Share:                           |       |                     |       |   |   |   |   |   |   |
| Basic                                      |       | (0.02                    | )          | (0.13 | ) | (0.13 | ) | (0.79 | ) |
| Diluted                                    |       | (0.02                    | )          | (0.13 | ) | (0.13 | ) | (0.79 | ) |
| Fiscal Year 2005  as originally reported:  |       |                     |       |   |   |   |   |   |   |
| Net Sales                                  |       | $                        | 13,139     |   | $ | 11,047 |   | $ | 12,141 |   |   |   |
| Gross Profit                               |       | 3,563                    |       | 2,969 |   | 3,298 |   |   |   |
| Loss From Continuing Operations            |       | 153                      |       | (498 | ) | (422 | ) |   |   |
| Income (Loss) From Discontinued Operations |       | 0                        |       | 0 |   | 0 |   |   |   |
| Net Loss Applicable to Common Stockholders |       | 117                      |       | (534 | ) | (458 | ) |   |   |
| Loss Per Share:                            |       |                     |       |   |   |   |   |   |   |
| Basic                                      |       | .02                      |       | (0.11 | ) | (0.10 | ) |   |   |
| Diluted                                    |       | .02                      |       | (0.11 | ) | (0.10 | ) |   |   |
| Fiscal Year 2004  as adjusted:             |       |                     |       |   |   |   |   |   |   |
| Net Sales                                  |       | $                        | 8,430      |   | $ | 8,769 |   | $ | 8,600 |   | $ | 9,562 |   |
| Gross Profit                               |       | 1,865                    |       | 2,300 |   | 1,541 |   | 2,467 |   |
| Loss From Continuing Operations            |       | (1,168                   | )          | (719 | ) | (3,208 | ) | (456 | ) |
| Income From Discontinued Operations        |       | 61                       |       | (11 | ) | 12 |   | 89 |   |
| Net Loss Applicable to Common Stockholders |       | (1,143                   | )          | (766 | ) | (3,233 | ) | (404 | ) |
| Loss Per Share:                            |       |                     |       |   |   |   |   |   |   |
| Basic                                      |       | (0.25                    | )          | (0.16 | ) | (0.69 | ) | (0.09 | ) |
| Diluted                                    |       | (0.25                    | )          | (0.16 | ) | (0.69 | ) | (0.09 | ) |
| Fiscal Year 2004  as reported:             |       |                     |       |   |   |   |   |   |   |
| Net Sales                                  |       | $                        | 10,816     |   | $ | 11,134 |   | $ | 10,730 |   | $ | 12,429 |   |
| Gross Profit                               |       | 2,383                    |       | 2,787 |   | 2,050 |   | 3,133 |   |
| Loss Before Income Taxes                   |       | (1,108                   | )          | (731 | ) | (3,196 | ) | (319 | ) |
| Net Loss Applicable to Common Stockholders |       | (1,143                   | )          | (766 | ) | (3,233 | ) | (404 | ) |
| Loss Per Share:                            |       |                     |       |   |   |   |   |   |   |
| Basic                                      |       | (0.25                    | )          | (0.16 | ) | (0.69 | ) | (0.09 | ) |
| Diluted                                    |       | (0.25                    | )          | (0.16 | ) | (0.69 | ) | (0.09 | ) |

 

45

----

**ITEM8(b). SUPPLEMENTARY FINANCIAL INFORMATION**

Not Applicable.

**ITEM9.**                CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable

**ITEM9A.**        CONTROLS AND PROCEDURES.

(a)          Evaluationof Disclosure Controls and Procedures

Management, with theparticipation of the principal executive officer and principal financialofficer, has evaluated the effectiveness of the design and operation of thedisclosure controls and procedures (as defined in rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) as of theend of the period covered by this annual report. Subject to the mattersdiscussed below, management has concluded that the Company’s disclosurecontrols and procedures are not effective to ensure that information requiredto be disclosed in the reports that the Company files under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the SEC and that the disclosure controls arealso not effective to ensure that information required to be disclosed in theCompany’s Exchange Act reports is accumulated and communicated to management,including the chief executive officer and chief financial officer to allowtimely decisions regarding required disclosure.

A material weakness is acontrol deficiency, or combination of control deficiencies, that results inmore than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. As ofMay 29, 2005, the Company did not maintain effective controls relating totransactions at its China subsidiary related to inventory build-up and reliefand reconciliation of intercompany accounts.

In connection with itsaudit of the Company’s consolidated financial statements for the year endedMay 30, 2004, Grant Thornton LLP (“Grant Thornton”), the Company’sindependent registered public accounting firm, advised the Audit Committee andmanagement of internal control matters with respect to certain inventorytransactions that they considered to be a material weakness as that term isdefined under standards established by the Public Company Accounting OversightBoard (PCAOB). The Company considered these matters in connection with theyear-end closing process and the preparation of the May 29, 2005consolidated financial statements included in this Form 10-K. Inresponse to the observations made by Grant Thornton, the Company will implementcertain enhancements to its internal controls and procedures, which it believesaddress the matters raised by Grant Thornton.

*China Subsidiary*

The Company did notmaintain effective controls over the preparation of and independent review ofaccounts at the China subsidiary. The Company has concluded that these controldeficiencies constitute material weaknesses.

*Remediation of Material Weaknesses Related to ChinaSubsidiary*

Managementhas taken, or is in the process of taking the following steps with respect tothe control deficiencies at its China subsidiary:

·       Thetransfer of a seasoned accountant with experience in Asian operations who willbe headquartered in Minneapolis, and will be the primary liaison with our Chinaaccounting staff and operations.

46

----

·       Commencementof a training program to upgrade the skill sets of our China accounting staff.

·       Thehiring of an experienced China-based controller to coordinate all financialreporting, monthly physical inventory counts and verification and also be apart of the weekly conference calls with all of our operations to improvecommunications.

Management believes thatimplementation of these actions will remediate the material weaknessesdescribed above.

*Warehouse Control Deficiencies*

In a cost-cutting effortin the third quarter of fiscal 2004, the Company closed down a manufacturingfacility in Minneapolis and terminated a third party warehouse facility inIreland. As part of the shutdown of the manufacturing in December 2003,certain personnel were terminated prior to the disposition of inventory at thelocation. The Company’s haste in cost elimination resulted in havinginsufficient staffing to control the disposition of the inventory. This wasfound to be a weakness of $25,569 in the counting of inventory that wasdiscovered during the course of the audit by the Company’s external auditors.This should have been recorded in the third quarter.

In addition to themanufacturing shut-down, the Company also closed a third party warehousefacility to cut costs in January 2004. This too resulted in theterminations of personnel whose responsibilities including monitoring thirdparty warehousing of customer stock inventory. Approximately $57,581 ofinventory was not adequately tracked. This error was also discovered in thecourse of the audit, and should have been recorded in the third quarter. Takentogether the manufacturing and third party warehouse control deficienciesresulted in an adjustment of $83,150, which should have been recorded in thethird quarter. This $83,150 adjustment was extrapolated over the Company’s entireinventory, which resulted in a total adjustment of $279,987. The Companybelieves that this adjustment is not material.

In connection with itsaudit of the Company’s consolidated financial statements for the year endedMay 30, 2004, Grant Thornton LLP (“Grant Thornton”), the Company’sindependent registered public accounting firm, advised the Company’s auditcommittee and management that the adjustments described with respect toinventory constituted a material weakness as that term is defined under standardsestablished by the Public Company Accounting Oversight Board (PCAOB). Inresponse to the observations made by Grant Thornton, the Company will implementcertain enhancements to its internal controls and procedures that the Companybelieves will address the matters raised by Grant Thornton.

Specifically, if theCompany determines to enter into any future third party warehouse agreement,the Company will make sure that is has devoted adequate resources for necessarypreventative and detective controls. The third party warehouse will have aweekly reconciliation between the inventory in the warehouse and the Company’sinventory system. The head of sales and the head of finance will review thisreconciliation. On a quarterly basis, the Company will physically count theinventory.

Similarly, before theCompany closes another manufacturing location, the Company will make sure thereare adequate resources in place for necessary preventative and detectivecontrols. If the Company closes a manufacturing location, it will have thenecessary resources to maintain a cycle count system until the disposition ofthe inventory is complete. Also there will be a physical inventory of theinventory before the end of each quarter until the disposition of the inventoryis complete.

**ITEM 9B.**       OTHERINFORMATION

NotApplicable.

47

----

**PART III.**

**ITEM 10.**   DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT

TheCompany’s Board of Directors is presently comprised of seven directors:
| ** **                   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                 | ** ** | **Director**                                      |
|------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|
| **Name and (Age)**           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                 | ** ** | **Principal Occupation and Other  Directorships** | ** ** | **Since** |
| Carol A. Barnett (40)        |       | Vice President,  Medtronic, Inc., Gastroenterology-Urology; Neurological Marketing and  Business Development Director, Medtronic; from 1998 to 2000, Neurological  Marketing Manager, Medtronic, Inc.                                                                                                                                            |       | 2001                                              |
| Brian T. Chang (46)          |       | Chief Executive  Officer, Pacific Investment Partners, January 2004 to present; Vice  Chairman Taian Pacific Gas Manufacturing since January 2004; Chairman,  Taian Pacific Gas Manufacturing Company from 2001 to 2004; From 2001 to 2002,  Vice President, Alliance Capital; from 1994 to 2000, President, Pacific  Investment and Consulting. |       | 2002                                              |
| John Colwell, Jr.  (47) |       | Chairman and  Chief Executive Officer, Web Label; from 1997 to 2000, President, Colwell  Industries. Mr. Colwell has twenty years of experience as a senior  executive that includes relevant experience actively supervising financial  and accounting officers at companies of similar or larger size than Ault.                                    |       | 2000                                              |
| Frederick M. Green (62)      |       | Chairman,  President and Chief Executive Officer of the Company; Director,  Communications Systems, Inc. (telecommunications).                                                                                                                                                                                                                             |       | 1979                                              |
| John G. Kassakian (62)       |       | Professor of  Electrical Engineering and Director, Laboratory for Electromagnetic and  Electronic Systems, Massachusetts Institute of Technology; Director, American  Power Conversion                                                                                                                                                                     |       | 1984                                              |
| David J. Larkin (65)         |       | Management  Consultant since 1995; Executive Vice President and Chief Operating Officer,  Jostens, Inc. in 1998 and 1999.                                                                                                                                                                                                                             |       | 1998                                              |
| Marvonia Pearson Walker (47) |       | Vice President,  AT&T’s Georgia Community Relations and High Speed Computer Networking Director  through June 2004; from December 1999 to September 2000,  Marketing Director, AT&T.                                                                                                                                           |       | 2001                                              |
|                              |            |                                                                                                                                                                                                                                                                                                                                                            |            |                                                   |  |  |

 

48

----

Certaininformation with respect to the executive officers of the Company is set forth:
| **Name and (Age)**         | ** ** | ** **                                       | ** ** | **Position** | ** ** | **Officer Since** |
|----------------------------|------------|--------------------------------------------------|------------|--------------|------------|-------------------|
| Frederick M. Green (62)    |       | President, Chief  Executive Officer and Director |       | 1980         |
| Gregory L. Harris (52)     |       | Vice  President—Business Development        |       | 1988         |
| Xiaodong Wang (47)         |       | Vice  President—Asia Pacific                |       | 2000         |
| Donald L. Henry (49)       |       | Vice President  and Chief Financial Officer(1)   |       | 1999         |
| William J. Birmingham (64) |       | Interim Chief Financial  Officer(2)              |       | 2005         |

----

(1)          Mr. Henry resignedfrom the Company on July 29, 2005.

(2)          Mr. Birminghamjoined the Company on August 1, 2005. From March 2000 through April 2005Mr. Birmingham served as Vice President of Finance for Harvey VogelManufacturing Company, a privately held metal stamping business with annualrevenues of $21 million.

**Compliancewith Section 16(a) of the Securities Exchange Act of 1934**

Section 16(a) of the Securities Exchange Act of1934 requires the Company’s directors and executive officers, and persons whoown more than 10% of a registered class of the Company’s equity securities, tofile with the Securities and Exchange Commission initial reports of ownershipand reports of changes in ownership of common stock and other equity securitiesof the Company. These insiders are required by Securities and ExchangeCommission regulations to furnish the Company with copies of all Section 16(a)forms they file, including Forms 3, 4 and 5. To the Company’s knowledge, andbased solely on review of the copies of such reports furnished to the Companyand written representations that no other reports were required, all required Section 16(a)filings applicable to directors, executive officers and greater than 10%shareholders in fiscal 2005 were timely filed.

49

----

**ITEM 11.**   EXECUTIVECOMPENSATION

**Summaryof Cash and Certain Other Compensation**

The following table shows, for fiscal years ended May 29,2005, May 30, 2004, and June 1, 2003, the cash compensation paid bythe Company, as well as certain other compensation paid or accrued for theseyears, to Frederick M. Green, the Company’s President and Chief ExecutiveOfficer, and to certain other most highly compensated executive officers of theCompany (together with Mr. Green, the “Named Executive Officers’’) whosetotal cash compensation exceeded $100,000 during fiscal year 2005 in allcapacities in which they served:

**SummaryCompensation Table**

|                                 | ** ** | ** ** | ** ** | ** **           | ** ** | **Long-Term Comp.** | ** ** | ** **                     | ** ** |
|---------------------------------|------------|------------|------------|----------------------|------------|--------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **Fiscal** | ** ** | **Annual Cash** | ** ** | **Securities**           | ** ** | **All Other**             | ** ** |
| **Name and Position** | ** ** | ** ** | ** ** | **Year**             | ** ** | **Compensation(1)**      | ** ** | **Underlying Options(2)** | ** ** | **Compensation** | ** ** |
| Frederick M. Green              |       |       | 2005       |                 |       |                     | $          | 307,732                        |       |   |   | 12,500 |   |   |   | $ | 4,022 | (3) |   |
| President and Chief             |       |       | 2004       |                 |       |                     | 313,811    |                           |       |   | 12,500 |   |   |   | 5,021 | (3) |   |
| Executive Officer               |       |       | 2003       |                 |       |                     | 292,218    |                           |       |   | 20,000 |   |   |   | 4,800 | (3) |   |
| Gregory L. Harris               |       |       | 2005       |                 |       |                     | $          | 174,157                        |       |   |   | 8,000 |   |   |   | $ | 3,419 | (4) |   |
| Vice President                  |       |       | 2004       |                 |       |                     | 174,157    |                           |       |   | 8,000 |   |   |   | 3,447 | (4) |   |
| Business Development            |       |       | 2003       |                 |       |                     | 165,942    |                           |       |   | 12,000 |   |   |   | 3,368 | (4) |   |
| Xiaodong Wang                   |       |       | 2005       |                 |       |                     | $          | 171,435                        |       |   |   | 8,000 |   |   |   | $ | 3,755 | (5) |   |
| Vice President                  |       |       | 2004       |                 |       |                     | 163,969    |                           |       |   | 8,000 |   |   |   | 3,845 | (5) |   |
| Asia Pacific                    |       |       | 2003       |                 |       |                     | 162,679    |                           |       |   | 12,000 |   |   |   | 3,707 | (5) |   |
| Donald L. Henry                 |       |       | 2005       |                 |       |                     | $          | 164,290                        |       |   |   | 8,000 |   |   |   | $ | 3,177 | (6)(7) |   |
| Vice President and Chief        |       |       | 2004       |                 |       |                     | 164,433    |                           |       |   | 8,000 |   |   |   | 3,755 | (6) |   |
| Financial Officer               |       |       | 2003       |                 |       |                     | 156,541    |                           |       |   | 12,000 |   |   |   | 3,845 | (6) |   |
|                                 |            |            |            |                      |            |                          |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Represents basecompensation paid to the named executives; includes bonuses for fiscal 2005 and2004.

(2)          Reflects the number ofshares that may be purchased pursuant to options granted in the year indicated.

(3)          Reflects 401(k) matchingcontributions of $2,368, $2,960 and $2,876 under the Company’s Profit Sharingand Retirement Plan in 2005, 2004 and 2003 respectively, and the payment of$1,654, $2,061 and $1,924 for life insurance premiums in 2005, 2004 and 2003respectively.

(4)          Reflects 401(k) matchingcontributions of $1,847, $1,875 and $1,911 under the Company’s Profit Sharingand Retirement Plan in 2005, 2004 and 2003 respectively, and the payment of$1,572, $1,572 and $1,457 for life insurance premiums in 2005, 2004 and 2003respectively.

(5)          Reflects 401(k) matchingcontributions of $2,249, $2,339 and $2,285 under the Company’s Profit Sharingand Retirement Plan in 2005, 2004 and 2003 respectively, and payments of$1,506, $1,506 and $1,422 for life insurance premiums in 2005, 2004 and 2003respectively.

(6)          Reflects 401(k) matchingcontributions of $1,670, $2,077 and $1,023 under the Company’s Profit Sharingand Retirement Plan in 2005, 2004 and 2003 respectively, and payment of $1,507,$1,507 and $1,421 for life insurance premiums in 2005, 2004 and 2003respectively.

(7)          Mr. Henry receiveda severance payment of $78,270 on September 1, 2005. The severance paymentis over and above the amounts listed in the annual cash compensation table.

50

----

**Option Grants in Fiscal Year 2005**

Thefollowing table contains information concerning grants of stock options to theNamed Executive Officers during the fiscal year ended May 29, 2005:

| ** **         | ** ** | ** **         | ** ** | **Percent of**          | ** ** | ** **         | ** ** | ** **     | ** ** | **Potential Realizable**           | ** ** |
|--------------------|------------|--------------------|------------|------------------------------|------------|--------------------|------------|----------------|------------|-----------------------------------------|------------|
| ** **         | ** ** | **Number of** | ** ** | **Total**                    | ** ** | ** **         | ** ** | ** **     | ** ** | **Value at Assumed**          | ** ** |
| ** **         | ** ** | **Securities**     | ** ** | **Options**                  | ** ** | ** **         | ** ** | ** **     | ** ** | **Annual Rate of Stock** | ** ** |
| ** **         | ** ** | **Underlying**     | ** ** | **Granted to All** | ** ** | **Exercise**       | ** ** | ** **     | ** ** | **Price Appreciation for**    | ** ** |
| ** **         | ** ** | **Options**        | ** ** | **Employees**                | ** ** | **Price**          | ** ** | **Expiration** | ** ** | **Option Term**                    | ** ** |
| ** **         | ** ** | **Granted**        | ** ** | **In Fiscal Year** | ** ** | **Per Share** | ** ** | **Date**       | ** ** | **5%**                                  | ** ** | **10%** | ** ** |
| Frederick M. Green |       |               | 12,500     |                         |       |               | 13.92      | %              |       |                                    | $          | 2.99 |   |   | 7/22/2009 |   | $ | 10,326 |   | $ | 22,817 |   |
| Gregory L. Harris  |       |               | 8,000      |                         |       |               | 8.91       | %              |       |                                    | 2.99       |   |   | 7/22/2009 |   | 6,608 |   | 14,603 |   |
| Xiaodong Wang      |       |               | 8,000      |                         |       |               | 8.91       | %              |       |                                    | 2.99       |   |   | 7/22/2009 |   | 6,608 |   | 14,603 |   |
| Donald L. Henry    |       |               | 8,000      |                         |       |               | 8.91       | %              |       |                                    | 2.99       |   |   | 7/22/2009 |   | 6,608 |   | 14,603 |   |
|                    |            |                    |            |                              |            |                    |            |                |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Option Exercises inFiscal Year 2005 and Fiscal Year-End Options Outstanding**

Thefollowing table sets forth information with respect to the Named ExecutiveOfficers concerning exercise of options and employee stock purchase plan activityduring the fiscal year ended May 29, 2005, and unexercised options held asof May 29, 2005. The closing price of $2.25 per share of the Company’sCommon Stock on May 27, 2005, the last trading day for the fiscal yearended May 29, 2005, was below all the grant exercise prices of all optionsoutstanding as of May 29, 2005.

| ** **          | ** ** | ** **           | ** ** | ** **   | ** ** | **Number of Securities**            | ** ** |
|---------------------|------------|----------------------|------------|--------------|------------|-----------------------------------------------|------------|
| ** **          | ** ** | **Shares**           | ** ** | ** **   | ** ** | **Underlying Unexercised**               | ** ** |
| ** **          | ** ** | **Acquired**         | ** ** | **Value(1)** | ** ** | **Options at Fiscal Year-End** | ** ** |
| ** **          | ** ** | **On Exercise** | ** ** | **Realized** | ** ** | **Exercisable**                               | ** ** | **Unexercisable** | ** ** |
| Frederick M.  Green |       |                 | 11,167     |         |       | $                                             | 11,601     |   |   | 269,375 |   |   |   | 20,625 |   |   |
| Gregory L. Harris   |       |                 | 0          |         |       | 0                                             |       |   | 112,500 |   |   |   | 13,000 |   |   |
| Xiaodong Wang       |       |                 | 0          |         |       | 0                                             |       |   | 30,000 |   |   |   | 13,000 |   |   |
| Donald L. Henry     |       |                 | 9,208      |         |       | 10,129                                        |       |   | 52,500 |   |   |   | 13,000 |   |   |
|                     |            |                      |            |              |            |                                               |            |  |  |  |  |  |  |  |  |  |

----

(1)          Valueis the difference between the exercise price of the option and the closingprice of the shares on the date of exercise.

**CompensationCommittee Interlocks and Insider Participation in Compensation Decisions**

The Compensation Committee of the Board of Directorsadministers our executive compensation programs. The Committee is currentlycomposed of independent, non-employee directors, none of whom was at any timeduring the past fiscal year an officer or employee of the Company, was formerlyan officer of the Company or any of its subsidiaries, or had any employmentrelationship with the Company.

Mr. Green, the Company’s Chairman, President andChief Executive Officer, participated in the deliberations of the CompensationCommittee regarding executive compensation that occurred during fiscal 2005, butdid not take part in deliberations regarding his own compensation.Mr. Green’s participation in the deliberations of the CompensationCommittee included providing information on the performance of  other employees and advisory recommendationsregarding the appropriate levels of compensation for the Company’sofficers.

51

----

**Change in Control Severance Pay Plan**

***Senior ManagementChange in Control Severance Plan.******  ***In August 1998,the Board of Directors approved the Senior Management Change in ControlSeverance Plan (the “Severance Plan”) that provides certain benefits to executiveofficers and senior management employees in the event of a termination ofemployment other than for cause or good reason in the 18-month periodfollowing a change in control. There are nine****eligible employees under the Severance Plan. The Board adopted theSeverance Plan to assist the Company in recruiting and retaining senioremployees, assure continuity of executive officers upon a change in control,and ease the transition to new employment for executive officers and seniormanagement that are terminated as a result of a change in control.

*Summaryof Severance Benefits.**  *Eligibleemployees are entitled to severance benefits if employment is terminated within18 months of a change in control for reasons other than death, for cause or fora good reason. Severance benefits are also due if a termination occurs prior toa change in control if the termination of employment is a condition to thechange in control transaction, or otherwise insisted upon by a party to thechange in control transaction. Employees eligible for the Severance Planconsist of selected executive officers and senior management level employees. Severancebenefits include: (i) a lump sum cash payment of one time or two times theemployee’s annual base salary plus the bonus that would be payable in the yearof termination, (ii) continued or substantially equivalent health, dental,vision, life, disability and other benefits for the employee and dependents forone year plus 30% of base salary in outplacement counseling, or an additional15% of the lump sum payment in lieu thereof, (iii) additional payments tocover any excise taxes due on account of payments under the Severance Plan and (iv) indemnificationand advancement of expenses for any claims arising from the eligibleparticipant’s service to the Company subject to applicable law. Mr. Green,Mr. Harris and Mr. Wang are eligible for two times annual base salaryand bonus, all other eligible employees are entitled to one-times annual basesalary and bonus

*Summary of keydefinitions.**  *TheSeverance Plan defines termination for cause which would disqualify aparticipant from severance as: (i) gross misconduct materially anddemonstrably injurious to the Company, (ii) willful and continued failureby the employee to perform substantially his or her duties after a demand forperformance by the Board of Directors unless excused by incapacity caused bymental or physical illness, or (iii) conviction of willfully engaging inillegal conduct constituting a felony or gross misdemeanor which is materiallyand demonstrably injurious to the Company or which impairs the employee’sability to do his or her duties. A good reason permitting an eligible employeeto terminate employment and receive severance benefits is defined as: (i) anadverse change in the employee’s status or position as an executive officer orsenior management employee, (ii) a reduction in base salary, (iii) thefailure to continue a material benefit plan, (iv) requiring the eligibleemployee to be based more than 25 miles from his or her officer prior to thechange in control or (v) the failure of the successor company to assent tohonoring the Severance Plan. A change in control under the Severance Plan isdefined as: (i) a sale of all or substantially all assets of the Company, (ii) approvalby shareholders of a plan to liquidate or dissolve the Company, (iii) aperson acquiring more than 20% but less than 50% of the Company’s Common Stockwithout prior Board approval, (iv) a merger in which the Company is ownerof at least 50% but not more than 80% of the surviving company unlesspre-approved the Company’s Board of Directors, (v) a change in Board ofDirectors such that the directors prior to the change in control do notconstitute a majority of the Board or (vi) a change in control required tobe disclosed under the Exchange Act.

**COMPENSATION COMMITTEE REPORT**

The Compensation Committeeis composed exclusively of non-employee members of the Company’s Board ofDirectors who qualify as “independent” directors under the listing rules ofNasdaq. The Committee determines cash compensation for the Chief ExecutiveOfficer and other executive officers, 

52

----

based onqualitative and quantitative measures of performance, and makes recommendationsto the Board for approval. The Committee also determines stock option awardsunder the Company’s Stock Option Plan.

**ExecutiveOfficer Compensation Policy**

The Committee’s policy isto provide executive compensation that is externally competitive at the variousprofessional levels. Application of the policy utilizes retrospectivequantitative criteria, as well as qualitative evaluation of individualinitiatives and achievements. It is also the Committee’s policy to encourageand recognize strategic actions that position the Company to better compete inits markets for enhanced operational results in the longer term. As a result ofthese factors, the actual change in compensation for any particular executiveofficer for a particular year may not necessarily reflect operational resultsof the preceding year. The Company utilizes independently conducted marketsurveys to obtain comparative compensation data that it uses to assess and makechanges to compensation program for the Company’s senior executives.

**Compensation Elements**

Compensation currently paid to the Company’s executiveofficers principally consists of three elements: base salary, incentivecompensation and annual stock option awards.

*Salary.**  *The base salary of the Company’s executive officersis generally established by reference to base salaries paid to executives insimilar positions with similar responsibilities based on publicly availablecompensation surveys. Base salaries of all executive officers are reviewed atthe beginning of each fiscal year, although adjustments, if any, to base salaryare implemented throughout the fiscal year beginning on the anniversary date ofeach executive’s date of employment. During the fiscal year ended May 29,2005 the Committee did not make any changes to the base compensation of theCompany’s executive officers in effect for the prior fiscal year, except thatthe annual base compensation of Mr. Wang was increased by approximately$8,000 to reflect increased responsibilities. The Committee regards basecompensation paid to the Company’s executive officers as reasonable in relationto published information regarding compensation of executives with similarresponsibilities.

*IncentiveCompensation.**  *The Company’s executive officersparticipate in an incentive compensation program based upon the Companyreaching defined revenue and income targets established at the beginning of thefiscal year. Because of the level of the Company’s fiscal 2005 revenues incomparison to targets set at the beginning of the fiscal year, under thisprogram each executive officer, other than Mr. Henry, is due to receivedcash incentive compensation equal to 2.5% of his fiscal 2005 base salary, or$15,942 in the aggregate.

*Options/Stock BasedCompensation.**  *Stockoptions are generally awarded at the beginning of each fiscal year under stockoption plans approved by the Company’s shareholders. Options are granted at anexercise price that is equal to the fair market value of a common share on thedate of the grant. The Committee believes that stock ownership by managementderived from granting of stock options is beneficial because it aligns theinterests of executives with the interests of shareholders. It serves tofurther encourage superior management performance and specifically motivatesexecutives to remain focused on factors that enhance the market value of theCompany’s common stock. At the beginning of fiscal year 2005, the Committeegranted stock options to purchase 36,500 shares of common stock to executiveofficers, which represented approximately 41% of the total options granted toall officers and key employees.

53

----

**ChiefExecutive Officer Compensation**

Frederick M. Green, theCompany’s President and Chief Executive Officer, is evaluated by the samefactors applicable to the evaluation of other executive officers, as describedabove, and participates in the same executive compensation plans provided tothe other senior executives. The Compensation Committee did not make anyadjustment to Mr. Green’s base salary in fiscal 2005. Following thecompletion of fiscal 2005, because of the level of the Company’s fiscal 2005revenues in comparison to targets set at the beginning of the fiscal year, Mr. Greenwill receive cash incentive compensation of $7,330, which represents  2.5% of his fiscal 2005 base salary, underthe incentive compensation applicable to all executive officers for fiscal year2005. Mr. Green was also awarded stock options to acquire 12,500 shares ofCompany common stock at the beginning of fiscal year 2005. The Committeeregards Mr. Green’s compensation as reasonable in relation to publishedinformation on compensation of executives with similar responsibilities.

***Submitted by the CompensationCommittee of the Company’s Board of Directors:***
| David J. Larkin, Chair | John Colwell, Jr. | Marvonia Pearson Walker |
|------------------------|------------------------|-------------------------|

 

**Director Compensation**

Members of the Board who are not otherwise employed bythe Company receive, at the time of election or reelection to the Board, anoption to purchase 2,000 shares of the Company’s common stock at a purchaseprice equal to the fair market value of the Company’s common stock on the dateof such election or reelection. In addition, each non-employee member of theBoard of Directors is also paid an annual fee of $4,000, plus $500 for eachBoard meeting or Board committee meeting attended.

54

----

**STOCK PERFORMANCE GRAPH**

The Securities andExchange Commission requires the Company to include a line graph presentingcomparative cumulative, five-year shareholder returns on an indexed basis witha broad market index and either a nationally-recognized industry standard or anindex of peer companies selected by the Company. The Company has chosen theNasdaq Market Index (U.S. Companies) as its broad market index and the S&P500 Electrical Components & Equipment Index as its peer-group index.The graph below compares the cumulative total return of the Company’s CommonStock over the last five years, assuming a $100 investmrnt on the last businessday of fiscal year 2000.

| ** **                                                  | ** ** | **Base**   | ** ** | **INDEXED RETURNS** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|--------------------------|------------|
| ** **                                                  | ** ** | **Period** | ** ** | **Years Ending**    | ** ** |
| **Company / Index**                               | ** ** | ** ** | ** ** | **5/28/00**              | ** ** | **6/3/01** | ** ** | **6/2/02** | ** ** | **6/1/03** | ** ** | **5/30/04** | ** ** | **5/29/05** | ** ** |
| **AULT  INC**                                               | ** ** |       | **100**    |                     |       | 100.87 |   | 84.52 |   | 33.91 |   | 51.83 |   | 41.74 |   |
| **NASDAQ  MARKET INDEX (U.S.)**                             | ** ** |       | **100**    |                     |       | 67.14 |   | 50.73 |   | 50.41 |   | 62.63 |   | 65.44 |   |
| **S&P 500 ELECTRICAL  COMPONENTS & EQUIPMENT** | ** ** |       | **100**    |                     |       | 95.39 |   | 88.18 |   | 82.18 |   | 102.82 |   | 127.16 |   |
|                                                             |            |            |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

55

----

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.

Thefollowing table provides information as of September 1, 2005 concerningthe beneficial ownership of the Company’s Common Stock by (i) allshareholders known to the Company to hold five percent or more of the CommonStock of the Company (ii) each of the Company’s directors, nominees to theBoard of Directors, and each of the named executive officers and (iii) alldirectors and executive officers of the Company as a group. Unless otherwiseindicated, all beneficial owners have sole voting and investment power overshares held.

|                                                            | ** ** | **Shares** | ** ** | **Percent of**            | ** ** |
|------------------------------------------------------------|------------|------------|------------|--------------------------------|------------|
| **Beneficial Owner**                                  | ** ** | ** ** | ** ** | **Beneficially Owned(1)** | ** ** | **Class** | ** ** |
| Skiritai Capital LLC                                       |       |       | 692,882    | (2)                            |       |   | 14.25 | % |   |
| 388 Market Street,  Suite 700                         |       |       |       |                           |       |   |   |   |   |
| San Francisco, CA 94111                                    |       |       |       |                           |       |   |   |   |   |
| Nidec America Corporation                                  |       |       | 488,000    | (3)                            |       |   | 9.12 | % |   |
| 318 Industrial Lane                                        |       |       |       |                           |       |   |   |   |   |
| Torrington, CT 06790                                       |       |       |       |                           |       |   |   |   |   |
| Royce & Associates,  LLC                          |       |       | 478,500    | (4)                            |       |   | 9.84 | % |   |
| 1414 Avenue of the Americas                                |       |       |       |                           |       |   |   |   |   |
| New York, NY 10019                                         |       |       |       |                           |       |   |   |   |   |
| Fifth Third Bancorp                                        |       |       | 364,820    | (5)                            |       |   | 7.50 | % |   |
| Fifth Third Center                                         |       |       |       |                           |       |   |   |   |   |
| Cincinnati, OH 45263                                       |       |       |       |                           |       |   |   |   |   |
| Dimensional Fund Advisors  Inc.                            |       |       | 312,292    | (6)                            |       |   | 6.42 | % |   |
| 1299 Ocean Avenue, 11th  Floor                             |       |       |       |                           |       |   |   |   |   |
| Santa Monica, CA 90401                                     |       |       |       |                           |       |   |   |   |   |
| Frederick M. Green                                         |       |       | 379,142    | (7)                            |       |   | 7.12 | % |   |
| William J. Birmingham                                      |       |       | 0          |                           |       |   |   |   |   |
| Carol A. Barnett                                           |       |       | 7,667      |                           |       |   | * |   |   |
| Brian T. Chang                                             |       |       | 2,667      |                           |       |   | * |   |   |
| John Colwell, Jr.                                     |       |       | 6,667      |                           |       |   | * |   |   |
| John G. Kassakian                                          |       |       | 25,667     |                           |       |   | * |   |   |
| David J. Larkin                                            |       |       | 15,667     |                           |       |   | * |   |   |
| Marvonia Pearson Walker                                    |       |       | 6,667      |                           |       |   | * |   |   |
| Gregory L. Harris                                          |       |       | 132,828    |                           |       |   | 2.49 | % |   |
| Xiaodong Wang                                              |       |       | 30,000     |                           |       |   | * |   |   |
| All  Directors & Officers as a group (10 persons) |       |       | 606,972    |                           |       |   | 11.40 | % |   |
|                                                            |            |            |            |                                |            |  |  |  |  |  |  |

----

*                    Indicatesless than one percent.

(1)          For each director andall officers and directors as a group, share and percent ownership informationreflects the following number of shares of Common Stock that may be purchasedpursuant to stock options that are exercisable as of May 29, 2005: Mr. Green,269,375 shares; Mr. Birmingham, no 

56

----

shares; Ms. Barnett,6,667 shares; Mr. Chang, 2,667 shares; Mr. Colwell, 6,667 shares; Mr. Kassakian,14,667; Mr. Larkin, 10,667; Ms. Pearson Walker, 6,667; Mr. Harris,112,500; Mr. Wang, 30,000; and all directors and officers as a group,459,877 shares.

(2)          Based on the Schedule 13G filed with the Securities and Exchange Commission on July 11, 2005.

(3)          Based on the Schedule 13G filed with the Securities and Exchange Commission on July 24, 2002, themost recent public filing available. The 488,000 shares reported representshares that are immediately issuable upon conversion of 2,074 shares of Series Bconvertible Preferred Stock of the Company. Nidec Corporation, the parentcompany of Nidec America Corporation, is also deemed to beneficially own suchshares.

(4)          Based on Schedule 13 Gfiled with the Securities and Exchange Commission on January 22, 2005.

(5)          Based on Schedule 13 Gfiled with the Securities and Exchange Commission on February 14, 2005.

(6)          Based on Schedule 13 Gfiled with the Securities and Exchange Commission on February 9, 2005.

(7)          Includes3,357 shares owned by Mr. Green’s spouse.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

Not Applicable.

**ITEM 14.**         PRINCIPALACCOUNTING FEES AND SERVICES

Thefollowing schedule is a summary of fees billed to the Company by Grant Thorntonfor fiscal 2005 and fiscal 2004 and Deloitte & Touche for the firsttwo quarters of fiscal 2004.

| ** **            | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004**    | ** ** |
|-----------------------|------------|----------------------|------------|-------------------------|------------|
| **Fee Category** | ** ** | ** **           | ** ** | **Grant Thornton** | ** ** | **Grant Thornton** | ** ** | **Deloitte & Touche** | ** ** |
| Audit Fees            |       |                 | $          | 157,720                 |       |   |   | $ | 101,052 |   |   |   | $ | 86,645 |   |   |
| Audit-Related  Fees   |       |                 | 0          |                    |       |   | 0 |   |   |   | 13,125 |   |   |
| Tax Fees              |       |                 | 15,533     |                    |       |   | 8,330 |   |   |   | 17,200 |   |   |
| All Other Fees        |       |                 | 3,166      |                    |       |   | 0 |   |   |   | 0 |   |   |
| Total Fees            |       |                 | $          | 176,419                 |       |   |   | $ | 109,382 |   |   |   | $ | 116,970 |   |   |
|                       |            |                      |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**AuditCommittee Pre-approval Policies and Procedures**

The Audit Committee pre-approves all audit andpermissible non-audit services provided by the independent auditors on acase-by-case basis. In connection with the approval of the annual auditservices and related fees, the audit committee also pre-approves certainaudit-related fees relating to the independent auditor responding to andresearching technical accounting questions and other matters related to thefinancial statements under audit. All of the services provided by the Company’sindependent auditors during fiscal 2004 and 2005, including services related tothe audit-related fees and tax fees, have been approved by the audit committeeunder its pre-approval process.

57

----

**PART IV.**

**ITEM 15.  EXHIBITS, FINANCIAL STATEMENT, SCHEDULES ANDREPORTS ON 8-K**

**(1) The following financial statements are included in Part II, Item 8:**

|                                                                                                                                             | ** ** | **Page** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm—Grant Thornton LLP                                                       |       | 23       |       |
| Report of Independent Registered Public Accounting  Firm—Deloitte  Anjin LLC                                                 |       | 24       |       |
| Report of Independent Registered Public Accounting  Firm—Deloitte & Touche LLP                                                |       | 25       |       |
| Consolidated  Financial Statements                                                                                                          |       |     |       |
| —Balance  Sheets, May 29, 2005 and May 30, 2004.                                                                             |       | 26-27    |       |
| —Consolidated Statements of Operations for the Years  Ended May 29, 2005, May 30, 2004 and June 1, 2003.                |       | 28       |       |
| —Consolidated Statements of Stockholders’ Equity for  the Years Ended May 29, 2005, May 30, 2004 and June 1, 2003. |       | 29       |       |
| —Consolidated Statements of Cash Flows for the Years  Ended May 29, 2005, May 30, 2004 and June 1, 2003.                |       | 30       |       |
| —Notes to Consolidated Financial Statements                                                                                            |       | 31       |       |

 

**(2)****          Thefollowing financial statement schedule for the years ended May 29, 2005, May 30,2004 and June 1, 2003 is submitted herein following the signature page ofthis report.**

| —Schedule II—Valuation  and Qualifying Accounts |   | 62 |   |
|-----------------------------------------------------------|--------|----|--------|

 

Allother Schedules are omitted because they are not applicable or the requiredinformation is shown in the financial statements or notes thereto.

**(3)****          Exhibits**

(a)           The Exhibits requiredpursuant to Item 601 of Regulation S-K to be filed with this report orincorporated by reference are listed in the Exhibit Index, which followsthe Financial Statement Schedules.

(b)          Reports on Form 8-Kfiled during the three months ended May 29, 2005. The Company filed Form 8-Kon March 29, 2005 reporting under Item 2.02 results for the quarter ended February 27,2005; the Company filed on May 25, 2005 under Item 2.01 announcing thecompletion of the sale of the Company’s wholly owned subsidiary in South Korea;the Company filed Form 8-K on June 2, 2005 under Item 1.01announcing the lease of 13,313 square feet of office space in its formerMinneapolis headquarter building and under Item 2.01 announced the completionof the sale of its Minneapolis headquarter building to Dane Industries Inc.

58

----

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, Ault Incorporated has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

**AULTINCORPORATED**
|                                                 |   |                    |
|-------------------------------------------------|--------|-------------------------|
| Frederick M. Green                              |   | September 27, 2005 |
| President, Chief Executive Officer and Director |   |                    |

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of the Registrant in the capacities and on the dates indicated.

**Power of Attorney**

Each person whosesignature appears below constitutes and appoints FREDERICK M. GREEN and WILLIAMJ. BIRMINGHAM as his true and lawful attorneys-in-fact and agents, each actingalone, with full power of substitution and resubstitution, for him and in hisname, place and stead, in any and all capacities, to sign any or all amendmentsto this Annual Report on Form 10-K and to file the same, with all exhibitsthereto, and other documents in connection therewith, with the Securities andExchange Commission, granting unto said attorneys-in-fact and agents, eachacting alone, full power and authority to do and perform each and every act andthing requisite and necessary to be done in and about the premises, as fully toall intents and purposes as he might or could do in person, hereby ratifyingand confirming all said attorneys-in-fact and agents, each acting alone, or hissubstitute or substitutes, may lawfully do or cause to be done by virtuethereof.

*Principal FinancialOfficer and Principal Accounting Officer
|                         | **Signature** | ** **                                      | ** ** |                         | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|-------------------------|---------------|-------------------------------------------------|------------|-------------------------|-----------|------------|------------|--|----------|------------|
|                         |          |                                            |       |                    |
| Frederick M. Green      |          | President, Chief Executive Officer and Director |       | September 27, 2005 |
|                         |          |                                            |       |                    |
| William J. Birmingham   |          | Interim Chief Financial Officer                 |       | September 27, 2005 |
|                         |          |                                            |       |                    |
| Marvonia Pearson Walker |          | Director                                        |       | September 27, 2005 |
|                         |          |                                            |       |                    |
| Brian T. Chang          |          | Director                                        |       | September 27, 2005 |

59

----

 
|                        |   |     |   |                    |
|------------------------|--------|----------|--------|-------------------------|
| John G. Kassakian      |   | Director |   | September 27, 2005 |
|                        |   |     |   |                    |
| David J. Larkin        |   | Director |   | September 27, 2005 |
|                        |   |     |   |                    |
| Carol A. Barnett       |   | Director |   | September 27, 2005 |
|                        |   |     |   |                    |
| John Colwell, Jr. |   | Director |   | September 27, 2005 |

 

 

60

----

 

SECURITIES AND EXCHANGECOMMISSION

Washington, D. C.  20549

**FORM 10-K**

ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d)

OF THE SECURITIES EXCHANGEACT OF 1934

OF

**AULT INCORPORATED**

**FOR**

**YEARENDED MAY 29, 2005**

----

**FINANCIAL STATEMENT SCHEDULES**

----

61

----

**SCHEDULE II**

**AULT INCORPORATED AND SUBSIDIARIES**

**VALUATION AND QUALIFYING ACCOUNTS**

**YearsEnded May 29, 2005, May 30, 2004, and June 1, 2003**

| ** **                      | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
|---------------------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|---------------------|------------|
| ** **                      | ** ** | **Beginning**       | ** ** | **Costs and**  | ** ** | ** **     | ** ** | **End of**     | ** ** |
| ** **                      | ** ** | **of Period**  | ** ** | **Expenses**        | ** ** | **Deductions** | ** ** | **Period**          | ** ** |
| Year ended May 29,  2005:  |       |                |       |                |       |           |       |                |       |   |   |   |   |
| Allowance for doubtful accounts |       | $                   | 291,000    |                |       | $              | 510,000    |                |       |   | $ | 20,000 | (a) |   | $ | 781,000 |   |
| Reserve for warranties          |       | 125,000             |       |                | 113,000    |           |       |                | 104,000    |   |   | 134,000 |   |
| Year ended  May 30, 2004:  |       |                |       |                |       |           |       |                |       |   |   |   |   |
| Allowance for doubtful accounts |       | 315,000             |       |                | 17,000     |           |       |                | 41,000     | (a) |   | 291,000 |   |
| Reserve for warranties          |       | 134,000             |       |                | 14,000     |           |       |                | 23,000     |   |   | 125,000 |   |
| Year ended  June 1, 2003:  |       |                |       |                |       |           |       |                |       |   |   |   |   |
| Allowance for doubtful accounts |       | 320,000             |       |                | 45,000     |           |       |                | 50,000     | (a) |   | 315,000 |   |
| Reserve for  warranties         |       | 113,000             |       |                | 193,000    |           |       |                | 172,000    |   |   | 134,000 |   |
|                                 |            |                     |            |                     |            |                |            |                     |            |  |  |  |  |  |  |  |  |

----

(a) Represents charge-off of accounts receivable,net of recoveries.

62

----

 

SECURITIES AND EXCHANGECOMMISSION

Washington, D. C.  20549

**FORM 10-K**

ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d)

OF THE SECURITIES EXCHANGEACT OF 1934

OF

**AULT INCORPORATED**

**FOR**

**YEARENDED MAY 29, 2005**

----

**EXHIBITS**

----

63

----

**AULT INCORPORATED**

**EXHIBITINDEX TOFORM 10-K FOR THE YEAR ENDEDMay 29, 2005**

**Required Registration S-KExhibit Items**
| SK Item | ** ** | **Title of Documents**                                                                                                                                            | ** ** | **Location**                                                                                                      |
|---------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|
| 3(a)    |       | Restated Articles of Incorporation, as amended                                                                                                                    |       | Filed as Exhibit 3(a) to Form 10-K for  fiscal 1988 and incorporated herein by reference           |
| 3(b)    |       | Bylaws, as amended                                                                                                                                                |       | Filed as  Exhibit 3(b) to Registration Statement No. 2-85224 and  incorporated herein by reference |
| 3(c)    |       | Amendment to Articles of  Incorporation                                                                                                                           |       | Filed as Exhibit 3(c) to  Form 10-K for fiscal 1999 and incorporated herein by reference                |
| 4.1     |       | Rights Agreement                                                                                                                                                  |       | Filed electronically on  Form 8-K for March 1996 and incorporated herein by reference                   |
| 10.1    |       | Management Incentive  Compensation Plan                                                                                                                           |       | Filed as  Exhibit 10(b) to Registration Statement 2-85224 and incorporated  herein by reference         |
| 10.2    |       | 1986 Employee Stock  Option Plan                                                                                                                                  |       | Filed as  Exhibit 10(c) to Form 10-K for fiscal 1987 and incorporated  herein by reference         |
| 10.3    |       | Employee Stock Purchase  Plan                                                                                                                                     |       | Filed electronically.  Commission File #333-4609 and herein incorporated by reference                             |
| 10.4    |       | 1986 Employee Stock  Option Plan, Amended                                                                                                                         |       | Filed electronically.  Commission File #333-4609 and herein incorporated by reference                             |
| 10.5    |       | 1996 Employee Stock  Option Plan                                                                                                                                  |       | Filed electronically. Commission  File #333-4609 and herein incorporated by reference                             |
| 10.6    |       | 1998 Senior Management  Change in Control Severance Plan                                                                                                          |       | Filed as  Exhibit 10.6 to Form 10-K/A for fiscal 2004 and incorporated herein  by reference             |
| 21      |       | Subsidiary of Registrant                                                                                                                                          |       | Filed as Exhibit 21  to Form 10-K for fiscal 1997 and incorporated herein by reference                  |
| 23.1    |       | Consent of Independent  Auditors                                                                                                                                  |       | Filed herewith at  page 65                                                                                   |
| 23.2    |       | Consent of Independent  Auditors                                                                                                                                  |       | Filed herewith at  page 66                                                                                   |
| 23.3    |       | Consent of Independent  Auditors                                                                                                                                  |       | Filed herewith at  page 67                                                                                   |
| 31.1    |       | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act). |       | Filed herewith at  page 68                                                                                   |
| 31.2    |       | Certification of the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act). |       | Filed herewith at  page 69                                                                                   |
| 32      |       | Certifications pursuant  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                               |       | Filed herewith at page 70                                                                                    |

 

Pursuant to provisions of Item 601(b)(A)(iii)(a) ofRegulation S-K, copies of instruments defining the rights of holders oflong-term debt of the Company are not being filed and in lieu thereof, Companyagrees to furnish copies thereof to the Securities and Exchange Commission uponrequest.

64

----